Income Tax Appellate Tribunal - Bangalore
Vijayalakshmi Agarbathi Works vs Second Income-Tax Officer on 22 September, 1993
Equivalent citations: [1994]49ITD311(BANG)
ORDER
Balasubramanyam, Judicial Member
1. This appeal, taken by the assessee, raises a ground as arising out of the assessment for 1984-85.
2. M/s. Vijayalakshmi Agarbathi Works was a firm constituted on 1-6-1967 by three partners. There was a re-constitution of this firm by means of an indenture dated 5-3-1974 whereby the partnership came to be composed of seven partners. The partners were all members of the same family and one K.S. Lakshmaiah Setty was the eldest.
3. The previous year relevant to this assessment was from 1-4-1983 to 31-3-1984. Lakshmaiah Setty died on 2-8-1983. On 10-8-1983 an indenture of partnership was drawn up by and between the surviving six partners who agreed to continue and carry on the business all along run under the name Vijayalakshmi Agarbathi Works.
4. The assessee filed two returns - one for the period terminated on 2-8-1983 and the other for the balance of the previous year. It was claimed that two separate assessments should be made as it was a case of succession of one firm by another. The Income-tax Officer held that only one assessment was proper to be made for the whole of the previous year. He accordingly assessed in the status of registered firm.
5. Being dissatisfied with the assessment made, the assessee had appealed. The Commissioner of Income-tax (Appeals) considered the legal issue in sufficient detail and concluded that there was only a change in the constitution of the firm and, therefore, the provisions of Section 187(2) were attracted.
6. The assessee, who lost the appeal, is before the Tribunal reiterating its pleas. Shri Gowthama's argument for the assessee was that the firm stood dissolved by the operation of Section 42 (c) of the Indian Partnership Act inasmuch as there being no term in the deed of partnership dated 5-3-1974 for continuance of the firm in the case of death of a partner. The firm having got dissolved on the premise stated, Shri. Gowthama argued, the other firm constituted by the deed of 10-3-1983 was a different firm; and that there was a succession of one firm by another to which provisions of Section 188, Income-tax Act, would have to be applied. The rejoinder on behalf of the revenue was that the death of Lakshmaiah Setty had not ipso facto caused dissolution of the partnership and, as facts would show, the surviving six partners had, by consensus, agreed to carry on the business in the same way without affecting the continuity of the firm and that the deed dated 10-3-1983 was no more than a formal document signifying that what had come to pass was no more than a change in the constitution of the firm. On that reason he had supported the assessment passed for the whole of the previous year.
7. The statutory implication of bringing a firm to a dissolution upon death of a partner by Section 42(c), Indian Partnership Act, is subject to contract between the partners. Shri Gowthama stated that the partnership deed dated 5-3-1974 did not contain a clause to the contrary and, on the other hand, the surviving partners were free to decide in any manner they desired and specific attention was brought to Clause 11 which reads :
All other matters for which no provisions are made, shall be decided upon by all partners, by mutual consent and in accordance with the Indian Partnership Act.
The argument was that the surviving partners had not either expressly or impliedly consented to continue the same firm so much so the legal consequences of Section 42(c) of the Indian Partnership Act was not averted. He supported his argument on the principle explained by the Full Bench decision of the Allahabad High Court in the case of CIT v. Kunj Behari Shyam Lal [1977] 109 ITR 154 wherein it is laid down :
... though the partnership deed of an erstwhile firm did not contain any stipulation that the firm would not be dissolved on the death of one of the partners, but, by virtue of Section 42(c) of the Indian Partnership Act, 1932, the firm stood dissolved, the firm which took over the business after the dissolution of the erstwhile firm could not be said to be a reconstituted firm and Section 188 and not Section 187 of the Income-tax Act, 1961, would apply in such a case, and two separate assessments should be made on the two firms.
8. Arguing for the revenue, Shri S.K. Iyer contended that Sections 187 to 189 of the Income-tax Act make special provisions in the matter of income-tax assessment on a firm and to that extent there is departure from the general law of partnership and if the true concept of Section 187(2) is understood, the proviso thereto does not bring about automatic dissolution upon death of a partner if the firm had continued by the surviving partners even after the death of a partner.
9. We must here refer to the decision of the Karnataka High Court in the case of CIT v. Shambulal Nathalal & Co. [1984] 145 ITR 329 where the majority view supports the argument advanced by the departmental representative. To quote Their Lordships :
... where a firm stands dissolved by the death of a partner, there being no provision in the partnership deed that the firm should continue in spite of the death of the partner, and the business of the dissolved firm with all assets and liabilities is taken over by a newly constituted firm consisting of three surviving partners of the erstwhile firm and the two sons of the deceased partner, it amounts to a mere change in the constitution of the firm as provided in Section 187 of the Income-tax Act, 1961, and is not a succession of one firm by another firm as provided in Section 188 and a single assessment for the entire accounting year before dissolution and after reconstitution is valid.
This has been followed in the case of CIT v. Sree Durga Enterprises [ 1984] 145 ITR 351 (Kar.) and, again, in the case of Ballal & Padival Tiles v. CIT [1987] 163 ITR 752 (Kar.).
10. On this legal question opinion of the High Courts was divided; but, however, the High Court of Karnataka had taken a view in favour of the revenue. By an amendment to Section 187(2), Income-tax Act, a proviso was introduced by Taxation Laws (Amendment) Act, 1984, with effect from 1-4-1975 which reads :
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.
We must point out the cases of Shambulal Nathalal and Company, Shree Durga Enterprises and Ballal and Padival Tiles decided by the Karnataka High Court pertain to period prior to 1-4-1984 and decided interpreting Section 187(2) which defined the scope of "change in the constitution ofthe firm" without the proviso. It has been pointed out in the case of Shambulal Nathalal & Co. (supra) that the Delhi High Court, among others, had taken the view that death of the partner would bring about dissolution of the partnership so long as there is no term in the deed for its continuance by His Lordship, Venkatachalaiah (as he then was). The decision was in CJT v. Sant Lal Arvind Kumar [1982] 136 ITR 379 (Delhi) wherein Their Lordships have ruled :
... 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 change in the constitution and separate assessments had to be made in regard to the income of the period from the first day of the accounting period up to the date of the death and of the rest of the accounting period up to the last day of the accounting period.
The above was also a case which related to a period prior to 1-4-1984 and before the proviso to Section 187(2) came on the statute book.
11. The proviso to Section 187(2) did bring about a change so much so the minority view in Shambulal Nathalal & Company's case (supra) has now become the law. The Supreme Court while deciding the case of Wazid Ali AbidAliv. CIT[ 1988] 169 ITR 761 had occasion to examine the correctness of the view taken by the Delhi High Court in the case of Sant Lai Arvind Kumar (supra). Considering this aspect Their Lordships (at p. 779) have pointed out:
.. .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 of 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 the decision.
In Wazid Ali Abid AWs case (supra) the controversy was in regard to grant of registration.
12. Whether the question is of one granting registration for the whole of the previous year or up to the date of death of the partner, or there should be one assessment for the whole of the year or two separate assessments for different parts of the previous year, the basic question is the same. That is, whether there was a change in the constitution of the firm or whether it was a case of succession of one firm by another firm. In view of the observation of the Supreme Court in the case of Wazid Ali AbidAli (supra) the provisions of Section 187 would not automatically apply.
13. To sum up : if the deed of partnership does not contain a term for continuance of the firm in the event of death of a partner, as it is in the instant case, as a normal consequence of Section 42(c) of the Indian Partnership Act there should be a dissolution. But this legal consequence is subject to a consensus between the surviving partners which they may reach soon after the death of a partner. So, in such cases, one has to initially see whether there was consensus or absence of consensus between the surviving partners to continue the firm. This is a question of fact. Such a consensus maybe either express or implied. It may be a matter for inference to be drawn from circumstances and conduct of surviving partners.
14. In the document dated 10-8-1983 brought about by the surviving partners it is stated that terms of conditions were mutually' settled on 3-8-1983. It is clear that surviving partners had reached an agreement the very next day after the death of partner Lakshmaiah Setty. The surviving partners were none other than the heirs of the deceased partner. There is no mention in the deed about the capital contributed by them. The same books of account were continued. If there was a dissolution, there must have been a closing of accounts on 2-8-1983 and the deceased's account should have been credited. There should have been distribution of the assets. No such thing happened here. It was stated that two balance-sheets and two profit and loss accounts were prepared. This is not the real test. Maintenance of the same account books even after the death is a strong circumstance militating against drawing an inference of dissolution. The conclusion to be drawn on the totality of facts and circumstances is that the surviving partners must have agreed to continuing the firm by carrying on the same business. On facts, we find that there was a continued existence of the same firm and, consequently, the provisions of Section 187(1) would apply. It is correct that there should be one assessment for the whole of the previous year and the impugned orders are upheld by us.
15. The appeal by the assessee is dismissed.