Case: Wazid Ali Abid Ali v. Commissioner of Income Tax, Lucknow. Additional Commissioner of Income Tax, Gujarat Vs. United Commercial Company

For the assessment year 1965-66, the relevant previous year commenced on November 17, 1963, and ended on November 4, 1964. The assessee was a partnership firm styled as Messrs. Wazid Ali Abid Ali of Phulpur in the district of Azamgarh. It was constituted under a deed of partnership dated March 17, 1959, with 17 members. The said deed provided, inter alia aswhere the deed is silent, it shall be governed by the Indian Partnership Act save and except that on the death or demise of any partner, the firm shall not be dissolved but shall be carried on with the remaining partners and that heir and representative of the deceased partner who resides in India on such terms and conditions to which they mutuallyJune 4, 1964, one of the partners, Qamaruddin, died and his son, Fariduddin, joined the firm as a partner. New deed of partnership evidencing the change in the constitution of the firm was not executed before November 4, 1964. The assessee filed a declaration in Form No. 12 for the relevant assessment year 1965-66 under section 184(7) of the Act. The declaration was signed by the 16 members who had continued all along and also by Fariduddin who had become a partner in place of his deceased father. The Income-tax Officer held that the admission of a new partner in place of the deceased partner amounted to a change in the constitution of the firm. He, therefore, held that the assessee was not entitled to the continued benefit of registration under section 184(7) of the Act. He was of the opinion that the firm had failed to file a fresh application for registration and, therefore, he disallowed the benefit of registration to the firm. On appeal, the Appellate Assistant Commissioner held that the assessee should have filed a fresh application for registration along with the partnership deed embodying the change in the constitution of the firm. The appeal was accordingly dismissed by him. The assessee preferred further appeal to the Tribunal and urged that the change which occurred on the death of Qamaruddin did not require the execution of a new deed of partnership nor a a fresh application for registration. Alternatively, it was contended that the assessee was entitled to the continued benefit of registration at least for that part of the previous year during which Qamaruddin and the inclusion of Fariduddin involved a change in the constitution of the firm. It was, therefore, necessary that a fresh deed of partnership should have been executed as well as a fresh application for registration filed. The Tribunal, however, accepted the alternative contention and observed that the conditions laid down in sub-section (7) of section 184 of the Act had been satisfied and that the assessee would be entitled to the benefit of registration up to June 4, 1964, that is to say, for a part of the previous year. In view of section 187(2) of the Act, it was obligatory according to the Tribunal and the Income-tax Officer to make a single assessment only on the assessee and to apportion the total income between the partners who were entitled to receive the profits accordingly as they were entitled to share the profits, the firm being assessed as a registered firm in respect of the profits ending on June 4, 1964, and as an unregistered firm in respect of the profits for the remaining part of the previous year. Thereupon, the aforesaid question was referred to the High CourtThe High Court was of the view that on the death of Qamaruddin on June 4, 1964, and on the entry of Fariduddin, there was a change in the constitution of the firm. According to the High Court, by virtue of section 42(c) of the Indian Partnership Act, 1932, a firm was dissolved by the death of a partner but as the section provided, that was subject to the contract between the partners. The High Court was of the view that clause 7 of the partnership deed dated March 17, 1959, specifically stipulated that the firm would not be dissolved on the death of a partner but it would be carried on with the remaining partners and such heir of the deceased partner who resides in India on the terms and conditions to which they mutually agree. The High Court was of the view that if there was any heir of the deceased partner who resides in India and agrees with the surviving partners on the terms and conditions on which he could be admitted to the partnership, the firm would not be dissolved. The High Court was further of the view that the condition that there should be mutual agreement between the surviving partners and the incoming partner indicated that the inclusion of the heir of the deceased partner was not an automatic one but rested onHigh Court referred to the decision in In re Makerwal Colliery [1942] 10 ITR 422 (Lah), where Monir J. observed that under the partnership constituted by a deed of partnership, the legal representatives of a deceased partner, who, by reason of a provision in the deed, was entitled but not bound to become a partner for a period which might be the same or different from the period fixed under the deed, he was to continue in the partnership for the unexpired portion of the period, the constitution of the firm is altered and, therefore, the new firm could not apply for the renewal of registration nor can, in such a case, the new firm apply for registration of the original partnership ex hypothesi, the applicants for registration were not parties to the deed of partnership. There, the learned judge had further observed that the only course open to seek registration was to execute a new deed of partnership and to apply for registration of that deedReference was made by the High Court to the decision of the Orissa High Court in Giridharilal Seetaram & Bros. v. CIT [1949] 17 ITR 282. The Orissa High Court held that in a case where the partnership deed provided that on the death of a partner, his legal representative was entitled to join the partnership and the partnership would be continued without dissolution, an application for registration signed by the surviving partners and the son of the deceased partner was not defective and should not be rejected on the ground that the original partnership deed without any alteration had been produced. The learned judge observed (p.may be that ordinarily on the death of any of the partners the firm gets dissolved automatically but it does not so dissolve where the deceased partners heir automatically, by virtue of the terms of the deed, becomes a partner without any freshto the High Court, the aforesaid observation of the learned judge had not been endorsed by the Allahabad High Court in Pannalal Babulal v. CIT [1969] 73 ITR 503. While agreeing to the observations in Makerwal Collierys case [1942] 10 ITR 422 (Lah). Oak C.J. and T. P. Mukherjee J. found themselves unable to adopt the view taken in Giridharilal Seetaram & Bros. case [1949] 17 ITR 282 (Orissa) that on the death of a partner, his successor would become a partner of the firm automatically. It was open to the heir, according to their decision, to join or not to join the partnership. He was not bound to do so. In that view, application for renewal of registration signed by the surviving partners and the son of the deceased partner could be rejected because the constitution of the firm was no longer reflected in the instrument of partnership. The High Court in the instant case was of the view that the Tribunal was right in holding that the inclusion of Fariduddin as a partner upon the death of Qamaruddin resulted in a change in the constitution of the firm and it could no longer be given the continued benefit of registration on the basis of the original partnership deed. The High Court was of the view that the next question was whether the Tribunal was also right in holding that the assessee was entitled to the continued benefit of registration in respect of the profits up to June 4, 1964, that is to say, the period during which Qamaruddin remained alive. According to the High Court, it was clear that the continued benefit of registration must be in respect of the entire assessment year and, therefore, it must affect the profits of the entire year relating to the assessment year. If the firm had dissolved on June 4, 1964, with the death of Qamaruddin, the relevant previous year would have been the period commencing from November 17, 1963, to June 4, 1964, and the profits for that period would have been treated for the assessment as in the case of a registered firm. The firm was, however, not dissolved and continued in existence throughout the previous year, that is to say, from November 17, 1963, to November 4, 1964. The High Court was, therefore, of the view that there was merely a change in the constitution of the firm. The High Court was of the opinion that by reason of the proviso to sub-section (7) of section 184 of the Act, the registration granted in a preceding year could not continue to have effect for the assessment year under consideration. The High Court was of the view that it was necessary for the assessee by reason of section 184(8) of the Act to apply for fresh registration for the assessment year concerned in accordance with the provisions of section 184. That required an instrument evidencing the partnership and specifying the individual shares of the partners. The declaration in Form No. 12 was misconceived, according to the High Court. The view taken by the Tribunal that the profits up to June 4, 1964, should be treated as in the case of a registered firm and the profits for the rest of the previous year should be treated as in the case of an unregistered firm, according to the High Court, found no support in the statue. The High Court was of the view that dividing the profits of the previous year in this fashion amounted to treating the firm as a registered firm for a part of the assessment year and as unregistered for the remaining part. The High Court found it difficult to conceive of such a case under the Act. The High Court was, therefore, of the view that the Tribunal was not right in holding that during the period covered by the constitution of the original partnership deed, the income was assessable in the hands of the assessee as a registered firm. The High Court accordingly answered the question in the negative. In consequence, the Revenue succeeded. The validity of this answer to the question has been challenged in this appeal by the assessee. Indeed, on this question, divergent views have been taken by different High Courts as we shall presently noticeCivil Appeal No. 609 (NT) of 1975 is an appeal by certificate granted by the High Court of Gujarat and admitted by this court. This is an appeal from the High Court of Gujarat at the instance of the Revenue for the assessment year 1964-65. The following two questions were referred to the High Court ofWhether, on the facts and circumstances of the case, there was any dissolution of the partnership on the date of death of Shri Sarabhai Chimanlal and that, therefore, there should be separate assessment till the date of his debt ?(2) Whether, on the facts and circumstances of the case, the provisions of section 187(2) apply to the facts of the casfacts involved in the said appeal were that the assessee was a partnership firm. The firm was granted registration in the preceding year 1963-64 under the Act. Originally, the firm consisted of five partners and one of the partners was Sarabhai Chimanlal. Sarabhai died on March 9, 1963. The business of the firm was in executing contracts entered into with the Railways for handling of goods at various stations and also some business in respect of coal, dealing in coal on commission, etc. The major part of the work was that of handling contracts entered into with the Railways for handling goods at Sabarmati railway station in Gujarat. On the death of Sarabhai Chimanlal, the books of the partnership firm dealing with the contracts, with the Railways were closed. The firm was maintaining its accounts in three separate sets of books. Set No. I dealt with the contracts of Railways. In the accounts maintained in set No. II and set No. III, books of account were continued but in the accounts of set No. I, balances were struck after preparing the profit and loss up to June, 1963, and the profits were credited to the respective partners accounts including the receipts. Thereafter, the account of the deceased was carried forward in different books. In respect of the other businesses, the books were closed but at the end of the period of accounts, profits were determined and bifurcated between two periods, the first period till the date of the death of the deceased partner and the second period beginning after his death. The previous year was Samvat year 2019. Samvat year 2019 commenced from October 28, 1962, and ended on October 27, 1963. The profits were credited in the account of Sarabhai along with the accounts of other partners for both the periods so far as set No. II and set No. III were concerned. The assessee-firm filed two returns for the assessment year in question - one for the period ending on March 9, 1963, and the other for the rest of the accounting period. A declaration under section 184(7) was enclosed along with the return for the first period. The basis on which these two returns were filed was that according to the assessee there was a dissolution of the firm on the death of Sarabhai Chimanlal and, therefore, the subsequent continuance of business was only for the purpose of winding up the firm. The Income-tax Officer refused to accept the contentions of the assessee and his main ground was that there was a change in the constitution of the firm within the meaning of section 187(2). Therefore, the assessee should have applied for registration and should not have remained content with the filing of the declaration under section 184(7) of the Act. Against the said decision, the assessee appealed and the Appellate Assistant Commissioner agreed with the conclusion of the Income-tax Officer and dismissed the appeal. The assessee appealed to the Appellate Tribunal. The Tribunal came to the conclusion that there was a dissolution of the partnership on March 9, 1963, and that conclusion was drawn from the various circumstances which the Tribunal took into consideration. Then, at the instance of the Revenue, reference was made to the High Court on the aforesaid two questions mentioned hereinbeforeThe Tribunal had negatived the contention that section 187(2) of the Act applied to the facts and circumstances of the case. The High Court took into account two clauses in the background of the partnership deed. According to the Tribunal, that the balances were completely struck and carried to a new set of books was an important circumstance and evidence to find out whether the parties did want to bring about a dissolution. The Tribunal was of the view that by virtue of clause 8 of the partnership deed the death of a partner would not bring about a dissolution automatically, yet, by mutual consent of the parties, which could be inferred from the facts, the firm has been dissolved. The High Court, however, noted that the primary circumstance was that the books of account in set No. I, which was in respect of major business, were closed on the death of Sarabhai Chimanlal. The Tribunal, however, had noted that the contract in respect of the Sabarmati railway station was to expire on March 31, 1963, but the contract was deemed to have been extended till April 30, 1963. As soon as Sarabhai died, books of account of the firm were closed and necessary entries were effected in respect of other railway stations also, since the contracts were terminated, that is, in September, 1963, books of other railway stations were also closed. The High Court noted that another major circumstance in support of its conclusion was mutual consent for dissolution of the firm and the fact that the partnership firm did not enter into new business activities and did not undertake any new contract. The High Court noted that if the surviving partners of the firm wanted that the firm should continue as it could have continued under clause 8 of the partnership deed, then surely, they would have taken new contracts or entered into new activities, because a firm like the assessee-firm surely would have come to a halt if there were no business activities or no new business contracts. The Tribunal had found considerable substance in the contention of the assessee that after the death of Sarabhai, the partners wanted to close the business. Another circumstance which had appealed to the Tribunal was that the profit earned subsequent to the death of Sarabhai were also credited to the account of the deceased proportionately and even in respect of profit earned subsequent period, the deceased partner was given a share of profit. The High Court noted that these, according to the assessee, indicated that the firm was dissolved but in the course of winding up whatever was realised was proportionately distributed and the amount coming to the share of the deceased was credited in his account even though he had expired on March 9, 1963. The High Court noted that the Tribunal was of the view that the conduct of the partners clearly indicated that the firm had agreed not to carry on business and whatever was done after the death of Sarabhai was merely by realisation of certain outstanding dues in the course of dissolution of the firm in discharging certain obligations by completing the contracts entered into prior to the death of SarabhaiThe High Court noted that there were two other circumstances which were pointed out. One was that no new deed of partnership was executed after Sarabhais death nor was any application made for registration by the surviving partners. The application contemplated by section 184(7) of the Act was filed in connection with the period up to March 9, 1963, and it was also pointed out before the High Court that the major source of profit was from the business mentioned in set No. I, that is, Sabarmati Railway contract, and actually in other accounts, losses were being incurred or not much profit was being earned in the business set out in set No. II and set No. III. After noting these facts, the High Court was of the view that the important thing was the intention of the partners and, referring to the different clauses, the High Court was of the view that the conclusion of the Tribunal that the partners had by mutual agreement decided to dissolve the firm with effect from March 9, 1963, was a correct and justified one and, therefore, the Tribunal was also justified in holding that the rest of the activities between March 9, 1963, and the end of the accounting period, that is, till the end of Samvat year 2019 was in the course of the dissolution of the firm. The Tribunal was, therefore, right in holding that there should be a separated assessment till the date of the death of Sarabhai Chimanlal. So far as the second question was concerned, the High Court was of the view that where at the time of making an assessment under section 143 or section 144 of the Act, it was found that there was a change which had occurred in the constitution of the firm, the assessment should be made on the firm as constituted at the time of making of the assessment and one of the consequences of a change occurring in the constitution of the firm was that if there was any change in the previous year, the firm had to apply for fresh registration for the assessment year concerned in accordance with the provisions of section 184. Under sub-section (2) of section 187, for the purposes of section 187, there was a change in the constitution of the firm if one or more of the partners ceased to be a partner or one or more new partners were admitted, in such circumstances where one or more of the person who were partners of the firm before the change had continued as partner or partners after the change; or where all the partners continued with a change in their respective shares or in the shares of some of them. In those circumstances, according to the High Court, since there was dissolution of the firm with effect from March 9, 1963, there was no question of the same firm being continued with a change in the constitution of the firm and the requirements of clause (a) of sub- section (2) or section 187 were not at all satisfied. The High Court was further of the view that, in any event, so far as clause (b) was concerned, all the partners did not continue with come change in their respective shares or in the shares of some of them since Sarabhai who held thirty per cent. share in the profits of the firm had died on March 9, 1963, and thereafter there was no new partner in his place. Of course, the estate of Sarabhai as represented by his wife, Kanchanben, who was also a partner, got the benefit of the profits which went to the share of Sarabhai but Kanchanben go that amount as representing the estate of Sarabhai and not in her capacity as a partner of the firm. Under these circumstances, the provisions of section 187(2) of the Act could not be said to apply to the facts of the present case. In the premises, the High Court answered both parts of the first question in the affirmative and in favour of the assessee. As to the second, the High Court answered it in the negative and in favour of the assessee. The High Court granted the certificate as mentioned hereinbefore to appeal to thisreal question with which we are concerned in both these appeals is, therefore, when there is death of a partner within a previous year in the case of registered firm, what happens ?

Reasoning:
There was a contract to the contrary, in our opinion, in the Allahabad High Courts decision, where the deed provided, inter alia, that where the deed is silent, it shall be governed by the Indian Partnership Act save and except that, on the death or demise of any partner, the firm shall not be dissolved but shall be carried on with the remaining partners and that heir and representative of the deceased partner who resides in India on such terms and conditions to which they mutually agree. Therefore, on the death of the partner, there is no dissolution by the express terms of the contract between the parties but the partnership is deemed to be carried on with the remaining partners and that heir and representative of the deceased partner. The terms and conditions, however, of such carrying on had to be mutually agreed upon. In that case, as mentioned hereinbefore, Qamaruddin, one of the partners, died on June 4, 1964, within the relevant time, and his son, Fariduddin, joined the firm as a partner. Before the expiry of November 4, 1964, that is to say, the previous year which expired on November 4, 1964, the assessee had filed a declaration in Form No. 12 for the relevant assessment year 1965-66 under section 184(7) of the Act. We are of the opinion that in this case, on the death of Qamaruddin and the inclusion of Fariduddin, there was a change in the constitution of the firm. It did not dissolve the firm but brought about a change in the constitution of the firm. Fresh deed had to be executed under sub-section (8) of section 184. This follows from an analysis of the different sections of the Act. The application was not filed for the whole of the assessment year and so, for part of the assessment year, the firm was registered and for the rest, the firm was not registered. The Tribunal held that the assessee would be entitled to the benefit of registration up to June 4, 1964, that is to say, a part of the previous year. The Tribunal further held that the total income be apportioned between the partners who were entitled to receive the profits accordingly as they were entitled to share the profits, the firm being assessed as a registered firm in respect of the profits ending of June 4, 1964, and as an unregistered firm in respect of the profits for the remaining part of the previous year. In our opinion, this conclusion is correct. The High Court has held that there is no warrant for this view. We are unable to agree. As a matter of fact, an analysis of the different sections of the Act leads to that conclusion and there is no contrary provision in the Act. Such a conclusion is logical and equitable and would do justice to both the Revenue as well as to the assessee. Our attention was not drawn to any decision of this court which is against that view though there is a certain amount of divergence of views amongst the High courts on this aspect. According to the High Court, by virtue of section 42(c) of the Indian Partnership Act, a firm was dissolved by the death of the partner but as the section provided, that was subject to the contract between the parties. The High Court was right in the view that clause (7) of the partnership deed dated March 17, 1959, specifically stipulated that the firm would not be dissolved on the death of a partner but it would be carried on with the remaining partners and such heir of the deceased partner who resides in India on the terms and conditions to which they mutually agreed. The High Court was of the view, in our opinion, rightly, that if there was an heir to the deceased partner who resides in India and agrees with the surviving partners on the terms and conditions on which he could be admitted of the partnership, the firm would not be dissolved. The High Court was further to the view that the inclusion of such partner depended upon the mutual agreement between the surviving partners and was not an automatic one, on the death of the deceased partner. In the background of the facts of this case, we are of the opinion that the High Court was right that in such circumstances, the course open was to seek registration to execute a new deed of partnership and to apply for the registration of that deed. But that does not make the registration up to the date of the death of the deceased partner invalid and, in our opinion, subject to any express prohibition indicating the same, the firm is entitled to the benefit of registration. We have found no such express prohibition, as the analysis of the various sections indicates. On the other hand, it would be just and equitable that the assessee should have that limited benefit. We are of the opinion that the Tribunal took the correct view in the first caseIn the aforesaid view of the matter, it must be held that the Allahabad High Court was in error in the view it took. The Tribunal was right. The appeal must be allowed and the judgment and order of the High Court must bethe High Court found examination of the facts of that case, that the assessees contention was right that the firm as found by the Tribunal was dissolved and the transactions were carried on with the remaining parties in the course of the winding up and for realisation of its dues. The High Court accordingly answered rightly in the affirmative and in favour of the assessee. There was, in fact, a dissolution as found by the Tribunal and on the facts and circumstances of that case and after the dissolution, the firm ceased to exist and there should be two separate assessments. The High Court was right in answering the question as it did. It appears to us that the High Court was also right in answering the second question, in view of the fact that there was a death and as such dissolution of the firm by the manner in which the parties acted, that there is no question of the same firm being continued and the provisions of section 187(2) could not be said to apply in the light of the facts