Reconstituted firm assessment must still follow previous-year partner income, limiting tax recovery to those who earned it.

On a change in constitution of a registered firm, section 28(1) of the Agricultural Income-tax Act, 1950 permits assessment of the firm as constituted at the time of assessment, but the tax burden must still track the income of the previous year under section 18(5)(a). The Kerala High Court noted that reconstitution, including a change in partners, does not justify fastening liability on partners who did not receive the relevant previous-year income. Tax recovery was therefore confined to the persons who were partners during that year, while section 28(1) was held to apply to reconstituted firms.

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Issues: (i) Whether, on a change in the constitution of a registered firm, tax liability under section 28(1) of the Agricultural Income-tax Act, 1950, is to be fastened on the partners of the reconstituted firm or on the persons who were partners during the previous year; (ii) Whether reconstitution of the firm attracts section 28(1) of the Agricultural Income-tax Act, 1950.

Issue (i): Whether, on a change in the constitution of a registered firm, tax liability under section 28(1) of the Agricultural Income-tax Act, 1950, is to be fastened on the partners of the reconstituted firm or on the persons who were partners during the previous year.

Analysis: Section 28(1) requires the assessment to be made on the firm as constituted at the time of assessment, but that provision is linked to assessment under section 18. Under section 18(5)(a), in the case of a registered firm, the partners are assessed on the basis of their share in the income of the previous year. The provisions must be read together so that a reconstitution of the firm does not result in partners of the reconstituted firm being taxed on income they did not receive during the previous year. Where reconstitution causes a change in the persons or shares of partners, recovery cannot be shifted to the new firm in a manner inconsistent with the charging provision and the assessment scheme.

Conclusion: The answer was in favour of the assessee and against the Revenue. Tax could be recovered only from the persons who were members of the firm during the previous year.

Issue (ii): Whether reconstitution of the firm attracts section 28(1) of the Agricultural Income-tax Act, 1950.

Analysis: A change in the number of partners amounts to a reconstitution of the firm. Section 28(1) specifically applies where a change has occurred in the constitution of a firm, and the assessment in such a case is to be made on the firm as constituted at the time of assessment. The provision therefore governs the case of a reconstituted firm.

Conclusion: The answer was in favour of the Revenue and against the assessee.

Final Conclusion: The reference was answered partly in favour of the assessee and partly in favour of the Revenue, with the operative relief confined to the tax liability issue decided on the basis of the previous year and the membership of the firm during that period.

Ratio Decidendi: In a reconstituted registered firm, the assessment may be made on the firm as constituted at the time of assessment, but the liability to pay agricultural income-tax must remain anchored to the partners' entitlement to the income of the previous year and cannot be shifted to persons who did not receive that income.

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