TaxTMI 
TaxTMI 
1983 (11) TMI 59
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....reconstituted firm. In the present reference, the question is of levy of penalty u/s. 271(1)(c) of the I.T. Act, 1961. The submission on behalf of the assessee was that since a new assessable entity comes into existence after reconstitution of partnership firm, penalty cannot be levied on the reconstituted firm for the default committed by the old firm. Before we deal with this question we may state the material and relevant facts. Initially M/s. Vishwanath Seth carried on business in silver, bullion and speculation, etc. Their income was assessed to tax in the status of HUF. After a partition in the family the business was converted into partnership firm with effect from August 1, 1955, relevant to the assessment year 1957-58. This partnership consisted of Vishwanath Seth and his three sons as partners. His two minor sons were admitted to its benefits. The two minor sons became major in 1958. They elected to remain as partners. The firm, thereafter, consisted of six partners, Vishwanath Seth and his five sons. Vishwanath Seth died in 1964. His five sons continued the partnership business in the same firm name. No outsider was, at any stage, a partner in this firm. The ....
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....n 1964 there was a change in the firm. Previously it had six partners and after his death it was constituted by five partners only. Since the two firms were different no penalty could be imposed on the new firm for the period prior to the reconstitution. The Tribunal repelled this submission. It held that in the present case there was no dissolution of the firm in 1964. The same business was continued by the five sons in partnership. The appeals were dismissed. At the instance of the assessee this Court required the Tribunal to refer the following question of law for its opinion : " Whether the Tribunal is right in confirming the penalty levied on the reconstituted firm when the concealment was by the previous firm ? " The finding recorded by the Tribunal that in the present case there was no dissolution of the firm has not been questioned in this reference. Under the Partnership Act it is not necessary that on the death of partner a firm must dissolve. It depends upon the terms in the contract of partnership. The question, therefore, is whether in L case, of a change of constitution of the firm (as envisaged by s. 187 of the I.T. Act), a new firm having different asses....
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....itution. The insolvency or death of a partner does not necessarily result in the dissolution of the firm." It was observed (p. 388): " If one can imagine a partnership as an association of persons bound by a legal tie or a vinculum juris, a change in the constitution of the firm reflects only an adjustment of this legal tie which binds the partners. It is as if there is a belt which encircles all these partners and the belt either shrinks or expands to accommodate or give effect to an incoming or outgoing partner. A dissolution, on the other hand, is a breaking or a disruption of this legal tie. " It is thus clear that under the Partnership Act the same firm continues to exist in spite of change in its constitution. It ceases to exist on its dissolution. In the present case the finding is that there was no dissolution. There was only reconstitution. Since this finding is unchallenged, we proceed on its basis alone. Hence the same partnership firm will be deemed to continue in spite of its reconstitution in 1964. The I.T. Act clothes the firm with a distinct assessable entity apart from its partners. This question came up for consideration under the Indian I.T. Act, 1922....
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....They, however, observed (p. 523): "A firm in order to be reconstituted must remain in existence." The learned judge, in the minority, held that s. 187 applies to the reconstitution of a firm after its dissolution. He then went on to consider whether in the case covered by s. 187 there should be two assessments, one on the old and the other on the reconstituted firm. The learned judge observed (p. 534): "The question whether after the constitution of a firm undergoes change of the nature described in section 187 of the Income-tax Act, 1961, which corresponds to section 26 of the 1922 Act, the newly constituted firm is the same firm or not, is concerned, the Supreme Court in the case of Commissioner of Income-tax v. Bharat Engineering and Construction Co. [1968] 67 ITR 273, 280 observed: "Even though under the Act an unregistered firm is assessable as such but, as could be seen from section 26(1), in the matter of assessment, it is the firm as constituted at the time of making the assessment that has to be assessed. In other words, if it is found that a change has occurred in the constitution of the firm, assessment will have to be made on the firm as constituted at the t....
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....he Bench drew support for this view from the decision of the Mysore High Court in Bharat Engineering Co.'s case [1968] 67 ITR 273." It thus expressed its agreement with the decision in Shiv Shanker Lal's case. Bharat Engineering Co.'s case is not a decision by the Supreme Court. It was a decision of the Mysore High Court. But unfortunately the minority opinion in Dahi Laxmi's case [1976] 103 ITR 517 (All) [FB], in Shiv Shanker Lal's case as well as in Badri Narain's Full Bench case [1978] 115 ITR 858 (All), treated it as a decision of the Supreme Court and is laying down a binding declaration of law. Since in fact it was not a Supreme Court decision, but a decision of the Mysore High Court, it cannot be treated as a binding precedent. The observation of the Mysore High Court in Bharat Engineering Co.'s case to the effect " for the purpose of assessment, every change in the constitution of a firm brings into existence a new firm " came up for consideration before that High Court in Karupukula Suryanarayana's case [1973] 92 ITR 141 (Mys). In this case the Mysore High Court held (p. 143): "That case did not lay down that whenever there is a change in the, constitution of a....
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.... under the I.T. Acts, the position is that firm retains its identity and assessable entity in case of its reconstitution. It is hence the same person. If the firm, prior to its reconstitution, concealed particulars of its income in the return filed by it, penalty could validly be imposed upon the reconstituted firm u/s. 271(1)(c) of the Act. This provision postulates that if the ITO or the AAC, in the course of any proceedings under this Act, is satisfied that any person has concealed the particulars of his income or deliberately furnished inaccurate particulars of such income, he may direct that such person shall pay by way of penalty... Under this provision, the person who has concealed, is liable to pay the penalty, provided the default comes to light in the course of any proceedings under this Act. Proceedings for assessment to income-tax are proceedings under the I.T. Act. Hence, if the relevant officer is satisfied about the default in the course of the proceedings for assessment of income-tax penalty could be imposed on the person in respect of whom the assessment proceedings were being conducted. If, in case where the person who has been assessed to income-tax (e.g., the re....
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....to being which succeeded to the business of the earlier firm. The Bench did not examine this argument, as it was assessee's own case that after the death of Vishwanath Seth there was a change in the constitution of the firm, and that the submission made by the assessee was examined on that basis. The question as to whether for purposes of levy of penalty the firm that came into being after the death of Vishwanath Seth was a new firm, otherwise than as a reconstituted firm, was neither canvassed nor dealt with by the Tribunal ". Thereafter, the Bench noted the submission advanced by the learned counsel for the parties thus : Main controversy before us, however, centres round the question as to whether after a firm is reconstituted its identity undergoes a change and it becomes a different assessable person. Whereas the submission of the Revenue is that notwithstanding the change in the constitution of the firm the identity of the firm as an assessable unit continues and it does not undergo any change, the firm as reconstituted remains the same person as it was before its reconstitution and can be made liable for the lapses committed by the firms, as it stood prior to its reconstitut....
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....ect of income derived by the old firm and that derived by it. " In CIT v. Shiv Shanker Lal [1977] 106 ITR 342 (All), the controversy about one or two assessment orders on reconstitution of a firm again came up for hearing and it was held by the Division Bench of this court, of which two of us were members (Hon'ble the Chief justice and the Hon'ble justice H. N. Seth) (p. 348), " that after a firm undergoes a change in its constitution, a new firm, though for certain purposes reflecting the personality of the erstwhile firm, comes into existence. This new firm is a distinct assessable entity different from the firm before its reconstitution ". It appears, the majority view in Dahi Laxmi's case [1976] 103 ITR 517 (All) [FB] was not placed before the Bench. This decision was followed by Full Bench of this court in Badri Narain Kashi Prasad v. Addl. CIT [1978] 115 ITR 858, of which two of us were members (Hon'ble Chief justice and Hon'ble R. M. Sahai J.). The reference was primarily made by the Division Bench because, in none of these cases of this court mentioned above, has any other case than that of Commissioner of Income-tax v. Bharat Engineering and Construction Co. [1968] 67 I....
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....may be there in the sense that remaining partners continue the business. But, in law, unlike events in Chap. V, the continuity is broken. The relationship is snapped. It is not optional. In Keshavlal Lallubhai Patel v. Patel Bhailal Narandas, AIR 1968 Guj 157, it was observed (p. 159): "The law of partnership draws a distinction between retirement of partner and dissolution of a firm. Section 39 defines dissolution of a firm as dissolution of a partnership between all the partners. Partnership is the jural relation between partners who are collectively called a firm and when this jural relation is snapped between all the partners inter se, that constitutes dissolution of the firm. But there may be cases where a partner may wish to withdraw from the firm without affecting the jural relation subsisting between the other partners. He may wish to sever his relations as a partner with the other partners leaving the jural relation to the other partners inter se unaffected." A firm under the I.T. Act can be charged as a distinct assessable entity as distinct from its partners who can also be assessed individually (CIT v. A. W. Figgies and Co. [1953] 24 ITR 405 (SC). The word " recon....
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....ssessment under s. 143 or s. 144 it is found that a change has occurred in the constitution of a firm, the assessment shall be made on the firm as constituted at the time of making the assessment . The expression " change in the constitution of a firm " has been explained in sub-s. (2) to mean : "(2) For the purposes of this section, there is a change in the constitution of the firm (a) if one or more of the partners cease to be partners or one or more new partners are admitted, in such circumstances that one or more of the persons who were partners of the firm before the change continue as partner or partners after the change ; or (b) where all the partners continue with a change in their respective shares or in the shares of some of them." The word " cease " used in sub-cl. (a) has to be understood as retirement or outgoing of a partner. It cannot include death because death results in dissolution. In the absence of any language it cannot be assumed that the I.T. Act which adopts the meaning of " partnership " and " firm as assigned to it under the Partnership Act intended that reconstitution and dissolution should be understood in the sense other than that in which it h....
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....82] 136 ITR 379 (Delhi). Apart from the detailed reasons given in those decisions the expression change in the constitution of a firm " used in s. 187 cannot have that wider meaning as in s. 26 of the earlier Act for the simple reason that unlike s. 26, sub-s. (2) of s. 187 explains the sense in which this expression has to be understood in the Act. Change in the firm may include change by death as well, but in the present Act, it having been explained, the scope cannot be widened. In fact in cases where there is an agreement between partners that the firm shall continue after a death it shall be covered even now. Due to sub-s. (2), only those cases stand excluded in which change occurs due to death as there is nothing in the Act which may indicate that reconstitution of a firm, has to be understood in any sense other than in which it is understood in the Partnership Act. Ratio of Shivram Poddar's case [1964] 51 ITR 823 (SC), is not available for holding that continuance of business by surviving partners after death of one results in change of firm within the meaning of s. 187 of the Act. Therefore, a change in the constitution of the firm by the ceasing of one or more of the partn....