JUDGMENT
V.A. Mohta, J.
1. The following two questions are referred at the instance of the assessee under section 256(1) of the Income-tax Act, 1961 :
“1. Whether, on the facts and in the circumstances of the case, there was only a change in the constitution of the firm ?
2. Whether, on the facts and in the circumstances of the case, there should have been two separate assessments for periods from January 1, 1973, to April 7, 1973, and April 10, 1973, to December 31, 1973 ?”
2. This reference is concerned with the assessment year 1974-75. The assessee is a partnership firm. On July 31, 1974, the firm filed two returns – one for the period January 1, 1973, to April 7, 1973 and the other for the period April 8, 1973, to December 31, 1973. The partnership was created originally by a deed dated January 5, 1971, in which 7 partners were admitted including one Smt. Kanchanbhai Hukumchand Parekh who had 20% share in the profit and loss. She died on April 7, 1973. Clause 13 of the deed provides that the partnership shall not be dissolved on the death of any partner. The books of account were closed on April 7, 1973, by drawing a profit and loss account. There was an agreement of dissolution of firm dated April 15, 1973. The assessee drew a new deed of partnership on April 17, 1973, in which Shri Hukumchand Parekh, husband of the deceased, Smt. Kanchanbhai, was taken in as a partner. His share was 20% in the profit and loss. There has been variation in the shares of the other partners.
3. The Income-tax Officer held that it was not a case of succession under section 188 of the Income-tax Act, but was a case of a change in the constitution governed by section 187(2) and as a result two separate assessments could not be made. The following undisputed position was noticed by him.
(1) That partner, Smt. Kanchanbai, died on April 7, 1973.
(2) That the books of account were closed on this date and a new set of accounts was maintained as from the next date.
(3) That a new deed of partnership was drawn up.
(4) That all assets and liabilities of the old firm were taken over by the alleged new firm.
(5) That the bank accounts were continued as they were.
(6) That the business also was continued as it was, in the same name, in the same premises and in the same commodities.
(7) That clause 13 of the old partnership specifically provided that the partnership shall not be dissolved on the death of any partner.
(8) That the new deed states that : “AND WHEREAS, consequent upon the sad demise of Shrimati Kanchanbhai, wife of Shri Hukumchand Parekh, a change with effect from April 10, 1973, has occurred in the constitution of the firm…… The partners have decided to continue the business in partnership as before”.
(9) That the agencies of the principal companies for which the assessee-firm acted as selling agents continued under the same old agreements and no new agreement was executed by the alleged new firm with them.
(10) That the accounts with the principal companies were settled at the end of the year and not separately for the old firm and the new firm.
(11) That in June, 1973, the estimate filed was one for the common firm and not for two separate firms.
4. The Income-tax Officer was particularly influenced by clause 13 of the old deed and the preamble of the new deed.
5. Aggrieved by the order of the Income-tax Officer, the assessee filed on appeal to the Appellate Assistant Commissioner who was pleased to allow the appeal, taking the view that it it was a case of dissolution by agreement of parties and, therefore, a case of succession. Aggrieved by the order of the Appellate Assistant Commissioner, the Departmental filed an appeal before the Tribunal which was pleased to allow the said departmental appeal and to restore the order passed by the Income-tax Officer.
6. Mr. Thakkar, learned counsel for the assessee, has invited our attention to the following circumstances in support of his contention that it was in reality a case of succession.
(i) There was a deed of dissolution;
(ii) Account of the old firm was closed and account of the new firm was opened;
(iii) There was reallocation of shares;
(iv) New deed makes a reference to the two firms;
(v) Two separate returns were filed.
7. Strong reliance was placed in support on the case of CIT v. E. H. Kathawala & Co. [1985] 151 ITR 348 (Bom). We will deal with that decision first. In the absence of a contract to the contrary, as contemplated under section 42(c) of the Indian Partnership Act, the firm stood dissolved on the death of one of the partners and the new firm succeeded to the old firm. There were also reallocation of shares and under the circumstances, the court held that case to be one of succession. The ratio of the decision is that a case of genuine dissolution by agreement or of dissolution by operation of law can be a case of succession. The ratio of that decision is not that whenever there is reallocation of shares, there is succession of old firm by new one, as was sought to be canvassed before us.
8. True it is that there can be dissolution under the provisions of the Partnership Act by an agreement between partners even if the firm is not dissolved by the death of a partner. But such dissolution has to be real and genuine. Several apparent circumstances indicate that in the present case, no genuine dissolution has taken place. The very preamble of the new deed indicates in no uncertain terms that “the partners have decided to continue the business in partnership as before”. This recital clearly indicates that there was merely a change in the constitution and there was agreement to continue business as before. Clauses 5 and 9 of the new deed respectively mention that (i) capital of the firm shall in the beginning be contributed by the persons in the form of their old investments being transferred from the old firm, and (ii) existing bank account or accounts shall be continued. The new deed has retrospective effect from April 10, 1973. All these circumstances demonstrate that the partners themselves have accepted the fact that there was only a change in the constitution and that all the partners decided to continue business as before. It is pertinent to notice that even the deed of dissolution refers to “deemed dissolution.”
9. The other circumstances such as (i) closing of account books of the old firm, opening or new account books, (ii) reallocation of shares, (iii) reference to the two firms in the new deed, and (iv) finding of two returns, in our judgment, are not decisive of the matter. It is pertinent to notice that even in June, 1973, the estimate filed is one for the common firm and not for two separate firms.
10. Section 187 of the Income-tax Act, 1961, deals with the subject of change in constitution of a firm. Section 187(2) reads thus :
“(2) For the purpose of thus 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.”
11. It broadly contemplates two situations : (a) ceasing of one or more of the partners to be partners or admission of one or more new partners, and (b) where all partner continue with a change in their respective shares or in the shares of some of them. Considering the use of the word “or” at the end of sub-section (2)(a), one of the points of debate before us was whether even when situations contemplated under sub-sections (2)(a) and (2)(b) are present simultaneously, section 187(2) can be attracted. We entertain no doubt whatsoever that the legislative intent is that even when there is a combination of these factors, section 187(2) would be attracted and the word “or” should be construed to mean “and/or”. Other interpretation would, in our judgment, defeat the very object of the sub-section.
12. Section 188 refers to succession of one firm by another firm, where two separate returns can be validly filed. For section 188 to be attracted, there has to be not only succession of one firm by another, but the case must not be covered by section 187, sub-section (2). The present case is squarely covered by section 187(2).
13. In the result, we answer question No. (1) in the affirmative and against the assessee and question No. (2) in the negative and against the assessee. The applicant to bear the costs of the respondent.