B.J Divan, C.J:— In this case at the instance of the revenue the following two questions have been referred to us by the Tribunal for our opinion:
“(1) Whether, in the facts and circumstances of the case, there was 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 death?
(2) Whether, in the facts and circumstances of the case, the provisions of section 187(2) apply to the facts of the case?”
2. These two questions were referred because, according to the Tribunal, these were the two questions necessary to bring out the real controversy between the parties.
3. The facts leading to this reference are as follows. The relevant assessment year is 1964-65. The assessee is a partnership firm and the firm was granted registration in the immediately preceding year 1963-64. Originally, the partnership firm consisted of five partners and one of the partners was Sarabhai Chimanlal. Sarabhai died on March 9, 1963. The business of the partnership firm was of executing contracts entered into with the railways for handling of goods at various stations and also some business in respect of dealing in coal on commission, etc. The major part of the work was that of handling contract entered into with the railways for handling goods at Sabarmati Railway Station. On the death of Sarabhai Chimanlal, the books of the partnership firm dealing with the contracts with the railways were closed. It appears that the firm was maintaining its accounts in three separate sets of books. Set No. I dealt with the contracts with the railways. In accounts maintained in Set II and Set III books the accounts were continued but in accounts in Set No. I balances were struck after preparing profit and loss account as on March 9, 1963, and the profit was 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 not closed but at the end of the year of account profits were determined and bifurcated between two periods, the first period till the date of death of the deceased partner and the second period being after his death. It may be mentioned that the year of account was Samvat year 2019. Samvat year 2019 commenced on 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 in respect of both the periods so far as Set II and Set III were concerned. The assessee-firm filed two returns for the assessment year in question, one for the period ending 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 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 these 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) and, therefore, the assessee should have applied for registration and mere filing of a declaration under section 184(7) could not help the assessee-firm. Against the decision of the Income-tax Officer the assessee appealed and the Appellate Assistant Commissioner agreed with the conclusion of the Income-tax Officer and dismissed the appeal. Thereafter, the assessee carried the matter in further appeal to the Appellate Tribunal and in the light of various circumstances including the clauses of the partnership deed, the Tribunal came to the conclusion that there was a dissolution of the partnership on March 9, 1963, and this conclusion was drawn from the various circumstances which the Tribunal took into consideration from the materials on record. Then at the instance of the revenue the reference has been made to this court. The Tribunal had negatived the contention of the revenue that section 187(2) applies to the facts of this case.
4. Before we go to the circumstances on which the Tribunal relied for the purpose of coming to its conclusions that the firm was dissolved on March 9, 1963, that is, on the death of Sarabhai, two clauses of the partnership deed must be borne in mind. Under clause 6 of the deed of partnership dated December 11, 1961, it was stated that the partnership was a partnership at will. If any partner desired to resign from the partnership firm, he was required to give three clear months' notice prior to his so doing. Clause 8 was in these terms:
“The partnership firm will not be discontinued or closed on account of retirement and/or death of the partner; and the business will be carried on with the remaining partners with the terms they decide with the heirs of the deceased partner.”
5. The circumstances which appealed to the Tribunal are that the books of account in Set No. I which was in respect of the major business were closed, profits were determined and credited to the respective accounts. The balances were completely struck and carried on to new set of books and according to the Tribunal this was a very important circumstance and evidence to find out that the parties did want to bring about dissolution. We may point out that the approach of the Tribunal in its order was that though under the deed of partnership by virtue of clause 8 the death of a partner would not bring about a dissolution automatically, yet, by mutual consent of the parties, which mutual consent was to be inferred from the facts and material on record, the firm can be said to have been dissolved. The first circumstance was, as we have already pointed out, that the books of account in Set No. I, which was in respect of the major business, were closed. The Tribunal also noted the fact 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, the books of the firm in Set No. I were closed and necessary entries were effected and in respect of other railway stations also, since the contracts were terminated, that is, in about September, 1963, the books in respect of other railway stations were also closed.
6. Another important circumstance on which the Tribunal relied in support of its conclusion that by mutual consent there was a dissolution of the firm was the fact that after the death of Sarabhai, the partnership firm did not enter into any new business activity and did not undertake any new contracts and that would clearly show that after the death of Sarabhai all that the firm did was to undertake activity with a view to see that outstanding contracts with the railways were carried out during the remainder of the period of those contracts but no new contracts were entered into. 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 undertaken new contracts or entered into other new activities because a firm like the assessee-firm before us would surely come to a dead halt if there was no new business activity or if there were no new business contracts and thus the Tribunal found considerable substance in the contention of the assessee that, after the death of Sarabhai, the partners wanted to close the business and whatever activity they continued was in the course of dissolution only and not with a view to carry on or continue the business.
7. A further circumstance which appealed to the Tribunal was that the profit earned subsequent to the death of Sarabhai was 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. This would, according to the assessee, indicate that the partnership 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. Thus, according to the Tribunal, the conduct of the partners clearly pointed out that they had agreed to dissolve the firm on the death of Sarabhai and whatever was done after his death was merely by way of realisation of certain outstanding dues in the course of dissolution of the firm and in discharging certain obligations by completing the contracts entered into prior to the death of Sarabhai.
8. There are two other circumstances which may also be pointed out. One is that no new deed of partnership was executed after Sarabhai's death nor was any application for registration made by the surviving partners. Further, the form contemplated by section 184(7) of the Income-tax Act, 1961, was filed in connection with the period uptill March 9, 1963, and it was also pointed out before us that the major source of profit 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 earned in the business set out in Set No. II and Set No. III.
9. To our mind the most important circumstance pointing to the intention of the partners and to show that an agreement to dissolve the firm was reached by them, though that agreement is not reduced to writing in the form of a document, is that no new contract was entered into or no new contract was undertaken after the death of Sarabhai Chimanlal. The main business of the firm was of undertaking contracts and carrying on the business of execution of these contracts with one or the other party and that main business activity seems to have been given up completely by the partnership firm. After March 9, 1963, since no new contracts were entered into and the existing contracts were worked out only till the end of the period of each respective contracts, it is obvious that though under clause 8 of the partnership deed there was a provision that there should not be an automatic dissolution of the firm as contemplated by the usual provisions of the Partnership Act, yet in this particular case by mutual agreement of the parties the partners appear to have agreed upon a dissolution of the firm. Under these circumstances, in our opinion, the conclusion of the Tribunal that the partners had by mutual agreement decided to dissolve the firm with effect from March 9, 1963, was correct and justified and, therefore, the Tribunal was also justified in holding that the rest of the activity 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 separate assessment till the date of death of Sarabhai Chimanlal.
10. As regards the second question regarding section 187, sub-section (2) of the Income-tax Act, 1961, where at the time of making an assessment under section 143 or section 144 it is found that there was a change which has occurred in the constitution of the firm, the assessment shall be made on the firm as constituted at the time of making the assessment and one of the consequences of a change occurring in the constitution of the firm is that if there is any change in the previous year the firm has 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 is a change in the constitution of the firm if one or more of the partners ceases to be a partner 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 where all the partners continue with a change in their respective shares or in the shares of some of them. Now, here, since there was a dissolution of the firm with effect from March 9, 1963, there is 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) of section 187 are not satisfied. In any event, so far as clause (b) is 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. share in the profits of the firm had died on March 9, 1963, and, thereafter, there was no new partner in his place and stead. 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) cannot be said to apply to the facts of the present case.
11. We, therefore, answer the questions referred to us as follows:
(1) In the affirmative as to both the parts and in favour of the assessee as to both the parts.
(2) In the negative and in favour of the assessee.
12. The applicant will pay the costs of this reference to the assessee.