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PETITIONER: THE COMMISSIONER OF INCOME-TAX, CENTRAL-I, BOMBAY

       Vs.

RESPONDENT: MESSRS. EMPIRE ESTATE, BOMBAY

DATE OF JUDGMENT:       29/01/1996

BENCH: BHARUCHA S.P. (J) BENCH: BHARUCHA S.P. (J) VERMA, JAGDISH SARAN (J) MANOHAR SUJATA V. (J)

CITATION:  1996 SCC  (2) 345        JT 1996 (1)   675  1996 SCALE  (1)572

ACT:

HEADNOTE:

JUDGMENT:                       J U D G M E N T 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  1.6.1973  to      12.1.1974 and  the other  for the period      from  13.1.1974  to  30.6.1974,  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  A.Y.  1975-76.  The relevant accounting year ended on 30th June, 1974.      The assessee  is a partnership firm. It was constituted under a deed of partnership dated 18th July, 1968. Its there partners were  Mrs. Ellen Keki Modi, Mr.Rustom Keki Modi and Ms. Maneck  Keki Modi. Mrs. Ellen Modi died on 12th January, 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 13th January, 1974, and it  mentioned   that  the   earlier  partnership  had  stood dissolved on 12th January, 1974.      The assessee  filed  two  returns  of  income  for  the relevant previous year, one for the period 1st June, 1973 to 12th January,  1974  and  the  other  for  the  period  13th January, 1974  to 30th  June, 1974.  It contended  that  the

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earlier partnership had stood dissolved on the death of Mrs. Ellen Modi  on 12th  January, 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 [Commissioner of  Income-tax vs. Kunji Behari Shyam Lal. 109 I.T.R.  154],   the  Andhra   Pradesh  High   Court   [Add1. Commissioner of  Income-tax vs.  Vinayaka Cinema, 110 I.T.R. 468], the  Gujarat High  Court [Add1.Commissioner of Income- tax vs.  Harjivandas Hathibhai.  108  I.T.R.  571]  and  the Calcutta   High    Court   [Mathuradas    Govardhandas   vs. Commissioner of  Income-tax, 125 I.T.R. 470] on the one hand and the Punjab High Court [Nandlal Sohanlal vs. Commissioner of Income-tax,  110 I.T.R. 170] and the Karnataka High Court [Sangam Silks  vs. Commissioner  of Income-tax,  122  I.T.R. 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 I.T.O.  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 1st April, 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 12th January, 1974, the assessee’s case is not affected by the proviso.      Section 42  of the Indian Partnership Act, 1932, so far

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as it is relevant, reads:      "42. Subject  to  contract  between  the      partners a firm is dissolved-      (a)...      (b).....      (c) by the death of a partner: and      (d)...."      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 12th  January, 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,  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 an 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  vs. Commissioner of  Income-tax, Lucknow,  169 I.T.R.  761.  The relevant paragraph of the judgment reads thus :      "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 the  winding up  and  for      realization of  its dues. The High Court

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    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 of the firm by the manner in      which the  parties acted,  that there is      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 was cited. In Commissioner of Income-tax vs. Basant Behari Gopal Behari and Company, 172 I.T.R. 662, 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 Commissioner of Income-tax vs. Indralok  Picture Palace,  188  I.T.R.  730,  also,  the partnership deed  provided that the death of a partner would not result  in the  dissolution of the firm. A partner died. The assessee  filed two  returns. The  I.T.O. 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.