COMMISSIONER OF INCOME-TAX VS SHERALLY MEHERALLY & SONS
1999 P T D 3423
[230 I T R 120]
[Bombay High Court (India)].
Before Dr. B. P. Saraf and A. Y. Sakhare, JJ
COMMISSIONER OF INCOME-TAX
versus
SHERALLY MEHERALLY & SONS
Income-tax Reference No. 165 of 1985, decided on 13/11/1997.
Income-tax---
----Firm---Assessment---Change in constitution of . firm or succession---No provision in partnership deed that firm would not be dissolved on death of a partner---Firm consisting of two partners---Death of a partner---New firm constituted by fresh deed of partnership between sole surviving partner of old firm and widow of deceased partner---Resulted in dissolution of old firm and emergence of new firm---Two assessments to be made, one for period before dissolution of firm and one for period after dissolution of firm---Indian Income Tax Act, 1961, Ss. 187 & 188.
A partnership firm was constituted under a deed of partnership, dated May 12, 1967, comprising two partners. One of the partners died on June 27, 1977, and a new firm was constituted by a fresh deed of partnership, dated September 5, 1977, between the sole surviving partner of the old firm and the widow of the deceased partner. For the assessment year 1978-79 two returns were filed in respect of the two firms, one for the period from October 24, 1976 to June 27, 1977, and the other for the period from June, 28, 1977, to November 11, 1977, as according to the assessee two different firms existed during these two periods. The Income-tax Officer rejected the contention of the assessee on the grounds that the firm did not stand dissolved on the death of one of the two partners and the old partnership firm continued to exist, that it was a case of mere change in the constitution of the firm as contemplated under section 187 of the Income Tax Act, 1961, and accordingly passed one assessment order in respect of the income of the entire period. On appeal, the Appellate Assistant Commissioner held that it was a case of dissolution of the old firm and the emergence of a new firm and hence directed the Income-tax Officer to pass two separate assessment orders for each of the two periods. On further appeal, the Tribunal affirmed the order of the Appellate Assistant Commissioner and observed that firm as constituted under the partnership deed, dated May 12, 1967, consisted of two partners and on the death of one of them,the firm stood dissolved in accordance with section 42 of the Partnership Act, 1932, and that there was no agreement between the partners that the firm would continue after the death of one of them. On a reference:
Held, affirming the decision of the Tribunal, (i) that the partnership came to an end on the death of one of the two partners and if the successor or, the legal representative of the deceased partner joined the sole surviving partner thereafter, to continue the business in partnership, the partnership between them would be a new partnership. Therefore, the Tribunal was right in holding that the provisions of section 187 of the Income Tax Act, 1961, would not be applicable to the case. of the assessee-firm and two separate assessments had to be made for the two periods, one for the period from October 24, 1976 to June 27, 1977, and the other for the period from June 28, 1977, to November 11, 1977.
(ii) That after the insertion of the proviso to section 187 with effect from April 1, 1975, to the effect that "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 controversy was concluded in favour of the assessee since the reference pertained to the assessment year 1978-79.
CIT v. Seth Govindram Sugar Mills (1965) 57 ITR 510 (SC) and CIT v. Empire Estate (1996) 218 ITR 355 (SC) fol.
Mt. Sughra v. Babu AIR 1952 All. 506 and Narayanan v. Umayal AIR 1959 Mad. 283 ref.
Dr. V. Balasubramanian, Senior Advocate for the Commissioner
P.C. Tripathi: Amicus curiae
JUDGMENT
DR. B.P. SARAF, J.---By this reference under section 256(1) of the Income Tax Act, 1961 (the "Act"), at the instance of the Revenue, the Income-tax Appellate Tribunal has referred the following question of law to this Court for opinion:
"Whether; on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the provisions of section 187 would not be applicable?"
The material facts of the case relevant for deciding the controversy in the above question, briefly-stated, are as follows:
By a deed of partnership, dated May 12, 1967, Hussainally Sherally and Roshanali Sherali agreed to carry on the business of fire-wood and timber in partnership and share the profits and losses in the ratio of 65: 35. On June 27, 1977, Hussainally Sherally died. As a result, the firm stood dissolved. On September 5, 1977, the sole surviving partner, Roshanali Sherah, entered into a fresh deed of partnership with the widow of Hussainally Sherally, Smt. Kalsumbai, to carry on the said business in partnership with her. For the assessment year 1978-79, two returns of income were filed in respect of the two firms, one for the period from October 24, 1976 to June 27, 1977, and the other for the period from June 28, 1977 to November 11, 1977, as according to the assessee two different firms existed during these two periods. The Income-tax Officer did not accept this contention of the assessee as he was of the opinion that the firm did not stand dissolved on the death of one of the two partners and the old partnership firm continued to exist. According to him, it was a case of mere change of constitution of firm as contemplated by section 187 of the Income-tax Act. He accordingly passed one assessment order in respect of the income of both the firms.
Aggrieved by the above order of the Income-tax Officer, the assessee appealed to the Appellate Assistant Commissioner of Income-tax. The Appellate Assistant Commissioner did not agree with the opinion of the Income-tax Officer. According to him, it was a case of dissolution of the firm and emergence of a new firm. He, therefore, directed the Income-tax Officer to pass separate orders of assessment for each of the two periods. The Revenue appealed against the order of the Appellate Assistant Commissioner to the Income-tax Appellate Tribunal (the "Tribunal"). The Tribunal agreed with the Appellate Assistant Commissioner and dismissed the appeal of the Revenue. While doing so, the Tribunal observed that the firm as constituted under the partnership deed, dated May 12, 1967, consisted of two partners and on the death of one of them, it stood dissolved. The Tribunal also observed that there was no agreement between the partners that the firm would continue after the death of one of them and held that in that view of the matter and also under section 42 of the Partnership Act, the firm stood dissolved on the death of one of the partners. Hence, this reference at the instance of the Revenue.
We have heard Dr. Balasubramanian, learned counsel for the Revenue. We have also heard learned counsel Mr. Tripathi, who was requested to assist the Court in this matter on behalf of the assessee. We have perused the facts of the case. The uncontroverted factual position is that the partnership firm constituted under the deed of partnership, dated May 12, 1967, comprised two partners. One of them died on June 27, 1977 and a new firm was constituted by a fresh deed of partnership, dated September 5, 1977, between sole surviving partner of the old firm and the widow of the deceased partner, Hussainally Sherally. The question that arises for consideration is whether it is reconstitution of the firm within the meaning of section 187 of the Act or it is a case of succession of one firm by another.
We have perused the provisions of sections 187 and 188 of the Income-tax Act and sections 31 and 42 of the Indian Partnership Act. On a careful consideration of the same, we are of the clear opinion that the partnership came to an end on the death of one of the two partners and if the successor or the legal representative of the deceased partner joined the sole surviving partner thereafter, to continue the business in partnership, the partnership between them would be a new partnership. We are supported in our above conclusion by section 42 of the Partnership Act, which so far as relevant, reads as follows:
"42. Subject to contract between the partners a firm is dissolved---
(c) by the death of a partner; ...."
Reference may also be made in this connection to section 31 of the Partnership Act which reads as follows:
"32.(1) Subject to contract between the partners and to the provisions of section 30, no person shall be introduced as a partner into a firm without the consent of all the existing partners."
It is clear from a plain reading of the above provision that it applies to a firm of more than two partners. It cannot apply to a firm of two partners because in that case, if one of the two partners dies, the firm automatically conies to an end and thereafter, there is no partnership in existence for a third patty to be introduced therein. In that view of the matter, it is clear that the Tribunal was right in holding that it was not a case of change of constitution of the firm within the meaning of section 187 of the Income-tax Act.
We are supported in our above conclusion by the decision of the Supreme Court in CIT v. Seth Govindram Sugar Mills (1965) 57 ITR 510. That was also a case of partnership comprising two partners who had entered into partnership representing their joint families. Under clause (3) of the partnership deed, it was provided (page 514):
"The death of any of the parties shall not dissolve the partnership and either the legal heir or the nominee of the deceased partner shall take his place in the provisions of the partnership."
The question for consideration of the Supreme Court was whether on the death of one of the partners, his heirs automatically became the partners of the said firm. The Supreme Court, on a consideration of the provisions of sections 42(c) and 31(1) of the Indian Partnership Act, held that the partnership between the two partners came to an end on the death of one of the partners. The Supreme Court repelled the contention of the Revenue in that case that a combined reading of sections 42 and 31(1) of the Partnership Act would lead to the conclusion that the two partners of the firm could by an agreement induct a third person into the partnership after the death of one of them. It was observed:
"Section 42(c) of the Partnership Act can appropriately be applied to a partnership where there are more than two partners. If one of them dies, the firm is dissolved; but if there is a contract to the contrary, the surviving partners will continue the firm."
The Supreme Court also reffered with approval to the following observations of Agarwala, J. of the Allahahad High Court in Mt. Sughra v. Babu, AIR 1952 All 506:
"In the case of a partnership consisting of only two partners, no partnership remains on the of one of them and, therefore, it is a contradiction in terms to say that there can be a contract between two partners to the effect that on the death of one of them to the partnership will not be dissolved but will Partnership is not a matter of status, it is a matter of contract. No heir can be said to become a partner with another person without his own consent, express of implied."
The Supreme Court referred with approval to the following observations of Ramachandra Iayer J. in Narayanan v. Umayal, AIR 1959 Mad. 283:
" .. if one of the partners died, there will not be any partnership toting to which the legal representatives of the deceased partner could be taken in. In such a case the partnership would come to an end by the death of one of the two partners, and if the legal representatives of the deceased partner joins in the business later, it should be referable to a new partnership between them. "
Reference may also be made in this connection to the latest decision of the Supreme Court in CIT v. Empire Estate (1996) 218 ITR 355. That was a case of a firm with more than two partners. The Supreme Court referred to sections 187 and 188 of the Income-tax Act and section 42(c) of the Partnership Act and observed:
"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."
Reference may also be made in this connection to the following proviso to section 187, which has been incorporated with effect from April 1, 1975:
"Provided that nothing contained in clause (a) shall apply to a ease where the firm is dissolved on the death of any of its partners."
In fact, the controversy in this case stands concluded in favour of the assessee in view of the above proviso itself because this reference pertains to the assessment year 1978-79 to which the above proviso applies.
For the reasons set out above, the question is answered in the affirmative and in favour of the assessee.
This reference is disposed of accordingly with no order as to costs.
Before parting with this case, we want to record our appreciation of the assistance rendered by Mr. Tripathi.
M.B.A./3108/FCReference answered.