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Dungarsidas Kaluram v. Addl. Commissioner Of Income-Tax, M.P
Factual and Procedural Background
The assessee, M/s. Dungarsidas Kaluram, filed two returns of income for the assessment year 1971-72: one up to 4th August 1970, the date of death of one partner, Chhaganlal, and another from 5th August 1970 onwards, when the surviving partner formed a new partnership. The Income Tax Officer (ITO) made a single assessment for the entire period. The Assistant Commissioner of Income Tax (AAC) held that the firm ceased to exist upon the death of one partner and that two separate assessments were required. The department appealed to the Income-tax Appellate Tribunal (Tribunal), which held that under Section 187(2)(a) of the Income-tax Act, 1961, a change in the constitution of the firm occurred but the firm continued to exist, warranting only a single assessment for the entire period. The Tribunal set aside the AAC's order and restored the ITO's order. The Tribunal then referred three questions of law to the court for its opinion.
Legal Issues Presented
- Whether only a single assessment could be made on the firm for the entire period from Diwali 1969 to Diwali 1970, despite the death of one partner and consequent dissolution of the firm on 4th August 1970?
- Whether the case falls under the ambit of Section 187 of the Income-tax Act, 1961, such that one assessment for the whole period is appropriate?
- Whether the provisions of Section 187(2)(a) of the Income-tax Act, 1961, apply when there is a dissolution of partnership under Section 42 of the Indian Partnership Act?
Arguments of the Parties
Department's Arguments
- Section 2(31) of the Income-tax Act defines a "person" to include a firm, thereby giving the firm a separate legal personality independent of its partners.
- Consequently, a change in the constitution of the firm under Section 187(2) should be considered without reference to the Indian Partnership Act.
Assessing Authority and AAC's Position
- The AAC held that the firm ceased to exist on the death of one partner and a new firm came into existence, necessitating two separate assessments.
Tribunal's Position
- The Tribunal held that Section 187(2)(a) applies to changes in the constitution of a firm that continues to exist, and that only one assessment should be made for the entire period.
- It set aside the AAC's order and restored the ITO's single assessment order.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| CIT v. Seth Govindram Sugar Mills [1965] 57 ITR 510 | Firm consisting of only two partners ceases to exist upon death of one partner. | The court relied on this precedent to hold that the firm ended on the death of one partner, negating the applicability of Section 187 of the Income-tax Act in this case. |
Court's Reasoning and Analysis
The court analyzed the nature of partnership and firm existence under both the Income-tax Act and the Indian Partnership Act. It acknowledged the department's contention that a firm is treated as a "person" under the Income-tax Act, but emphasized that Section 2(23) of the Act refers to the Indian Partnership Act for the meaning of "firm" unless the context requires otherwise. The court held that the firm in question, consisting of only two partners, ceased to exist upon the death of one partner, as established by the Supreme Court in CIT v. Seth Govindram Sugar Mills. Consequently, Section 187, which applies to changes in the constitution of a continuing firm, was not applicable here. The court also noted that the third question regarding Section 187(2)(a) and Section 42 of the Indian Partnership Act did not arise because Section 42(c) applies only to firms with more than two partners. Therefore, the court answered the first two questions negatively, against the revenue, and declined to answer the third question.
Holding and Implications
The court held that only one assessment could not be made for the entire period as the firm ceased to exist upon the death of one partner, and Section 187 of the Income-tax Act was not applicable.
The direct effect of this decision is that the revenue's contention for a single assessment under Section 187 was rejected. The court did not set any new precedent beyond affirming the established principle that a two-partner firm ends on the death of one partner. The parties were directed to bear their own costs, and the third question was left unanswered as unnecessary.
1. By this reference under Section 256(1) of the I.T. Act, 1961, hereinafter called "the Act", the Income-tax Appellate Tribunal, Indore Bench, Indore, has referred the following question of law to this court for its opinion:
"(i) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that only a single assessment could be made on the firm, M/s. Dungarsidas Kaluram, for the assessment year 1971-72 in regard to its income of the whole period Diwali 1969 to Diwali 1970 when out the two partners one partner expired on 4th August, 1970, i.e., between Diwali 1969 to Diwali 1970, and the firm stood dissolved on the said date ?
(ii) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in holding that the case comes under the ambit of Section 187 and one assessment of the income of the whole period be made ?
(iii) Whether the provisions of Section 187(2)(a) of the Income-tax Act, 1961, is applicable if there is a dissolution of partnership in the eye of law as provided under section 42 of the Indian Partnership Act ?"
2. The material facts giving rise to this reference briefly are as follows : The assessee is M/s. Dungarsidas Kaluram and the assessment year in question is 1971-72. The assessee filed two returns of income--the first up to 4th August, 1970, when one of the two partners of the firm, namely, Chhaganlal, died and the other from 5th August, 1970, onwards, when the surviving partner formed another partnership with Smt. Rukmanibai, widow of Chhaganlal, and one Sureshchandra. The ITO made only one assessment for the entire accounting, period. On appeal, the AAC found that after the death of Chhaganlal, one of the two partners of the firm, the firm ceased to exist and another firm came into existence. The AAC, therefore, held that two separate assessments had to be made. Against the order of the AAC the department preferred an appeal before the Tribunal. The Tribunal held that by virtue of the provisions of Section 187(2)(a) of the Act there was a change in the constitution of the firm and only one assessment had to be made for the entire accounting period. In this view of the matter, the Tribunal set aside the order of the AAC and resorted to the order passed by the ITO. On an application made in that behalf, the Tribunal has referred the aforesaid questions of law to this court for its opinion.
3. Now, in the case of a partnership consisting of only two partners, no partnership remains on the death of one of them. As held by the Supreme Court in CIT v. Seth Govindram Sugar Mills [1965] 57 ITR 510, in such a case, the firm automatically comes to an end. Section 187 of the Act is attracted when 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. Sub-section (2) of Section 187 of the Act indicates what is meant by a change in the constitution of a firm. But a change in the constitution of a firm presupposes the continued existence of the firm. Learned counsel for the department contended that Section 2(31) of the Act defines a "person" to include a firm and, therefore, for the purpose of the I.T: Act, a firm has a separate personality and existence independent of the partners who constitute it. It was, therefore, contended that where the provisions of Section 187(2) of the Act are attracted, resort cannot be had to the provisions of the Partnership Act. Now, it is no doubt true that a firm is treated as a " person " under the provisions of the Act, but Section 2(23) of the Act provides that unless the context otherwise requires, "firm" has the same meaning as is assigned to it under the Indian Partnership Act, 1932. The provisions of Section 187(2) of the Act cannot be construed to mean that even though a partnership has come to an end on account of the death of one out of the two partners of the firm, nevertheless the firm would not be deemed to have ceased to exist. In our opinion, the provisions of Section 187 of the Act are not attracted in the instant case. The question as to whether, if there is a dissolution of partnership as provided by Section 42 of the Indian Partnership Act, 1932, the provisions of Section 187 of the Act are attracted, ,does not really arise in this case because, as held by the Supreme Court in CIT v. Seth Govindram Sugar Mills [1965] 57 ITR 510, section 42(c) of the indian partnership act can be applied only where there are more than two partners. It is not, therefore, necessary to answer the third question referred to us.
4. For all these reasons, our answer to the first two questions referred to us is in the negative and against the revenue. The answer to the third question is not necessary in the circumstances of the case. Parties shall bear their own costs of this reference.
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