COMMISSIONER OF INCOME-TAX VS MAHESH OIL AND RICE MILLS, 1998 PTD-MADHYA-PRADESH-HIGH-COURT-INDIA 1080 (1993)

Income-tax---

----Firm---Assessment---Death of partner---Reconstitution of firm with new partners---Two assessments to be made---Indian Income Tax Act, 1961, Ss. 187 & 188.

By virtue of the insertion of the proviso to section 187(2) by the Taxation Laws (Amendment) Act, 1984, with retrospective effect from April 1, 1975, where a partnership stands dissolved by the death of a partner, section 187 of the Income Tax Act, 1961, would not apply and the proper section would be section 188 of the Act.

The assessee-firm as originally constituted consisted of three partners. One of them died on January 16, 1977. Thereafter, his widow and another person were taken as partners with effect from January 17, 1977. The assessee-firm filed two separate returns---one for the period up to January 16, 1977, and another for the remaining period. The Income-tax Officer, while assessing the firm, made a single assessment, taking the view that the case was governed by section 187(1) of the Act. The Tribunal held that section 188 was applicable and two assessments had to be made. On a reference:

Held (i) that the Tribunal was justified in holding that section 188 was applicable in the case of the assessee;

(ii) that two assessments had to be made, one for the period up to January 16, 1977, and the other for the period from January 17, 1977, onwards.

CIT v. Isthmian Steamship Lines (1951) 20 ITR 572 (SC); CIT v. Kheta Sons & Co. (1986) 162 ITR 833 (MP) and Girdharilal Nannelal v. CIT (1984) 147 ITR 529 (MP) ref.

V.K. Tankha with Adhikari for the Commissioner.

None for the Assessee.

JUDGMENT

GULAB C. GUPTA, J.--This is a reference under section 256(1) of the Income Tax Act, 1961 (hereinafter referred to as "the Act"), at the instance of the Revenue for purposes of obtaining the decision of this Court, on the following questions of law:

" (i) Whether, on the facts and in the circumstances of the case, the Tribunal erred in holding that the Income-tax Officer was not justified in making a single assessment of the firm instead of two assessments, one for the period up to January 16, 1977, and the other from the period January 17, 1977, onwards?

(ii) Whether, on the facts and in the circumstances of the case, the Tribunal is justified in holding that the provisions of section 188 are applicable in the case of the assessee and not the provisions of section 187, as done by the Income-tax Officer?"

The facts relevant to the decision of the aforesaid questions are that the assessee-firm, as originally constituted, consisted of three partners, namely, Ram Bharoseylal, Harishchand and Sint. Ram Kunwar Devi. One of the partners, i.e., Ram Bharoseylal, died on January 16, 1977. Thereafter, by a fresh partnership deed, his widow and another were taken as partners with effect from January 17, 1977. From the statement of facts mentioned in the order of the Income-tax Appellate Tribunal, it appears that the partnership deed does not provide that on the death of a partner, the partnership will continue with the remaining partners and the firm will not dissolve. The assessee-firm filed two separate returns---one for the period up to January 16, 1977, and another for the remaining period. The Income-tax Officer, while assessing the firm, made a single assessment, taking the view that the case was governed by section 1870) of the Act. The assessee-firm preferred an appeal before the Appellate Assistant Commissioner, which was dismissed. The firm thereafter, took the matter to the Income-tax Appellate Tribunal, which has passed the impugned order and made the reference. According to the Tribunal, it was a case of dissolution of the firm and, therefore, the Income-tax Officer was not justified in making a single assessment. The Tribunal, therefore, directed the Income-tax Officer to make' two separate assessments, one for the period up to January 16, 1977, and the other for the period from January 17, 1977, onwards. Since the assessee-firm (sic) was not satisfied, the reference to this Court has been made under section 256(1) of the Act.

Section 187(1) of the Act, as it stood at the time when the reference was made, read as under:

"187.??? Change in constitution of a firm.--(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:

Provided that--

(i) the income of the previous year shall, for the purpose of inclusion in the total incomes of the partners, be apportioned between the partners who, in such previous year, were entitled to receive the same; and

(ii) When the tax assessed upon a partner cannot be recovered from him, it shall be recovered from 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."

It appears that several Benches of this Court had taken different views on the aforesaid law. There was, therefore, the necessity of reconciliation and hence the matter was considered by a Full Bench of this Court in Girdharilal Nannelal v. CIT (1984) 147 ITR 529. The Full Bench, interpreting words "change in the constitution of the firm" occurring in section 187(2) of the Act, held that it includes within its ambit even cases of dissolution? of partnership where the firm is reconstituted with at least one of the old partners together with the incoming partners and the business is continued. The Full Bench also held that resort to the general law and the concept of dissolution and change in the constitution of a firm, according to the Indian Partnership Act, is not warranted. After the aforesaid decision, section 187(2) was amended by the Taxation Laws (Amendment) Act, 1984, with retrospective effect from April 1, 1975, by inserting the following proviso into it:

"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."

The effect of this proviso was considered by this Court in CIT v. Kheta Sons & Co. (1986) 162 ITR 833 and it was held that the aforesaid amendment has changed the law with retrospective effect and, therefore, the Full Bench judgment in Girdharilal's case (1984) 147 ITR 529 would not apply to cases where the partnership stands dissolved on the death of any one of its partners after April 1, 1975. The relevant portion from the aforesaid judgment is as under (page 835):

"Section 187(2) as it stood prior to this amendment was interpreted alongwith section 188 of the Act by a Full Bench of this Court in Girdharilal Nannelal v. CIT (1984) 147 ITR 529, to mean that it indicates where one or more of the partners of the old firm continue to be partners in the new firm, it is a case of change in the constitution of the firm, as defined in section 187(2). But for the proviso inserted in section 187(2), retrospectively with effect from April 1, 1975, according to this Full Bench decision, it is section 187 and not section 188 which would have applied to the facts of the present case. However, the above proviso inserted in subsection (2) of section 187 retrospectively with effect from April 1, 1975, applies to the assessment year 1975-76 which is the relevant assessment year for the purpose of this case and, therefore, it is on the basis of this proviso that the present case is to be decided. In view of the settled principle relating to the applicability of such an amendment, it cannot be doubted that this amendment inserting the proviso in subsection (2) of section 187 applies to the assessment year commencing on April i, 1975, i.e., the assessment year 1975-76 which is the relevant assessment year in the present case (see CIT v. Isthmian Steamship Lines (1951)20 ITR 572 (SC)).

The result of the applicability of the above proviso to subsection (21 of section 187 is that section 187(2)(a) shall not apply to a case like the present where the firm is dissolved on the death of any of its partners under the general law of partnership in the absence of a contract to the contrary. This being so, it is a case of succession governed by section 188 on account of the fact that applicability of section 187 is excluded by virtue of the proviso to subsection (2) of section 187. "

In view of the aforesaid, it is clear that in all cases where partnership stands dissolved by the death of a partner section 187(2) would not apply and the proper section would be section 188 of the Act.

Applying the aforesaid law to the facts of the present case, one of the partners of the firm died on January 16, 1977, and the firm was reconstituted by taking two new partners from January 17,1977. It is, therefore, a case where the proviso added by the amending Act of 1984 will apply and the case would be governed by section 188 and not section 187 of the Act. It appears that the order of the Tribunal was passed before the amendment and the Tribunal has come to this very conclusion without it. The Tribunal had, however, not noticed the Full Bench judgment of this Court to Girdharilal's case (1984) 147 ITR 529. If it had noticed the said judgment, it would have come to a different conclusion. However, since the law has been amended retrospectively and the said law applies to the facts of the present case, the decision of the Tribunal must be upheld.

In view of the discussion aforesaid, our answers to the two references, referred to us, are as under

(i) The Income-tax Officer was not justified in making a single assessment of the firm and, therefore, the Tribunal was right in ordering him to make two assessments, one for the period up to January 16, 1977, and the other for the period from January 17, 1977, onwards and

(ii) The Tribunal is justified in holding that the provisions of section 188 of the Act are applicable in the case of the assessee.

No orders as to costs.

M.B.A/1263/FC ???????????????????????????????????????????????????????????????????????????????? Reference answered.