Firm Dissolution: Separate Assessments Required for New Firm Formation

The court concluded that Section 187(2) of the Income-tax Act did not apply as the firm had dissolved upon the death of a partner, leading to the formation of a new firm. Separate assessments were deemed necessary for the assessment year 1969-70. The court ruled in favor of the assessee, supporting the Tribunal's decision for separate assessments and against the Revenue.

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Issues Involved:
1. Applicability of Section 187(2) of the Income-tax Act, 1961.
2. Determination of whether the firm was dissolved or if there was merely a change in the constitution of the firm.
3. Requirement of separate assessments for the firm for the assessment year 1969-70.

Detailed Analysis:

Issue 1: Applicability of Section 187(2) of the Income-tax Act, 1961
The core question referred to the court was whether Section 187(2) of the Income-tax Act, 1961, applied to the case at hand. Section 187(2) deals with changes in the constitution of a firm. The Tribunal had held that this section was not applicable because the firm had dissolved upon the death of a partner, Kanhaiyalal Saboo, and a new firm was constituted thereafter. The Tribunal's interpretation was that Section 187(2) presupposes the continuation of the firm, which was not the case here as the firm had dissolved and a new firm had taken over.

Issue 2: Determination of Dissolution vs. Change in Constitution
The court examined whether the firm was dissolved or if there was merely a change in the constitution of the firm. According to the partnership deed dated April 12, 1965, the partnership was "at will," and no clause provided for the continuation of the partnership after the death of a partner. Section 42(c) of the Partnership Act states that a firm is dissolved by the death of a partner unless otherwise agreed. The court noted that after Kanhaiyalal's death, a deed of dissolution was executed on March 12, 1968, and a new partnership deed was executed on March 27, 1968. Thus, the court concluded that the firm had indeed been dissolved, and a new firm had been formed, which meant that Section 187(2) of the Income-tax Act did not apply.

Issue 3: Requirement of Separate Assessments
Given the dissolution of the old firm and the formation of a new firm, the court had to decide whether separate assessments were required for the two periods within the assessment year 1969-70. The Tribunal had held that separate assessments should be made because the old firm ceased to exist upon the death of Kanhaiyalal, and a new firm was constituted thereafter. The court supported this view, stating that when a firm is dissolved, it cannot be said to continue, and thus, the provisions of Section 187(2) do not apply. Instead, Section 188, which deals with the succession of one firm by another, was applicable. This necessitated separate assessments for the periods before and after the dissolution.

Conclusion
The court concluded that the Tribunal was correct in holding that Section 187(2) of the Income-tax Act, 1961, was not applicable because the firm had dissolved upon the death of Kanhaiyalal Saboo. Consequently, two separate assessments were required for the assessment year 1969-70. The court answered the referred question in the affirmative, in favor of the assessee and against the Revenue, thereby supporting the Tribunal's decision for separate assessments. There was no order as to costs of the reference.

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