High Court Of Delhi
CIT vs. Delhi Haryana Dall Mills
Sections 187(2), 188
Asst. Year 1978-79
B.C. Patel, C.J. & Badar Durrez Ahmed, J.
IT Ref. No. 117 of 1984
15th January, 2004
JUDGMENT
B.C. Patel, C.J. :
The following question is referred to this Court under s. 256(1) of the IT Act, 1961 (hereinafter referred to as ‘the said Act’), at the instance of the Revenue: “Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that there should be two separate assessents in respect of the periods?”
2. So far as the facts are concerned, it transpires that the partnership firm “M/s Delhi Haryana Dall Mills” was constituted by a partnership deed dt. 18th April, 1970 executed by seven partners. The said partnership was dissolved by a deed of dissolution executed on 20th May, 1977, according to which the partners—(1) Sh. Johri Mal and; (2) Sh. Shiv Lal—took over the running business, the factory building, machinery, furniture, etc. The other partners were to be paid off. On 21st May, 1977, Sh. Johri Mal and Sh. Shiv Lal entered into a new partnership deed taking in three new partners. The IT returns were filed for the aforesaid two periods, namely, one return for the period from 1st April, 1977, to 20th May, 1977, and the second return for the period from 21st May, 1977, to 31st March, 1978. The AO clubbed the income-tax of both the periods treating that s. 187 (2) will be applicable and assessed the assesses vide order dt. 28th Aug., 1980, which is at p. 7 as ‘Annex.-A’ to the paper book.
3. The CIT(A) arrived at a conclusion that provisions of s. 187(2) of the said Act were not applicable and, therefore, it was held that the ITO was wrong in clubbing the incomes of the two firms and ordered that they be assessed separately. It is against this finding that the Tribunal was approached. The Tribunal, on appreciation of the material placed on record, arrived at a conclusion that there was a dissolution of the partnership firm on 20th May, 1977, and a new partnership deed was executed on 21st May, 1977, constituting a new partnership firm. The Tribunal, considering the facts and law in detail and, particularly, two decisions of this Court, in the case of CIT vs. Arvind Construction Co. (1975) 98 ITR 571 (Del) and in the case of CIT vs. Sant Lal Arvind Kumar (1981) 25 CTR (Del) 207 : (1982) 136 ITR 379 (Del), upheld the finding recorded by the CIT(A). It held that s. 187 will apply only when there was, in the eye of law, a firm which continued in existence and not in a case where under the law one firm had ceased to exist and another firm had come into existence. On behalf of the Revenue, it is contended by the learned counsel relying on the decision in the case of CIT vs. Har Nath Ram Nath (1997) 224 ITR 713 (All) and in the case of CIT vs. Ramesh Biscuit Factory (1994) 205 ITR 205 (All), that it was not correct on the part of the Tribunal to arrive at a conclusion that there was a dissolution, but it ought to have held that there was reconstitution of the firm and or continuation of the firm. It was contended, relying on these judgments, that although a new partnership deed was executed in each of the cases, yet it was held that it was a case of reconstitution. Reverting to the decisions, we find that there was no question of dissolution of the partnership firm.
A minor who was admitted to the partnership firm, on his attaining the age of majority, decided to continue as a partner and between the same partners there was a fresh partnership deed. Therefore, in effect, the old partnership firm continued but with a new agreement between them. And, therefore, there was continuation of the business by reconstitution of the firm. This is clearly not the case here.
In the instant case, the firm was dissolved by a dissolution deed. The CIT(A) had pointed out that a goodwill account was also created thereby setting the goodwill of the firm at Rs. 1,50,000 and while settling the accounts of the partners, each of the 7 partners were given credit of their respective share of the goodwill according to their profit-sharing ratio. The business was taken over by Sh. Johri Mal and Sh. Shiv Lal and their accounts were debited by Rs. 75,000 each on account of the entire goodwill taken over by them. Thus, the accounts were settled and the firm was dissolved in toto. Sec. 40 of the Indian Partnership Act, 1932, provides that a firm may be dissolved with the consent of all the partners or in accordance with a contract between the partners. Admittedly, that has been done in the instant case and the firm was dissolved. The CIT (A), on appreciation of the materials placed before it, also arrived at a conclusion that there was a new partnership deed executed on 21st May, 1977, with the five partners. It is very clear from what is indicated hereinabove that there was no reconstitution of a firm. On the other hand, there was dissolution of a firm and a new firm came into existence after the dissolution. Therefore, s. 187(2) will have no application. Learned counsel for the Revenue submitted that the Tribunal relied on two judgments of this Court. The learned counsel further submitted that against the decision of the High Court, the matter was carried in appeal by the Revenue and the appeal has been admitted for hearing by the Supreme Court. It may be noted that we are not deciding the issue on the basis of the judgments on which reliance was placed by the Tribunal but upon a consideration of facts in the context of legal principles on the question as to whether s. 187(2) would be applicable or not. Therefore, it makes no difference whether the decisions are the subject-matter of pending appeals before the higher forum or not.
In view of this, it is very clear that s. 187(2) will not apply and the Tribunal was right in law in holding that there should be two separate assessments in respect of the two periods. We are also supported by the decision of this Court in the case of CIT vs. Delhi Metal Store (1995) 123 CTR (Del) 53 : (1995) 211 ITR 622 (Del) which was fairly pointed by the learned counsel for the Revenue in the absence of the counsel appearing for the assessee. In similar facts, the Court has held as under: “The first contention is fallacious. It is not a case of mere retirement but of dissolution of the firm and formation of a new firm under a new partnership agreement. Retirement is severance of relationship by some partner(s) from the other partners continuing the said business as before. Dissolution of a firm is between all the partners on which heretofore relationship ceases between all. In the present case, the preamble of the deed of dissolution negatives the contention that it was a case of mere retirement. The prime question is not whether some of the old partners also happen to be partners in the newly constituted firm but whether the old firm continued to exist or is finished and instead a new firm came into existence. Merely because some partners of the old dissolved firm also became partners in the new firm, it cannot be said that it is a continuation of the old firm. The old firm stood dissolved on execution of the dissolution deed. A partnership is a relation between the persons who have agreed to share the profits of a business carried on by all or any one of them acting for all. The relationship between them is essentially contractual. On dissolution of the firm on 2nd May, 1969, this relationship terminated. It could not continue. Of course, it was open to some of them, as in the instant case, along with others to enter into a new relationship constituting a new firm. Such a firm cannot be said to be a continuation of the old dissolved firm or to have been reconstituted under s. 187(2) of the Act but the formation of a new firm succeeding the old firm, falling within the ambit of s. 188 of the Act.”
8. It is in new of this that the answer to the question is against the Revenue and in favour of the assessee.
[Citation : 267 ITR 478]
