Change in partnership constitution after a partner's death governs assessment where the business continues under a fresh deed.

Where a partnership business continues without discontinuance after the death of a partner and the remaining partners execute a fresh deed to carry on the business as a going concern, the matter is treated as a change in the constitution of the firm under section 26(1) of the Indian Income-tax Act, 1922, not as succession under section 26(2). The text states that, on this interpretation, assessment must be made on the firm as constituted at the time of assessment. It further notes that the Supreme Court's construction of section 26 distinguishes a dissolved but continuing business from a true case of succession.

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Issues: Whether, on the death of a partner and continuance of the business by the remaining partners under a fresh deed, the case fell under section 26(1) or section 26(2) of the Indian Income-tax Act, 1922, and whether the assessment had to be made on the firm as constituted at the time of assessment.

Analysis: Section 26(1) applies where, at the time of assessment, there has been a change in the constitution of a firm or the firm has been newly constituted; section 26(2) applies where one person carrying on business has been succeeded by another. The business in question did not cease on the partner's death, but continued with the remaining partners, and a fresh partnership deed was executed taking over the business as a going concern. The authoritative interpretation of section 26 by the Supreme Court establishes that where the firm is dissolved but the business is not discontinued and there is a change in constitution, assessment is governed by section 26(1), whereas succession falls under section 26(2).

Conclusion: The case was governed by section 26(1), not section 26(2), and the assessment ought to have been made on the firm as constituted at the time of assessment.

Final Conclusion: The reference was answered in favour of the assessee, holding that the death of the partner resulted in a change in the firm's constitution for assessment purposes.

Ratio Decidendi: Where a partnership business continues without discontinuance after the death of a partner and the continuing partners constitute a fresh firm, the matter is a change in constitution of the firm under section 26(1) of the Indian Income-tax Act, 1922, rather than succession under section 26(2).

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