AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2003 (9) TMI 17
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....had expressed their desire to retire from the partnership and gave notice accordingly. On June 14, 1990, a new partnership deed (annexure C) was executed between Sri P. T. Cheriyan, who was the partner in the original partnership deed, Sri P. B. Titus and Mrs. Mary Thomas as partners. For the assessment year 1991-92 the firm filed two separate returns, one for the period from April 1, 1990, to June 13, 1990, and the other for the period from June 14, 1990, to March 31, 1991. This was on the ground that on the retirement of the two partners of the firm as originally constituted the said partnership ceased to exist by operation of law and subsequently another partnership deed was executed by the remaining partner along with two others. According to the assessee this is a case of succession covered by section 188 of the Act and therefore two separate assessments are contemplated as provided under section 170 of the Act. The Assessing Officer however took the view that there was no dissolution of the original partnership of June 14,1990, when two partners retired and that it was a case of change in the constitution within the meaning of section 187(2) of the Act when two partners re....
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....d on the happening of any such event, the remaining partners shall be entitled to continue the business of the firm as before, subject to determination of the share of the retiring or deceased partner. He also took us to the provisions of the partnership deed dated June 14,1990, and submitted that the partners of the original firm, i.e., Mrs. Santha Benjamin and Mrs. Annie Thomas, retired from the said firm only as per the partnership deed dated June 14,1990, that new partners were inducted by the remaining partner only on the basis of clause 14 of the original partnership deed and, therefore, it is a clear case of change in the constitution of the firm as contemplated under section 187(2) of the Act. Senior counsel also took us to the provisions of section 187(2) of the Act and the decision of the Supreme Court in CIT v. Empire Estate [1996] 218 ITR 355 and contended that it is only in cases where there is a dissolution of the partnership firm and the induction of new partners, the provision of section 188 of the Act is attracted and that in a case where some of the partners in the original partnership retire and a partnership is reconstituted by the remaining partner by inducting....
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....enjamin and Mrs. Annie Thomas expressed their desire to retire from the partnership and gave notice accordingly. It is also stated in the recital that the first partner, P. T. Cherian, decided to relieve Mrs. Santha Benjamin and Mrs. Annie Thomas from the partnership and to continue the business in partnership admitting Sri P. B. Titus and Mrs. Mary Thomas as partners. Here it must be noted that the partnership deed dated June 14, 1990, is not one of dissolution-cum-reconstitution. The said deed is a partnership between the continuing partner Sri P. T. Cherian and two new partners. This partnership deed, it must be noted, is one executed by the said three persons only as is evidenced from the opening paragraph and the details of the signatures of the said deed occurring in the last paragraph of the said deed. Thus it is clear that this is a new partnership deed after the dissolution of the existing partnership by operation of law. Since the partnership deed dated June 14, 1990, clearly recites that the remaining partner Sri P. T. Cherian had decided to continue in the business in partnership admitting Sri P. B. Titus and Mrs. Mary Thomas as partners, it must be treated that the new....
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....rtnership Act can appropriately be applied to a partnership where there are more than two partners. If one of them dies, the firm is dissolved; but if there is a contract to the contrary, the surviving partners will continue the firm. On the other hand, if one of the two partners of a firm dies, the firm automatically comes to an end and, thereafter, there is no partnership for a third party to be introduced therein, and, therefore, there is no scope for applying clause (c) of section 42 to such a situation. It may be that pursuant to the wishes or the directions of the deceased partner the surviving partner may enter into a new partnership with the heir of the deceased partner, but that would constitute a new partnership. In this light section 31 of the Partnership Act falls in line with section 42 thereof The above observation made by the Supreme Court makes the position clear that in a case where two out of the three partners of the partnership firm retires, there is an automatic dissolution of the firm by operation of law. If this is so even in a case where the partnership deed provided that the firm shall continue notwithstanding the retirement or death of a partner there e....
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....ship are one and the same entity, and there cannot be any continuation of the old firm to enable the assessing authority to make a consolidated assessment on the new firm for both the periods. It was also contended that section 187(2) of the Act does not alter the legal position that a single individual cannot constitute a firm. The petitioner had also relied on, inter alia, the decisions of the Full Benches of the Allahabad and Andhra Pradesh High Courts which according to it, will support the case pleaded. The Division Bench after considering the principles laid down in the said decisions observed that, even if the extinction of the old firm and the constitution of the new firm took place simultaneously, in law it must be presumed that the retirement of the partners of the old firm preceded the constitution of the new firm, for, unless the old firm ceases to exist, a new firm cannot come into being. It was also observed that, merely because there is a common partner in the two firms, it cannot be said that the old firm continues with a mere change in the constitution and however small or minute the interregnum may be, there is an extinction of the old firm preceding the constitut....
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....ious High Courts have taken different views on the question arising in cases where after the death of a partner or partners, the business of the firm had been continued taking in new partners and in some of the cases, the deed of partnership stipulated that notwithstanding the death of a partner, the partnership is to be continued taking the heir of the deceased partner as a new partner. It was observed that a Full Bench of three judges of the Andhra Pradesh High Court in Addl. CIT v. Visakha Flour Mills [1977] 108 ITR 466, the High Court of Kerala in CIT v. Kelukutty [1972] 85 ITR 102, the Madhya Pradesh High Court in Vimal and Amur Talkies v. CIT [1982] 138 ITR 660, a Full Bench of the Punjab and Haryana High Court in Nandlal Sohanlal v. CIT [1977] 110 ITR 170, a Full Bench of the Karnataka High Court in CIT v. Shambulal Nathalal and Co. [1984] 145 ITR 329 and the Madras High Court in CIT v. Alagappa Cotton Mills [1984] 149 ITR 640, have taken the view that, in the facts and circumstances, the death of a partner followed by the taking of a fresh partner did not result in dissolution of the partnership and that since some pre-existing partners continued to be partners of the firm,....
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....led the 'firm name'. The firm is not a legal entity, except in a very minor and limited sense for the purpose of the Civil Procedure Code and the Income-tax Act, but is only a collective or compendious name for all the partners. One of the basic elements of partnership is the agreement entered into between the persons concerned. In order that there should be an agreement there must at least be two persons willing to join as partners. Whatever be the legal consequence of one among the three or more partners dying or retiring, there can be no controversy that when one among the only two partners dies or retires, the partnership de jure and de facto ceases to exist. It may be that ultimately the surviving partner takes over the entire business of the firm paying off the retiring partner or the heirs of the deceased partner or having done so he takes a new partner and they together pay off the retiring partner or the heirs of the deceased partner or he takes as partner the heir of the deceased partner. Whatever be the contingency which may happen, the inevitable consequence of one among the two partners dying or retiring is the total extinction in the eye of law of the partnership or f....
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....rs, one of whom died and the partnership deed did not contain a contract to the contrary. The surviving partner took a new partner after a few days. The court observed that a contract to the contrary may prevent dissolution of a partnership notwithstanding the death of a partner and assure continuity of the firm, but the position is different when the firm consists of only two partners because the moment one of the two partners dies, the firm automatically comes to an end. In such circumstances it was held that the proviso to clause (a) of sub-section (2) of section 187 did not apply. The Delhi High Court in Sant Lal Arvind Kumar's case [1982] 136 ITR 379 where a partnership firm consisted of four partners of which one died, the deed did not stipulate that the firm would not stand dissolved on the death of a partner. On the death of a partner the other partners took as partner a grandson of the deceased. It was held that section 187 of the Act would not apply but section 188 would apply. The High Court also pointed out that there is difference c between the change in the constitution of the firm and that the provisions of the Income-tax Act do not purport to alter or modify the pri....
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....r the Income-tax Act. It was accordingly held by the High Court that where the partnership deed of a firm did not contain any provision that the death of a partner would not dissolve the firm one of the partners of the firm died in the middle of the accounting period and thereafter a fresh deed was executed under which the surviving partners took a fresh partner in the place of the deceased and continued to carry on the business, the case was one of succession and not one of change in the constitution and separate assessments had to be made in regard to the incomes. With respect, we agree that where in a case, there is a change in the constitution of the firm by taking of a new partner and the old firm is succeeded by a new firm then, in such a case, there might be succession and there could be two assessments as contemplated under section 188 of the Act. We accept the reasoning of that decision." The Division Bench of the Gauhati High Court finally observed as follows: "In the present case, one of the two partners constituting the firm retired and subsequently the surviving partner and a new partner continued the business under a new deed. It is clear that the partnership ce....
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....considered the question whether the assessment made in terms of section 187 is sustainable or not. It was observed that the answer depends upon the construction of sections 187 and 188 read with section 170 of the Act. After adverting to the said provision it was observed that the provisions of sections 187 and 188 are concerned only with the person upon whom the liability for the tax can be imposed. Adverting to the provisions of section 187 of the Act it was observed that if a change in the constitution of the firm occurs in the course of the assessment, i.e., before the assessment is made, the firm which will be made liable to tax is the firm as constituted at the time of assessment. To say that there is a change in the constitution of the firm it shall be shown that at least one of the partners of the firm before the change continues as a partner after the change and further observed it does not mean that the firm which succeeds the firm carrying on business or profession cannot claim an assessment under section 188 if some of its partners happen to be the partners of the firm which it succeeded. The Division Bench thereafter observed as: "The answer must be in the negative;....
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....ip consisting of three partners of which one died, there being no provision in the deed of partnership contemplating the continuance of the partnership in the event of the death of a partner, the partnership stood dissolved. No deed of dissolution was executed but the surviving partners executed a fresh deed of partnership for carrying on the business on and from January 13, 1974, and it mentioned that the earlier partnership had stood dissolved on January 12, 1974. The assessee filed two returns of income for the period June 1, 1973, to January 12, 1974, and the other for the period January 13, 1974, to June 30, 1974. The assessee contended that the earlier partnership had stood dissolved on the death of a partner on January 12, 1974, and, that, therefore this was a case of succession contemplated by section 188 of the Act and not a case of reconstitution of the partnership within the meaning of section 187 of the Act. The Officer rejected the contention. This was confirmed in appeal by the Commissioner of Income-tax (Appeals) also. However, on further appeal, the Tribunal held that there is a difference of opinion between different High Courts and, following the view taken by the....