1975 (2) TMI 8 - HC - Income Tax

Court rules reconstitution of partnership post-death as succession under Income-tax Act

The High Court ruled in favor of the assessee, determining that the reconstitution of the partnership firm post the death of a partner constituted a case ... A Partner, Change In Constitution Of Firm, Partnership Firm, Two Partners Issues:1. Whether the reconstitution of the partnership firm falls under section 187(2) of the Income-tax Act.2. Whether the case falls under section 188 of the Income-tax Act and requires two separate assessments.Detailed Analysis:The judgment pertains to a case where the assessee-firm underwent reconstitution following the death of a partner. The Income-tax Officer treated it as a mere change in the firm's constitution and made a single assessment order. The Appellate Assistant Commissioner upheld this decision, but the Appellate Tribunal allowed the assessee's appeal, stating that the old firm was dissolved automatically upon the partner's death, leading to the formation of a new firm. The department then sought a reference to the High Court under section 256(1) of the Income-tax Act to determine the appropriate section under which the case falls.The main issue in contention was whether the reconstitution of the firm should be governed by section 187(2) or section 188 of the Income-tax Act. The revenue argued that since the business continued after the partner's death with additional partners, it constituted a mere change in the old firm's constitution. Conversely, the assessee contended that the new firm formed post-dissolution was distinct, warranting separate assessments under section 188.The High Court relied on a previous Full Bench decision in Dahi Laxmi Dal Factory v. Income-tax Officer, Sitapur [1976] 103 ITR 517 (All) [FB], which held that when a firm dissolves, and another takes over the business, it constitutes a case of succession under section 188, even if some partners overlap. Bound by this precedent, the Court concluded that the present case fell under section 188 of the Income-tax Act, necessitating separate assessments for the old and new firms.Ultimately, the Court ruled in favor of the assessee, holding that the Tribunal's decision aligning with section 188 was correct. No costs were awarded, but the counsel's fee was assessed at Rs. 200.