TaxTMI 
TaxTMI 
1984 (1) TMI 42
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....hri Ramanathan Chettiar on September 30, 1964, in which Alagappa Cotton Mills with its buildings and machinery were exclusively allotted to the share of Shri Ramanathan Chettiar. The value of the land, buildings, machinery and goodwill as per books on that day was Rs. 14,61,721. At the time of the partition, the said mill assets were revalued at Rs. 33,50,000. As a result of revaluation of the assets at the time of partition, each of the three minor sons of Shri Ramanathan Chettiar became entitled to Rs. 4,00,000 representing the value of his share in the mill assets as revalued. Since, Shri Ramanathan Chettiar was exclusively allotted the mill assets, he credited Rs. 4,00,000 each in the personal accounts of his three minor sons in the books of the firm which was liable to be paid with interest at 9% per annum to equalise the shares. After the family partition on September 30,1964, Shri Ramanathan Chettiar continued to be a partner in the firm in his individual capacity and not as the " karta " of the HUF with his wife, Smt. Meyammai Achi, as the other partner. At that stage, one Shri J.K.K. Natarajan advanced a sum of Rs. 1,50,000 on July 27, 1964, at 12% per annum and a furthe....
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....n only on the written down value in the relevant previous year. The ITO found that even in an earlier assessment year, namely, 1965-66, depreciation had been claimed by the assessee on the basis of the notional revaluation of the mill assets on September 30, 1964. But the ITO had held that since the partnership had admittedly undergone certain changes only in its constitution, the written down value of the previous year should alone be taken as the value for the allowance of the depreciation. Aggrieved by the order of the ITO, the assessee went in appeal before the AAC. The Appellate Authority, however, upheld the view taken by the ITO holding that the assessee is entitled to claim depreciation only on the written down value and not on the notional revaluation. The assessee then took the matter in appeal before the Tribunal in respect of the orders passed with reference to the assessments for the years 1967-68 to 1971-72. The Tribunal, by order dated July 23, 1974, had called for a remand report from the AAC in respect of the following points: "1. Whether the alleged partition is true and genuine ? 2. Whether the revaluation of the mill assets represents their correct marke....
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....at which it took over the mill assets, such price being the cost for which it was allotted to Shri Ramanathan Chettiar at the time of partition. The Revenue, on the other hand, contended that in the absence of a dissolution deed dissolving the old partnership constituted under the deed dated February 26, 1962, in view of s. 187(2), the old firm should be taken to continue with a change in the constitution and the cost of the mill assets should be taken to be the same as the written down value and depreciation can be allowed only on the written down value and not on the notional cost arrived at the time of the partition. On these rival contentions of parties, the Tribunal formulated the following two points for consideration: 1. Whether on September 30, 1964, the old partnership firm comprising of Shri Ramanathan Chettiar and Smt. Meyammai Achi came to be dissolved and a new firm comprising Shri Ramanathan Chettiar and Smt. Meyammai Achi came into existence on October 1, 1964, and later reconstituted by admitting Shri J. K. K. Natarajan and Shri J. K. K. Munirajan as partners so that depreciation should be allowed on the basis of the valuation at which the assessee took over the m....
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....ary 26, 1962 ? 2. Whether, on the facts and circumstances of the case, the Appellate Tribunal was right in holding that depreciation should be allowed on the enhanced value of the mill assets of the assessee-firm at Rs. 33,50,000 and not on the basis of the written down value of Rs. 14,61,721.95 ?" As already stated, the Tribunal has proceeded on the basis that if there is only a reconstitution of the firm on September 30, 1964, depreciation has to be allowed only on the book value of the mill assets and not on the enhanced value of the mill assets. But it has, however, held that there has been a dissolution of the partnership constituted by the deed dated February 26, 1962 and, therefore, depreciation has to be allowed on the revaluation of the mill assets as on September 30, 1964. Thus, the main question for consideration is to see whether there is a dissolution as on September 30, 1964, as has been held by the Tribunal or whether there is only a reconstitution of the firm on September 30, 1964, as alleged by the Revenue. The facts are not very much in dispute. A partnership firm was constituted by a deed dated August 31, 1955, consisting of Alagappa Chettiar and his sons, Ann....
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....4, the partnership of four partners was to take effect from October 1, 1964. Thereafter, on November 1, 1964, Ramanathan Chettiar and his wife, Meyammai Achi retired from the partnership after relinquishing their interest in the partnership in favour of the two continuing partners, namely, J. K. K. Natarajan and J. K. K. Munirajan under a release deed dated November 1,1964. On November 1,1964, a new partnership consisting of Sri J. K. K. Natarajan and Sri J. K. K. Munirajan was constituted and the now partnership is the assessee before us. On these facts, the question is, whether the partnership consisting of Ramanathan Chettiar and Meyammai Achi constituted on October 1, 1964, after the partition in the family on September 30, 1964, is a new firm or whether it came into existence as a result of the reconstitution of the old firm which was in existence before partition. On the admitted facts set out above, it will be clear that the firm that was functioning on or before September 30, 1964, was a firm consisting of Ramanathan Chettiar as " karta " of the HUF and his wife, Meyammai Achi, as partners with 10 annas and 6 annas shares respectively. Subsequent to the partition, Ramanatha....
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....vides that, where a person carrying on any business or profession has been succeeded therein by any other person who continues to carry on that business or profession, the predecessor shall be assessed in respect of the income of the previous year in which the succession took place up to the date of succession, and the successor shall be assessed in respect of the income of the previous year after the date of succession. Thus, s. 170 will apply to a case falling under s. 188. But that will not apply to a case falling under s. 187. On the facts of this case, it cannot be said that the case falls under s. 188 and it can be said to fall only under s. 187, it being a clear case of change in the constitution of the firm. Before October 1, 1964, the firm consisting of Ramanathan Chettiar as " karta " of the HUF and his wife as partners with 10 annas and 6 annas shares respectively, carried on the business. After October 1, 1964, the same two partners with the same profit sharing ratio continued to be partners with the only difference that after October 1, 1964, Ramanathan Chettiar was a partner in his individual capacity and not as " karta " of the HUF. Even assuming as contended by the....
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....tional and not real, and, therefore, the losses cannot be determined on the basis of such notional value, the Delhi High Court held that the valuation of the assets at the stage of the dissolution of the partnership was not notional, but real, as adjustments have been made by the payment of Rs. 4,35,000 in cash by the assessee to the other partner with view to equalising their shares, and, therefore the actual cost of the assets on the date of the partition was Rs. 6 lakhs which was the value given to them for the purpose of allotment. We do not see how that decision can be applied to the facts of this case. In that case, there was in fact a dissolution of the firm consisting of two partners. As a result of the dissolution, the assets were revalued and allotted to each of the partners and there was also equalisation of the shares and one partner had to pay owelty to the other. In those circumstances, the conclusion is inescapable that the value of the assets allotted to each of the partners will be the value given to the assets at the time of the division of the assets and allotment thereof. In this case, the 10 annas share held by the HUF was the subject matter of partition among....
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....e also, there was a dissolution of the earlier partnership and the partnership business was taken over by a new partnership and the new partnership had acquired the mill and the mill assets on payment of certain value. Therefore, it was held that they were entitled to depreciation on their purchase value of the mill and the mill assets. This decision also cannot help the assessee in this case. In Mavukkarai (N.) Estate Tea Factory v. Addl. CIT [1978] 112 ITR 715, a Division Bench of this court to which one of us was a party, considered the scope of s. 187(2) and held that merely because there was common partner in the two firms, it could not be said that the old firm continued with a mere change and the said observation has been strongly relied on by the learned counsel for the assessee. But that observation came to be made on the special facts of that case. There, four partners of a firm of five partners retired from the partnership on June 30, 1970, after executing a release deed under which the remaining partner, J, took over the rights and liabilities of the firm. On the same day, J formed a new firm with the same name as the old firm by taking in three new partners. The new f....
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....953, if a person charged under Schedule ceases within the year of assessment to carry on the trade in respect of which the assessment is made and is succeeded by another person, the Commissioners are to adjust the, assessment as directed. In Commissioners of Income-tax v. Gibbs and others [1942] AC, 402, a partnership of four stockbrokers took in a fifth partner and thereafter continued to carry on business as stock-brokers. It was held by the House of Lords (Lord Russell of Killowen dissenting) that, although in English law a partnership is not single juristic person, when the four partners took a fifth partner they ceased to carry on business and were succeeded by the partnership of five persons within the meaning of sub-rule 1 ; so that the Commissioners of Income-tax had jurisdiction under sub-rule 2 to adjust an assessment made on the partnership of four and charge the partnership of five with a fair proportion of the assessment from the time that the latter partnership came into being ". It is no doubt true, the House of Lords had held in Commissioners of Income-tax v. Gibbs [1942] AC 402, that when a partnership of four stockbrokers took a fifth partner and thereafter cont....
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....as 1-10-1964 R - 25% RM. Meyammai Achi, Kottayur 23-11-1961 R - 25% J. K. K. Natarajan, Komarapalayam 1-10-1964 R - 25% J. K. K. Munirajan 1-10-1964 R - 25% --------------------------------------------------------------------------------------------------------------------------------------------------- NOTE : ' Sri AL. RM. Ramanathan Chettiar has been admitted in the partnership in his individual capacity from 1-10-1964 '. --------------------------------------------------------------------------------------------------------------------------------------------------- In the application for registration under Form No. 11 A for the year 1966- 67, the following details have been furnished : ' From 1-4-1964 to 30-9-1964 : AL. RM. Ramanathan Chettiar 9% to 1,000 h 0-10-0 AL. M. Meyammai Achi " - 0-6-0 From 1-10-64 to 31-10-64 : AL. RM. Ramanathan Chettiar 9% 1/4 AL. RM. Meyammai Achi 9% 1/4 J. K. K. Natarajan " 1/4 J. K. K. Munirajan " 1/4 From 11-11-64 to 31-10-65 : J. K. K. Natarajan 1/2 J. K. K. Munirajan 1/2 In their letter dated March 19, 1966, addressed to the ITO, the assessees have given the following details regarding the cons....
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....z., April 1, 1964, to September 30, 1964, and October 1, 1964, to March 31, 1965. " Thus it is seen that the assessees themselves have proceeded on the basis that there was only a change in the constitution of the firm on October 1, I 964, and they also claimed a consolidated loss treating the old firm to be continuing as reconstituted. As regards depreciation, the assessee has claimed up to the period September 30, 1964, on the basis of the written down value. But for the period subsequent to October 1,1964, it is based on the revaluation said to have been made at the time of the partition of the HUF of Ramanathan Chettiar. It should be noted that Form No. 11A is applicable only when there is a change in the constitution of the firm or in the shares of the partners and the application for registration in Form No. 11A is consistent with the assessees' original stand that there is only a change in the constitution of the firm. Even assuming that the assessee can alter his original stand and contend that in law there is no change in the constitution of the old firm but the coming into existence of a new firm which should be taken to have purchased the mill and mill assets from the ....
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....er for the whole year against the assessee. When the matter reached the High Court, the High Court by a majority of a Full Bench held that s. 187 of the I.T. Act, 1961, applies only where a firm is reconstituted in accordance with ss. 31 and 32 of the Indian Partnership Act, namely, when a new partner is taken or an existing partner retires with the consent of all the partners or without their consent if the contract of partnership so provides. But, where a firm is dissolved either by agreement of the partners or by operation of law and another firm takes over the business, that will be a case of succession governed by s. 188 of the Act, even though some of the partners of the two firms are common. But the said decision of the majority overlooks the fact that s. 188 applies only in cases not covered by s. 187. That s. 187 not only contemplates reconstitution of a firm in accordance with s. 31 of the Partnership Act but also other cases, cannot be disputed. The majority decision has thus given a very restricted scope to s. 187. With respect, we are not, therefore, inclined to accept the said decision as laying down the correct law. In Addl. CIT v. United Commercial Co. [1977] 108 I....
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.... and the business of the firm shall be carried on by the remaining partners under the same name and style of Messrs. Pigot Chapman and Company. A question arose as to whether the transaction amounted to a change in the constitution or whether it is a dissolution of the old firm succeeded by a new firm. The Supreme Court held on the facts that that was not a case of a mere change in the constitution of firm but one of a new firm succeeding to the old business and, therefore, the assessee was entitled to the relief under s. 25(4) of the Indian I.T. Act, 1922. It has been pointed out by the Supreme Court that the question whether there has been a dissolution of the firm and upon such dissolution a new firm has succeeded to the business of the old firm is a question to be decided upon the intention of the parties to be gathered from the document or documents" if any, executed by and between the partners and other facts and surrounding circumstances of the case. There, the document bringing into existence the new partnership had specifically stated that the old firm has been dissolved by mutual consent and in view of those special circumstances, the court held that it was a case of diss....
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....all the parts taken together, no doubt, constitute the whole but when the unifying principle of that whole no longer exists, the parts gain their individuality and become separate and distinct. We do not see how that decision will help the assessee in this case. Here, the joint family was carrying on business with another in partnership with 10 annas share. There was disruption in the joint family and the 10 annas share in the business was allotted to the " karta " and after the partition, the " karta " in his individual capacity continued the business along with the other partner with the same 10 annas share. Therefore, the business of the partnership has not been split up; though there was disruption of the joint family of Ramanathan Chettiar, the unity of the business was not disrupted and the business continued to be carried on by the same two partners. Therefore, the principle that as a result of the partition in the joint family and the division of assets of the joint family, there is a discontinuance of the business, cannot be applied to the facts of the case on hand. Kalooram Govindram v. CIT [1965] 57 ITR 335 (SC), on which strong reliance has been placed by the learned co....
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....plication here. Here, there is no allotment of the business as a whole. But the 10 annas share in the partnership which carried on the business was the subject-matter of the partition between the members of the family of Ramanathan Chettiar. In those circumstances, it cannot be said that Ramanathan Chettiar was allotted the entire partnership business or he Purchased the business as a whole as was the case before the Supreme Court. If at all, the said Ramanathan Chettiar can be said to have acquired as a result of the partition in his family the 10 annas share in the partnership. The entire assets of the partnership or the 6 annas share belonging to Meyammai Achi were not the subject-matter of allotment as was the case before the Supreme Court. On the facts of this case, it can only be said that a business which was carried on by a firm of a joint family of Ramanathan Chettiar and Meyammai Achi from February 26, 1962, continued to be carried on by a firm in which Ramanathan Chettiar in his individual capacity and Meyammai Achi were partners from October 1, 1964. Since, there is another partner, namely, Meyammai Achi, in both the firms, it can only be taken as a mere change in the ....