COMMISSIONER OF INCOME-TAX VS EMPIRE ESTATE NOTE 46, P.
1997 P T D 623
[218 I T R 355]
[Supreme Court of India]
Present: J. S. Verma, S. P. Bharucha and Mrs. Sujata V. Manohar, JJ
COMMISSIONER OF INCOME-TAX
Versus
EMPIRE ESTATE
Tax Reference Cases Nos. 13 and 14 of 1983, decided on 29/01/1996.
(Direct reference under section 257 of the Income-tax Act, 1961 to the Supreme Court by the Income Tax Appellate Tribunal).
Income-tax---
----Firm---Assessment---Change in the Constitution of partnership-- Succession---Death of partner---Scope of Ss. 187 & 188---No provision in partnership-deed that firm would not be dissolved on death of a partner-- Firm was dissolved on death of a partner---Surviving partners continuing business---Two assessments to be made---Indian Income Tax Act, 1961, Ss. 187 & 188---Indian Partnership Act, 1932, S.42.
Section 187 of the Income-tax Act, 1961, says that where, at the time of making an assessment, it is found that a change has occurred in the constitution of a firm, the assessment shall be made on the firm as it is constituted at the time of making the assessment. "Change in the constitution of the firm" is defined for the purpose. The relevant part of the definition states that if one or more of the partners cease to- be partners in such circumstances that one or more of the persons who were partners of the firm before the change continue as partner or partners after the change, there is a change in the constitution of the firm. These provisions would apply to a firm, which survives upon the death of a partner. They would apply to the case of a partnership where a partner dies and the partnership deed provides that death shall not result in the dissolution of the partnership. Such provision is lawful because section 42 of the Partnership Act, 1932, contemplates it. If there is no such provision and a partner dies, the partnership stands dissolved. The partnership does not then survive upon the death of the partner. The case-is not one of a change in the constitution of the partnership. It falls outside the scope of section 187 of the Income-tax Act, 1961. When the surviving partners in such a case continue the business in partnership, section 188 is attracted for there is a succession of one partnership by another.
A firm constituted under a deed of partnership, dated July 18, 1968, had three partners. One of the partners died on January 12, 1974. There being no provision in the deed of partnership contemplating the continuance of the partnership in the event of the death of a partner, the partnership stood dissolved. No deed of dissolution was executed but the surviving partners executed a fresh deed of partnership for carrying on the business on and from January 13, 1974, and it mentioned that the earlier partnership had stood dissolved on January 12, 1974. The assessee filed two returns of income for the relevant previous year, one for the period June 1, 1973, to January 12, 1974, and the other for the period January 13, 1974 to June 30, 1974. It contended that the earlier partnership had stood dissolved on the death of a partner on January 12, 1974, and that, therefore, this was a case of succession contemplated by section 188 of the Income-tax Act, 1961, and not a case of reconstitution of the partnership within the meaning of section 187 of the Act. The Income Tax Officer rejected the contention. The Tribunal held that the case of the assessee did not fall within the expression "change in the constitution of the firm" under section 187 and directed the Income Tax Officer to make assessments for the two aforementioned periods of the relevant, previous year. On a direct reference to the Supreme Court under section 257 of the Act:
Held, that the Tribunal was justified in holding that there should be two assessments, one for the period from June 1, 1973, to January 12, 1974, and the other for the period from January 13, 1974, to June 30, 1974, as the assessee's case did not fall within the provisions of section 187(2) of the Act.
Wazid Ali Abid Ali v. CIT (1988) 169 ITR 761 (SC) fol.
CIT v. Basant Behari Gopal Behari & Co. (1988) 172 ITR 662 (All.); CIT (Addl.) v. Harjivandas Hathibhai (1977) 108 ITR 517 (Guj.); CIT v. Indralok Picture Palace (1991) 188 ITR 730 (All.); CIT v. Kunj Bahari Shyam Lal (1977) 109 ITR 154 (All.); CIT (Addl.) v. Vinayaka Cinema (1977) 110 ITR 468 (AP); Mathurdas Govardhandas v. CIT (1980) 125 ITR 470 (Cal.); Nandlal Sohanlal v. CIT (1977) 110 ITR 170 (P&H) and Sangam Silks v. CIT (1980) 122 ITR 479 (Kar.) ref.
Dr. R.R. Mishra, Senior Advocate (Ranbir Chandra and S.N. Terdol, Advocates with him) for the Appellant.
JUDGMENT
S.P. BHARUCHA, J -There being a conflict in the decisions of the High Courts, the Income Tax Appellate Tribunal has referred to this Court, under section 257 of the Income Tax Act, 1961, the following question:
"Whether, on the facts and in the circumstances of the case and in law, the Tribunal was justified in holding that there should be two assessments, one for the period from June 1, 1973 to January 12, 1974, and the other for the period from January 13, 1974 to June 30, 1974 as the assessee's case did not fall within the provisions of section 187(2) of the Income Tax Act, 1961?"
The relevant assessment year is the assessment year 1975-76. The relevant accounting year ended on June 30, 1974.
The assessee is a partnership firm. It was constituted under a deed of partnership, dated July 18, 1968. Its three partners were Mrs. Ellen Keki Modi, Mr. Rustom Keki Modi and Ms. Maneck Keki Modi. Mrs. Ellen Modi died on January 12, 1974. There being no provision in the deed of partnership contemplating continuance of the partnership in the event of the death of a partner, the partnership stood dissolved. No deed of dissolution was executed but the surviving partners executed a fresh deed of partnership for carrying on the business on and from January 13, 1974, and it mentioned that the earlier partnership had stood dissolved on January 12, 1974.
The assessee filed two returns of income for the relevant previous year, one for the period June 1, 1973, to January 12, 1974, and the other for the period January 13, 1974 to June 30, 1974. It contended that the earlier partnership had stood dissolved on the death of Mrs. Ellen Modi on January 12, 1974, and that, therefore, this was a case of succession contemplated by section 188 of the Act and not a case of reconstitution of the partnership within the meaning of section 187. The Income Tax Officer rejected the contention. The appeal to the Commissioner of Income-tax (Appeals) failed. The assessee thereupon appealed to the Tribunal. The Tribunal noted that there was a difference of opinion between the Allahabad High Court (CIT v. Kunj Behari Shyam Lal (1977) 109 ITR 154 (FB), the Andhra Pradesh High Court (Addl. CIT v. Vinayaka Cinema (1977) 110 ITR 468 (FB), the Gujarat High Court (Addl. CIT v. Harjivandas Hathibhai (1977) 108 ITR 517) and the Calcutta High Court (Mathurdas Govardhandas v. CIT (1980) 125 ITR 470) on the one hand and the Punjab High Court. (Nandlal Sohanlal v. CIT (1977) 110 1TR 170 (FB) and the Karnataka High Court (Songam Silks v. CIT (1980) 122 ITR 479) on the other hand. The Tribunal followed the view of the High Courts earlier mentioned. It held that the case of the assessee did not fall within the expression "change in the constitution of the firm" under section 187 and directed the Income Tax Officer to make assessments for the two aforementioned periods of the relevant previous year.
Section 187, so far as is relevant reads thus:
"187. (1) Where, at the time of making an assessment under section 143 or section 144, it is found that a change has occurred in the constitution of a firm, the assessment shall be made on the firm as constituted at the time of making the assessment.
(2) For the purposes of this section, there is a change in the constitution of the firm---
(a) if one or more of the partners cease to be partners or one or more new partners are admitted, in such circumstances that one or more of the persons who were partners of the firm before the change continue as partner or partners after the change; or
(b) where all the partners continue with a change in their respective shares or in the shares of some of them."
Section 188 reads thus:
"188. Where a firm carrying on a business or profession is succeeded by another firm, and the case is not one covered by section 187, separate assessments shall be made on the predecessor firm and the successor firm in accordance with the provisions of section 170. "
It needs to be noted that a proviso was inserted in section 187 by the Taxation Laws (Amendment) Act, 1984, with retrospective effect from April 1, 1975, which reads thus:
"Provided that nothing contained in clause (a) shall apply to a case where the firm is dissolved on the death of any of its partners."
Mrs. Ellen Modi having died on January 12, 1974, the assessee's case is not affected by the proviso.
Section 42 of the Indian Partnership Act, 1932, so far as it is relevant, reads:
"42. Subject to contract between the partners, a firm is dissolved---
(c) by the death of a partner; and ..''
The deed of partnership between Mrs. Ellen Modi and the partners who survived her did not provide that the death of a partner would not dissolve the partnership. Therefore, by reason of section 42 of the Partnership Act, the partnership stood dissolved on January 12, 1974, by reason of Mrs. Ellen Modi's death. This the Tribunal rightly found.
Section 188 states that where a firm carrying on a business is succeeded by another firm and the case is not covered by section 187, separate assessments have to be made on the predecessor firm and the successor firm. Section 187 says that where, at the time of making an assessment, it is found that a change has occurred in the constitution of a firm, the assessment shall be made on the firm as it is constituted at the time of making the assessment. "Change in the constitution of the firm" is defined for the purpose. The relevant part of the definition states that if one or more of the partners cease to be partners in such circumstances that one or more of the persons who were partners of the firm before the change continue as partner or partners after the change, there is a change in the constitution of the firm. These provisions would apply to a firm, which survives upon the death of a partner. They would apply to the case of a partnership where a partner dies and the partnership deed provides that death shall not result in the dissolution of the partnership. Such provision is lawful because section 42 of the Partnership Act contemplates it. If there is no such provision and a partner dies, the partnership stands dissolved. The partnership does not then survive upon the death of the partner. The case is not one of a change in the constitution of the partnership. It falls outside the scope of section 187. When the surviving partners in such a case continue the business in partnership, section 188 is attracted for there is a succession of one by another partnership.
It is unnecessary to refer to the judgments of the High Courts by reason of which the Tribunal made the reference directly to this Court for we find the issue covered by the judgment of this Court in Wazid Ali Abid Ali v. CIT (1988) 169 ITR 761. The relevant paragraph of the judgment reads thus (at page 781):
"So far as Civil Appeal No. 609 of 1975 is concerned, the question is whether, on the facts and circumstances of the case, there was any dissolution of the partnership on the date of the death of Shri Sarabhai Chimanlal and there should be two separate assessments or whether, on the facts and circumstances of the case, the provisions of section 187(2) apply to the facts of this case. There, the High Court found on examination of the facts of that case, that the assessee's contention was right that the firm as found by the Tribunal was dissolved and the transactions were carried on with the remaining parties in the course of winding up and for realisation of its dues. The High Court accordingly answered rightly in the affirmative and in favour of the assessee. There was, in fact, a dissolution as found by the Tribunal and on the facts and circumstances of that case and after the dissolution, the firm ceased to exist and there should be two separate assessments. The High Court was right in answering the question as it did. It appears to us that the High Court was also right in answering the second question, in view of the fact that there was a death and as such dissolution firm by the manner in which the parties acted, that the to no question of the same firm being continued and the provisions of section 187(2) could not be said to apply in the light of the facts."
Learned counsel for the Revenue cited two judgments of the Allahabad High Court in which the judgment of Wazid Ali Abid Ali 11988) 169 ITR 761 (SC) was cited. In CIT v. Basant Behari Gopal Behari and Co. (1988) 172 ITR 662 (All.) it had been found by the Tribunal that the partnership deed provided that the partnership would not dissolve on the death of any partner and that there was no evidence to suggest that the partnership had actually stood dissolved on the death of a partner. Accordingly, it was held that there had been a change in the constitution of the partnership on the death of that partner and only one assessment for the entire assessment year could be made. In CIT v. Indralok Picture Palace (1991) 188 ITR 730 (All) also, the partnership deed provided that the death of a partner would not result in the dissolution of the firm. A tanner died. The assessee filed two returns. The Income Tax Officer took the view that this was a case of reconstitution of the partnership and, clubbing the periods, made one assessment. The High Court upheld his view. In both these cases, the partnership deeds provided that the death of a partner would not dissolve the partnerships. The death of a partner, therefore, did not dissolve the partnerships and the businesses were continued by reconstituted partnerships.
In the result, we answer the question in the affirmative and in favour of the assessee. There shall be no order as to costs.
M.B.A./1122/ P T DReference answered.