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Cit Lucknow v. Hindustan Motor Finance Co. - INCOME TAX REFERENCE No. 134 of 1985  RD-AH 849 (21 September 2004)
Income Tax Reference No.134 of 1985
Commissioner of Income Tax, Lucknow
v. M/s Hindustan Motors Finance Co., Bareilly
Hon'ble R.K.Agrawal, J.
Hon'ble K.N.Ojha, J.
(Delivered by R.K.Agrawal, J.)
The Income Tax Appellate Tribunal, Delhi has referred the following questions of law under Section 256(1) of the Income Tax Act, 1961 (hereinafter referred to as "the Act") for opinion to this Court:-
"1. Whether on the facts and in the circumstances of the case, the appellate Tribunal was justified in law in holding that the two firms were entirely distinct and separate entities and, therefore, on the basis of two returns filed for the periods 1.4.78 to 31.5.78 and 1.6.78 to 31.3.79 two separate assessments has to be made by the Income Tax Officer ?
2. Whether on the facts and in the circumstances of the case appellate Tribunal was justified in law in upholding the order of the Appellate Assistant Commissioner directing the Income Tax Officer to grant registration to the assessee firm for the assessment year 1979-80 in question ?"
Briefly stated, the facts giving rise to the present reference are as follows:-
The reference relates to the assessment year 1979-80. The respondent assessee is a firm carrying on the business of hire purchase of trucks. Initially the respondent firm was constituted under the partnership deed dated 1.4.1977 and had 12 partners. It was dissolved under a deed of dissolution, executed on 1.6.1978, and another partnership was constituted under a fresh deed of the same date in which 6 of the erstwhile partners, namely, Smt. Gurjeet Jaggi, Lt. Col. S.S.Gill, S.P.S.Gill, Smt. Rajinder Kaur and Smt. Kulwant Kaur, joined the fresh partnership alongwith two new partners - Sardar Lakhinder Singh and Smt. Harbans Kaur. The respondent filed two returns - one for the period 1.4.1978 to 31.5.1978 and the other for the period 1.6.1978 to 31.3.1979. The Income Tax Officer instead of making two assessments, had made only one assessment, treating it to be a case falling under Section 187 of the Act. He also declined the registration and assessed the respondent as unregistered firm. The respondent, feeling aggrieved, preferred separate appeals - one against the assessment and the other against the order declining registration. The Appellate Assistant Commissioner of Income Tax allowed both the appeals and directed the Income Tax Officer to frame two separate assessment on the basis of the return filed as also to grant registration to the firm. The Revenue's appeal before the Tribunal has failed.
We have heard Sri Govind Krishna, the learned counsel for the Revenue, and Sri Vikram Gulati, learned counsel appearing for the respondent.
The learned counsel for the Revenue submitted that earlier partnership firm which consisted of 12 partners, had undergone a change and a new firm was carried on by 6 of the existing partners with two new partners and, therefore, it clearly fell under Section 188 of the Act and, therefore, one assessment had to be made. He relied upon a decision of the Apex Court in the case of Commissioner of Income Tax v. Empire Estate, (1996) 218 ITR 855 (SC).
So far the grant of registration is concerned, he submitted that as the two new partners were Benamidars, the firm was not entitled for registration.
Sri Vikram Gulati, the learned counsel appearing for the respondent assessee, however, submitted that even though the respondent was earlier constituted as a partnership firm having 12 partners, it stood dissolved on 1.6.1978 when a deed of dissolution was executed. The assets and liabilities of the said firm was taken over by the six partners who decided to form a new partnership firm by taking in two new partners and, therefore, it is not a case of change in the constitution of firm but a case of succession of one firm by another firm falling under Section 188 of the Act. He, thus, submitted that the two assessments ought to have been made and not one.
Insofar as the grant of registration is concerned, he submitted that the findings given by the Appellate Assistant Commissioner that two new partners have brought in their personal funds and they are partners which has not been challenged and, therefore, the registration has rightly been granted. He relied upon the following decisions :-
(i) Dahi Laxmi Dal Factory v. Income Tax Officer, Sitapur, and another, (1976) 103 ITR 517 (All);
(ii) Commissioner of Income Tax v. Raj Brothers, (1987) 165 ITR 720 (A.P.);
(iii) Commissioner of Income Tax v. K.D.Punetha and sons, (1996) 218 ITR 114 (All);
(iv) Commissioner of Income Tax v. Sukh Dayal Sobh Raj, (1996) 218 ITR 309 (All);
(v) Commissioner of Income Tax v Omprakash Premchand and Co., (1997) 227 ITR 590 (M.P.).
Having heard the learned counsel for the parties, we find that the respondent, a partnership firm constituted under the partnership deed dated 1.4.1977, was having 12 partners till 31.5.1978 when, by virtue of a deed of dissolution dated 1.6.1978, the said partnership was dissolved and under a fresh deed of the same date another partnership was constituted by the six erstwhile partners and two new partners. Under the dissolution deed, the continuing partners have taken the business of the earlier partnership including the assets and liabilities and the goodwill of the partnership. The trade name, the business activities, the premises etc. continued to be the same. Section 187 of the Act deals with the change in a constitution of the firm. Sub-section (2) which is relevant for the present reference, is being reproduced below:-
"187. Change in constitution of a firm. -
(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;
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."
Section 188 of the Act deals with succession of one firm by another firm. It is applicable to a situation where the case is not one covered by Section 187 of the Act. It reads as follows:-
"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."
From a reading of the aforesaid provision, it would be seen that if in the newly constituted firm one or more partners continue after the change, it will be considered as a change in the constitution of the firm and where the firm is dissolved on death of any of its partner and is reconstituted with any or more existing partners, it will not be treated as a change in the constitution of the firm. Further, if a case is covered under Section 187 of the Act, the provisions of Section 188 of the Act dealing with succession of one firm by another firm would not arise.
In the case of Dahi Laxmi Dal Factory (supra), a Full Bench of this Court has held that where a firm is dissolved either by agreement of the partners or by operation of law and another firm takes over the business, that will be a case of succession, governed by Section 188 of the Act even though some of the partners of the two firms are common. In the case at hand before the Full Bench, the firm was constituted by two partners out of which one had died and there was no stipulation in the partnership deed that the firm shall not stand dissolved on the death of the partner.
In the case of Raj Brothers (supra), the Andhra Pradesh High Court has held that the dissolution of a partnership firm by any of the means set out in Sections 40 to 44 of the Partnership Act brings about a legal death of the partnership firm and from the date of dissolution, the partnership is to be treated as extinct for all purposes and, therefore, the petitioner partnership were liable to be assessed separately under Section 188 of the Act on the income derived by them for the respective period. The Andhra Pradesh High Court has further held that by introducing the proviso after sub-section (2) to Section 187 of the Act, by the Amendment Act, 1984, the Act sought to recognise only a dissolution brought about by the death of any of the partners within the meaning of Section 40(2)(c) of the Partnership Act and did not recognised all other forms of dissolution envisaged by Sections 40 to 44 of the Partnership Act.
In the case of K.D.Punetha and sons (supra), this Court has held that where the registered partnership deed did not provide that the firm would continue even after the death of one of its partners, it was incumbent upon the Assessing Officer to make two assessments for the two different period following the Full Bench decision of this Court in the case of Dahi Laxmi Dal Factory (supra).
In the case of Sukh Dayal Sobh Raj (supra), this Court has taken a similar view.
In the case of Omprakash Premchand and Co. (supra), the Madhya Pradesh High Court has held that the reconstitution and dissolution of firms are two distinct legal concept; whereas dissolution brings the partnership to an end, the reconstitution means the continuation of partnership under altered circumstances.
In the case of Empire Estate (supra), the Apex Court has held that in the case of partnership where a partner dies and the partnership deed provides that the death shall not result in the dissolution of the partnership, the provisions of Section 187 of the Act would not be applicable. If there is no such provision and a partner dies, the partnership stands dissolved. It does not then survive upon the death of this partner. The case is not one of a change in the constitution of partnership. It falls outside the scope of Section 187 of the Act and the provision of Section 188 of the Act is attracted.
All the decisions cited by the learned counsel for the respondent assessee relate to a case of death where there had been no provision in the partnership deed that the partnership firm shall not stand dissolved on the death of one of the partners.
In the case of Commissioner of Income Tax v. Ram Jas Rai Askaran Das, (1996) 218 ITR 18 (All), this Court has held that where in a partnership firm two of the partners had retired and the firm was reconstituted by the remaining four partners who also admitted some minors to the benefit of partnership and the partnership was dissolved on 31.3.1974 and a new partnership came into existence from 1.4.1974, it was a case of change in the constitution of the firm and not a case of succession and only one assessment has to be made.
From a reading of the provisions of Sections 187 and 188 of the Act, it is absolutely clear that a case which falls under Section 187(2) of the Act, would be treated to be a change in the constitution of the firm and not succession.
We are in respectful agreement with the view in the case of Ram Jas Rai Askaran Das (supra).
Sofaras the second question is concerned, it may be mentioned here that the Tribunal had found that the control and management of the business of a firm can be left upon an agreement between the parties in the hands of even one of the partners to be exercised on behalf of all of them and there was nothing wrong in constituting the three of the partners as Management Board for deciding day to day policy matter and for smooth running of the business of the firm. The deposits have been made by the new partners for themselves as partners and profits have been divided in accordance with the profit sharing ratio specified in the partnership deed. These findings have not been specifically challenged by the Revenue by raising a separate question of law. In this view of the matter, we are of the opinion that the firm was entitled for grant of registration.
In view of the foregoing discussion, we answer the first question of law in the negative, i.e., in favour of the Revenue and against the assessee, and the second question of law in the affirmative, i.e., in favour of the assessee and against the Revenue. There shall be no order as to costs.
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