Partnership dissolution upon death leads to new firm formation; court rules in favor of assessee.

The partnership firm was found to be dissolved upon the death of a partner, leading to the formation of a new partnership with the surviving partners and the deceased partner's widow. The court held that Section 187 of the Income-tax Act was not applicable as there was a dissolution in law, directing separate assessments for the two periods. The court agreed with the view that dissolution leads to a new firm under Section 188, rejecting the revenue's argument. Ultimately, the court ruled in favor of the assessee on all questions, with costs awarded to the assessee.

---

---

Issues Involved:
1. Whether the partnership firm was dissolved on the death of a partner.
2. Applicability of Section 187 of the Income-tax Act, 1961.
3. Whether separate assessments should be made for the two periods.

Detailed Analysis:

Issue 1: Dissolution of the Partnership Firm
The Tribunal found that the partnership firm was dissolved on the death of one of the partners, Harjivandas Hathibhai, on May 25, 1967. The original partnership deed dated April 29, 1960, did not contain any provision for the continuation of the firm upon the death of a partner. Therefore, the Tribunal held that the firm was automatically dissolved upon Harjivandas Hathibhai's death, and a new partnership was formed with the surviving partners and the widow of the deceased partner.

Issue 2: Applicability of Section 187 of the Income-tax Act, 1961
Section 187 deals with changes in the constitution of a firm. The Income-tax Officer and the Appellate Assistant Commissioner concluded that there was merely a change in the constitution of the firm, attracting Section 187, and thus, the income for the two periods should be clubbed together. However, the Tribunal held that Section 187 was not applicable as there was a dissolution in law. The Tribunal directed that separate assessments should be made for the two periods.

Issue 3: Separate Assessments
The Tribunal directed that there should be two separate assessments for the periods from November 13, 1966, to May 25, 1967, and from May 26, 1967, to November 2, 1967. This was based on the finding that the old firm was dissolved on the death of the partner, and a new firm came into existence.

Court's Analysis:

Section 187, 188, and 189 of the Income-tax Act
- Section 187: Provides for change in the constitution of a firm. Under sub-section (1), the assessment shall be made on the firm as constituted at the time of making the assessment.
- Section 188: Deals with the succession of one firm by another, requiring separate assessments for the predecessor and successor firms.
- Section 189: Addresses the dissolution of a firm or discontinuation of business, where the Income-tax Officer must assess the total income as if no dissolution had occurred.

Contentions and Precedents:
- The revenue relied on the decisions of the Allahabad High Court in R. B. Jessa Ram Fateh Chand v. Commissioner of Income-tax and the Punjab and Haryana High Court in Dharam Pal Sat Dev v. Commissioner of Income-tax, which supported the view that a change in the constitution of the firm did not amount to a dissolution.
- The Full Bench of the Allahabad High Court in Dahi Laxmi Dal Factory v. Income-tax Officer overruled the earlier decision, holding that Section 187 applies only to reconstitutions as per Sections 31 and 32 of the Indian Partnership Act. Dissolution leads to a new firm, attracting Section 188.

Court's Conclusion:
- The court agreed with the reasoning of the Full Bench of the Allahabad High Court in Dahi Laxmi Dal Factory's case, holding that Section 187 does not alter the general law of partnership.
- The court rejected the revenue's contention that Section 187 introduces a change from the general law of partnership.
- The court emphasized that the correct approach is to determine whether there was an agreement between the surviving partners and the deceased partner that the firm should not stand dissolved upon the death of a partner.

Final Decision:
- Question No. 1: Answered in the negative and in favor of the assessee.
- Question No. 2: Answered in the affirmative and in favor of the assessee.
- Question No. 3: Answered in the affirmative, applying Section 188, and in favor of the assessee.
- The Commissioner was ordered to pay the costs of the reference to the assessee.

---