JUDGMENT
V.V. Kamat, J.
1. The following two questions have been referred for consideration and consequent opinion :
“1. Whether, on the facts and in the circumstances of the case, was the Tribunal right in law and fact in holding that in the case under consideration a new firm has come into existence on the death of one of the partners ?
2. Whether, on the facts and in the circumstances of the case, was the Tribunal right in law and in fact in finding that from the conduct of the partners, it is very clear that there was a dissolution of the firm which had come into existence on April 16, 1956 ?”
2. Although a third question was framed, it has not been referred.
3. The assessee-firm was constituted under a deed of partnership dated April 16, 1956, in the name and style of “Paper Mart”. One of the four partners, one Sri K.T. Paul, expired on March 24, 1977. According to the deed of partnership, he had three shares whereas the other partners, namely, K.T. Cherukutty had one share, K.T. Francis had two shares and lastly, K.T. Antony had one share. On that day (March 25, 1977) under an entirely new and separate deed of partnership a new partnership of the remaining three partners came into existence under a document. In addition thereto, simultaneously a deed of dissolution of the earlier partnership was also entered into between the remaining three partners. On the basis of the earlier orders of this court all these three documents, namely, the original deed of partnership dated April 16, 1956, the deed of dissolution dated March 25, 1977, and the new partnership dated the same day are placed on record as annexures “E”, “F” and “G”, respectively, on the record in a proper and legal manner. On seeing the deed of dissolution it is clearly seen that the three parties to the deed of dissolution are stated to be carrying on partnership business under the earlier document dated April 16, 1956, and under the said deed the earlier partnership is dissolved. Perusal of the document shows that the profits and losses up to March 25, 1977, are agreed to be determined by the closure of the accounts of the earlier firm in proportion to the shares of the partners relating thereto. Perusal of the further terms and conditions of the document also reveals that the heirs and legal representatives of the deceased partner of the earlier firm are looked after by giving them their agreed share. This aspect is specified in the deed of dissolution especially in Clause 4(b) thereof.
4. Even looking at the deed of partnership dated March 25, 1977, it is seen that an entirely new and separate partnership has come into existence under the above document. It is also referred to therein that the passing away of one of the partners of the earlier firm, Sri K.T. Paul, was the occasion to dissolve the earlier firm. The document also makes it abundantly clear that in the process of dissolution it is not that the share of the deceased partner is looked after in the process of dissolution, but even the shares of the remaining three partners have also been separated by metes and bounds carefully recording the terms and conditions in regard thereto also. On the factual matrix the two documents have made it abundantly clear that the earlier firm has ceased to exist on its partners having been separated by metes and bounds although the occasion was the death of one of them. A new partnership has come into existence.
5. It is in the light of the above factual peculiarities, that application of the provisions of Sections 187, 188 and 189 of the Income-tax Act, 1961, would require consideration. It will have to be seen that these Sections 187, 188 and 189 dealt with three different situations. Whereas Section 187 deals with a case where the firm continues the same as before in the eye of law, but there is a change in the constitution either because of a partner going out or any partner coming in and so long as one of the partners is common. There is a process of continuation with the entry and exit of some of the partners, reasons may be manifold keeping some of the partners as a mark of the continuation process. .
6. Section 188 relates to the situation of succession of one firm by another and in such a situation an occasion is created for a separate assessment in the light of the provisions of Section 170 of the Act. Section 189 deals with the situation applicable to the factual matrix at our hands. A partnership firm is dissolved when its business gets discontinued. This would be obviously an occasion for a separate legal situation in the context. The documentary material on record as we have spelt out hereinbefore makes the situation abundantly clear that there is no facet of continuance and to the contrary it is seen that the death of one of the partners Sri Paul was an occasion for others to dissolve the earlier partnership, separate themselves individually from, each other settling the accounts and meeting the claims of the heirs and legal representatives of the deceased partner Paul and then agreeing to come together on a new and entirely independent contractual basis forming partnership afresh.
7. In this background, it is necessary to consider the emphasis placed on Clause 2 of the original partnership deed. The contention of the Department was that as a result of the said clause, the dissolution could not be considered as permissible. Even the appellate authority has relied on the approach of the Income-tax Officer with reference to Clause 2 carving out an exception from the general principles of the law of partnership regarding the dissolution of a firm in the event of the death of a partner. We had the advantage of getting the text of Clause 2 of the original deed of partnership dated April 16, 1956. It would be convenient to quote the said clause verbatim as follows :
“The partnership business shall be to carry on the business of paper merchants, to deal in yarn and dyes, to conduct printing press, to deal in soaps, to undertake the publication of books, to do agency or brokerage business and such other business allied to the above and any other business which can be conveniently carried on and shall be situated at Trichur and in such other place or places and shall be of such other nature as the partners may from time to time agree upon.”
8. A bare reading of the said clause quoted hereinbefore exhibits an entirely opposite situation making it clear by way of reinforcement of the principles of law in regard thereto that normally on the death of any one of the partners the consequence is dissolution of the partnership, subject to contract to the contrary. It is not possible to comprehend the contention relying on Clause 2 of the deed of partnership.
9. It would not be out of place to refer to the observations in the Full Bench judgment of the Andhra Pradesh High Court in Addl. CIT v. Vinayaka Cinema [1977] 110 ITR 468 to the effect that the death of one of the partners is not a definite pointer either way. There has to be material for continuance of the business with regard to the dissolution of the firm and also with regard to the existence of a new and independent partnership by itself. If those aspects are available, it is clear that there would be two separate assessment proceedings.
10. The decision of the Supreme Court in Wazid Ali Abid Ali v. CIT [19881 169 ITR 761 directly deals with the situation in regard to the partnership deed even containing a clause providing that the firm shall not be dissolved on the death of a partner, but shall continue with remaining partners and the heir of the deceased partner agreeing to join. The death of the partner during the year, closing of accounts and crediting would definitely result in amounting to dissolution requiring separate assessment to be made up to the date of death. It is also clear that the clause in the partnership deed to the contrary that the firm shall not be dissolved on the death of a partner, but shall continue with the remaining partners and the heir of the deceased partner seeking to join would have no consequence in respect of the requirement of separate assessment.
11. For the above reasons the reference is answered in the affirmative, against the Revenue and in favour of the assessee.
12. A copy of this judgment shall be caused to be sent under the seal of the court and the signature of the Registrar to the Income-tax Appellate Tribunal, Cochin Bench. Order accordingly.