DELHI BENCH(THIRD MEMBER) INCOME TAX OFFICER v. JAINA TEXTILES October 30, 1985 JUDGMENT K. C. SRIVASTAVA, A. M.: I have carefully gone through order recorded by Judicial Member but I am not inclined to agree with his conclusion. There was firm M/s Jaina Textiles with five partners having different shares in profits and losses of firm s business. original partnership deed was executed 21st Jan. 1974. names of partners were as under: Smt. Raj Kumari Jain per cent share Smt. Kiran Mala per cent share Naveen Kumar Jain per cent share Atual KumarJain per cent share Agum Prakash Mittal per cent share business of firm was manufacture and sale of power loom and handloom cloth. Clause 12 of partnership deed provided that duration of firm shall be partnership at will. Clause 14 of deed stated that partners were partners in their individual and personal capacity and they did not represent any family or any other person. Upto immediately preceding year firm had been assessed on above basis. On 7th June 1979 partners decided to dissolve firm and for this purpose dissolution Deed was executed. first clause of Dissolution Deed stated that partners as constituted on 21st Jan. 1974 stood dissolved w.e.f. 7th June 1979 and parties of first deed " do not now constitute firm and their inter se relationship as partners stands terminated." books of accounts were written upto date of dissolution and profits were determine upto that date. capital of each partner was ascertained and final balance sheet was drawn up. By this Dissolution Deed Smt. Kiran Mala retired as partner and she was not to have right or interest or ownership in any of assets of firm after date of dissolution. assets and liabilities of firm were taken over by remaining person. balance in account of Smt. Kiran Mala was paid to her by cheque. On same day i.e. 7th June 1979 above for persons after dissolving earlier firm executed another partnership deed and while doing so they executed partnership deed. business continued to be same and assets and liabilities of dissolved firm were taken over at pay be new firm. This partnership was also partnership at will. shares of four partners was determined at: Smt. Raj Kumari per cent Share Shri Naven Kumar Jain per cent " Shri Atual Kumar Jain per cent " Shri Agum Prakash Mittal per cent " Clause 14 of Deed provided that two partners, namely, Naveen Kumar Jain and Atual Kumar Jain had contributed capital of their joint families and these persons represented their families in firm. books of account have been maintained by new firm and first accounting period ended on 31st March 1980. firm filed return for period starting from 7th June 1979 to 31st March 1980. separate return for period from 1st April 1979 to 6th June 1979 was also filed. ITO, however, was of view that this was case of mere change in constitution of firm and there was no complete dissolution of previous firm. He, therefore, assessed income of first. He, therefore, assessed income of first period along with income of second period together, He also appeared to have made protective assessment in respect of dissolved firm separately. In appeal AAC directed that two separate assessment should be made for two periods and he, therefore, set aside order of ITO and directed that assessment should be made on basis that there was succession by new firm as contemplated under s. 186 of IT Act, 1961. Now Revenue is in appeal challenging order of AAC that there should be two separate assessment for two periods. From facts given above, it emerges that there were five partners of old firm which was dissolved and remaining partners entered into fresh partnership and separate accounts have been maintained by these two firms. According to ITO, provisions of s. 187 (2) are applicable in this case and because some of old partners continued in new firm, it was merely change in constitution of firm. According to assesses, this was case of succession of one firm by another firm as earlier firm was dissolved and its existence came to end after such dissolution. This being case of Meerut, we have to consider legal position in light of decisions of Allahabad High Court. There is no dispute that all earlier decisions of Allahabad High Court including decisions in case of Badri Narain Kashi Prasad vs. Addl. CIT (supra) and CIT vs. Shiv Shanker Lal Ram Nath (supra). and several other decisions had taken view that on dissolution of firm on death of partner and two separate assessment would be made. Even in case of retirement of partner, similar view was taken if facts suggested that earlier firm came to end. However, difficulty which has arisen in present case is due to interpretation of decision of Allahabad High Court in case of Vishwanath Seth vs. CIT. U. P. (supra). This was decision of Full Bench consisting of this five Judges. Who reviewed earlier decisions of that Court and there was change in view taken by High Court on legal question. I, therefore, proceed to consider ratio of this decision of Allahabad High Court. In above case there was firm consisting of Shri Vishwa Nath Seth and his three sons as partners. Shri Vishwanath Seth died in 1964 and his five sons continued partnership business in same firm name. As result of raid in premises of firm some incriminating materials were found and firm agreed to be assessed on total sum of Rs. 15,62,326. This income was to be spread over to asst. yrs. 1957-58 to 1966-67. It was also agreed that firm was to pay penalty and such penalty was imposed for different years. question arose whether penalty could be imposed on new firm in repeat of income concealed by firm which existed prior to death of Shri Vishwanath Seth. Tribunal held that penalty could be levied on new firm as there was no dissolution of firm in 1964 and same business was continued by five sons in partnership. High Court after considering legal position at great length, observed that in that case there had been no dissolution of firm. High Court came to conclusion that in present case, same firm continued and, therefore, penalty could be levied on that firm for concealment for salaries period as well. There was dissenting judgment by one of Judges. close study of above judgment shows that High Court has mainly proceeded on basic fact that there was no dissolution of firm. On page 253, their Lordships observed "So, reconstitution without dissolution does not bring into existence of new firm. In case of reconstitution same firm continues to exist." Their Lordships also referred to decision of Delhi High Court in case of CIT vs. Sant Lal Arivind Kumar (1981) 25 CTR (Del) 207: (1982) 136 ITR 379 (Del) and after quoting from that decision they held that in case of change in constitution same firm continues but it ceases to exist on its dissolution. Their Lordships further proceeded to hold " In present case, finding is that there was no dissolution. There was only reconstitution. Since this finding is unchallenged we proceed on basis alone. Hence same partnerships firm will be deemed to continue inspite of its reconstitution in 1964. Their Lordships proceeded to consider decision of Allahabad High Court in case of CIT vs. Shiv Shanker Lal Ram Nath (supra) and case of Badri Narain Kashi Prased vs. Addl. CIT (supra). They pointed put that ion these deicsions decisionof Mysore High Court to case of CIT vs. Bharat Engineering & Construction Co. (168) 67 ITR 273 (Mys) was wrongly considered to be decision of Supreme Court. Their Lordships then proceeded to refer to other view taken by Punjab & Haryana High Court in case of Hoshiarpur Electric Supply co. vs. CIT (1971) 79 ITR 164 (P&H) and by Delhi High Court tin case of CIT vs. Sant Lal Arvind Kumar (supra). Their Lordships observed In all these decision, it has been held that in cases of reconstitution under s. 187, same firm continues and is assessable in respect of income of entire previous year. In our opinion, this is control legal position." decision of Allahabad High Court has not directly considered question of one assessment or two assessments but it has no doubt stated that view expressed in earlier judgments by same High Court was not correct to certain extent. They have also held that decisions of Punjab & Haryana High Court and Delhi High Court represented correct view. However, it cannot be forgotten that whole decision has proceeded on basis that there had been no dissolution of firm and this fact alone has weighed upon mind of ld. Judge while giving above judgment. In present case it is clear that there has been dissolution of firm and partners by conscious act had agreed to terminate earlier firm and start afresh. fact that assets of earlier firm were taken over by remaining partners and they utilised it in new business could not alone determine legal position. genuineness of dissolution has not been doubted by Revenue authorities. question, therefore, arises is whether in spite of there being dissolution of firm, there should be one assessment in respect of both periods. In my opinion, answer should be in negative. As already stated above, dissolution of firm means its end and termination of agreement and after such dissolution if firm comes into existence it has to be separate firm and not same firm. This question was considered verry lucidly and in great detail in judgment of Delhi High Court in case of CIT vs. Sant Lal Arvind Kumar (supra) which has been quoted with approval in judgment of Allahabad High Court in case of Vishwanath Seth vs. CIT (supra). Head Note in above case may be reproduced to explain position: "Sec. 187 of IT Act, 1961, comes into operation and applies only when there is eye of law firm with continued existence and not to case where under law one firm has ceased to exist and another has come into existence. purpose of sub-s. (2) of s. 187 is not one of expansion of normal concept of change in constitution of firm but is really one of limitation, purpose is not to say that firm will continue in spite of dissolution but rather to say that, even in case where there is only change in constitution, sub-s. (1) will not apply if partners before and after change are not common. It is not correct to say that s. 187 (2) contemplates change in all cases where business continues though in hands of different form provided there are common partners. Though creating mild ambiguity, language of s. 188 it not only not inconsistent or contradictory but is intended to clarify meaning of s. 187 and to exclude possibility of common law doctrine regarding personality of firm even in cases of mere change in constitution. concept of partnership is one of agreement between partners. If partners agree, not that one partner should go out another should come in, but that on particular event happening firm should be treated as dissolved, they are entitled to say so, and what partners have disrupted it is not for Department to unite unless there is specific authorisation in Act. Where there is no agreement to treat firm as continuing notwithstanding death of partner, partners have no option to treat firm as continuing under Partnership Act, 1932, firm gets dissolved and ITO is not entitled to ignore this consequence. There is nothing in language of ss. 187, 188 or 189 which precludes application of partnership law principles even under IT Act. In first place, definition section of IT Act, s. 2, specifically enacts in cl. (23) that for purposes of IT Act expression " firm", "partner" and " partnership" have same meaning as they have under partnership Act. This necessarily means that for any question arising under IT Act, concepts of partnership law have full application unless there is same thing in any particular provisions which compels contrary view. Even under IT Act, concept of firm will be same as under partnership law and in absence of contract to contrary firm on its dissolution ceases to exist." Their Lordships came to conclusion that wherever there is dissolution of firm either by actual agreement or not earlier firm comes to end and new firm takes its place. Their Lordships further observed on p. 393 as under: "The correct approach is that s. 187 were to be applied firm is assessable in respect of income for entire pervious year though shares of partners will be allocated only according to their respective periods of membership of firm. Thus, if s. 187 is applied, partners of firm will not suffer any disadvantage because income of previous year will be apportioned on time basis as has been done in cases under reference only to partners who where there during relevant period. Though there will be single assessment on firm share income of partners will relate to respective periods for which they have been partners and they will be under no disability. only controversy arises regarding aggregation of income for entire period in hands of firm, for, if firm is registered firm or unregistered firm. On other hand if there are two firms in existence (or in appropriate case more than two firms) income in hands of each will have to be confined to period of its existence. It is only this aspect that works to disadvantage of Revenue. It is no doubt true that if answer propounded by us, is correct one, it may be possible for partners to divide their income into various segments by simple process of dissolving firm and then reconstituting with small change (either in share or in partners) rather than by calling it change in constitution. But as already pointed out concept of partnership is one of agreement between partners. If partners agree not that one partner should go out and another should come in but that on particular event happening firm should be treated as dissolved, they are entitled to say so and what partners have disrupted it is not for Department ot unite unless there is specific authorisation in Act. In view of above legal position, I am inclined to hold that in present case, earlier firm came to end as result of dissolution of that firm. new firm of four partners of old firm came into existence as result of fresh partnership deed. It may also be mentioned that two of partners who were earlier representing themselves were now representing their HUF. That itself could not be of much importance but has to be noted as fact. In such situation, provisions of s. 197(2) cannot apply and provisions of s. 188 would be applicable as this was case of succession of one firm by other after dissolution of firm. revenue s appeal is, therefore, dismissed. August, 1984 ORDER UNDER S. 255 (4) OF IT ACT K. C. SRIVASTAVA, A. M.: We have heard above matter and we have differed in opinion and, therefore, we state point on which we differed and refer matter to President of Tribunal so that matter could be heard by one or more Member of Tribunal. point of difference is as under: "Whether on facts and in circumstances of case, there should be assessment or two assessments for period from 1st April 1979 to 31st March 1980?" th Oct. 1985 Order G. KRISHNAMURTY, SENIOR VICE PRESIDENT: difference of opinion between my learned brother, who heard this appeal is whether on facts and in circumstances of case, there should be one or two assessment for period from 1st April 1979 to 31st March 1980 There was firm called M/s Jain Textiles with five partners constituted under case of partnership dt. 21st Jan. 1979. partners were: Smt. Raj Kumari Jain per cent share Smt. Kiran mala per cent share Shri Naveen Kumar Jain per cent share Shri Atual Kumar Jain per cent share Shri Agum Prakash Mittal per cent share business of firm was manufacture and sale of powerloom and handloom cloth. duration of partnership was at will. On 7th June 1979 by mutual agreement partners decided to dissolve partnership. deed of dissolution was then executed, which stated that partnership that subsisted between them under deed of partnership dt. 21st Jan. 1974, would stand dissolved w.e.f. 7th June 1979. This deed of dissolution provided that relationship of partnership that subsisted between them was forfeited with effect from that date. books of accounts were closed to be date of dissolution and profits were determined upto. Here date and were adjusted to be accounts of partners. deed of dissolution further provided that act. Kiran Mal Jain, partner holding 30 per cent share was to ceases as partners after that date. Again on same day by another deed of partnership executed remaining four period joined together as partners and executed new deed of partnership. This partnership took over assets and liabilities of old firm and profit caring ratio of these partners was as under: Smt. Raj Kumari per cent share Naveen Kumar Jain per cent share Atual Kumar Jain per cent share Agum Prakash Mittal per cent share It further provided that Shri Naveen Kumar Jain and Shri Atul Kumkar Jain had invested capital belonging to their joint families and they represented their joint families. New books of account were opened and they were closed to P&L A/c on 31st March 1980. firm filed return for period from 7th June 1979 to 31st March 1980. Another return was filed of period from 1st April 1979 to 6th June 1979. While claim of assessee was that these two firms were separate and distinct and profits of these two firms must be assessed separately, ITO was of opinion that there was only change in constitution of firm, that there was no dissolution of previous firm and consequently income of both firms belonged to one firm and clubbed income of both firms and made one assessment. In appeal, AAC held that view taken by ITO was incorrect and directed ITO to make two separate assessment for two periods. Aggrieved by that order, Revenue has come up in appeal before Tribunal. ld. Judicial Member took he view that provisions of s. 187(2) were attracted. that there was only change in constitution of firm, that dissolution was only show and formality and therefore one assessment made by ITO was proper and just and upheld that view, certain decisions of Allahabad High Court more particularly decision in CIT vs. Shiv Shankar Lal Ram Nath (supra), CIT vs. Sant lal Arvind Kumar (supra), CIT vs. Gupta Stores (supra) and Vishwanath Seth vs. CIT (supra) were cited before Tribunal in support of view that in such situation what took on law was succession of firm and not change in constitution of firm consequences of which is to make two separate entities. ld. Judicial Member distinguished these cases by pointing out that in all those cases death of partner was involved and since death of partner resulted in law in dissolution of firm, that position was totally different from position obtaining in this case where partner retired from partnership. He was of firm opinion that provisions of s. 187 (2) clearly applied. ITO was therefore right and justified in framing one assessment for entire previous year and that ld. appellate authority was not justified in disturbing that finding. ld. Accountant Member was of different opinion. This case coming from Meerut, he observed that he should consider decisions of Allabhabad High Court, which is jurisdiction of High Court. By referring to decisions of Allahabad High Court in Badri Narain Kashi Prasad vs. Addl. CIT (supra), CIT vs. Shiv Shankar Lal Ram Nath (supra), and Vishwanath Seth (supra) and few other decisions held that this was case of succession notwithstanding that no death of partner was involved. According to him what was more important in situation of this nature was whether there was any dissolution of partnership either in law or by agreement and once dissolution was proved as fact, then what followed was only succession of firm and not change in constitution. He referred to decision of Delhi High Court in CIT vs. Sant Lal Arvind Kumar (supra), which was referred to by Allahabad High Court in case of Vishwanth Seth (supra) and was approved with respect. Thus, both ld. Members differed on question whether on facts and in circumstances of case there was succession of firm or change in constitution. I have heard parties at length and I am of considered opinion that on facts of this case there was only succession of firm and not change in constitution of firm as opined by ld Judicial Member. There are series of case decided by Allahabad High Court on this aspect and latest tone was one reported in Vishwanath Seth (supra). In this case Allahabad High Court took note of decision of Delhi High Court in case of CIT vs. Sant lal Arvind Kumar (supra), where Delhi High Court explained that s. 187 of IT Act, 1961 come into operation only when there is in eye of law firm with continued existence, and not to case where under law one firm has ceased to exist and another has come into existence. purpose of sub-s. (2) of s. 187 is not one of expansion of normal concept of change in constitution of firm but is really one of limitation. It is not to say that firm will continue in spite of dissolution but rather to say that even in case where there is only change in constitution, sub-s. (1) will not apply if partners before and after change are not common. Delhi High Court has clearly pointed out in this case that concept of partnership is one of agreement between partners; if partners agreed not that one partner should go out another should come in but that on particular event happening, firm should be treated dissolved, they are entitled to say so and what partners have disrupted is not for Department to unite unless there is specific authorisation in Act. Whenever there is dissolution of firm either by actual assessments or otherwise, earlier firms comes to end and new firm takes its place. Thus, what is to be seen is whether there is dissolution of firm of five partners constituted under deed of partnership dt. 21st April 1974. dissolution deed executed provided in most unambiguous terms that firm stood dissolved and terminated as on from 7th June, 1979. subsequent events that followed, namely, closing of accounts of old firm apportionment of profits amongst themselves, settlement of accounts inter se. showed that that firm had ended and relationship as partners had come to close. By subsequent, deed of partnership partners rejoined as partners by entering into separate agreement. Thus old firm having stood dissolved it cannot be said that itcontinued to exist. As pointed out, by Delhi High Court unless that firm continued to exist, there cannot be any question of change in constitution of that firm. This is also view taken by majority of High Courts in India except Punjab and Haryana. Now in case before Allahabad High Court tin Vishwanath Seth (supra). Full Bench of Allahabad High Court held approving view taken by Delhi High Court in Santlal Arvind Kumar (supra) that under general law of partnership and under Indian partnership Act as well as under s. 187 of IT Act, 1961, in case of reconstitution of firm, it retains its identity and is continued and is assessable in respect of income of entire previous year. question therefore is whether firm retained identity. In that case Tribunal found as fact that on death of one of partners there was no dissolution of partnership but only reconstitution of firm. That was concession given before High Court and it was on that concession and fact found by Tribunal that High Court held that there was only change in constitution of firm notwithstanding death of one of partners. While referring to this finding recorded by Tribunal Full Bench of Allahabad High Court pointed out that under Partnership Act it is not necessary that on death of partner, firm must dissolve. It depends upon terms in contract of partnership. Then Allahabad High Court pointed out at page 253 after discussing decision of Gujarat High Court prorated in Keshav lal Lalubhai Patel vs. Patel Bhailal Naran Das AIR 1968 Guj 157 that reconstitution of firm without dissolution does not bring into existence new firm. Then High Court pointed out at end of page that firm ceases to exist on its dissolution. Since finding of Tribunal in that case was that there was no dissolution of firm was not challenged before High Court, High Court proceeded on basis that same firm continued to exist and therefore there was only reconstitution. Thus, according to Allahabad High Court decision, which is binding on us in this case what is to be seen is whether there is dissolution of firm or not. I have already referred to facts which proved beyond and shadow of doubt that there was dissolution of old firm consisting of five partners evidenced by execution of dissolution deed followed up by entries in account books and execution of new deed of partnership governing relationship of new partners that agreed to become as partners. Therefore, mere commonness of partners cannot covert this into change in constitution of firm because old firm ceased to exist and on its cessation question of change of constitution of that firm cannot exist. It is these reason that weighed with in coming to conclusion that view taken by ld. Accountant Member is correct and appropriate view and is in accord with law. I, therefore, express my agreement with that law. There is no doubt case that came to my notice which was one decided by Madhya Pradesh High Court in CIT vs. Ram Kishan Bhojraj (1984) 38 CTR (MP) 258 (FB): (1984) 147 ITR 52 (MP) where it was pointed out that in matter for which provision is made in IT Act, 1961 to be governed by it notwithstanding anything different or to contrary contained in general law relating to that matter. Construing provisions of ss. 187 (2A) and 188 Full Bench of Madhya Pradesh High Court pointed out that if firm is dissolved and succeeded by another firm which has, as its partners one or more of partners of original firm, case will be one covered by s. 187 and that would be merely change in constitution of firm. Madhya Pradesh High Court dissented from consistent judgment delivered by Delhi, Gujarat, Madras, Andhra Pradesh (Full Bench), Allahabad (Full Bench) and Orissa High Courts disapproved view taken by its own High Court and Karnataka High Court and Punjab and followed decision of Calcutta High Court and Haryana High Court. But again I find that Madras High Court in such recent case reported in CIT vs. Meenakshi Bankers (1984) 41 CTR (Mad) 219: (1985) 152 ITR 132 (Mad) held that if there is factually dissolution of firm and reconstitution of new firm after such dissolution, it should be taken to be succession of one firm by another and it cannot be taken to be reconstitution of old firm by new firm so as to attract s. 187 of IT Act, 1961, Madras High Court clearly pointed out that in cases where one firm comes to end, that firm which has been dissolved and can no longer be said to continue or that there was only change in constitution of that firm. In coming to this conclusion, Madras High Court followed decision of Andhra Pradesh High Court, Allahabad High Court, Calcutta High Court tin another case and specifically dissented from Punjab and Haryana High Court in Nandla Sohanla vs. CIT 1978 CTT (P&H) 5 (FB): (1977) 110 ITR 170 (P&H) which was specifically followed by Madhya Pradesh High Court. It is also significant to note that in case before Madras High Court there is not even dissolution deed executed. Yet from facts of case and assessments made in form of return, High Court inferred that there was dissolution of firm whereas in present case before there was dissolution deed executed, which put end to relationship of partnership between partner. Thus, judicial opinion though divided, majority view was in favour of view that in case of dissolution of firm either by death of partner or by act of parties, that firm comes to end and if another firm is constituted even though by taking some of old partners, that new firm would be separate and distinct firm from old firm and that would be case of one firm by another firm and not change in constitution of firm. Now mater will go back before Original Bench which heard appeal for deciding matter according to majority opinion. *** INCOME TAX OFFICER v. JAINA TEXTILES