Venkateswara Stone Co. v. Commissioner Of Income-Tax, A.P

1. This reference at the instance of the assessee raises the question whether Section 187 or 188 of the Income-tax Act applies. Mr. Anjaneyulu, the learned counsel appearing for the assessee, relying upon the Full Bench decision of this court in Addl, Commissioner of Income-tax v. Vinayaka Cinema contended the Section 187 does not apply to a situation where a firm is dissolved by the operation of law on account of the death of one of the partners, and that the fact that the partners of the dissolved firm continued the same business as before by taking in one or more partners by fresh agreement will not bring the case under Section 187 of the Act.

2. The facts leading to this reference are these :

Under a deed of partnership dated May 3, 1971, the firm of Messrs. Venkateswara Stone Company, Kasturpalli, came into existence with 15 partners. The deceased, Linga Reddi, who was one of the partners of the firm, died on September 29, 1972. A new partnership firm came into existence under a fresh partnership deed executed on June 6, 1973, with retrospective effect from September 30, 1972. The two widows of Linga Reddi were admitted as partners into the new firm with effect from September 30, 1972. This firm consisted of 16 partners as against 15 partners of the previous firm. The business was carried on in the name of Messrs. Venkateswara Stone Company. The books of account were not closed on September 29, 1972, on the date when Linga Reddi died. They were continued till December 31, 1972, when the accounts of the partnership firm were closed for that calendar year. By mutual consent of the parties, the profits up to September 29, 1972, were apportioned on time basis and disbursed among the partners in accordance with the earlier partnership deed dated May 3, 1971. The profits of the subsequent period September 30,1972, to December 31, 1972, were also ascertained on the same basis and distributed among the partners in accordance with the second deed of partnership dated June 6, 1973. The firm filed a return for the first period declaring an income of Rs. 70,674 and a separate return for the subsequent period September 30, 1972, to December 31, 1972, declaring an income of Rs. 24,154. Along with the first return of income the assessee also filed a declaration for continuation of registration under Section 184(7) of the Act. That was in respect of the partnership which was in existence till September 29, 1972. The income of the newly constituted firm was declared in the status of an unregistered firm. The claim of the assessee was that in the absence of any agreement to the contrary, the partnership which was constituted under the deed dated May 3, 1971, came to be dissolved by the operation of law on the death of Linga Reddi and that the partnership which came into existence subsequently with effect from September 30, 1972, was a distinct and separate one. The Income-tax Officer negatived the contention that there were two separate firms and assessed the entire income for the period from January 1, 1972, to December 31, 1972, in the assessee's hands holding that there was in fact no dissolution of the firm on the death of Linga Reddi. That view was upheld both by the Appellate Assistant Commissioner and the Appellate Tribunal. Hence, at the instance of the assessee, the following question was referred to this court for its opinion :

"Whether, on the facts and in the circumstances of the case, the partnership firm which came into existence on September 30, 1972, after the death of partner, Shri T. Linga Reddi, can be considered as distinct and separate from the partnership which was in existence till September 29, 1972, and the income of that firm is liable to be taxed separately ?"

3. Mr. Anjaneyulu contended that a scrutiny of the recitals in the partnership deed dated June 6, 1973, would clearly bring out the fact that there was no agreement to the contrary between the deceased and the surviving partners for the continuance of the firm and, as such, the Tribunal erred in holding that there was no dissolution of the firm on the death of a partner. Before we refer to the provisions of law and the decisions relied upon by Mr. Rama Rao, the learned counsel for the revenue, and Mr. Anjaneyulu, the learned counsel for the assessee, it may be useful to refer to the relevant recitals in the partnership deed dated June 6, 1973 :

"Whereas the business of working up of quarries Nos. 1 and 2 at Gandlepally and quarry in Survey No. 662 at Angadi Raichur by excavating stones, etc., and selling the same under the name and style of M/s. Sri Venkateswara Stone Co. was carried on at Gandlepally and Angadi Raichur with head office at Kasturpally, in partnership by the parties of the first 14 parts along with Shri T. Linga Reddi on terms and conditions incorporated in the deed of partnership dated 3rd May, 1971, till 29th September, 1972, on which date the said T. Linga Reddi died.

AND WHEREAS with effect from 30th September, 1972, the said business is continued in partnership by the parties referred to hereinabove, the parties of the first 14 parts having agreed to take up the party of the 15th part, namely, Smt. T. Bhagya Devi w/o late T. Linga Reddi, as partner, to which she has also agreed on terms and conditions mutually agreed upon with 6%, 11%, 6%, 3%, 6%, 6%. 8%, 4%, 9%, 11%, 5%. 5%, 11%, 2% and 2% respectively.

And whereas the parties hereto hereby agree to continue the said business on the said terms and conditions in future.

AND WHEREAS the parties hereto are desirous of reducing to writing and recording hereunder the terms and conditions so mutually agreed Upon between them.

NOW THIS DEED WITNESSETH THAT the parties hereto mutually agree, declare and covenant as follows :

1. That the name of the partnership business shall continue to be M/s. Venkateswara Stone Co.

2. That the business of the firm shall continue to be that of working up of the quarries Nos. 1 and 2 of the Gandlepally and quarry in Survey No. 662 of Angadi Raichur, by excavating stones, etc., and selling the same and doing allied business or any other quarries which may be obtained in future.

3. That the business of the firm shall continue to be carried on at Gandlepalli and Angadi Raichur wherein the quarries are situated but for all purposes the office of the firm shall be at Kasturpalli, Post Revalapalli, Taluk Kodangal, District Mahaboobnagar. If needed, the business may be extended to any other place or places as may be agreed upon by the partners.

4. The capital of the firm shall be the amount standing to the credit of the parties. Additional capital required may either be supplied by the partners or may be borrowed from outside. The partners shall not be entitled to interest on their capital."

4. The learned counsel for the assessee contends that nowhere in the deed of partnership do we get that, notwithstanding the death of a partner, there shall be no dissolution of the firm. The terms of the partnership deed only refer to the continuance of the business of that firm and not continuance of the firm as such. Relying upon the recital "that the business of the firm shall continue to be carried on", Mr. Anjaneyulu contended that so long as there is nothing to indicate that the dissolution of the firm shall not occur in the event of the death of one of the partners the firm gets automatically dissolved on the death of a partner by virtue of Clause (c) of Section 42 of the Indian Partnership Act. In this connection, it is contended by Mr. Rama Rao for the revenue that a contract to the contrary need not be expressed and it could be implied, and that having regard to the conduct of the parties, the Tribunal has come to the conclusion that there was no dissolution of the firm and it was only a case of a change in the constitution of the firm. In support of his contention, the learned counsel for the revenue invited our attention to the inference drawn by the Tribunal, namely, that on the death of Linga Reddi, the business of the firm was not discontinued, the partnership accounts were not closed for profit and loss and no separate books of accounts were opened for the subsequent period. It is on these grounds that the Tribunal concluded that "in effect, the partners of the firm never thought of dissolution of the firm". The test in a case of this nature is to see whether there was any implied contract between the deceased and the other partners that the partnership shall continue notwithstanding the death of any one of them. None of the lower authorities had directed itself to this aspect of the case. Section 42 of the Partnership Act to the extent relevant reads :

"42. (c) Subject to contract between the partners a firm is dissolved by the death of a partner."

5. There was no express contract between the partners. There is also nothing to suggest that the conduct of the partners was such that during the lifetime of Linga Reddi they intended there would be no dissolution of the firm by reason of the death of a partner. The mere fact that no separate sets of accounts were opened or that the accounts were not closed for profit and loss will not by itself establish that there was a contract to the contrary between the partners that the firm shall not get dissolved on the death of one of them. A Full Bench of five judges of this court in Additional Commissioner of Income-tax v. Vinayaka Cinema had to consider the question whether Section 187 or 188 of the Act would be applicable in the case of a dissolution of a firm by operation of law. As the correctness of the view of the Full Bench of three judges of this court in Additional Commissioner of Income-tax v. Visakha Flour Mills [1977] 108 ITR 466 (AP) was canvassed, the Bench of five judges was constituted/ Mr. Rama Rao in this connection invited our attention to the fact that both the Full Benches (Full Bench of three judges in Addl. Commissioner of Income-tax v. Visakha Flow Mills [1977] 108 ITR 466 (AP) and the Full Bench of five judges in Addl. Commissioner of Income-tax v. Vinayaka Cinema , had affirmed an earlier decision of a Bench of this court in Commissioner of Income-tax v. T. Veeraraghavulu Chetty & Sons Co. , to which one of us (Chief Justice) was a party. Kondaiah J., speaking for the Full Bench in Visakha Flour Mills' case [1977] 108 ITR 466 (AP), followed the view expressed by the Division Bench in Veeraraghavulu Chetty's case . In deciding that case, the Tribunal followed its earlier decision in another case, Sri Venugopal Rice, Turmeric and Polish Mill v. Income-tax Officer (I.T.A. 404 (Hyderabad), 68-69). In that firm, there were 19 partners and one of them died. A subsequent deed was drawn up, the only change effected being that in the place of the deceased partner, his son was taken as a partner into the same share in profit and loss. In Veeraraghavulu Chetty's case , there was no death of any partner, but the assets and liabilities belonging to the old firm were taken over by the new firm. Veeraraghavulu Chetty's firm continued with four partners up to October 29, 1965, and on October 30, 1965, three more partners were added. All the previous partners continued to remain as partners and continued the business till the end of the accounting year. The business as such continued with the same assets and liabilities. On the facts aforesaid, the Division Bench held :

"Where some partners are added and the business as such is continued with the assets and liabilities of the old firm, it is a case of change in the constitution of the firm and the income of the firm for the entire assessment year is liable for a single assessment. The assessment should be made on the firm as constituted at the time of assessment under Section 187(2)(a). Section 188 does not apply to such firm inasmuch as there is no question of the new firm succeeding to the old one and the income and business of the old firm continued as such throughout the accounting year."

6. That decision was affirmed by the Full Bench in Visakha Flour Mills' case [1977] 108 ITR 466 (AP). The Division Bench decision was also affirmed by the Full Bench of five judges in Vinayaka Cinema's case . Divan C.J., who spoke for the majority, referring to Veeraraghavulu Chetty's case , observed thus (page 492);

"In Commissioner of Income-lax v. T. Veeraraghavulu Chetty & Sons , a Division Bench of this court consisting of Obul Reddy C.J. and Sriramulu J. dealt with a situation where there was introduction of new partners in the midst of the accounting year. They were not dealing with a situation where a firm was dissolved because of the provisions of the Partnership Act, and it was held that the- entire income of the firm for the whole year was to be assessed instead of two separate assessments and the conclusion of the learned judges of the Division Bench is correct in the light of the fact that the case was clearly governed by the provisions of Section 187(1) as interpreted by us."

7. What Mr. Rama Rao contended is that the decision of this court in Veeraraghavulu Chetty's case [1975] 100 1TR 723 {AP) was based not only on the facts of that case, but also on the facts of the case of Venugopal Rice, Turmeric and Polish Mill Contractors Co. (ITA 404/1968-69), where one of the partners died. The fact, however, remains that so far as Veeraraghavulu Chetty's case was concerned, there was no death of a partner and obviously it is for that reason that in Vinayaha Cinema's case , the Full Bench by majority affirmed that decision. In this reference, we are concerned with the applicability of Vinayaka Cinema's case . We may, therefore, refer to the facts of that case. That was a case where for running a cinema business a partnership had come into existence under a deed dated April 29, 1967. There were 9 partners including one Srinivasulu and his son, Kamalakara Rao. Kamalakara Rao was a major at the relevant time and was the managing partner of the firm. Srinivasulu had gifted away four out of twelve shares that he held in the firm to his daughter, Smt. Y. V. Ramani, and had formed a sub-partnership with her in the firm. That sub-partnership also was recognised by the income-tax department and assessments were made separately in respect of the father and daughter in respect of their respective share incomes. Srinivasulu died on August 17, 1968, and on that very day another partner, Subbarama Reddy, retired from the firm after gifting away his interest in the firm's business to one K. Panchala Lakshmamma. There was no clause in the partnership deed dated April 29, 1967, providing that, in the event of the death of one of the partners, the firm was not to be dissolved. Hence, as a result of the death of Srinivasulu, the old partnership firm stood dissolved under the provisions of the Partnership Act. By deed dated August 19,,1968, a new partnership firm was constituted and under the new partnership deed, seven of the partners of the old firm together with two new partners, viz., Smt. Y. V. Ramani and K. Panchala Lakshmamma, started a new partnership firm. This new firm was also registered under the Income-tax Act. For the assessment year 1969-70, two separate returns were filed, one for the period April 1, 1968, to August 17, 1968, and the other for the period August 18, 1968, to March 31, 1969. The question that was ultimately referred on those facts was:

"Whether, on the facts and in the circumstances of the case, and in view of Section 187(2)(a) of the Income-tax Act, 1961, a single assessment could not be made on the aggregate of the income for the two periods and the tax charged on such aggregate income ?"

"Therefore, when a partner dies and the firm is dissolved, though it can be said that he ceases to be a partner, it cannot be said that there is a mere change in the constitution of the firm."

8. In our opinion, the view expressed by the Full Bench governs this case also. The facts there too were that there was no clause in the partnership deed to the effect that, in the event of the death of one of the partners, the firm was not to be dissolved. The facts in this reference are almost similar to the facts with which the learned judges were concerned in that case. As already noticed by us, the recitals do not show that the firm shall be continued in the event of the death of one of the partners. Therefore, it cannot be said that it is a case of change in the constitution of the firm.

9. Mr. Rama Rao next sought to invite our attention to a decision of the Punjab and Haryana High Court in Nandlal Sohanlal v. Commissioner of Income-tax , where a Full Bench of five judges of that court, by a majority of 4 to 1 took a contrary view to the one expressed by this court by a majority, of 3 to 2 in Additional Commissioner of Income-tax v. Vinayaka Cinema [FB] and requested, that, in view of the importance of the question involved and the differing views expressed earlier by a Full Bench of this court and the Full Bench decision of the Punjab and Haryana High Court, the case merits to be referred to a larger Bench of seven judges. We are unable to agree that this case requires to be decided by a larger Bench of seven judges. Having regard to the view expressed by the Full Bench of this court in Additional Commissioner of Income-tax v. Vinayaka Cinema , we hold that the firm which came into existence on the death of Linga Reddi is distinct and separate from the partnership firm, which was in existence till September 29, 1972.

10. The reference is answered accordingly in favour of the assessee. No costs. Advocate's fee Rs. 250.