Continuity of partners determines firm reconstitution under income tax law; succession provisions do not apply where common partners remain.

Where partners of the earlier firm continued in the successor firm, the statutory test in section 187(2)(a) was satisfied and the matter was treated as a change in constitution rather than a dissolution and succession under section 188. Although the firm was dissolved in partnership law terms and a new firm came into existence, income-tax treatment depended on continuity of partners, and two partners remained common between the old and new firms. The proviso to section 187(2)(a) did not apply, only one assessment was required, and the questions were answered in favour of the Revenue.

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Issues: Whether the assessee's case fell within section 187(2) of the Income-tax Act, 1961 as a mere change in the constitution of the firm, or within section 188 as dissolution and succession requiring separate assessments.

Analysis: The firm was dissolved and a new firm came into existence in partnership law terms, but for income-tax purposes the controlling provisions were sections 187 and 188. Section 188 applies only where the case is not covered by section 187(2). Under section 187(2)(a), a change in constitution occurs if one or more partners cease or new partners are admitted, provided one or more partners of the earlier firm continue after the change. Here two partners remained common between the old and new firms, so the statutory condition of continuity was satisfied. The proviso to section 187(2)(a) was not attracted.

Conclusion: The case was one of reconstitution and not dissolution. Only one assessment was payable, and both referred questions were answered against the assessee and in favour of the Revenue.

Ratio Decidendi: Where at least one partner of the earlier firm continues after a change in partners, the matter falls within section 187(2) as a change in constitution, and section 188 does not apply.

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