Allahabad High Court
Commissioner Of Income-Tax vs Hanuman Prasad Dwarka Prasad on 23 March, 1987
Equivalent citations: [1987]168ITR116(ALL), [1987]32TAXMAN448(ALL)
JUDGMENT R.K. Gulati, J.
1. This reference under Section 256(1) of the Income-tax Act, 1961 (hereinafter to be referred as "the Act"), has been made at the instance of the Revenue to answer the following question of law:
"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that where there is a change in the constitution of a firm, two assessments have to be made, one in respect of the income derived by the firm before reconstitution and another in respect of the income derived by the firm after its reconstitution ?"
2. The assessee is a registered firm and the reference relates to the assessment year 1978-79. One of the partners of the firm, Ramji Lal, expired on October 23, 1977. Consequently, on his death, the remaining two partners, Hanuman Prasad and Dwarka Prasad, continued the business of the firm with effect from. October 30, 1977. It was claimed before the Income-tax Officer on the death of Ramji Lal that the firm was dissolved and the accounts of the firm were closed on October 28, 1977. The assessee also made a claim before the Income-tax Officer that two assessments should be made, (a) for the period April 1, 1977, to October 28, 1977, and (b) for the subsequent period October 30, 1977, to March 31, 1978. The Income-tax Officer, however, made one assessment for both these periods. This action of the Income-tax Officer was confirmed by the Appellate Assistant Commissioner, on appeal being filed by the assessee.
3. The assessee went up in appeal before the Income-tax Appellate Tribunal. The Tribunal, following a Full Bench decision of this court in Badri Narain Kashi Prasad v. Addl. CIT [1978] 115 ITR 858, allowed the assessee's appeal. In the aforesaid case, this court had taken the view that where there was a change in the constitution of the firm, the firm after the change in its constitution is a distinct assessable entity different from the firm before its reconstitution and, therefore, two different assessment orders should be made, one in respect of the income derived by the firm before reconstitution and another in respect of the income derived after reconstitution of the firm. The Tribunal, therefore, set aside the assessment order with a direction to the Income-tax Officer to make two assessments, one for each of the two periods. It is in this background that the question extracted above has been referred for the opinion of this court.
4. Section 187 deals with the procedure which should be adopted where there is a change in the constitution of the firm during the currency of the previous year relevant to the assessment year in question. According to Sub-section (1) of Section 187, the assessment, in such a situation, shall be made on the firm as constituted at the time of making the assessment. The effect of Sub-section (1) of Section 187 is that the entire income of the previous year of the firm is assessed by a single assessment and under the first proviso to Sub-section (1) of Section 187, the income so assessed in the hands of the firm is apportioned between the partners who, in such previous year, were entitled to receive the same for the purpose of inclusion in the respective total income of the partners. The expression "change in the constitution of the firm" has been defined in Sub-section (2) of Section 187. The relevant provision as it stood at the relevant time was to the following effect:
"(2) For the purposes of this 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..... "
5. The Full Bench decision relied upon by the Income-tax Appellate Tribunal is no longer good law as it has been overruled by a larger Bench in Vishwanath Seth v. CIT [I984] 146 ITR 249 (All) [FB].
6. If the controversy had rested at this stage, in view of the decision in Vishwanath Seth's case [1984] 146 ITR 249 (All) [FB], the question referred was liable to be answered in favour of the Department. However, during the pendency of this reference before this court, Section 187 was amended by the Taxation Laws (Amendment) Act, 1984. By--section 33 of the Amending Act, a proviso to Sub-section (2) of Section 187 was inserted with retrospective effect from April 1, 1975, and shall be deemed to have been so added with effect from that date. The newly added proviso is to the following effect:
"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."
7. Since the aforesaid amendment has been inserted retrospectively as stated earlier, the amendment will have to be given effect to as if it existed at the time when the assessment in dispute was made after April 1, 1975. In order to record any answer to the question referred, it would be necessary to find out, whether the firm was dissolved on the death of Ramji Lal, who was one of the partners before the change in the constitution of the firm. In fact, the assessee did raise such a plea before the Income-tax Officer and the Appellate Assistant Commissioner. The Tribunal did not go into this question and it was not necessary for it to do so in view of the Full Bench decision of this court in Badri Narain Kashi Prasad's case [1978] 115 ITR 858. With the changed position in law, the question which was left uninvestigated by the Tribunal assumes importance. In order to decide this controversy, it would be necessary to look into the partnership deed and the clause relating to the continuance of the firm in the event of death of any partner. The conduct of the surviving partners will also be relevant to determine the question. In the absence of material and relevant finding, the question referred to us cannot be answered at this stage. An identical question was considered in CIT v. Agency Hamdard Waqf Ltd. [1987] 166 ITR 698 (All) by a Division Bench of this court of which one of us, Hon. R. K. Gulati J., was a member. The question referred in that case in similar circumstances was returned without any answer with the direction to the Income-tax Appellate Tribunal to rehear and decide the appeal afresh.
8. For the reasons given in that decision, the question referred in this reference is also returned unanswered with the direction to the Income-tax Appellate Tribunal to rehear the appeal and decide the same afresh, keeping in view the amended provision of Section 187(2) of the Act. It will be open to the Income-tax Appellate Tribunal, if necessary, to take further evidence in deciding the appeal if the circumstances of the case so warrant.
9. In the result, we return the reference unanswered with the direction that the Income-tax Appellate Tribunal will rehear the appeal and decide it afresh as indicated in this order and in accordance with law. There shall be no order as to costs.