Sriramulu, J.:— The assessee-firm, named and styled, “M/s. T. Veeraraghavulu Chetty and Sons, Company”, consisting of four partners, was constituted under an instrument of partnership dated June 1, 1958. The firm carried on wholesale business in grocery at Kavali. T. Veeraraghavulu Chetty was one of the partners in the said firm, representing the Hindu undivided family consisting of himself and his three sons. On October 30, 1965, a partition by metes and bounds was effected between the members of the Hindu undivided family of T. Veeraraghavulu Chetty. The amount that stood to his credit in his capital account, in the firm's account books, was also divided between T. Veeraraghavulu Chetty and his three sons. The partners agreed that the three sons of T. Veeraraghavulu Chetty should also be taken as partners in the said firm. In accordance with that agreement, the accounts of the old firm were settled on October 30, 1965, and the resultant profit and loss up to that date was shared between the four partners and credited to their respective accounts. On October 31, 1965, the three sons of T. Veeraraghavulu Chetty were taken in as partners and the four partners of the old firm continued to remain as partners in the new firm. The assets and liabilities belonging to the old firm were taken over by the new firm. The terms and conditions on which the new firm agreed to run the business were reduced to writing in a partnership deed executed on December 4, 1965. The deed recited that the new firm was brought into existence with effect from October 31, 1965.

2. For the assessment year 1966-67, the accounting year of which was from April 1, 1965, to March 31, 1966, the assessee-firm filed two returns declaring its incomes of Rs. 96,321 for the period April 1, 1965, to October 30, 1965, and Rs. 41,387 for the period October 30, 1965, to March 31, 1966. The assessee-firm claimed that there was a change in the constitution of the firm with effect from March 31, 1965, and that two separate assessments should be made for the two periods mentioned above. The Income-tax Officer rejected that contention and held that a single assessment had to be made, under section 187 of the Income-tax Act, 1961, on the firm as constituted at the time of making the assessment. The Income-tax Officer after rejecting the contention of the assessee made a single assessment on the firm as constituted at the time of making the assessment, on the income of the entire accounting year.

3. On appeal by the assessee, the Appellate Assistant Commissioner upheld the assessment order. On a further appeal by the assessee, the Income-tax Appellate Tribual, by relying upon the reasons given by it in I.T.A No. 404/1968-69 (Sri Venugopal Rice, Turmeric and Polish Mill Contractors Company) agreed with the contention of the assessee and directed the Income-tax Officer to make separate assessments one for the period April 1, 1965, to October 30, 1965, and the other for the period thereafter.

4. At the instance of the Commissioner of Income-tax, the Income-tax Appellate Tribunal, under section 256(1) of the Income-tax Act, 1961, has referred the following question of law to this court:

“Whether, on the facts and in the circumstances of the case, a single assessment could not be made on the aggregated income of the two firms for the two periods and the tax charged on such aggregated amount”

5. The learned counsel, Sri P. Rama Rao, on behalf of the revenue contended that this is a case where three new partners were admitted and the four persons who were partners of the firm before the change, continued as partners after the change, and all the seven partners continued the business with all the assets and liabilities of the business of the firm before change. The firm is a distinct entity for the purposes of income-tax. The change that had occurred is only a change in the constitution of the firm within the meaning of section 187(2)(a) of the Income-tax Act, 1961 (hereinafter referred to “the Act”). In such a case, assessment shall have to be made under section 187(1) on the firm as constituted at the time of making the assessment. Section 188 of the Act provides that in a case where one firm carrying on business is succeeded by another firm and the case is not covered by section 187, separate assessments have to be made on the predecessor and successor firms in accordance with the provisions of section 170 of the Act. Since this is a case covered by section 187 of the Act, a single assessment and no two separate assessments can be made. In support of this argument, the learned standing counsel for the revenue relied upon the decision in Excel Productions v. Commissioner of Income-tax [1971] 80 ITR 356 Ker..

6. The learned counsel, Sri Anjaneyulu, appearing for the assessee on the other hand, contended that the expressions “firm”, “partner” and “partnership” have been assigned, under section 2(23) of the Act, the same meanings as are respectively assigned to them under the Indian Partnership Act. Under the Indian Partnership Act, a firm of four partners is not the same as a firm of seven partners. As seen from the facts of this case, the old firm of four partners was dissolved and it has been succeeded to by a different firm of seven partners and, therefore, two assessments have to be made on the predecessor and successor firms as provided in section 170 of the Act, because there is no provision in the Act to aggregate the incomes of two different firms for the computation of tax. In support of this argument, the learned counsel relied upon the decision of the Mysore High Court in Commissioner of Income-tax v. B. Shamiah Setty Brothers.

7. For holding that two separate assessments have to be made in this case, one on the predecessor firm and the other on the successor firm, the Income-tax Appellate Tribunal relied upon its earlier order passed in I.T.A No. 404/68-69, and the reasons given in it. The contentions raised and the arguments advanced in support thereof and the findings given by the Tribunal in that case, are adopted by the assessee and the revenue in the case before us. Hence, it is necessary to know the facts of that case.

8. In the case of Sri Venugopala Rice, Turmeric and Polish Mill Contractors Co., I.T.A No. 404/1968-69, there was a firm of 19 partners. On December 29, 1966, one of the partners, Ch. Venkataramiah, died. A subsequent deed was drawn up on February 2, 1966, with 19 partners. The only change that was effected was that in the place of Ch. Venkataramiah, his wife, Ch. Annapurnamma, was taken in as a partner with the same share in the profit and loss account. For the assessment year 1967-68, the accounting year of which was December 5, 1965 to November 20, 1966, the firm filed two returns of income one for the period December 5, 1965, to December 29, 1965, and the other for the period December 30, 1965, to November 20, 1966. The income-tax authorities held that as the business continued without the change of the firm and the identity of the firm continued intact, only a single assessment has to be made and, accordingly a consolidated assessment was made on the firm in respect of the total income for the two periods. On further appeal, the Income-tax Appellate Tribunal agreed with the assessee's contention and directed that two separate assessments should be made on the income up to December 29, 1965, and for the period between December 30, 1965, and November 20, 1966.

9. On behalf of the assessee, it was contended before the Income-tax Appellate Tribunal that on the death of one of the partners, there was a complete dissolution of the firm under section 42(c) of the Indian Partnership Act and hence the firms before and after December 29, 1965, were two separate entities and there was, therefore, a succession of one firm by another within the meaning of section 188 of the Income-tax Act, 1961, and that the case did not come under section 187(2).

10. On behalf of the revenue, it was submitted that the firm was a distinct entity for the purpose of the Income-tax Act, whatever be the position of law under the general law of partnership and that the case was squarely covered by the decision of the Kerala High Court in Excel Productions v. Commissioner of Income-tax.

11. The Income-tax Appellate Tribunal held that since there was no contract to the contrary, the death of one of the partners brought about a total dissolution of the firm. On that date, what all happened was that the assessee's books of accounts were closed to profit and loss account and the profit computed was credited to the erstwhile partners' accounts. There was no dissolution account made, nor was any realisation account worked out. There was no stoppage of business and the business continued as such with all its assets and liabilities. There was continuation as far as the business was concerned, in which one set of partners was succeeded by another set of partners with as many as 18 partners being common between the two sets. The change squarely fell within the criteria laid down in section 187(2)(a). The Income-tax Appellate Tribunal, accordingly, refused to accept the assessee's contention that there was a dissolution of the partnership and a new firm came into existence, and held that assessment has to be made under section 187(1) on the firm as constituted at the time of making the assessment. After having held that no new firm had come into existence and what all had happened was only a change in the constitution of the firm, the Income-tax Appellate Tribunal observed that the question to be considered was not the question of assessment of the firm, but whether the incomes of two different firms could be clubbed and aggregated so as to enhance the burden of the succeeding firm. The Tribunal observed that, no doubt, the decisions relied upon by the assessee did lend support to its stand that the firm was a separate entity different from the partners, but none of those decisions was an authority for the proposition that one firm with one set of partners was the same as another firm with a different set of partners, and there was no provision in the Income-tax Act which authorised the assessment of the incomes earned for a part of the accounting year by one assessee, and the income of a different firm for the rest of the accounting year. The Income-tax Appellate Tribunal further observed that, whether a single return covering the entire period was filed or two separate returns for the two periods, prior to and after the change in constitution, the incomes of the two periods have to be separately worked out and the tax thereon separately computed.

12. Those are the reasons given by the Income-tax Appellate Tribunal for holding in the case before us that two separate assessments have to be made, i.e, one on the firm of four partners for the period of the accounting year till October 29, 1965, and the other on the firm of seven partners for the period from October 30, 1965, till the end of the relevant accounting year.

13. In order to appreciate the contentions that are raised before us by the department and the assessee, it is necessary to know the scheme of the assessment of firms and the relevant provisions of the Income-tax Act, 1961.

14. Section 2(23) gives the same meanings to the expressions “firm” “partner” and “partnership” as are respectively assigned to them in the Indian Partnership Act. Section 2(31) of the Income-tax Act, 1961, says that a “person” includes a firm also. Section 4 of the Income-tax Act is the charging section. Income-tax has to be charged for any assessment year at the rate or rates specified in respect of the total income of the previous year of every person. As to what is the total income of any previous year is stated in section 5 of the Act. Section 170 provides that if a person carrying on business is succeeded by another person who continues to carry on that business, two assessments have to be made, one on the predecessor in respect of the income of the previous year in which the succession took place up to the date of succession, and another on the successor, in respect of the income of the previous year, after the date of succession.

15. Chapter XVI of the Income-tax Act, 1961, contains the special provisions which are applicable to the assessments of firms.

16. Section 182 of the Act provides that, in the case of a registered firm, the income-tax payable by the firm itself has to be determined and the share of each partner in the income of the firm shall be included in his total income and assessed to tax. Under section 183, an unregistered firm has to pay tax on the basis of its total income. Relevant portions of section 187 and section 188 read thus:

“187. (1) Where at the time of making an assessment under section 143 or section 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;

Provided that—

(i) the income of the previous year shall, for the purposes of inclusion in the total incomes of the partners, be apportioned between the partners who, in such previous year, were entitled to receive the same; and

(ii) when the tax assessed upon a partner cannot be recovered from him, it shall be recovered from the firm as constituted at the time of making the assessment.

(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.

188. Where a firm carrying on a business or profession is succeeded by another firm, and the case is not one covered by section 187, separate assessments shall be made on the predecessor firm and the successor firm in accordance with the provisions of section 170.”

17. Section 189 of the Act deals with the assessment of a firm which has been dissolved or the business of which is discontinued. This section lays down that where any business or profession carried on by a firm has been discontinued or where a firm is dissolved, the Income-tax Officer shall make an assessment of the total income of the firm as if no such discontinuance or dissolution had taken place, and all the provisions of the Act shall apply so far as they may be to such assessment.

18. Coming to the facts of this case, we find that the assessee-firm continued with four partners till October 29, 1965, and on October 30, 1965, three more partners were added. All the previous four partners continued to remain partners and continued the business till the end of the accounting year. Although accounts were made up of profits till October 29, 1965, no dissolution account was prepared, nor the realisation account worked out. The business as such continued with the same assets and liabilities. It is, therefore, clear that, within the meaning of section 187(2)(a) of the Act, there was a change in the constitution of the firm in the relevant accounting year. In such a case, under section 187(1) of the Act, assessment shall have to be made on the firm as constituted at the time of making the assessment. Whatever be the position under the genera] partnership law, since tax is levied under the provisions of the Income-tax Act, 1961, on the firm itself, and then an apportionment of the total income is made between the partners and their respective shares of income included in their individual incomes, it follows that a firm has been treated as a distinct and separate entity, different from the partners that constituted it. That it is so is now well-established by a long line of authorities. Suffice to cite the following decisions:

In Commissioner of Income-tax v. A.W Figgies & Company, the Supreme Court observed, at page 408, thus:

“The section does not regard a mere change in the personnel of the partners as amounting to succession and disregards such a change. It follows from the provisions of the section that a mere change in the constitution of the partnership does not necessarily bring into existence a new assessable unit or a distinct assessable entity and in such a case there is no devolution of the business as a whole.”

19. In Shivram Poddar v. Income-tax Officer [1964] 51 ITR 823 SC. their Lordships of the Supreme Court observed at pages 827 and 828, thus:

“Under the ordinary law governing partnerships, modification in the constitution of the firm in the absence of a special agreement to the contrary amounts to dissolution of the firm and reconstitution thereof, a firm at common law being a group of individuals who have agreed to share the profits of a business carried on by all or any of them acting for all, and supersession of the agreement brings about an end of the relation. But the Income-tax Act recognises a firm for the purposes of assessment as a unit independent of the partners constituting it; it invests the firm with a personality which survives reconstitution……………Where the firm is dissolved, but the business is not discontinued, there being change in the constitution of the firm, assessment has to be made under section 26(1), and if there be succession to the business, assessment has to be made under section 26(2).”

20. Following the decision of the Supreme Court in Shivram Poddar v. Income-tax Officer, a Division Bench of the Allahabad High Court in R.B Jessa Ram Fateh Chand v. Commissioner of Income-tax [1971] 81 ITR 409, 412 All. held that:

“‘………….the Income-tax Act recognises a firm for purposes of assessment as a unit independent of the partners constituting it; it invests the firm with a personality which survives reconstitution………………Where the firm is dissolved, but the business is not discontinued, there being change in the constitution of the firm, assessment has to be made under section 26(1), and if there be succession to the business, assessment has to be made under section 26(2).’”

21. Ultimately, the question that has to be decided in this case is whether this is a case of succession of one firm by another firm, or whether it is merely a change in the constitution of the firm.

22. The word “succession” connotes a transfer of ownership. The requisites of “succession” have been laid down by the Supreme Court in Commissioner Of Income Tax, Madras v. K.H Chambers, Madras [1965] 55 ITR 674 SC. as follows:

(i) there should be change of ownership;

(ii) the integrity of the business should remain ……. the whole business should devolve upon the successor; and

(iii) the identity and continuity of the business should be substantially preserved—the same business should be carried on by the person succeeding

23. A change of ownership may occur either by transfer inter vivos or by inheritance. Since a transfer is a contract, it must be supported by consideration. In the instant case, though accounts have been made up of the firm of four partners, and profit and loss determined up to October 29, 1965, the firm has not been dissolved and the business remained intact, and continued with the assets and liabilities of the firm of four partners, till the end of the accounting year. The only change that was effected was that three more partners were added. If there was a dissolution of one firm succeeded by another, the successor-firm would have paid some amount as the consideration, for the transfer to the predecessor firm. No such amount has been shown to have been paid by the so-called successor-firm to the predecessor-firm. There is, therefore, no transfer of business in this case, and the change that has taken place is only a change in the constitution. In such a case, it is mandatory to assess the firm as constituted at the date of making the assessment.

24. In Karupukula Suryanarayana Setty and Sons v. Commissioner of Income-tax, before September 1, 1965, there were six partners in the firm. Thirteen more partners were introduced into the firm with effect from September 1, 1965. The assessee contended that a new firm was constituted with effect from September 1, 1965, and, therefore, two separate assessments should be made. Rejecting that contention of the assessee, a Division Bench of the Mysore High Court held that:

“Where there has been a change in the constitution of the firm in the course of the previous year relevant to the assessment year, there should be only one assessment and that should be on the firm as constituted at the time of making the assessment as provided in section 187(1) of the Income-tax Act, 1961.”

25. On the facts, it was held that, as there was no succession of one firm by another, section 188 did not apply to such a case, and it could not be contended that two assessments should be made, one up to the date of change in the constitution of the firm, and another from that date to the end of the previous year. In coming to that conclusion, the Mysore High Court followed the decision of the Kerala High Court in Excel Productions v. Commissioner of Income-tax.

26. In Excel Productions v. Commissioner of Income-tax, there was a firm of five partners, which was registered under the provisions of the Indian Partnership Act. The constitution of the firm was changed by taking in four minors also as partners. The Income-tax Officer assessed the income of two periods separately; but the Commissioner of Income-tax felt that such separate assessments for the two periods were erroneous and prejudicial to the revenue and, therefore, revised the assessment. The Income-tax Appellate Tribunal upheld the validity and legality of the revised assessment. In a reference, the Kerala High Court held that there was a change in the constitution within clause (a) of sub-section (2) of section 187 and that the assessment should be made only under that section and not under section 188, though the assessment had to be on the firm as constituted at the time of making the assessment.

27. From all these decided cases, it follows that where, some partners are added and the business as such is continued with the assets and liabilities of the firm earlier to the change, then it would be a case of change in the constitution of the firm and, in such a case, it is incumbent on the Income-tax Officer to make one assessment on the firm as constituted at the time of making the assessment. Since assessment has to be made in respect of the total income of the year, under section 4 of the Act, at the rate or rates specified in the Income-tax Act, it necessarily follows that the entire total income of the previous year of the firm should be assessed in the hands of the firm as constituted at the time of making the assessment. Section 188 of the Act does not apply to this case, because it is covered by section 187(2)(a). General law of partnership cannot be imported into the Income-tax Act, because the firm has been given a special treatment in the income-tax law.

28. The reasons given by the Income-tax Appellate Tribunal in I.T.A No. 404/1968-69 are inconsistent with each other. In one breath, the Income-tax Appellate Tribunal held that there was no dissolution and a new firm did not come into existence at least for income-tax purposes and that assessment has to be made under section 187(1) of the Act on the firm as constituted at the time of making the assessment. In another breath the Tribunal presupposes two different firms and poses a question before itself as to whether a single assessment could be made in the case of two different firms which satisfies the conditions regarding the change in constitution specified in section 187(2) of the Act.

29. Even assuming for a moment that a new firm of seven partners succeeded to the old firm of four partners, as contemplated in section 188 of the Act, still, since that change comes within section 187(2) of the Act, it cannot be said that there was a succession within the meaning of section 188 of the Act and no two assessments could be made under section 170 of the Act. The Tribunal, therefore, erred in holding that there was a succession in this case of one firm by another, and that two assessments should be made under section 170 of the Act. We do not agree with the Tribunal that the question arising in this case is one of clubbing of the incomes of two different assessable entities. Since the business as such and the firm continued for the entire accounting year, even after the change in the constitution, it cannot be said that there were two different firms, one succeeding the other whose incomes have to be clubbed. The question of clubbing of incomes does not arise in this case because there are no two different firms. There has been only one firm in this case for the purposes of income-tax and no succession took place in the accounting year in question. The Tribunal, therefore, was not justified in holding that there should be two assessments.

30. In Commissioner of Income-tax v. B. Shamiah Setty. Brothers, strongly relied upon by the assessee's counsel, Sri Anjaneyulu, one of the three partners of a firm retired on July 31, 1957, and the remaining two partners formed a partnership under a partnership deed dated August 1, 1957. The Income-tax Officer held that there was only a change in the constitution of the firm and added the income of the period prior to August 1, 1957, to the income subsequent to that date, for the assessment year 1958-59. The Appellate Assistant Commissioner held that the two firms were distinct and the income of the old firm could not be added to the income of the new firm. The Income-tax Appellate Tribunal confirmed that order. On a reference made to it, the Mysore High Court held that:

“The question whether there was a new partnership or whether the old partnership continued was a question of fact and the finding of the Appellate Tribunal that the two partnerships were different was binding on the High Court. The aggregation of the income of the two partnerships by the Income-tax Officer was not justified.”

31. The aforesaid decision of the Mysore High Court rests upon its view that the question whether the old partnership continued or whether a new partnership came into existence was a question of fact and the finding given on that question by the Income-tax Appellate Tribunal was binding upon the court. We are unable to agree with the Mysore High Court that the question whether the old partnership firm continued or whether a new one has come into existence is a question of fact. It is, in our opinion, a mixed question of fact and law. In the view that it had taken that the above finding of the Appellate Tribunal was binding on it, the Mysore High Court answered the question referred to it in favour of the assessee in that case. In the instant case before us, since the finding of the Income-tax Appellate Tribunal is that there was a change in the constitution and that no new firm came into existence, it necessarily follows that there should be only one assessment and not two separate assessments for the different periods of the previous year.

32. The form in which the question has been framed by the Income-tax Appellate Tribunal in the reference is not happy. We reframe the question thus:

“Whether, on the facts and in the circumstances of the case, a single assessment has to be made as contemplated under section 187(1) or two separate assessments under section 170 of the Income-tax Act”

33. We answer the reframed question in the affirmative, i.e, against the assessee and in favour of the department. That is to say, on the facts and in the circumstances of the case, a single assessment has to be made under section 187(1) of the Income-tax Act, 1961, on the firm as constituted at the time of making the assessment and not two assessments under section 188 and section 170 of the Act. The assessee shall pay the costs of this reference to the Commissioner of Income-tax.

34. Advocate's fee Rs. 250.