The Judgment of the Court was delivered by

D.M Chandrashekhar, C.J:— This reference has come before me under sub-s. (2) of s. 259 of the I.T Act, 1961 (hereinafter referred to as the Act), on a difference of opinion between Venkatachaliah J. and Rama Jois J., who constituted the Bench, which heard, in the first instance, the reference under P. 256 of the Act.

2. I have heard the learned standing counsel for the Revenue and Sri K.R Prasad for the assessee. In the separate opinions of my learned brothers, the question referred to by the Income-tax Appellate Tribunal, the material facts of the case, the relevant statutory provisions, i.e, ss. 187, 188 and 189 of the Act, have all been set out and it is unnecessary to repeat them here. Suffice it to state that in the present case a partnership firm stood dissolved by the death of a partner as there was no provision in the deed of partnership that the firm should continue in spite of the death of a partner. The business of the firm was taken over by a newly constituted firm consisting of the three surviving partners of the erstwhile firm and the two sons of the deceased partner. The question that arose before the income-tax authorities was, whether the case should be regarded as a mere change in the constitution of the firm as provided in s. 187 or as succession by a new firm as provided in s. 188.

3. As stated by Venkatachaliah J., in his opinion, the real question that arises for determination in this reference, is whether a case which is otherwise one of succession falling under s. 188, ceases to be so and becomes a mere “change in the constitution of a firm” for the purpose and within the meaning of s. 187(2)(a) and is accordingly taken out of the purview of s. 188 by a special rule contained in s. 187 which departs from the general law of partnership and avoids the consequences of the intervening dissolution of the firm. As my learned brothers have pointed out in their opinions, on the above question, there is a sharp divergence of opinion among the High Courts in India and there is no direct decision of the Supreme Court on this point.

4. The reasoning in favour of each of the two divergent views on the above point has been very ably set out in the respective opinions of my learned brothers.

5. The reasoning for the view that such a case comes within the scope of s. 188 and not s. 187, has been stated thus by the Calcutta High Court in Mathurdas Govardhandas v. CIT, [1980] 125 ITR 470 (Cal) (p. 485);

“Section 189 deals specifically with the case of the dissolution of the firm. This is an independent section and is not subject to either s. 187 or s. 188. Therefore, where there is a dissolution of a firm, s. 189 will come into operation and the ITO is bound to assess the dissolved firm and if the business of the dissolved firm has been taken over by another firm, in our view, the successor firm will have to be assessed under s. 188. The operation of s. 188, in such a case, cannot be stayed on the ground that the case might be covered under s. 187.

Section 187 of the I.T Act no doubt gives a special meaning or definition to the expression ‘change in the constitution of a firm’, but the said section ex facie does not seek to define or interpret dissolution of a firm. The concept of dissolution, therefore, has to be understood in the context of general law as also of the Indian Partnership Act.”

6. The reasoning for the view that such a case comes within the scope of s. 187(1) and not s. 188, has been elucidated thus by the High Court of Punjab & Haryana in Nandlal Sohanlal v. CIT, [1977] 110 ITR 170 (P & H) [FB], at p. 196:

“The purport of section 187(1) is that assessment on the firm which undergoes change in its constitution has to be made as it stands reconstituted at the time of the making of assessment, provided of course one of its old partners continues to be it's member at the time of framing the assessment. In a way it gives a special definition of the expression ‘reconstituted firm’, it implies that if the same business continues and at least one of the old partners continues as partner, the change in the remaining personnel of the firm, whether one or more partners cease to remain partners or some new ones are added, the firm continues to have a legal entity as a unit of assessment.”

7. There is much to be said in favour of each of these two divergent views.

8. There is one difficulty in accepting the reasoning in Mathurdas Govardhandas's case, [1980] 125 ITR 470 (Cal), namely, that due effect is not given to the words “and the case is not one covered by section 187” occurring in section 188. These words indicate that the case of a firm which is dissolved and its business is taken over by another firm of which one or more partners were also partners of the dissolved firm, comes within the scope of s. 187(2)(a) and not section 188. The Division Bench of the Delhi High Court in Commissioner Of Income-Tax… v. Sant Lal Arvind Kumar…, [1982] 136 ITR 379, which followed the line of reasoning in Mathurdas Govardhandas' case, [1980] 125 ITR 470 (Cal), sought to get over this difficulty by saying “too much significance cannot be attached to these words”. But, this is hardly convincing. It is a well-known rule of statutory construction that no word in a statute should be regarded as redundant if some meaning can reasonably be given to it. Hence, it is reasonable to hold that the words “and the case is not one covered by section 187 “occurring in s. 188, take the case of such firm out of the ambit of s. 188 and bring it within the ambit of s. 187.

9. It was argued by Sri Prasad that there is no deeming provision in s. 187 or 188 which creates a legal fiction that in spite of dissolution of a firm and a newly constituted firm taking over its business, the old firm shall be deemed to be re-constituted if one or more partners are common to both those firms.

10. When there is a dissolution of a firm under the law of partnership and a new firm takes over the business of the dissolved firm, it is true that under the general law of partnership the old firm cannot be regarded as being re-constituted. But, the legal position of a firm under the income-tax law, is different from that under the general law of partnership in several respects. It is not necessary to employ any particular words or phraseology like “deemed to be” to provide that a firm which is regarded as dissolved under the general law of a partnership, shall be regarded as being merely re-constituted under the law of income-tax in certain circumstances.

11. As regards the objection that s. 187 could not have intended to treat a firm which, as a matter of fact, was dissolved under the general law of partnership, a continuing firm which has merely undergone re-constitution, it is sufficient to point out that both in the Indian I.T Act, 1922, and in the I.T Act, 1961, there are several provisions to the effect that notwithstanding death, dissolution or discontinuance of persons and bodies, assessment may be made as if such death, dissolution or discontinuance had not taken place.

12. Shri Prasad, however, gave an illustration in which the result of taking the view that the dissolution of a firm and succession of its business by a new firm consisting of one or more partners of the old firm, should be regarded as a reconstitution of the earlier firm, would lead to an anomalous result. Suppose a firm, A, having 4 partners is dissolved and its business is bifurcated and each portion of business is taken over by two new firms, B and; C, each having two partners of the old firm and two new partners. If the above view should be followed, the case, should be regarded as a mere change in the constitution of the firm, A, and it would continue to be assessed and the firms, B and C cannot be assessed. Sri Prasad argued that this illustration would be sufficient to demonstrate that the continued existence of the firm under the general law of partnership, is a condition precedent for applying s. 187 and that, where a firm has ceased to exist by dissolution, s. 187 can have no application to it in any circumstances.

13. For the purpose of this case, it is not necessary for me to express an opinion whether in the case referred to by Sri Prasad by way of illustration, ss. 187, 188 or 189 applies. Even if the construction placed in Nandlal's case, [1977] 110 ITR 170 (P & H) [FB], on ss. 187 and 188 leads to an anomalous result in a peculiar set of facts or circumstances, that, by itself, would not be sufficient to hold that the construction of ss. 187 and 188, which is otherwise reasonable, should not be adopted.

14. On the other hand, the other construction, namely, that if a firm is dissolved and its business is taken over by another firm consisting of one or more partners of the old firm, the case will be governed by s. 188, may lead to evasion of the full tax effect on firms. A firm may be dissolved and a new firm may be constituted any number of times in a year, to carry on the same business by dropping one of many partners and/or by taking another partner.

15. If a statutory provision relating to tax law is reasonably capable of two constructions, the one which leads to evasion of tax, should be avoided.

16. For the above reason, I agree with the view taken by Rama Jois J. In the result, the question referred to this court by the Income-tax Appellate Tribunal should be answered in favour of the Revenue and against the assessee and as follows:

“On the facts and in the circumstances of this case, the Tribunal was not justified in holding that the assessment of the assessee-firm for the year 1974-75 could be made only in accordance with section 188 and that a single assessment for the whole year was not valid even if, as between the old firm and the new firm, one or more partners thereof were common.”

Chief Justice:— In accordance with the opinion of the majority of judges, the question referred to this court by the Income-tax Appellate Tribunal is answered in favour of the Revenue and against the assessee and as follows:

“On the facts and in the circumstances of the case, the Tribunal was not justified in holding that the assessment of the assessee-firm for the year 1974-75 could be made only in accordance with section 188 and that a single assessment for the whole year was not valid even if, as between the old firm and the new firm, one or more partners thereof were common.”