1992 (10) TMI 51 - HC - Income Tax

Firm's Income Assessment: Original & Reconstituted Firms Must Be Assessed Separately

The High Court held that in cases of a firm's constitution change during an accounting year, the original firm's income must be assessed separately from ... Assessment, Firm Issues Involved:1. Legality of a single assessment aggregating income for two periods under section 187 of the Income-tax Act, 1961.2. Interpretation of section 187(2) concerning the change in the constitution of a firm.3. Applicability of Supreme Court and High Court precedents on the issue of clubbing income in case of reconstitution of a firm.Detailed Analysis:1. Legality of a Single Assessment Aggregating Income for Two Periods Under Section 187 of the Income-tax Act, 1961:The primary issue was whether it was legal to make a single assessment aggregating the income for both periods when there was a change in the constitution of the firm. The assessee argued for separate assessments for the periods before and after the reconstitution of the firm. The Income-tax Officer, however, clubbed the income of the original and reconstituted firms into a single assessment, citing section 187(2).2. Interpretation of Section 187(2) Concerning the Change in the Constitution of a Firm:The Tribunal followed precedents from the Andhra Pradesh, Punjab and Haryana, and Mysore High Courts, which supported the view that income should be clubbed. Conversely, the Allahabad High Court had ruled that income derived by the original firm should not be clubbed with the reconstituted firm's income. The Supreme Court in Wazid Ali Abid Ali v. CIT [1988] 169 ITR 761 clarified that the income of the original firm should be assessed separately from the reconstituted firm, thus supporting the assessee's contention.3. Applicability of Supreme Court and High Court Precedents on the Issue of Clubbing Income in Case of Reconstitution of a Firm:The Supreme Court's decision in Wazid Ali Abid Ali's case was pivotal. The Supreme Court approved the approach of the Allahabad High Court's Division Bench in CIT v. Shiv Shanker Lal Ram Nath [1977] 106 ITR 342, which held that income should be assessed separately for the periods before and after the reconstitution. This decision overruled the contrary view of the five-judge Full Bench of the Allahabad High Court in Vishwanath Seth v. CIT [1984] 146 ITR 249, which had supported the clubbing of income.The judgment emphasized that section 187 is a machinery provision that specifies on whom the assessment should be made in case of a change in the constitution of the firm. It does not dictate the computation of income or tax determination. The Rajasthan High Court in CIT v. Ganeshdas Jagdish Prasad [1988] 173 ITR 622 and the Patna High Court in CIT v. Shree Shankar Vastralaya [1991] 192 ITR 488 supported this interpretation, ruling that separate assessments should be made for the periods before and after the reconstitution.Conclusion:In conclusion, the High Court ruled that in the case of a change in the constitution of a firm during an accounting year, the income derived by the original firm should be assessed separately from the income derived by the reconstituted firm. The income of the two firms should not be clubbed together for assessment purposes. The question of law was answered in the negative and in favor of the assessee, affirming the need for separate assessments for the two periods.