Income Tax Appellate Tribunal - Kolkata
Babulal Chandak vs Income-Tax Officer on 31 March, 1992
Equivalent citations: [1992]41ITD475(KOL)
ORDER
D.S. Meenakshisundaram, Vice President
1. This is a an appeal against the order of the Commissioner of Income-tax, West Bengal-X passed under Section 263 of the Income-tax Act, 1961 and dated 30-1-1990.
2. The facts leading to the present appeal are the following :
There was a partnership firm carrying on business in cloth under the firm name of M/s. Babulal Chandak. This firm had come into existence sometime in 1963 and was evidenced by a Deed of Partnership dated 20-9-1963. It consisted of the following four partners, viz.:-
1. Babulal Chandak;
2. Kishori Lal Chandak;
3. Dhan Raj Bhutra; and
4. Pannalal Bhutra These four partners shared the profits and losses in the ratio of 31 %, 25%, 25% and 19% respectively. This partnership firm was dissolved by a mutual agreement among the partners at the close of business on 21 -10-1987. The terms of this dissolution were set out in a Deed of Dissolution dated 7-11-1987. According to this Deed of Dissolution, the partnership firm was dissolved from 21-10-1987. According to Clause (2) of this Deed, all the assets and the liabilities of the firm of the dissolved partnership as at the close of business on 21-10-1987 were taken over by two of the erstwhile partners, namely, Babulal Chandak and Kishorilal Chandak, who were entitled to any on the business under the same trade name and style either by themselves or by entering into partnership with others. Thus, the other two partners, Dhanraj Bhutia and Pannalal Bhutra left the partnership firm. Notice of dissolution of this partnership was also given to the Registrar of Firms on 18-1-1988.
3. Thereafter, the two erstwhile partners, Babulal Chandak and Kishorilal Chandak along with Dharam Chand Chandak, son of Kishorilal Chandak, formed a new partnership to carry on business in cloth under the same old firm name of M/s. Babulal Chandak with effect from 22-10-1987 at 16, Pageyapatty Street, Calcutta. This partnership was evidenced by a Deed of Partnership dated 12th November, 1987. The Profit sharing ratio of the three partners of this partnership firm was the following:-
Babulal Chandak - 40%
Kishorilal Chandak - 40%
Dharamchand Chandak - 20%
The Partnership Deed shows that the partnership business had commenced on 22nd October, 1987 and it was "at will". The books of accountant of this new firm were to be kept according to the Ramrtavami year and the first accounting year of the firm was to be closed on Chait Sudi 8, Sambat year 2045 (corresponding to 25th March, 1988). This partnership firm was registered with the Registrar of Firms on 17-12-1987 and intimation of the dissolution of the old partnership of four partners and the formation of a new partnership was also given to the Manager, Indian Overseas Bank, Sonapatti Branch, Calcutta. The new partnership firm of three partners was also granted a textile licence by the Directorate of Textile, Government of West Bengal on 29-7-1989.
4. The partnership of four partners filed its return of income for the assessment year 1988-89 declaring its income of Rs. 39,960 for the period ending on 21-10-1987 on 9th August, 1988 and also applied for continuation of registration in Form No. 12. The ITO, Ward-14(13), Calcutta completed the assessment of this firm by his order dated 26-4-1989 passed under Section 143(3), read with Section 184(7), of the Act. By this order, the Assessing Officer granted continuation of registration to this old firm and determined the assessee's total income at Rs. 43,600 which he apportioned amongst the four old partners of the dissolved firm.
5. The other partnership of three partners also filed its return of income separately for the period 22-10-1987 to 31-3-1988 and applied for registration along with the new Deed of Partnership to the ITO, Ward-14(15), Calcutta. This firm was also assessed on the income returned by it and registration was also granted to the said firm under Section 185(1)(a) of the Act. These assessment orders passed by the ITO were considered to be erroneous and prejudicial to the interests of the revenue by the CIT as he was of the view that it was a case of a mere change in the constitution of the firm and not a case of succession as on the retirement of two of the partners, the remaining two partners continued to carry on the same old business under the same old name at the same place and address by admitting a new partner and that, therefore, the assessee's case would fall within the scope of change in constitution of the firm as specified in Section 187(2) of the Income-tax Act. He, therefore, initiated action under Section 263 of the Act and called upon the assessee to show cause against the cancellation of the assessments. The assessee appeared through its authorised representative and argued that on its dissolution, a Deed of Dissolution was executed and the same was intimated to the Registrar of Firms. It was also argued that there was no prohibition in law against the formation of a new partnership by the remaining two partners with a new partner. It was, therefore, submitted that the two assessments made separately on the two different firms on the basis of the two returns filed by the two assessee-firms were correct and that they did not call for any action under Section 263 of the Act.
6. The Commissioner did not agree with these contentions of the assessee. He held that for the purpose of the Income-tax Act, the two firms, old and new, were doing the same nature of business at the same place in the same name and style as in the case of the erstwhile business of the existing partners and that the only change was that a new partner was introduced and two partners of the erstwhile firm had retired and this would not dissolve the said partnership firm. He, therefore, cancelled both the assessments made by the Income-tax Officers, Ward-14(13) and Ward-14(15), Calcutta, with a direction to club both the files together and make a fresh assessment as per law and allow registration/renewal and continuation of registration according to law. Aggrieved by this order of the Commissioner under Section 263 of the Act, the appellant has come up on further appeal to the Tribunal.
7. I have heard Shri B .C. Jain, the learned Chartered Accountant for the appellant and Shri S.C. Chatterjee, the learned Departmental Representative and carefully considered their submissions in the light of the materials placed before me.
8. In my view, the assessee is entitled to succeed in its appeal. The short question for my consideration in the present appeal is whether it is a case of change in the constitution of a firm within the meaning of Section 187(2) of the Act to which Section 187(1) would apply or a case of succession of one firm to another firm which would be covered only by Section 188 of the Act. The assessee's contention is that it is a case of succession of one firm by another and, therefore, only the provisions of Section 188 will be applicable and not the provisions of Section 187(1) of the Act and that, therefore, the two separate assessments made on the two firms on the basis of the separate returns filed by them were correct and that the Commissioner was not justified in cancelling the said assessments and in directing the ITO to club the income of both the firms into a single assessment and make a single assessment in respect of the entire income by invoking Section 187 of the Act. The learned counsel for the appellant had relied on the materials contained in the assessee's paper book and which I have referred to earlier while setting out the facts of the case. The assessee has relied on the decisions of the Aridhra Pradesh High Court in CIT v. Raj Bros. [1987] 165 ITR 720, and the Madras High Court in the case of C/7v. R. Sithan Chetty & Sons [1984] 145 ITR 306. He also relied on the passage at page 4245 of Volume 4 of Chaturvedi & Pithisaria's Income-tax Law (4th Edition) dealing with the distinction between the dissolution of a partnership and its reconstitution. The assessee also relied on the decision of the Bombay High Court in the case of CIT v. H.R. As lot [1978] 115 ITR 255. On behalf of the revenue reliance has been placed on the decision of the Calcutta High Court in the case of Joshi & Co. v. CIT [1986] 162 ITR 268.
9. To my mind, the assessee's case is squarely covered by the following observations of the Supreme Court in the case of Wazid Ali Abid Ali v. CIT [1988] 169 ITR 761 at pages 778 & 779, wherein their Lordships of the Supreme Court have quoted with approval the decision of the Delhi High Court in CIT v. Sant Lal Arvind Kumar [1982] 136 ITR 379:
The Delhi High Court, however, held in the case of CIT v. Sant Lal Arvind Kumar [1982] 136 ITR 379, that Section 187 of the Income-tax Act came into operation and applied only when there was in the eye of law a firm with continued existence and not to a case where under the law, one firm had ceased to exist and another came into existence. The High Court observed that the purpose of Sub-section (2) of Section 187 was not one of expansion of the normal concept of a change in the constitution of a firm but was really one of limitation; the purpose was not to say that a firm would continue in spite of dissolution hut rather to say that, even in a case where there was only a change in the constitution, Sub-section (1) would not apply if the partners before or after the change were not common. It is not correct, according to the High Court, to say that Section 18V(2) contemplated a change in all (pases where the business continued though in the hands of a different firm provided there were common partners. The High Court was of the view that though creating a mild ambiguity, the language of Section 188 is not only inconsistent or contradictory but in a way is to clarify the meaning of Section 187 and to exclude the possibility of the common law doctrine regarding the personality of a firm even in cases of a mere change in the constitution. The concept of partnership, it was held, is one of agreement between the partners. If the partners agreed, not that one partner should go out and another should come in, but that on a particular event happening the firm should be treated as dissolved, they are entitled to say so, and what the partners have disrupted, it is not for the Department to unite unless there is specific authorisation in the Act. Where there is, however, no agreement to treat the firm as continuing notwithstanding the death of a partner, the partners have no option to treat the firm as continuing. Under the Indian Partnership Act, 1932, the firm gets dissolved and the Income-tax Officer is not entitled to ignore this consequence. There is nothing in the language of Section 187,188 or 189, according to the High Court, which precludes the application of the partnership law principles even under the Income-tax Act. It was accordingly held by the High Court that where the partnership deed of a firm did not contain any provision that the death of a partner would not dissolve the firm, one of the partners of the firm died in the middle of the accounting period and thereafter a fresh deed was executed under which the surviving partners took a fresh partner in the place of the deceased and continued to carry on the business, the case was one of succession and not one of change in the constitution and separate assessments had to be made in regard to the incomes. With respect we agree that where in a case, there is a change in the constitution of the firm by taking a new partner and the old firm is succeeded by a new firm then, in such a 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.
[Emphasis supplied]
10. In the present case, the four partners of the old firm had agreed to dissolve the partnership by mutual agreement as evidenced by the Deed of Dissolution dated 7-11-1987. The said partnership was dissolved on 21-10-1987 and notice of dissolution of this partnership was also given to the Registrar of Firms as required by Section 63(1) of the Indian Partnership Act, 1932 on 18-1-1988 as could be seen from page 2 of the assessee's paper book. The new partnership firm which came into existence on 22-10-1987 was also registered with the Registrar of Firms, as could be seen from the receipt at page 2 of the assessee's paper book as well as the intimation given by the said new partnership to Indian Overseas Bank about the dissolution of the old firm and the formation of the new firm, which had taken over the liabilities and assets of the old partnership firm. The licence granted by the Directorate of Textiles of Government of West Bengal on 29-7-1987 also shows that this new partnership firm with the three partners was recognised as a separate entity and a new firm, by the Directorate of Textiles. All these facts clearly establish that it is not a case of mere change in the constitution of the firm, but a case of complete dissolution of the old partnership and the formation of a new partnership after such dissolution. In other words, it is a succession of the old firm of four partners which was dissolved on 21-10-1987 by a new partnership firm of three partners which came into existence on 22-10-1987 as contemplated by Section 188 of the Act. The provisions of Section 187(2) of the Act are not applicable to the facts of the present case. The learned departmental representative relied on the decision of the Calcutta High Court in Joshi & Co.'s case (supra) and contended that this decision would be applicable to the facts of the present case. I find myself unable to accept this contention. I may point out that this decision of the Calcutta High Court has also been noticed by the Supreme Court and also approved in the same decision of Wazid Ali Abid Ali's case (supra). But the decision in Joshi & Co.'s case (supra) turned on entirely different facts and, therefore, is not applicable to the present case.
11. It was next argued by Shri Chatterjee on behalf of the revenue that the decision in Sant Lal Arvind Kumar's case (.supra) referred to above, was also a case of dissolution on the death of a partner and the same would not be applicable to the facts of the present case, if it is to be held that the case of Joshi & Co. cited by him is not applicable to the present case. I am unable to agree in this line of decision sought to be drawn by the learned departmental representative. Apparently this argument overlooks that under Section 40 of the Indian Partnership Act, 1932, a firm may be dissolved with the consent of all the partners or in accordance with a contract between the partners. In the present case this is precisely what had happened. The old firm of four partners was dissolved by mutual agreement at the close of business on 21-10-1987 and this agreement is embodied in the Deed of Dissolution dated 7-11-1987. The two decisions of the Madras & the A.P. High Courts in R. Satan Chatty Sons case (supra) and Raj Bros.'s case (supra) respectively fully support the case of the appellant.
12. It is not in dispute in the present case that these two partnership firms have maintained separate books of account and their profits and losses have been separately ascertained at the close of business on 21 -10-1987 and as on Ram Navami Day, 25th March, 1988 and that the profits and losses had been apportioned amongst the partners of the respective firms in accordance with their profit sharing ratios as disclosed in the respective partnership deeds. There is also no dispute about the genuineness of the two partnership firms as well as the genuineness of the dissolution of partnership on 21-10-1987 and that the Deed of Dissolution executed on 7-11-1987 and the other documents that have been produced before the departmental authorities. In the light of the above materials, I respectfully follow the decisions of the Supreme Court and of Madras & A.P. High Courts referred to above and hold that it is a case of succession of the old firm of four partners by the new firm of three partners and that the provisions of Section 188 alone would be applicable to the facts of the present case and that the Income-tax Officers had rightly accepted the two separate returns of income filed by the two firms and made separate assessments in respect of the same. Consequently, I hold that the Commissioner was not justified in his conclusion that the said assessments were erroneous and prejudicial to the interests of the revenue. I, therefore, cancel the order passed by the Commissioner under Section 263 of the Act and restore the separate assessments made on the two firms separately by the two Income-tax Officers on the basis of the separate returns filed by them.
13. In the result, the appear is allowed.