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Petitioner: WAZID ALI ABID ALI VS Respondent: COMMISSIONER OF INCOME-TAX, LUCKNOW and JUDGMENT
Court Name: Supreme Court of India Judge(s): Sabyasachi Mukharji, G. L. Oza, G. L Title:WAZID ALI ABID ALI vs COMMISSIONER OF INCOME-TAX, LUCKNOW and
JUDGMENT
Reported As: 1989 PTD 786 Result: Order accordingly Judgment JUDGMENT ' SABYASACHI MUKHARJI, J.--By this judgment we will dispose of two appeals first one at the instance of the assessee and second one at the instance of the revenue--but both these appeals deal with one common situation namely the position of the registered firm during the assessment year if one of the partners dies or retires. Civil Appeal No,1792(NT) of 1974 is an appeal by the assessee from the judgment and order of the Allahabd High Court, dated 22nd December, 1972 answering the following question referred to it under section. 256(1), Income-tax Act 1961, hereinafter referred to as the Act, for the assessment year 1965-66 in favour of the revenue and in the negative:- "Whether, on the facts and in the circumstances of the case the Tribunal was justified in holding that for the period covered by the old constitution the income was assessable in the hands of the assessee as a registered firm?" 2. For the assessm ent year 1965-66 the relevant previous year commenced on 17th November, 1963 and ended on 4th November, 1964. The assessee was a partnership firm styled as Messrs Wazid Ali Abid All of Phulpur in the District of Azamgarh. It was constituted under a deed of partnership dated 17th March 1959 with 17 members. The said deed provided, inter alia, as follows:- "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 the heir and representative of the deceased partner who resides in India on such terms and conditions to which they mutually agree."
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3. On June 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 4th November, 1964. The assessee filed a declaration in Form No,XII for the relevant assessm ent 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 alongwith 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 Qamanuddin did not require the execution of a new deed of partnership nor 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 had remained alive. The Tribunal was of the view that the death of 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 subsection (7) of section 184 of the Act had been satisfied and that the assessee would be entitled to the benefit of registration up to 4th June, 1964, that is to say, 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 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 4th June, 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 Court. 4. The High Court was of the view that on the death of Qamaruddin on 4th June, 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), Partnership Act, 1932 a firm was dissolved by the death of 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 17th March, 1959 specifically stipulated that the firm would not be dissolved on the death of a partner but it would be carried on with remaining partners and such heir of the deceased partner who resides in India on 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 automatic one but rested on agreement. 5. The High Court referred to the decision in In re: Makerwal Colliery, (1942) 10 ITR 422 (Lahore), where Monir, J. Observed that if under the partnership constituted by a deed of partnership, the legal representative 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 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
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renewal of registration nor can in such case the new firm apply for registration of the original partnership as ex hypothesis, 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 the registration of that deed. 6. Reference was made by the High Court to the decision of the Orissa High Court in Giridharilal Seataram & Bros. v. CIT, (1949) 17 ITR 282. The Orissa High Court held that in 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:- "It 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 partner's heir automatically, by virtue of the terms of the deed, becomes a partner without any fresh agreement." ' According to 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 Colliery (supra) Oak, C.J., and T.P. Mukherjee, J. Found themselves unable to adopt the view taken in Giridharilal Seetaram & Bros. (supra) 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 Quamaruddin 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 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 after (up to?) 4th June, 1964 that is to say the period during which Qamaruddin remained alive. According to the High Court it was clear that 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 4th June, 1964 with the death of Qamaruddin the relevant previous year would have been the period commencing from 17th November, 1963 to 4th June, 1964 and the profits for that period would have been treated for the assessment as in case of a registered firm. The firm was, however, not dissolved and continued in existence throughout the previous year that is to say from 17th November, 1963 to 4th November, 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 subsection (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 164(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,XII was misconceived, according to the High Court. The view taken by the Tribunal that the profits up to 4th June, 1964 should be treated as in case of a registered firm and the profits for the rest of the previous year should be treated as in case of an unregistered firm, according to the High Court, found no support in the statute. The High Court was of the view that dividing the profits of the previous year in this fashion
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amounted to treating the firm as a registered firm for a part of the assessment year and an unregistered for the remaining part. The High Court found it difficult to conceive 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 notice. 7. Civil Appeal No,609 (NT) of 1975 is an appeal by certificate granted by the High Court of Gujerat and admitted by this Court. This is an appeal from the High Court of Gujarat at the instance of the revenue for the assessm ent year 1964-65. The following two questions were referred to the High Court of Gujarat:- "(1) Whether, in 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 assessm ent till the date of his death? (2) Whether in the facts and circumstances of the case, provisions of section 187(2) apply to the facts of the case?" ' The facts 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 9th March, 1%3. The business of the firm was of 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 the contracts with the Railways were closed. The firm was maintaining its accounts in three separate sets of books. Set No,1 dealt with the contracts of Railways. In accounts maintained in Set No,II and Set III books of accounts were continued but in accounts of Set No,1 balances were struck after preparing profit and loss up to June, 1963, and the profits were credited to the respective partners' account including the receipts. There after the account of the deceased was carried forward in different books. In respect of the other businesses, the book were closed but at the end of the period of account, profits were determined and bifurcated between periods, first the period till the date of death of the deceased partner and the second period being after his death. The previous year was Samvat year 2019. Samvat year 2019 commenced from 28th October, 1962 and ended on 27th October, 1963. The profits were credited in the account of Sarabhai alongwith 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 assessm ent year in question--one for the period ending on 9th March, 1963 and the other for the rest of the accounting period. A declaration under section 184(2) was enclosed alongwith the return for the first period. The basis on which these two returns were filed was that according to the assessee there was 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 187(2) 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 9th March, 1963 and that
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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 hereinbefore. 8. The Tribunal had negative the contention under section 184 (2) of the Act applying the facts and circumstances of the case. The High Court took into account two questions in the background of the partnership deed. According to the Tribunal this was important circumstance and evidence to find out whether the parties did want to bring about dissolution. The Tribunal was of the view that by virtue of clause 8 of the partnership deed if (sic) a partner would not bring about a dissolution automatically, yet by mutual consent of the parties which could be confirmed from the fact that the firm has been dissolved. The High Court, however, noted that the primary circumstance was that the books of accounts in Set No,I, which was in respect of major business, were closed on the death of Sarabhai Chimanal. The Tribunal, however, had noted that the contract in respect of the Sabarmati Railway Station was to expire on 31st March, 1963 but the contract was deemed to have been extended till 30th April, 1963. As soon as Sarabhai died, books of accounts 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 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 profits earned subsequent to the death of Sarabhai were also credited to the account of the deceased proportionately and even in respect of profit earned for the subsequent period the deceased partner was given 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 amount coming to the share of the deceased was credited in his account even though he had expired on 9th March, 1963. The High Court noted that the Tribunal was of the view that the conduct of the partner clearly indicated that firm had agreed not to carry on business and whatever was done after death of Sarabhai was merely by realization 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 Sarabhai. 9. The High Court noted that there were two other circumstances which were pointed out. One was that no new deed of partnership was executed after Sarabhai's 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 until March 9, 1%3 and it was also pointed out before the High Court that the major source of profits was of 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 incurred in the business set out in Set II and Set 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, 1%3 was a correct and justified one and, therefore, the Tribunal was also justified in holding that the rest of the activities between March 9, 1%3 and the end of the accounting period, that is, till the end of Sam vat Year 2019 were in the course of the dissolution of the firm. The Tribunal was therefore, right in
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holding that there should be separate assessment till the date of 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 assessm ent 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 the 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 subsection (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 persons 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, 1%3 there was no question of the same firm being continued with change in the constitution of the firm and the requirements of cl. (a) of subsection (2) of Section 187 were not at all satisfied. The High Court was further of the view that in any event, so far as cl. (b) was concerned all the partners did not continue with some change in their respective shares or in the shares of some of them since Sarabhai who held thirty per cent shares 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 got 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 the first question both parts in the affirmative and in favour of the assessee. As to 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 this Court. 10. The real question with which we are concerned in both these appeals is, therefore, when there is death of a partner within a previous year in case of a registered firm what happens ? 11. In order to appreciate the controversy in this case, it is necessary to have a perspective of the scheme of the Act of the assessm ent of firms. Under the scheme of the Act assessment of firm has been provided in Chap. XVI and it can be found in Ss.182 to 189 of the Act. Section 170 of the Act which is relevant in this connection provides succession to business or profession and stipulates that where a person carrying on any business or profession or such person hereinafter in that section being referred to as the predecessor 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. The other subsections of Section 170 deal with certain contingencies with which we are not concerned. The expressions "firm" and "partnership" have the same meaning as given in the Indian Partnership Act, 1932. "Partnership" is defined by Section 4 of the said Act as the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. It is further stated that the relation of partnership arises from contract and not from status. Section 39 of the said Act provides dissolution of partnership between all the partners of a firm called the "dissolution of the firm". A firm may be dissolved with the consent of all the partners or in accordance with a contract between the partners. Section 42 provides that subject to contract between the partners affirm is dissolved, inter alia see clause (c) by the death of a partner. It is necessary to bear in mind that Section 143 deals with regular assessment and Section
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144 deals with best judgment assessment. Section 182 of the Act which is in Chap. XVI as mentioned hereinbefore provides for assessme nt of firm and stipulates that notwithstanding anything contained in Ss. 143 and 144 and subject to the provisions of…
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