Assessment of dissolved firm under income-tax law fails where succession, not discontinuance, is shown and procedural machinery is absent.

Assessment of a dissolved firm could not be sustained under section 26(1) of the Indian Income-tax Act, 1922, because that provision applies only to a mere change in constitution or a newly constituted firm at the time of assessment. A later agreement could not retrospectively alter the legal position against third parties. The facts also showed succession to the business rather than discontinuance, so section 44 was inapplicable. Although section 26(2) was the proper provision in principle, it then lacked the procedural machinery needed to support a pre-amendment assessment. The result was that the assessment orders were invalid.

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Issues: Whether assessment orders made against a dissolved firm were valid in law, and whether the case fell under section 26(1), section 44, or section 26(2) of the Indian Income-tax Act, 1922.

Analysis: Section 26(1) applies only where, at the time of assessment under section 23, there is merely a change in the constitution of the firm or a newly constituted firm. On the facts, the firm had been dissolved and the business had first been carried on by one person as sole proprietor; a later agreement could not retrospectively alter the legal position against third parties. The case therefore did not involve a mere change in constitution or a new firm.

The facts also showed that the business had not been discontinued on dissolution, but had been succeeded to. In such a situation, section 44, which proceeds on discontinuance of business, was inapplicable. The proper provision was section 26(2). But section 26(2), as it then stood, did not supply the procedural machinery for assessment of a dissolved firm, and the later amendment to section 44 could not cure assessments already made before its commencement.

Conclusion: The assessment orders were invalid, and the question referred was answered in the negative, in favour of the assessee.

Ratio Decidendi: A dissolved firm cannot be validly assessed under section 26(1) merely because the parties later stipulate a retrospective commencement of partnership; where there is succession rather than discontinuance, section 44 does not apply, and section 26(2) cannot sustain a pre-amendment assessment without the requisite machinery.

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