COMMISSIONER OF INCOME-TAX VS SURYA BHAGAVAN VASTRALAYAM
1999 P T D 2567
[227 I T R 304]
[Andhra Pradesh High Court (India)]
Before dyed Shah Mohammed Quadri and R. Bayapu Reddy, JJ
COMMISSIONER OF INCOME-TAX
Versus
SURYA BHAGAVAN VASTRALAYAM
Case Referred NoA1 of 1987, decided on 28/08/1996.
Income-tax---
----Firm---Assessment---Dissolution of firm---Change in constitution of firm---Death of partner---New deed executed by surviving partners---Old firm was dissolved---Separate assessments to be made on two firms---Indian Income Tax Act, 1961, Ss. 187 & 188.
Section 187 of the Income Tax Act, 1961, deals with the assessment of the firm when there is a change in the constitution of the firm. The proviso to subsection (2) was inserted by the Taxation Laws (Amendment) Act, 1984, with retrospective effect from April 1, 1975. Before the insertion of the proviso to subsection (2) the death of a partner was treated as a change and it was provided that at the time of making an assessment under section 143 or section 144 if it was found that a change had occurred in the constitution of a firm, the assessment had to be made on the firm as constituted at the time of making the assessment. The proviso directs that the provisions of clause (a) of subsection (2) shall not apply to a case where the firm is dissolved on the death of any one of the partners. In the previous year relevant to the assessment year 1979-80, there were six partners in the firm. Out of them, one partner BVS, died on August 28, 1978. In the partnership deed there was no stipulation that in the event of the death of one of the partners the firm would continue as such. After the death of the said partner, a separate partnership was entered into by the remaining partners and a deed of partnership was executed on September 19, 1978. The assessment-firm filed two returns, the first one for the period from April 1, 1978, to August 28, 1978, and the second one for the period from August 29, 1978, to March 31, 1979. The Income-tax Officer took the view that. on the death of the partner there was a change in the firm, and consequently he made a single assessment for the entire previous year. The Appellate Authority took the view that the Income-tax Officer was not justified in making a single assessment and this view was upheld by the Tribunal. On a reference:
Held, that the provisions of section 188 would apply and the Income-tax Officer would have to make two separate assessments, one on the predecessor firm for the period from April 1, 1978 to August 28, 1978, and the second on the successor firm for the period from August 29, 1978 to March 31, 1979.
CIT (Addl.) v. Vinayaka Cinema (1977) 110 ITR 468 (AP) ref.
S.R. Ashok for the Commissioner.
Nemo for the Assessee.
JUDGMENT
SYED SHAH MOHAMMED QUADRI, J. ---In this reference under section 256(1) of the Income Tax Act, 1961 (for short "the Act"), at the instance of the Revenue, the following question is referred to this Court for opinion, viz.:
"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is correct in law in holding that consequent on the death of one of the partners, Sri B.V. Satyanarayana, on August 28, 1978, there was dissolution of the firm under section 187(2) of the Income-tax Act and consequently directing two separate assessments for the assessment year 1979-80 one for the period up to the date of death of the partner and the other for the subsequent period?"
The respondent is the assessee. It is registered firm. In previous year relevant to the assessment year 1979-80, there were six partners in the firm. Out of them, one partner, Sri B.V. Satyanarayana, died on August 28, 1978. In the partnership deed there was no stipulation that in the event of death of one of the partners, the firm would continue as such. After the death of the said partner, a separate partnership was entered into by the remaining partners and a deed of partnership was executed on September 19, 1978. The assessee-firm filed two returns, the first one for the period from April 1, 1978 to August 28, 1978, and the second one for the period from August 29, 1978, to March 31, 1979. The Income-tax Officer took the view that on the death of the said partner there was a change in the constitution of the firm, consequently, he made a single assessment for the entire previous year, by order of assessment, dated October 31, 1981. He also made a protective assessment on the basis of the income returned for the first period. Against the said order of assessment, the assessee carried the matter in appeal before the Commissioner of Income-tax (Appeals). The appellate authority took the view that the Income-tax Officer was not justified in making single assessment for the said two periods and directed the Income-tax Officer to make two separate assessments for the abovesaid two periods. Aggrieved by the said order of the Commissioner of Income-tax (Appeals), the Revenue went in appeal before the income-tax Appellate Tribunal. The Tribunal held that on the death of the partner, the firm was dissolved and it could not be said that there was a mere change in the constitution of the firth and that the subsequent firm could not be treated as a continuation of the old firm or that the second firm was only a continuation of the old firm with a change in its constitution. In that view of the matter, the Tribunal dismissed the appeal of the Revenue on January 1, 1994. It is from the order of the Tribunal, the abovesaid question has arisen.
It will be useful to read here the provisions of sections 187 and 188 of the Income Tax Act, 1961, which are as follows:
"187. Change in constitution of a firm. ---(I) 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 purposes 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 purpose 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:
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.
188. Succession of one firm by another firm.---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 can be seen that section 187 of the Act deals with the assessment of the firm when there is change in the constitution of the firm. We may note here that the proviso to subsection (1) of section 187 was omitted by the Direct Tax Laws (Amendment) Act, with effect from April 1, 1989. The proviso to subsection (2) was inserted by the Taxation Laws (Amendment) Act, 1984, with retrospective effect from April 1, 1975. Before the insertion of the proviso to subsection (2), the death of a partner was treated as a change and it provided that at the time of making an assessment under section 143 or section 144 if it was found that a change had occurred in the constitution of a firm, the assessment had to be made on the firm as constituted at the time of making the assessment. Subsection (2) explains as to what constitutes a change in the constitution of the firm for purposes of section 187. It has already been mentioned above that the death of the partner was treated as a change.
Section 188 provides how the assessment should be made in cases of succession of one firm by another firm. It says that where a firm carrying on a business or profession is succeeded by another firm and section 187 has no application to the case, then separate assessments have to be made on the predecessor firm and the successor firm in accordance with the provisions of section 170.
From a reading of the above two provisions, it is clear that if there is a change in the constitution of the firm, then section 187 is attracted and a single assessment has to be made on the firm as constituted at the time of making the assessment and the death of a partner is not treated as a fact changing the constitution of the firm for the purpose of section 187. Where one firm carrying on business or profession is succeeded by another firm and the provisions of section 187 have no application, then separate assessments have to be made on the predecessor firm and the successor firm in accordance with the provisions of section 170.
In Addl. CIT v. Vinayaka Cinema (1977)110 ITR 468, a larger Bench of this Court, by a majority, held that the very basic concept oinderlying section 187(1) was that one and the same firm must be continuing throughout the assessment year under consideration and even if there was a change in the constitution of the firm, the firm, as an entity must continue as one and a single entity throughout the period; in such a case there must be a single assessment because there would be only one assessment, viz., on the firm as it stood at the time of the end of the assessment year and in such a case it could not be contended that there should be two assessments. It was further held that subsection (1) of section 187 did not apply to a situation where the firm was dissolved by operation of the one or the other provisions of section 42 of the Indian Partnership Act and after the dissolution one or more partners continue the same business as before by a fresh agreement with one or more new partners, that when a partner had died and the firm was dissolved though it could be said that he ceased to be a partner, it could not be said that there was a mere change in the constitution of the firm. It was in the light of the judgment of the larger Bench that the Tribunal has held that it cannot be said that the second firm was only a constitution of the old firm with a change in its constitution and dismissed the appeal of the Revenue. Here we must take note of the change in the law as it stands by virtue of the amendment in section 187, that is, insertion of the proviso to subsection (2), referred to above. The said proviso directs that the provisions of clause (a) of subsection (2) shall not apply to a case where the firm is dissolved on the death of any one of the partners. As a result of the insertion of the said proviso, it cannot be said that a change has occurred in the constitution of the firm. If that be so, section 187 would not be attracted. Consequently, the provisions of section 188 would apply and the Income-tax Officer will have to make separate assessments, one on the predecessor firm for the period from April 1, 1978 to August 28, 1978, and the second on the successor firm for the period from August 29, 1978 to March 31, 1979.
In view of the above discussion, we answer the question in the affirmative, i.e., in favour of the assessee and against the Revenue.
The reference is accordingly answered.
M.B.A./2032/FCReference answered.