JUDGMENT
D.K. Jain, J.
(1) At the instance of the revenue the Income-tax Appellate Tribunal has referred under Section 256(1) of the Income-taxAct. 1961 (for short the Act), the following question for the opinion of this Court :Whether on the Pacts and in the circumstances of the case,the Tribunal was right in holding that the present was not a case of change in the Constitution of the linn,and in directing that separate assessments be made on the two firms, instead of one consolidated assessment?”
(2) The material facts as found and narrated by the Tribunal in the statement of the case are as follows :
(3) Originally the assesses firm consisted of five partners with a minor admitted to the benefits of the partnership. With effect from 1/01/1969 there were certain changes in the constitution of the firm,with which we are not concerned, except to mention that the deed of partnership contained the following three clauses :
“17.That if any party desires to retire from the partnership business he shall have to give at least three months notice to the remaining partners and can retire while settling his accounts at the close of the accounting year and in so doing the outgoing party shall not be entitled to the rights or value of the goodwill of the partnership business.
18.That the partnership being at will, it may be dissolved by the mutual consent of all the partners hereto.
19.That in the event of death of any party, the partnership shall not be dissolved but the heir or heirs of the deceased partner shall be entitled to step into his place in the partnership business.”
(4) It appears from the preamble of the deed of dissolution dated 2/05/1969 that on account of some differences between the partners,they decided to dissolve the firm. Accordingly, on 2/05/1969 the partners of the firm drew two deeds-one of them was the deed of dissolution of the firm w.e.f. 30/04/1969. By this dissolution deed,all the assets and liabilities of the firm were to be taken over by two partners and the other partners were to be paid the amount standing to their credit in the balance sheet. The other deed was an instrument of partnership by which a new partnership firm was formed with the above two partners Along with two other persons. In addition, two minors were also admitted to the benefits of the firm. The terms and conditions of the newly constituted firm were set out in the new partnership deed. The name of the firm and the nature of the business.however, continued to be I ho same as before. The new firm commenced its business from 1/05/1969. The accounting period of the original as well as the new firm was the calendar year.
(5) For the assessment year 1970-71, for which the accounting period ended on 31/12/1969, the assessed firm filed two returns of income claiming that during the previous year there were two firms in existence; (i) from I January 1969 to 30/04/1969 and (ii) from 1/05/1969 to 31/12/1969, when the newly constituted firm carried on the business. The Income-tax Officer did not accept thisclaim. He took the view that it was merely a change in the constitution of the firm during the previous year as contemplated by Scetion187(2) of the Act. He, therefore, assessed the entire income for the period from 1/01/1969 to 31/12/1969 in the hands of the newly constituted firm. On appeal, the Appellate Assistant Commissioner held that the old firm had been dissolved and that the second firm could not be treated as a reconstitution of the previous firm and,therefore, assessed’s case did not fall under Section 187(2) of the Act,He accordingly directed separate assessments in respect of the income for the two periods, viz., 1/01/1969 to 30/04/1969 and 1/05/1969 to 31/12/1969.
(6) Aggrieved by the decision of the Appellate Assistant Commissioner, the revenue preferred an appeal to the Tribunal. There was a difference of opinion between the Judicial Member and the Accountant Member. The Judicial Member took the view that in view of provisions of Section 187 of the Act, the Income-tax Officer was justified in making a single assessment for both the said periods. On the other hand the Accountant Member was of the view that the provisions of Section 187(2) came into operation only where in the eye of law the same firm continued to exist but that where a firm stood dissolved in law and in terms of the contract concerning the partnership, the language of Section 187(2) could not be considered to be wide enough to authorise single assessment on the successor firm under Section 187(1) of the Act. On account of this difference of opinion, the matter was referred to the third Member, who agreed with the view taken by the Accountant Member. Thus. by majority view the Tribunal held that the income of the old and the newly formed firm should be assessed separately for the aforesaid two periods and the tax liability determined accordingly. Hence the present reference.
(7) On the above facts, the point referred for our opinion is whether the income earned by the old dissolved firm is to be clubbed with the income of the newly constituted firm and assessed as such in the hards of the reconstituted firm.
(8) To us, the matter appears to be simple in that it is not a case of continuation of old firm, to which only Section 187 of the Act would be attracted but of dissolution of old firm on execution of the dissolution deed and the emergence of a new distinct firm under a new partnership deed executed on 2/05/1969. As such answer to the question has to be in the affirmative. We also feel that after the decision of the Supreme Court in Wazid Ali Abid Ah v. C.I.T., (1988) 169 Itr 761 and of this Court in Commissioner of Income Tax v. Sant Lal ArvindKumar, (1982) 136 Itr 379 the controversy involved in the case has been laid to rest.
(9) However, Mr. B. Gupta, learned counsel for the revenue has raised the three contentions as below: (i) When on 2 May 1960 there constituted firm came into existence, it was a case of retirement of some partners and induction of some others with four partners continuing in the partnership as before and, therefore, when the deed did not say that retirement will result in dissolution. It was in any case a case of change in constitution of firm under Section 187(2) read with Section 188 of the Act; (ii) the special provisions of Section 187(2) and 188 having been enacted to prevent tax evasion, these should be interpreted in such a way that these are not rendered nugatory or otiose and (iii) the decision of the five Judges Bench of the Allahabad High Court in Vishwanath Seth v. C.I.T., (1984) 146 ITR249 having not been over-ruled by the Supreme Court in WazidAli’s case, it continues to be good law even today and should be applied to the facts in hand. In support of the last contention,reliance is placed on a Division Bench Decision of the Allahabad High Court in Commissioner of Income Tax v. Basant Behari Gopal Behari & Co., (1988)172 Itr 662. He also submits that although in Sant Lal ArvindKumar’s case, there are certain observations which go against the stand point of the revenue, but in so far as the question of applicability of Sections 187 and 188 of the Act to the facts of the present case isconcerned, its ratio cannot apply because all the decisions relied upon in that case were cases of death of a partner. He assets that the concept of firm under Section 187 is different from the one under the Partnership Act.
(10) The first contention is fallacious. It is not a case of mere retirement but of dissolution of the firm and formation of a new firm under a new partnership agreement. Retirement is severance of his relationship by some partner(s) from the other partners continuing the said business as before. Dissolution of firm is between all thepartners on which heretofore relationship ceases between all. In the present case, the preamble of the deed of dissolution negatives the contention that it was a case of mere retirement. The prime quetion is not whether some of the old partners also happen to be partners in the newly constituted firm but whether the old firm continued to exist or finished and instead a new firm came into existence. Merely because some partners of the old dissolved firm also became partners Metal Store, Delhi in the new firm it cannot be said that it is a continuation of the oldfirm. The old firm stood dissolved on execution of the dissolutiondeed. A partnership is a relation between the persons who are agreed to share the profits of a business carried on by all or any one of them acting for all. The relationship between them is essentiallycontractual. On dissolution of the firm on 2/05/1969 this relationship terminated. It could not continue. Of course it was open to some of them) as in the instant case, Along with others to enter into a new relationship constituting a new firm. Such a firm cannot be said to be a continuation of the old dissolved firm or to have been re-constituted under Section 187(2) of the Act but the formation of a new firm succeeding the old firm, falling within the ambit of Section 188 of the Act.
(11) The second contention, we feel has to be stated to be rejected.In the light of the view taken by this Court in Sant Lal Arvind Kumar’scase, with which we are in respectful agreement, we feel that there being no conflict between Section 187 and the general provisions of the Partnership Act, the argument does not survive for consideration.Even otherwise, it was never the case of the revenue that in the present case change in constitution of the firm was effected, w.e.f. 1/05/1969,with a view to avoid tax. Right from the assessment stage till the second appeal before the Tribunal, the only legal issue raised waswith reference to the applicability of Section 187 and nothing else.We cannot permit the revenue to raise this issue in these proceedings at this late stage, particularly when it would involve fresh investigation into facts.
(12) Coming to the third contention of Mr. Gupta, which is based on the decision of the Allahabad High curt in Basant Behari Gopal Behari & Cots case (supra), (which is otherwise distinguishable being confined to its own facts not available here), wherein the Division Bench of that Court has taken the view that in Wazid Ali’s case, the Supreme Court had not over-ruled its Five Judges Full Bench decision in Vishwanath Seth’s case (supra). According to the Division Bench,there was no occasion for the Supreme Court in Wazid Ali’s case over-rule the decision in Vishwanath Seth’s case and, therefore, in that view of the matter, the Full Bench decision in Vishwanath Seth’scase continued to be a binding decision despite the decision of the Supreme Court in Wazid Ali’s case.
(13) On a careful perusal of the decision of the Supreme Court inWazid Ali’s case, we are unable to persuade ourselves to read the said decision the way the Allahabad High Court has read it in Basant Behari Gopal Behari’s case. One of the judgments noticed and clearly approved by the Supreme Court in Wazid Ali’s case was the Bench decision of the Allahabad High Court in Commissioner of Income Tax v. Shiv Shankar LalRam Nath, (1977) 106 Itr 3426 which had been reversed by the five Judges Full Bench in Vishwanath Seth’s case. The Supreme Court dealt with this decision and the said two Full Bench decisions of thesame High Court as under : “CITv. Shiv Shanker Lal Ram Nath (1977) 106 Itr 342 isa Bench decision of the Allahabad High Court which held that in case where a firm is reconstituted, the old firm cases to exist. It was observed by the court that section 187 of the Act even by implication does not create a fiction that the income derived by the old firmbe comes the income of the reconstituted film. The High Court held that the Tribunal was right in holding that after reconstitution, it becomes a separate assessableunit. The same High Court in a Full Bench decision of five Judges held that it was well settled that on the death of a partner, the constitution of the firm changes. It observed that if a partner dies and is replaced by a legalrepresentative, there is a change in the constitution of the firm and the new firm will be liable in respect of the income derived from the old firm. The Full Bench suggested that after the reconstitution, the firm becomes a distinct assessable entity, different from the firm before its reconstitution. It observed that two different assessment orders had to be passed, one in respect of income derived by it before reconstitution and the other in respect of income derived after its. reconstitution. The decision under appeal here was over-ruled by the said Full Bench decision. But the Full Bench of the Allahabad HighCourt consisting of five learned judges in Vishwanath Seth v. Commissioner of Income Tax (1984) 146 ITB. 24.9 over-ruled the previous decision of that Court in Commissioner of Income Tax v. Shiv Shankar Lal Ram Nath (1977) 106 Itr 342 and Badri Narain Kashi Prasadv. Additional Commissioner of Income Tax (1978) 115 Itr 858(All)(FB). This Full Bench ruled that under the general law of partnership under the Indian Partnership Act as well as under section 187 of the Act in the case of reconstitution of a firm, it retains its identity and is assessable in respect of the entire previous year. In view, however, of the scheme of Chapter Xvi of the Act, we are unable to agree; if we were left with the general position under the India Partnership Act, we might have agreed.”
(14) The above paragraph leaves little room for doubt in our mind that the Supreme Court has. in clear terms, approved the decision of the Division Bench in Shiv Shankar Lal Ram Nath’s case (supra),which was also approved by the three Judges full Bench of the same Court in Badri Narain Kashi Prasad’s case and did not agree with the contrary view taken by the five Judges Bench in VishwanathSeth’ s case. It is also clear from the fact that the Supreme Court has categorically disapproved the view taken by the Full Bench of Madhya Pradesh High Court in Girdharilal Nannelal v. Commissioner of Income Tax (1984)147 Itr 529, which was similar to the one taken in Vishwanath’scase and contrary to the view taken by the Division Bench in ShivShankar Lal Ram Nath’s case.
(15) The facts of the case in hand are similar to the facts in ShivShankar Lal Ram Nath’s case (supra). That was also a case when:two partners had quitted and gone out and in their place two others were taken in as partners along with two minors, who were admitted to the benefits of the partnership and in these facts it was held thatnot withstanding the provisions of Section 187 of the Act, the firm,after it underwent change in its constitution, became an assessableentity, which for the purpose of assessment, was distinct from the firm as it stood before receonstitution and that the income derived by theold firm ought to be assessed in the hands of the new firm separately and without clubbing it with the income derived by it after reconstitution. The said decision having been dealt with specifically and then approved by the Supreme Court, we are of the opinion that it must be accepted as laying down the correct law and is on all fours to the facts of the present ease. Even otherwise, the ratio of the judgment of the Supreme Court in Wazid Ali’s case (supra) supports the majority view taken by the Tribunal.
(16) Before parting with the case, we may also deal with the last contention urged by Mr. Gupta that the ratio of the decision in Sant Lal Arvind Kumar’s case is not applicable on the facts of instant case,The pronouncement of the Supreme Court in Wazid Ali’s case (supra).wherein the decision of this Court in Sant Lal Arvind Kumar (supra)has also been considered and approved, is very clear and leaves no scope for any doubt that the point in issue, viz., whether in a situation.as prevailing in the instant case, it would be a case of succession governed by Section 188 or a case of mere change in constitution to which Section 187 of the Act is applicable, is no longer res integra and that that there is no merit in the contention. We, therefore, feel that it is not necessary for us to re-analyze the provisions of Sections 187 to 189 of the Act, which deal with the procedure to be adopted for assessment of the firm in the event of change in constitution, succession and dissolution in greater detail.
(17) Suffice it to say that Section 187(1) of the Act lays down that where at the time of making an assessment under Section 143 or 144, it is found that a change has occurred in the constitution of a firm,assessment shall be made on the firm as it exists at the time of making the assessment. Sub-section (2) of Section 187 merely clarifies asto what would a change in constitution mean for the purpose of Section 187. Section 188 provides for assessment in the case of succession of one firm by another and provides that where a firm carrying ona business or profession is succeeded by another firm, and the case is not 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, which deals with the procedure of assessmentetc. in the case of succession of the business or profession otherwise than on death. Section 189 lays down the manner of assessing a firm which has been dissolved or the business of the firm has beendiscontinued. It provides that the assessment has to be made of the the total income of the firm as if no such dissolution or discontinuance had taken place.
(18) From the language of Section 187 it is clear that it speaks of the firm on whom the assessment is to be made in the event of a change in constitution of the firm. The Section, thus, identifies the person on whom assessment is to be made in the case of change in the constitution as envisaged under Section 187(2) of the Act. It merely lays down that it is the firm as constituted at the time of making the assessment who shall be liable for assessment and no further. In Sant Lal Arvind Kumar (supra) dealing with the question as to whether theterms’ of Sections 186 to 189 carry any implication that even where a firm gets dissolved under the provisions of the partnership law it should be deemed to continue for the purpose of assessment to income-tax, it was held as follows ; “THE legislature could have easily said, but did not say, that the firm in the circumstances set out in s. 187(2) shall be deemed to continue to exists with only a change in the constitution notwithstanding that under any other law in force it may be considered to have got dissolved on the death of a partner, etc.Not only is there no deeming provision contained in s. 187,the language of that section, particularly sub-s. (2), clearly envisages the continued existence of a “firm”. It talksof: “a”-firm and “the” firm and it also postulates that there are common partners before or after .the change that is referred to there. This language clearly envisages that the provision comes into operation and applies only where there is in the eye of law a firm with continued existence and not to a case where under the law one firm has ceased to exist and another has come into existence.It appears to us that to import any such concept ins.187 would be to travel beyond the ordinary and natural meaning of the words used in the context of the partnership law that is clearly applicable and that has not been excluded by reason of any specific provision. The judicial decision deciding to the contrary appear to have read into the language of sub s(2) of s. 187 an implication that what all has to be done is to compare thepartners before a particular event and the partners after the particular event irrespective of whether the firm has continued or not and to have envisaged the definition ins. 187(2) as intended to transcend dissolutions of firms under the partnership law. In our opinion the purpose ofsub-s(2) is not by way of expansion of the normal concept of A change in the constitution. It appears to be really a purpose of limitation. The purpose of the definition insub-s(2) appears to be not to say that a firm will continue in spite of dissolution but rather to say that even in a case where there is only a change in the constitution the provisions of Sub-section (l) will not apply even if the partners before and after the change are not common.”
(19) Then again, considering the effect of the words “of succession not being a case falling under Section 187”, appearing in Section 188,on which much emphasis has been laid by Mr. Gupta the Court observed as under : “IN our opinion, however, too much of significance cannot be attached to these words. In the first place, the language of s. 187 has to be interpreted on its own and s. 188 does not put any further meaning into it. It will be remembered here that under the common law doctrine, which we have already referred to a firm has no legal personality at all apart from the partners. Under that common law doctrine even an ordinary change in the constitution which would normally fall within Chap. V. of the Indian Partnership Act would result in a case of succession.In fact it will be appropriate to notice that this was exactly the difficulty that arose in the case of A.W. Figgies and company considered by theSupreme court. In that case there were many changes in the constitution of the firm and it was argued by thedepartment, notwithstanding a specific exception ins.25(4), that these were not mere changes in the constitution but really a case of repeated succession, there having been a dissolution on each of the occasions of one firm and the formation of a new firm. It is in order to avoid contentions of that type that section 188 appears to have used the words above referred to. The intention of these words is that merely because there is a change in the constitution of the firm, it should not be argued that there is a succession of one set of persons by another because such a case would be really covered by s. 187. We,therefore, think that the language of s. 188, though creating a mild ambiguity, is not merely not inconsistent or contradictory but is only intended to clarify the meaning of s. 187 and to exclude the possibility of the applicabilityof the common law doctrine regarding the personality of a firm even in cases of mere change in the constitution.”
(20) While considering this decision in Wazid Ali's case (supra), the Supreme Court observed thus ; "WITHrespect, we agree that where in a case, there is a change in the constitution of the firm by taking of a new partner and the old firm is succeeded by a new firm then, in sucha case, there might be succession and there could be two assessments as contemplated under Section 188 of the Act. We accept the reasoning of that decision." (21) From the above observations of the Supreme Court it is evident that it has approved the approach of this Court in Santlal Arvind Kumar's case. Its fall would apply. We, therefore, reject the contention that the law laid down in Sant Lal Arvind Kumar's case is not applicable to the facts of the present case. (22) In view of the foregoing discussion we have no hesitation endorsing the view taken by the Tribunal that the income derived by the old firm from 1/01/1969 to 30/04/1969 should be assessed in the hands of the newly constituted assessed firm separately from theincome derived by it for the period from I May 1969 to 31/12/1969 and income for both the periods should not be clubbed together for the purpose of assessment on the assessed firm. We Would accordingly answer the question referred to us in the affirmative, thatis, in favor of the assessed and against the revenue. (23) Since the assessed is not represented, there will be no order as to costs.
