Rajasthan H.C : Whether, on the facts and in the circumstances of the case, there should be two assessments, one for the period April 1, 1973 to July 27, 1973, and the other for the period July 28, 1973 to March 31, 1974, or one assessment under the Act ?

Counsel Appeared

Singhal, for the Revenue : V. Bhojwani, for the Assessee

S. VERMA, C. J. :

This reference under s. 256(1) of the IT Act, 1961, at the instance of the Revenue is to answer the following question of law, namely :

“Whether, on the facts and in the circumstances of the case, there should be two assessments, one for the period April 1, 1973 to July 27, 1973, and the other for the period July 28, 1973 to March 31, 1974, or one assessment under the Act ?”

The relevant assessment year is 1974-75 for which the previous year ended on March 31, 1974. The assessee-firm, Sri Krishna Re- rolling Mills, Jaipur, comprised six partners and was constituted by a partnership deed dt. November 25, 1965 (Annexure “A”). One of the terms in the partnership deed was that the firm shall not be dissolved by the death or retirement or insolvency of any of the partners; and on the death of any partner, the surviving partners will include the heir or legal representative of the deceased partner as a partner in that firm. Two of the partners of this firm, namely, Smt. Jai Devi and Munshi Lal Gupta, died on July 19, 1973, and July 27, 1973, respectively. The surviving partners, namely, Shriram Gupta, Vidhyadhar Jaju, Mohanlal Gupta and Ghanshyam Das Mohta continued that partnership taking in Smt. Barfidevi, widow of Munshi Lal Gupta, and Shriniwas Gupta, son of Smt. Jai Devi Gupta, as new partners in the firm. A new partnership deed dt. November 2, 1973 (Annexure “B”), was drawn up describing the four surviving partners as continuing partners and the widow and the son of the two deceased partners as new partners stating clearly in this deed that it was mutually agreed to continue the partnership taking into it these two new partners and reconstituting the firm w.e.f. July 28, 1973. Accordingly, there was an express indication in this new deed (Annexure “B”) of the continuance of the same firm by the surviving partners along with the widow and the son of the two deceased partners. This partnership deed also contained a similar term as in the earlier deed (Annexure “A”), that the firm will not stand dissolved by the death or retirement or insolvency of any of the partners; and that on the death of any partner, the surviving partners will include the heir of the deceased partner as a partner in the firm.

The assessee contended that in the relevant year, two separate assessments were to be made, one for the period April 1, 1973 to July 27, 1973, and the other for the period July 28, 1973 to March 31, 1974, instead of a single assessment for the entire year. This contention of the assessee was negatived by the ITO who held that it was a case of reconstitution or a mere change in the constitution of the firm governed by s. 187(2) of the Act. The assessee’s appeal to the AAC was rejected but the further appeal to the Tribunal was allowed. Following the ecision of the Allahabad High Court in Dahi Laxmi Dal Factory vs. ITO (1976) 103 ITR 517 (All) (FB), the Tribunal has directed the ITO to frame tow assessments for the aforesaid two periods as claimed by the assessee, treating it to be a case of succession governed by s. 188 of the Act. Hence, this reference at the instance of the Revenue.

Learned counsel for the Revenue has placed reliance on the decision of this Court in CIT vs. Gharsana Beriwal Road Works (1987) 65 CTR (Raj) 313:(1988) 170 ITR 500 (Raj), to contend that on account of a contract to the contrary contained in the partnership deed, there was no dissolution of the partnership firm as a result of death of any partner and, therefore, the case falls within the ambit of s. 187(2) of the Act. On the other hand, learned counsel for the assessee strenuously urged that there is a finding of the Tribunal in favour of the assessee that there was dissolution of the firm on the death of its two partners notwithstanding a contract to the contrary in the partnership deed. He argued that this term in the partnership deed stood superseded by the conduct of the parties who agreed to dissolve the firm as a result of which the firm was actually dissolved. He argued that in the face of this finding of the Tribunal, it must be held that the firm was dissolved on account of which s. 187(2) of the act has no application. Having heard both the sides, we are satisfied that the contention of learned counsel for the Revenue must be accepted.

We have already mentioned the specific term in the partnership deed (Annexure “A”) dt. November 25, 1965, which specifically provides for non-dissolution of the partnership firm on death, retirement or insolvency of any of the partners and further provides for continuance of the same firm by the surviving partners together with the heir of the deceased partner being taken in as a partner. It is the terms of this partnership deed which governed the case at the time of death of the two partners. Clause (c) of s. 42 of the Indian Partnership Act, 1932, which lays down the general principle of dissolution of a firm on the death of a partner is clearly subject to a contract to the contrary in the terms of the partnership deed. It is, therefore, obvious that as a result of a contract to the contrary in the partnership deed dt. November 25, 1965, which provided for continuance of the partnership firm and not its dissolution by death of any partner, the general principle contained in s. 42(c) of the Partnership Act, providing for dissolution of the firm on the death of a partner was not attracted. Not only this, the new partnership deed dt. November 2, 1973 (Annexure “B”), expressly stated that the surviving partners had mutually agreed to continue the partnership with the two new partners who were heirs of the deceased partners and to reconstitute the firm with effect from July 28, 1973. This statement in the new partnership deed (Annexure “B”) was a reiteration of the consequence of non-dissolution of the firm as a result of a contract to the contrary in the earlier partnership deed (Annexure “A”) instead of the same amounting to superseding the earlier contract to bring about dissolution as claimed by learned counsel for the assessee.

We find that the Tribunal’s finding appearing from the Tribunal’s order (Annexure “E”) dt. May 31, 1979, is based on an obvious misreading of the terms contained in the partnership deed. The Tribunal has held that on the death of the two partners, the firm automatically stood dissolved because in the partnership deed, there was no contract that after the death of a partner, the firm shall not be dissolved. The same thing has been repeated by the Tribunal thereafter by saying that in the partnership deed there was no contract to the contrary that acted the death of a partner, the firm shall not stand dissolved; a nd so in view of s. 42(c) of the Indian Partnership Act, after the death of a partner, the firm automatically stands dissolved. This is the only basis on which the Tribunal has come to the conclusion that the partnership firm stood dissolved on the death of the two partners. This finding is not based on any material other than the partnership deed which has undoubtedly been misread. It is incorrect to say that this finding is based on any other evidence as claimed by learned counsel for the assessee. Sucha a finding based entirely on an obvious misreading of the partnership deed cannot be treated as a finding of fact in favour of the assessee as contended by learned counsel for the assessee. The question, therefore, is whether, in this situation, the decision of this Court in CIT vs. Gharsana Beriwal Road Works (supra) relied upon by learned counsel for the Revenue is distinguishable for any reason.

As already indicated, there was a contract to the contrary in the partnership deed as a result of which the partnership firm did not stand dissolved in accordance with the general principle contained in s. 42(c) of the Indian Partnership Act on the death of two of the six partners. This is also evident from the fact that the surviving four partners continued the partnership together with heirs of the two deceased partners as new partners and said so expressly in the new partnership deed as stated earlier. In view of this fact, there appears to be no reason to old that the earlier decision of this Court on which learned counsel for the Revenue relied is distinguishable for any reason. In that decision, one of us (J. S. Verma C.J.), speaking for the Division Bench, concluded as under (P. 502) : “It may be added that the proviso inserted in sub-s. (2) of s. 187 of the Act retrospectively w.e.f. April 1, 1975, by the Taxation Laws (Amendment) Act, 1984, has no application since it excludes from the ambit of cl. (a) of sub-s. (2) of s. 187 only a case where a firm is dissolved on the death of any of its partners. In a case like the present where there is no dissolution of the firm on the death of any of its partners on account of a contract to the contrary in the deed of partnership, the said proviso is not attracted.”

8. We may now refer to a recent decision of the Supreme Court in Wazid Ali Abid Ali vs. CIT (1988) 67 CTR (SC) 43:(1988) 169 ITR 761 (SC), which deals with this question. It was held by the Supreme Court that in all cases, dissolution does not take place by the death if there is a contract to the contrary in a given case. Dealing with the facts on which that decision was rendered, it was clearly held that on the death of a partner, there is no dissolution of the partnership firm if there be an express term to the contrary and the partnership is carried on with the remaining partners together with the heir and representative of the deceased partner. It was expressly held that (at p. 765) “by virtue of s. 42(c) of the Indian Partnership Act, 1932, a firm was dissolved by the death of a partner but as the section provided, that was subject to the contract between the partners.” Reference was also made in this decision of the Supreme Court to the proviso to s. 187(2) inserted w.e.f. April 1, 1975, and it was pointed out that this proviso could not be interpreted to mean that in every case where one of the partners died, the firm was and must be held to be dissolved; and the language of that proviso was clear and it stated that nothing in cl. (a) of s. 187 (2) should apply to a case where a firm was dissolved on the death of any of its partners. The Supreme Court held with reference to the facts of one of the appeals disposed of by that decision that (at p. 780) “so far as the High Court had held that the assessee-firm was not dissolved on the death of one of the partners in view of the terms of the partnership deed, but there is a change in the constitution of the firm, the High Court was right”. After this decision of the Supreme Court, it cannot be doubted that the general principle of dissolution of a partnership firm according to s. 42(c) of the Partnership Act on the death of a partner is subject to a contract to the contrary where the number of surviving partners is two or more. This is the position even after the insertion of the proviso to s. 187(2) w.e.f. April 1, 1975.

Learned counsel for the assessee placed strong reliance on a decision of the Allahabad High Court and another of the Gujarat High Court which do not require separate consideration, inasmuch as the Allahabad decision is considered in the supreme Court decision and the Gujarat decision was the subject-matter of one of the appeals giving rise to the Supreme Court decision. The Gujarat decision [(1977) 108 ITR 264] was affirmed by the Supreme Court and it was pointed out that in the facts of that case, the partnership firm was dissolved and transactions were carried on thereafter by the remaining parties in the course of winding up and for realisation of its dues. It is unnecessary for us to deal with any other decision in view of the authoritative pronouncement of the Supreme Court on this point. In our opinion, the Supreme Court decision on this point reaffirms the view taken in the earlier decision of this Court in CIT vs. Gharsana Beriwal Road Works (supra). There is thus no ground to distinguish that decision. Following that decision, this reference has to be answered in favour of the Revenue.

Consequently, the reference is answered in the negative, in favour of the Revenue and against the assessee by holding that the view taken by the Tribunal is not justified and that this is a case of a mere change in the constitution of the firm governed by s. 187(2) and not one of succession governed by s. 188 of the IT Act, 1961.

No costs.

[Citation : 175 ITR 366]