Change in constitution of firm under income tax law prevails over partnership dissolution clause where existing partners continue.

Section 187(2)(a) of the Income-tax Act treats a firm as continuing for tax purposes where one or more pre-existing partners remain after another partner ceases to be a partner. A partnership clause providing for dissolution on retirement cannot override this statutory deeming rule. On those facts, the situation is treated as a mere change in the constitution of the firm, not dissolution, and the assessment must be made on that basis rather than by separate assessments for different periods.

---

---

Issues: Whether the case involved a mere change in the constitution of the firm within the meaning of section 187(2) of the Income-tax Act, 1961, and whether the income of the relevant periods had to be assessed separately.

Analysis: Section 187(2)(a) creates a legal fiction for income-tax purposes: if one or more partners cease to be partners but one or more of the pre-existing partners continue, the firm is treated as continuing and not as dissolved. The partnership clause providing for dissolution on retirement could not override this statutory deeming provision. Since one partner continued, the situation fell within a change in constitution rather than dissolution, and a single assessment was warranted.

Conclusion: The reference was answered in favour of the Revenue. The Tribunal was not correct in directing separate assessments, and the case was one of change in the constitution of the firm, not dissolution.

Final Conclusion: The statutory scheme under section 187(2) governed the matter, with the consequence that the firm was treated as continuing for assessment purposes and the assessee was not entitled to separate assessments for the two periods.

Ratio Decidendi: For income-tax purposes, where one or more partners continue after a partner ceases to be a partner, section 187(2) deems the firm to continue notwithstanding a partnership clause of dissolution, and the case is treated as a change in constitution rather than dissolution.

---