Patna H.C : Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the income for the two periods cannot be clubbed together and that separate assessments should be made for the two periods ?

Counsel Appeared

Sharan, for the Revenue : Vikash Jain, for the Assessee

C. BHARUKA, J.:

In this case, a statement of case was called for by this Court under s. 256(2) of the IT Act, 1961 (hereinafter to be referred to as “the Act”), for considering the following question of law:

“Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the income for the two periods cannot be clubbed together and that separate assessments should be made for the two periods ?”

The relevant facts of the case are as below:

The assessee is a partnership-firm. The present reference relates to the asst. yr. 1976-77. During the previous year relating to the assessment year in question, i.e., on April 18, 1975, one of the partners, namely, Mahadeo Lal Kedia, died. Two days thereafter i.e., on April 21, 1975, a new deed of partnership was executed by inducting a new partner in the firm. The books of account of the old firm were closed and new set of books of account were opened from April 21, 1975, i.e., from the date of constitution of the second firm. Two trading accounts and profit and loss accounts were prepared and two separate returns were filed along with an application for continuance of registration for the first period and a claim for fresh registration for the second period. The ITO, while making the assessment, granted continuance of registration till April 18, 1975, i.e., the date of death of the deceased partner and granted fresh registration to the newly constituted firm from April 21, 1975, as per the provisions of s. 185 of the Act. Inspite of this fact, the ITO clubbed the income of both the periods and assessed the tax liability. The assessee preferred an appeal to the AAC but the same was dismissed. On second appeal, the Tribunal took the view that the first firm was dissolved on the death of Shri Mahadeo Lal Kedia and, accordingly, directed that the income for the two periods cannot be clubbed and separate assessments should be made for the two periods.

In my opinion, the Tribunal has rightly held that the income of the two periods cannot be clubbed. It is so because, on an appraisal of the facts, the Tribunal had come to the conclusion that on the death of one of the partners on April 18, 1975, the first firm stood dissolved. This fact also seems to have been admitted by the ITO because it was only because of this that he granted continuance of registration to this firm only till this date, i.e., till April 18, 1975. Further, the ITO himself has granted fresh registration to the newly constituted firm which clearly implies that the two firms were treated as separate and independent legal entities for the purpose of the IT Act. It is also of importance to note that there was an interregnum of two days between the dissolution of the first firm and the constitution of the second firm. Apart from this, even if, for the sake of argument, it is presumed in favour of the Department that the business of the firm did not close on the death of the partner and that there was a reconstitution of the firm by inducting a new partner, still in view of the law as now finally settled by the Supreme Court in the case of Wazid Ali Abid Ali vs. CIT (1988) 67 CTR (SC) 43 : (1988) 169 ITR 761 (SC), the income for the two periods cannot be clubbed and there has to be necessarily two separate assessments. At page 778 of the said report, it has been observed that : “The Full Bench of the Madhya Pradesh High Court, in Girdharilal Nannelal vs. CIT (1984) 38 CTR (MP) 258 : (1984) 147 ITR 529, held that any matter for which a provision was made in the IT Act, 1961, was to be governed by it, notwithstanding anything different or to the contrary contained in the general law relating to the matter. It was further held that, in the case of a change in the constitution of a firm during the accounting year, the income earned by the firm before such change was to be clubbed with the income earned after such change and a single assessment had to be made on the firm for the entire accounting period. On an analysis of the different sections of the Act, we are unable to agree with this conclusion.”

4. Further, while considering the decision of the Delhi High Court in the case of CIT vs. Sant Lal Arvind Kumar (1981) 25 CTR (Del) 207 : (1982) 136 ITR 379 (Del), it has been observed by the Hon’ble Supreme Court that (at p. 779 of 169ITR): “With respect, we agree that where in a case, there is a change in the constitution of the firm by the 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 s. 188 of the Act.”

5. For the reasons aforesaid, I answer the question in the affirmative, i.e., in favour of the assessee and against the Department. However, in the circumstances of the case, there shall be no order as to costs. Let a copy of this judgment be transmitted to the Assistant Registrar of the Tribunal, Patna Bench, Patna, in terms of s. 260 of the Act.

G. G. SOHANI C., J.:

I agree.

[Citation:192 ITR 488]