Firm dissolution on partner's death triggers succession, requiring separate tax assessments for predecessor and successor firms.

A two-partner firm that dissolved on the death of a partner and was replaced by a fresh partnership carrying on the same business was treated as a case of succession, not mere reconstitution. Section 187 applies only where the firm continues and only its constitution changes; once dissolution occurs, section 188 governs. The predecessor and successor firms are separate assessable entities, so their incomes cannot be clubbed in one assessment. The assessment and revisional orders were therefore quashed.

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Issues: (i) Whether, on the death of one of two partners and the formation of a fresh partnership to carry on the same business, the case fell under section 187 of the Income-tax Act, 1961 as a change in the constitution of the firm, or under section 188 as succession of one firm by another; and (ii) whether the income of the erstwhile firm and the successor firm could be clubbed together in one assessment.

Issue (i): Whether, on the death of one of two partners and the formation of a fresh partnership to carry on the same business, the case fell under section 187 of the Income-tax Act, 1961 as a change in the constitution of the firm, or under section 188 as succession of one firm by another.

Analysis: The majority held that section 187 applies only where the firm continues in existence and its constitution changes by the admission, retirement, or ceasing of partners in circumstances contemplated by the partnership law. Where a two-partner firm stands dissolved on the death of one partner, the firm comes to an end and a fresh firm carrying on the same business is a successor firm. The distinction between reconstitution and dissolution was treated as fundamental, and the case was held to be one of succession rather than mere reconstitution.

Conclusion: The case was governed by section 188, not section 187, and separate treatment of the predecessor and successor firms was required.

Issue (ii): Whether the income of the erstwhile firm and the successor firm could be clubbed together in one assessment.

Analysis: The majority held that the Act did not authorise treating the income of two distinct firms as one composite assessable sum merely because one succeeded the other. Where section 188 applies, the predecessor and successor are separate assessable entities, and a single assessment covering both periods was impermissible.

Conclusion: Clubbing the income of the erstwhile firm and the successor firm in one assessment was invalid.

Final Conclusion: The impugned assessment and revisional orders could not stand, and the writ petition was allowed with the orders quashed.

Ratio Decidendi: A dissolved firm cannot be treated as merely reconstituted for assessment purposes; where dissolution is followed by a new firm taking over the business, the case falls under succession and requires separate assessment of the predecessor and successor firms.

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