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Sangam Silks v. Commissioner Of Income-Tax, Karnataka.
Factual and Procedural Background
The reference arises from a question referred to this Court by the Income-tax Appellate Tribunal, Bangalore Bench, under s. 256(2) of the Income-tax Act, 1961, concerning the method of assessment where a partnership firm is reconstituted during an accounting year preceding an assessment year. The assessee-firm, M/s. Sangam Silks, Bangalore, had an accounting year ending 31 March 1971 and was reconstituted on 12 June 1970: one partner (P.R. Sathyanarayana Shetty) left and two new partners (P.S. Ramachandra Shetty and K.N. Srinivasa Shetty) joined; two original partners continued. For the assessment year 1971–72 the firm filed two separate returns covering the periods 1 April 1970–12 June 1970 and 13 June 1970–31 March 1971. The Income-tax Officer (ITO) made a single assessment on the reconstituted firm, combining income for both periods. The assessee appealed unsuccessfully to the AAC and the Tribunal. The Tribunal referred the question whether s.187 of the Act applied to the case, and on petition under s.256(2) this Court reframed the reference to include the further question whether one assessment for the whole year or two separate assessments should have been made. The Court was therefore called upon to determine the proper application of ss.187 and 188 of the Act to these facts.
Legal Issues Presented
- Whether, on the facts and in the circumstances of the case, the provisions of section 187 of the Income-tax Act, 1961, apply to the case (i.e., whether a change in the constitution of the firm occurred within s.187(2)).
- Whether the Tribunal was justified in upholding the ITO's action in making one assessment for the entire period 1 April 1970 to 31 March 1971 on the assessee-firm, or whether two separate assessments should have been made—one for the period up to the date of reconstitution (1 April 1970 to 12 June 1970) and another for the period after reconstitution (13 June 1970 to 31 March 1971).
Arguments of the Parties
Assessee's Arguments (Sri B.P. Gandhi)
- Section 187 of the Act has no application to the present case (contention that the type of change in constitution present is not covered by s.187(2)).
- Even if s.187 applies, it authorises making two separate assessments (one before reconstitution and one after), and does not authorise clubbing the income of the firm before and after reconstitution into a single assessment on the reconstituted firm.
- Argued reliance on a Division Bench decision of the Allahabad High Court (Commissioner of Income-Tax, Lucknow v. Shiv Shanker Lal Ram Nath) supporting the view that s.187 makes the new firm liable but does not treat the old firm's income as the new firm's income.
- Contended that making only one assessment would frustrate the proviso to s.187(1) which requires apportionment of the previous year's income among partners, and that such apportionment indicates the need for separate assessments.
Revenue's Position (Sri S.R. Rajasekhara Murthy)
- The record shows limited detailed pleading for the revenue in the text; the learned counsel for the revenue acknowledged that the original question did not cover the assessee's second contention and did not dispute that the second contention was the main point urged before the Tribunal. The parties agreed to reframing the question to include that contention.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Karupukula Suryenarayana Shetty and Sons v. CIT, [1973] 92 ITR 141 (Division Bench of this Court) | Held that where change in constitution of a firm occurs as in s.187(2), assessment must be made on the firm as reconstituted at the time of assessment; s.188 is not attracted. | The Court treated this decision as directly controlling and reiterative of the principle that a single assessment on the reconstituted firm for the whole year is required; it fully covered and rejected the assessee's second contention. |
| Shivram Poddar v. ITO, [1964] 51 ITR 823 (Supreme Court) | Observation that the Income-tax Act recognises a firm as an entity with a personality which survives reconstitution; assessment provisions treat firm as continuing for tax purposes despite reconstitution. | The Court relied on these observations to support the interpretation that s.187 treats the reconstituted firm as the same person for assessment purposes and that the firm survives reconstitution for tax liability. |
| Commissioner Of Income-Tax, Lucknow v. Shiv Shanker Lal Ram Nath, [1977] 106 ITR 342 (Allahabad Division Bench) | Held that s.187 does not create a fiction that income of the old firm becomes income of the reconstituted firm; rather the new firm is made liable to be assessed in respect of the old firm's income. | The Court considered this decision but rejected its interpretation; it held that the language of s.187 supports making the reconstituted firm the entity to be assessed for the whole year (i.e., one assessment), and that the Allahabad Division Bench's view was inconsistent with other authorities and the text of s.187. |
| Dahi Laxmi Dal Factory v. ITO, [1976] 103 ITR 517 (Allahabad Full Bench) | Majority view that s.187 is not merely machinery; the reconstituted firm becomes liable to pay tax for the whole year and is assessed accordingly. | The Court cited this Full Bench majority view to support the proposition that s.187 contemplates one assessment on the reconstituted firm and affects the liability for the whole year. |
| Excel Productions v. CIT, [1971] 80 ITR 356 (Kerala High Court) | Negated similar contention that reconstitution requires separate assessments; supported the view that s.187 treats the firm as continuing for assessment. | The Court noted that this decision was accepted in Karupukula and relied on it as part of the body of authority supporting one assessment on the reconstituted firm. |
| Nandlal Sohanlal v. CIT, [1977] 110 ITR 170 (Punjab & Haryana Full Bench) | Expressed a view similar to those holding that s.187 requires the reconstituted firm to be assessed for the whole year. | The Court referenced it as another authority taking a view consistent with treating the reconstituted firm as the taxable entity for the whole year. |
| CIT v. Bharat Engineering and Construction Co., [1968] 67 ITR 273 (Division Bench of this Court) | Contains observation that every change in the constitution of a partnership brings into existence a new firm (arising under the 1922 Act). | The Court considered this observation but held it not decisive because s.187(2) of the 1961 Act specifically defines which changes constitute a mere change in constitution for the purposes of that Act; thus the observation did not support the assessee's case for mandatory separate assessments. |
| Ramcharitar Ram Harihar Prasad v. CIT, [1953] 23 ITR 301 (Patna High Court) | Authority that this Court may reframe a question in a s.256 reference to bring out the real issue between the parties. | The Court cited it to justify reframing the question in the reference to include the assessee's main contention about whether there should be one or two assessments. |
Court's Reasoning and Analysis
The Court proceeded by statutory interpretation and application of precedent, following these analytical steps drawn from the opinion:
- Statutory text—The Court set out ss.187 and 188 of the Income-tax Act, 1961. Section 187(1) directs that where a change has occurred in the constitution of a firm at the time of making an assessment under s.143 or s.144, the assessment shall be made on the firm as constituted at the time of making the assessment. The proviso to s.187(1) requires apportionment of the previous year's income among partners entitled to it, and provides for recovery of tax assessed on a partner from the reconstituted firm if necessary. Section 187(2) defines the changes in constitution to which the section applies. Section 188 deals with succession where s.187 does not apply.
- Application to facts—Given that one partner left and two new partners joined while two original partners continued, the Court found that the facts fell squarely within s.187(2)(a): a change in constitution had occurred and at least one partner continued after the change. Therefore s.187 applied.
- Rejection of the first contention—The Court rejected the assessee's argument that both events happening (partners leaving and new partners entering) excludes the case from s.187(2). The Court held that s.187(2) contemplates either or both events: the happening of both events does not remove the case from the section.
- Precedential support—The Court invoked its earlier Division Bench decision in Karupukula Suryenarayana Shetty (1973) and a line of other authorities (including Full Benches and High Courts) which interpret s.187 as treating the reconstituted firm as the same taxable entity for assessment purposes. The Supreme Court's observation in Shivram Poddar (1964) that the Income-tax Act invests a firm with a personality which survives reconstitution supported this statutory reading.
- Rejection of alternate interpretation—The Court considered the Allahabad Division Bench decision (Shiv Shanker Lal Ram Nath) relied upon by the assessee, which held that s.187 makes the new firm liable but does not fictionally convert old firm's income into new firm's income. The Court rejected this narrower reading, holding that s.187's language and structure indicate that the reconstituted firm is to be assessed for the whole previous year when the change is of the types set out in s.187(2). The Court also pointed to an earlier Full Bench (Dahi Laxmi Dal Factory) and other decisions that supported the single-assessment approach, and observed that the Allahabad Division Bench had not noticed the Full Bench decision.
- Legislative purpose and recovery provisions—The Court examined the proviso to s.187(1) and the lack of any provision to recover tax assessed on the firm before reconstitution from the reconstituted firm. It reasoned that if the legislature intended separate assessments with ultimate recovery from the reconstituted firm, it would have provided for such recovery; the absence of such a provision supports the conclusion that one assessment on the reconstituted firm is intended. The specific proviso allowing recovery from the reconstituted firm of tax assessed on a partner (but not for tax assessed on the pre-reconstitution firm itself) further indicated that s.187 contemplates one assessment on the reconstituted firm.
- Apportionment argument—The Court addressed the assessee's contention that apportionment of income among partners (as required by the proviso) signals a need for separate assessments. The Court found no difficulty in apportioning income when complete accounts for the whole year (before and after reconstitution) are available, and therefore saw nothing in the proviso suggesting that two assessments are required.
- Conclusion of analysis—On the combined statutory text, purpose (to prevent tax-evasion by creating multiple entities mid-year) and precedent, the Court concluded that s.187(1) requires assessment on the firm as constituted at the time of assessment (the reconstituted firm) and does not require two separate assessments for the two periods within the accounting year.
Holding and Implications
Holding: The Court answered the reference by holding that, on the facts and in the circumstances of the case, the Tribunal was justified in upholding the action of the Income-tax Officer in making one assessment for the entire period from 1 April 1970 to 31 March 1971 on the assessee-firm.
Implications:
- Direct effect on the parties: The single assessment made by the ITO combining incomes for the whole year on the reconstituted firm is upheld; the assessee's contentions are rejected. The assessee was ordered to pay the costs of the revenue and an advocate's fee of Rs. 250.
- Precedential posture: The Court reiterated and applied the earlier Division Bench decision in Karupukula Suryenarayana Shetty, and relied on a body of authority (including Supreme Court observations and High Court Full Bench decisions) treating the firm as a continuing taxable entity under s.187 where the change in constitution falls within s.187(2). The opinion thus reaffirms the single-assessment approach under s.187 rather than creating a new departure from existing case law.
- No broader implications were discussed in the opinion beyond the direct effect on assessment practice under s.187 and the reaffirmation of the existing line of authority described above.
Costs: The Court ordered that the assessee shall pay the costs of the revenue; advocate's fee Rs. 250.
Rama Jois, J.:— Whether, on account of any change brought about in the constitution of a partnership firm during an accounting year preceding an assessment year, s. 187 of the I.T Act, 1961 (hereinafter referred to as “the Act”), requires the income-tax authorities to make separate assessments, one for the period commencing from the accounting year up to the date of reconstitution of the firm and another for the period commencing from the date of such reconstitution till the end of the accounting year or a single assessment, on the reconstituted firm, is the question of law that arises for consideration in this reference made by the Income-tax Appellate Tribunal, Bangalore Bench, Bangalore (hereinafter referred to as “the Tribunal”), pursuant to an order made by this court under s. 256(2) of the Act.
2. The brief and undisputed facts of the case relevant for answering the reference are these: M/s. Sangam Silks, Bangalore, the assessee, is a partnership firm. The assessment year concerned is 1971–72. During the relevant accounting year ending March 31, 1971, there was a reconstitution of the firm on June 12, 1970. Prior to June 12, 1970, the firm consisted of three partners, namely, V. Pandurangaiah, G. Srinivasulu Shetty and P.R Sathyanarayana Shetty. On June 12, 1970, P.R Sathya-narayana Shetty went out of the firm by executing a release deed. On the same date two other partners entered into the partnership firm. They are P.S Ramachandra Shetty and K.N Srinivasa Shetty. Thus, the new firm consisted of four partners out of whom two were partners prior to June 12, 1970. The firm continued its business during the accounting year. For the assessment year 1971–72 the firm filed two separate returns, one for the period commencing from April 1, 1970; to June 12, 1970, and another for the period commencing from June 13, 1970, to March 31, 1971. The ITO made a single assessment on the reconstituted firm clubbing the income for both the periods. Aggrieved by the order, the assessee preferred an appeal before the AAC who affirmed the order of assessment. The further appeal by the assessee to the. Income-tax Appellate Tribunal also met with failure. Thereafter, on a petition made to this court under s. 256(2) of the Act, this court directed the Tribunal to refer the following question for the opinion of this court:
“Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the provisions of section 187 of the Income-tax Act, 1961, apply to the case?”
3. Accordingly, the Tribunal has drawn up the statement of the case and has referred the above question for the opinion of this court. Sri B.P Gandhi, learned counsel for the assessee, raised the following contentions:
(i) Section 187 of the Act has no application to this case.
(ii) Even if s. 187 of the Act applies to this case, the said section only authorises the making of two separate assessments, one for the period up to the date of reconstitution of the firm and another for the rest of the period and it does not authorise the clubbing of the income of the firm before its reconstitution with its income after its reconstitution and the making of one assessment.
4. Learned counsel for the assessee submitted that though the question referred covers only the first contention urged for the assessee, the real controversy between the assessee, and the revenue consists of both the contentions urged for the assessee. From the order of the Tribunal, it is clear that the assessee had raised both the contentions before it and in fact the second contention was its main point. Sri S.R Rajasekhara Murthy, learned counsel appearing for the revenue, also stated that the question as framed did not cover the second contention urged for the assessee and he did not dispute that it was the main contention urged before the Tribunal. In the circumstances, the learned counsel for the assessee prayed for reframing the question so as to include the second contention also. He submitted that in a reference made under s. 256 of the Act, it is open to this court to reframe the question so as to bring forth the real issue between the parties. This is also the view taken by the Patna High Court in the case of Ramcharitar Ram Harihar Prasad v. CIT, [1953] 23 ITR 301. In the circumstances, learned counsel for both the parties agreed to the reframing of the question as required and accordingly we reframe the question as follows:
“Whether, on the facts and in the circumstances of the case, the Tribunal was justified in upholding the action of the Income-tax Officer in making one assessment for the period from April 1, 1970, to March 31, 1971, on the assessee or whether the Tribunal should have held that the Income-tax Officer should have made two separate assessments, one for the period from April 1, 1970, up to June 12, 1970, the date of reconstitution of the firm, and another assessment for the period from June 13, 1970, up to March 31, 1971?”
5. In order to appreciate the two contentions raised for the assessee, it is necessary to set out the provisions of ss. 187 and 188 of the Act. They 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.”
6. The aforesaid two sections form part of the special provisions applicable to firms, incorporated in Chap. XVI of the Act. Sub-section (1) of s. 187 provides that in the case of a firm where it is found at the time of making assessment either under s. 143 or under s. 144 of the Act, that a change 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. There is a proviso to sub-s. (1). It has two clauses. The effect of the first clause is that though the assessment is required to be made on the reconstituted firm, as existing at the time of making the assessment, for purposes of inclusion of total incomes of the partners for the previous year, it should be apportioned between all the partners, who in such previous year were entitled to receive the same. According to the second clause, when taxes assessed upon any partner could not be recovered from him, it should be recovered from the firm as constituted at the time of making assessment. Sub-section (2) sets out the circumstances which should be regarded as having brought about a change in the constitution of the firm. Clause (a) of sub-s. (2) provides that if one or more of the partners cease to be partners or one or more new partners are admitted, in such circumstances, when one or more partners of the firm before the change continue as partner or partners after the change or where the partners continue after the change with their respective shares or in the shares of some of them, it shall be construed as having brought about a change in the constitution of the firm. Section 188 of the Act provides that in cases where a firm carrying on a business or profession is succeeded by another firm and the case is not one covered by s. 187 of the Act, separate assessment shall be made on the predecessor firm and the successor firm in accordance with the provisions of s. 170 of the Act.
7. In the present case, as can be seen from the facts of the case, only one of the three partners of the firm went out on June 12, 1970. On the same date two other partners got into the partnership. The resultant position was two partners of the firm before the change continued to be partners of the firm along with two other new partners. Therefore, this is a case of change in the constitution of the firm and it squarely falls under the provisions of s. 187(2) of the Act.
8. Learned counsel for the assessee, however, contended that it is only in cases where one or more partners cease to be partners or one or more partners are admitted, the case comes under the description of “change in constitution” given in sub-s. (2) of s. 187, but in a case where both the events, namely, one or more of the partners going out and one or more partners getting into the firm takes place, the case would not be covered by the description of “change in the constitution of the firm” given in sub-s. (2) of s. 187 of the Act. In that view he submitted that in the present case, since one partner went out and two partners got into the firm on June 12, 1970, the case is not governed by sub-s. (2) of s. 187 and consequently sub-s. (1) of s. 187 has no application
9. In our view the first contention is devoid of any merit. According to sub-s. (2) of s. 1.87 of the Act, the change in constitution takes place either by one or more partners going out of the firm or by one or more partners entering into the partnership. Both the events have occurred in this case. It is not correct to suggest that only one of the events should happen, and not both, for bringing the case under sub-s. (2) of s. 187 of the Act. If either of the events is sufficient to bring about a change in the constitution of the firm for the purposes of s. 187, the effect of happening of both the events cannot be different. Hence, we reject the first contention.
10. As regards the second contention raised for the assessee, the question is not res integra. A similar question came up for consideration before a Division Bench of this court in Karupukula Suryenarayana Shetty and Sons v. CIT, [1973] 92 ITR 141 (Kar). There, this court held that in cases where the change has occurred in the constitution of the firm, the assessment has to be made on the firm as reconstituted at the time of making the assessment in view of s. 187(1) of the Act. It was also held that to such a case the provisions of s. 188 of the Act are not attracted. The said decision fully covers the second contention urged for the assessee, and is against it.
11. Learned counsel for the assessee, however, maintained that certain aspects were not brought to the notice of this court in the aforesaid case and, therefore, the said judgment requires reconsideration. He argued that though s. 187(1) requires the making of an assessment on the reconstituted firm, there is no indication in the said sub-section that the income of the firm before its reconstitution and the income of the firm after its reconstitution, should be clubbed together for the purpose of making an assessment. He further submitted that the sole object of sub-s. (1) of s. 187 was to make the reconstituted firm liable for payment of tax by the firm before its reconstitution and not to include the income of the firm before its re-constitution in the income of the firm after its reconstitution. In support of his submission he relied on the decision of a Division Bench of the Allahabad High Court in Commissioner Of Income-Tax, Lucknow v. Shiv Shanker Lal Ram Nath., [1977] 106 ITR 342, wherein the facts were very similar to the facts of this case. There, it was held that s. 187 of the Act, even by implication, did not create a fiction that the income derived by the old firm becomes the income of the reconstituted firm, but the section made the new firm liable to be assessed in respect of the income derived by the old firm. Their Lordships noticed the difference between s. 188, which provides for making separate assessment in the case of succession of one firm by another not covered by s. 187 and also s. 187(1) of the Act which requires the making of an assessment on on the reconstituted firm, and held that merely because there is no provision in and also s. 187(1) of the Act which requires the making of an assessment s. 187 for assessing two different persons as in s. 188, it does not follow that s. 187 contemplates only one assessment being made on the new firm. Learned counsel for the assessee urged that the view taken by the Division Bench of the Allahabad High Court in the aforesaid decision should be preferred to the view of this court in Karupukula Suryanarayana Shetty's case, [1973] 92 ITR 141.
12. In our opinion, the language of ss. 187 and 188 does not give any scope for such interpretation. Section 187 is a special provision incorporated in the Act providing for the making of assessment on the reconstituted firm as existing at the time of making the assessment in cases where there has occurred a change in the constitution of the firm. Sub-section (2) of s. 187 of the Act specifically defines as to what “the change in the constitution” means for the purpose of s. 187. It may be that under the provisions of the Partnership Act every change of partners brings into existence a new firm. But s. 187 treats the firm before its reconstitution and as reconstituted as one and the same “person” for purposes of making the assessment. Thus, under the provisions of the Act, the firm is treated as a separate and distinct entity and independent from its partners and it continues to exist notwithstanding the change in its composition if such change is one of the types mentioned in s. 187(2). In this behalf, we may refer to the observation of the Supreme Court in Shivram Poddar v. ITO, [1964] 51 ITR 823, wherein the Supreme Court was interpreting the corresponding provision in the Indian I.T Act, 1922. The relevant portion of the judgment reads (pp. 827, 828):
“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 purposes of assessment as a unit independent of the partners constituting it; it invests the firm with a personality which survives reconstitution. A firm discontinuing its business may be assessed in the manner provided by section 25(1) in the year of account in which it discontinues its business; it may also be assessed in the year of assessment. In either case it is the assessment of the income of the firm. 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). The provisions relating to assessment on reconstituted or newly constituted firms, and on succession to the business are obligatory.”
13. The above observations equally apply to the provisions of Chapter XVI of the Act and particularly to ss. 187 and 188 of the Act, which correspond to sub-ss. (1) and (2) of s. 26 of the Indian I.T Act, 1922. Therefore, the object of s. 187 is to treat the reconstituted firm same as the firm before its reconstitution notwithstanding the change of one or more partners. Obviously, this section is aimed at prevention of evasion of the liability of partnership firms to pay tax on the basis of the total income of a given year by merely substituting one or more partners in the middle of the year and creating two or more taxable entities and filing separate returns in the names of such firms. Section 187, therefore, provides that the reconstituted firm existing at the time of making the assessment alone should be assessed for the relevant assessment year. Therefore, we are unable to agree with the view taken by the Division Bench of the Allahabad High Court in Shiv Shankar Lal Ram Nath's case, [1977] 106 ITR 342, on which reliance was placed for the assessee. Further, it should be pointed out that a Full Bench of the same High Court in an earlier case, Dahi Laxmi Dal Factory v. ITO, [1976] 103 ITR 517, had taken a contrary view which has not been noticed by the Division Bench. In Dahi Laxmi Dal Factory's case, the majority view expressed at page 524 is as follows:
“It is not correct to say that section 187 is merely a machinery section and is not a charging section. It may not be charging section in the sense that it does not by itself authorise the imposition of tax but nevertheless it does affect the liability of a person to pay the tax. By virtue of this section the reconstituted firm which in a sense is a new firm becomes liable to pay the tax for the whole year even though a part of the tax would be payable by the erstwhile firm.”
14. The majority also agreed with the view of the Kerala High Court in Excel Productions v. CIT, [1971] 80 ITR 356 in which a similar contention was negatived by the Kerala High Court and which view has been accepted by this court in Karupukula Suryanarayana Shetty's case, [1973] 92 ITR 141. A Full Bench of the Punjab and Haryana High Court in Nandlal Sohanlal v. CIT, [1977] 110 ITR 170 has also taken a similar view.
15. Learned counsel for the assessee, however, submitted that every change in the constitution of a firm brings into existence a new firm, and, therefore, separate assessments on the old firm and the new firm must be made. In support of this submission, he relied on a Division Bench decision of this court in CIT v. Bharat Engineering and Construction Co., [1968] 67 ITR 273, which arose under the corresponding provision of the 1922 Act, particularly on the observation made in the judgment to the effect that every change made in the constitution of a partnership brings into existence a new firm. We do not think that the said observation is of any assistance to the assessee. Sub-section (2) of s. 187 specifically states the circumstances which should be treated as bringing about only a change in the constitution of the firm. In view of the provisions of s. 187(2), it cannot be contended that any of the changes in the constitution of a firm of the nature mentioned therein brings into existence a new firm. Further, in the case of Karupukula Suryanarayana Shetty, [1973] 92 ITR 141 also, reliance was placed for the assessee therein on the said observation and the Division Bench held that that decision did not lay down that whenever there is a change in the constitution of a firm two separate assessments are to be made.
16. There is no substance in the submission made for the assessee that s. 187(1) only makes the reconstituted firm liable to pay tax of the firm before its reconstitution, but does not authorise the making of one assessment for the whole year on the reconstituted firm. In this behalf it is sufficient to point out that s. 187(1) only speaks of making the assessment on the firm as reconstituted at the time of making the assessment and says nothing about the recovery of the tax due from the firm before its reconstitution. If the intention was that two assessments should be made, the Legislature would have also provided for collecting the tax due from the firm before its constitution from the firm as reconstituted. In this behalf, it is significant to note that under sub-cl. (ii) to the proviso to s. 187(1) specific provision has been made for the recovery of tax assessed against a partner, from the reconstituted firm, if it cannot be recovered from him. There is no such provision for the recovery of tax assessed against or payable by the firm before its reconstitution at the hands of the reconstituted firm. Absence of such provision is obviously for the reason that s. 187(1) contemplates the making of only one assessment for the entire concerned previous year on the reconstituted firm. Therefore, there is nothing in the wording of s. 187 which persuades us to take the view that two assessments should be made for the two periods, and the total tax assessed for both periods should be collected from the reconstituted firm.
17. Lastly, learned counsel for the assessee argued that unless separate assessments are made on the firm before its reconstitution and after its reconstitution, it would be difficult to work out the apportionment of income between the partners which is required to be made under the proviso to s. 187(1) of the Act and according to him this gives the clearest indication that there should be separate assessments. We are not impressed by this argument either. While sub-s. (1) of s. 187 of the Act provides for making assessment on the reconstituted firm, the proviso thereunder clearly indicates that the income of the previous year has to be apportioned between all the partners who were entitled to receive the same during such previous year. We do not find that there would be any difficulty in making the apportionment when the entire accounts of the firm before its reconstitution and after its reconstitution is available. Therefore, we see nothing in the proviso which implies that under sub-s. (1) of s. 187 of the Act there should be two separate assessments.
18. In the light of the discussion as above, we hold that in the case of change of constitution of a partnership firm occurring in any accounting year in any of the manners set out in sub-s. (2) of s. 187 of the Act, sub-s. (1) of that section requires that the assessment should be made on the firm as constituted at the time of making the assessment, and not two separate assessments, one on the firm before reconstitution and another on the firm as reconstituted, and we reiterate the view taken by this court in Karupukula Suryanarayana Shetty's case, [1973] 92 ITR 141. For the reasons aforesaid, we reject the contentions urged for the assessee and answer the reference as follows:
On the facts and in the circumstances of the case, the Tribunal was justified in upholding the action of the ITO in making one assessment for the period from April 1, 1970, to March 31, 1971, on the assessee-firm.
19. The assessee shall pay the costs of the revenue. Advocate's fee Rs. 250.
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