1. At the instance of the assessee, the Income-tax Appellate Tribunal, Indore Bench, Indore, has stated the case and referred the same to us for opinion on the following question :

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that it was a case of change in the constitution of the firm as contemplated by Section 187(2)(a) of the Income-tax Act, 1961, and was not a case of succession of one firm by another as provided for in Section 188 of the Act and that one assessment of the income of the assessee for the whole period was liable to be made ?

2. Undisputed facts of the case are as follows : Firm, M/s. Ganesh Dall Mill, Indore, was originally constituted by four persons : (1) Shri Tejram, (2) Shri Omprakash, (3) Shri Bhukhraj, and (4) Shri Chandmal, having equal shares. There was no clause in the partnership deed to the effect that on the death or retirement of any of the partners, the firm will continue. On 11th February, 1971, one of the partners, namely, Tejram, died and another partner, Omprakash, retired. A fresh deed of partnership was executed on 4th March, 1971, which was operative with effect from 12th February, 1971. This partnership deed was executed between the two surviving partners, Shri Bukhraj and Shri Chandmal, and one Shri Surjamal, who was taken as anew partner. The firm also admitted four minors to the benefits of the partnership. The share of Shri Chandmal in the original firm was reduced from 0.25 paise to 0.13 paise in the rupee in the newly constituted firm. The business of the original firm was continued by the newly constituted firm. The same accounting years and the same books of account continued after the new partnership came into existence. The newly constituted firm took over the assets and liabilities of the old firm though this fact was not specifically stated in the new partnership deed.

3. For the assessment year 1972-73, the assessee filed two returns for the two periods, i.e., for the period from Diwali, 1970, to February 11, 1971, and for the period from February 12, 1971, to Diwali, 1971. It was claimed that after the death of one partner and the retirement of another on February 11, 1971, the original firm stood dissolved and the newly constituted firm was its successor-firm.

4. The ITO held that it was a case of change in the constitution of the firm within the meaning of section 187 of the i.t. act and he made a single assessment in respect of the entire accounting period. The AAC upheld the order of the ITO.

5. The assessee came up in second appeal before the Appellate Tribunal. It was contended that as there was no clause in the partnership deed showing a contract to the contrary, the death of one of the partners and the retirement of another resulted in the dissolution of the firm on February 11, 1971, according to Section 42 of the Partnership Act. The new firm constituted thereafter was a successor-firm within the meaning of section 188 of the i.t. act and, therefore, two separate assessments should have been made for the two different periods. The Appellate Tribunal did not accept this contention and upheld the finding of the ITO and the AAC. At the instance of the assessee, therefore, the question has been referred to us for opinion.

6. Chapter XVI of the I.T. Act makes special provisions applicable to firms. Section 2(23) of the Act defines "firm", "partner" and "partnership" as having the meanings respectively assigned to them in the Indian Partnership Act. Part C of Chap. XVI refers to changes in the constitution,. succession and dissolution. Before we consider the language of Sections 187 and 188 of the Act, we may refer to the provisions in the partnership act on the incidents of partnership.

7. Chapter V(Sections 31 to 35) of the Partnership Act refers to the effect of introduction, retirement, expulsion and insolvency of a partner on the partnership subject to contract between the partners. It may be useful to refer to the Note on the Special Committee on Chap. V of the Partnership Act. We may reproduce the portion relevant for our purpose :

"As result of the limitation on the selection of these provisions, they relate chiefly to what is referred to in various places in the Bill as a ' change in the firm', that is, a change in the constitution of the firm which has not resulted in the dissolution of the firm. However, a few provisions, such as Clause 34(1) and Clause 37, are of general application; that is, they apply where the firm continues without dissolution, and also where a dissolved firm is reconstituted and carries on the business with the property and assets of the dissolved firm. For this reason, the chapter is given the non-committal, title of 'Incoming and outgoing partners', rather than the restricted title 'change in a firm' which would otherwise have been more suitable."

8. Chapter VI of the Partnership Act contains provisions about the dissolution of a firm. These two separate chapters provide for two different situations. Sections 31 to 35 of the Act in Chap. V refer to a change in the constitution while Sections 39 to 44 in Chap. VI refer to the dissolution of a firm. Conceptually, therefore, "change in the constitution of a firm" and "dissolution of a firm" are expressions defined-and explained in the Partnership Act itself. The I.T. Act in its reference to these terms does not make any marked departure from their meaning in the Partnership Act. According to us, there is no substantial conflict between these two enactments so far as the various meanings assigned to the terms used in the two Acts are concerned, though we are aware of the fact that under the income-tax law, a firm is an assessable unit apart from its partners.

9. The English law of partnership with its reference to the revenue law (tax law) as applied to "changes in the composition of a firm" may also be noted even though there is some difference in the various provisions between the English and the Indian Acts. Lindley on Partnership, 13th Edn., at pp. 22-23 & 829-830 deals with the matter. Following relevant passages at pp. 22 & 23 may be noted :

In Income Tax Commissioners v. Gibbs and Others [ 1942] AC 402; 10 ITR (Supp.) 121 (HL) a partnership of four stockbrokers took in a fifth partner and thereafter continued to carry on business as stockbrokers. It was held by the House of Lords (Lord Russell of Killowen dissenting) that, although in English law a partnership is not a single juristic person, when the four partners took a fifth partner they ceased to carry on business and were succeeded by the partnership of five persons within the meaning of Sub-rule 1......

10. The author has reproduced the following from Viscount Simon L.Cs.' speech:

......We must in this case be prepared to construe the rule under discussion in a popular rather than a technical sense, and I am not greatly shocked to find that, when dealing with a joint assessment of trade carried on by a partnership, the legislature has proceeded on the view that when the trade was first carried on by A, B, C and D in partnership and was subsequently carried on by A, X, Y and Z in partnership, this is to be regard ed as though the first partnership ceased and the second partnership succeeded to the first.

11. The learned author then comments :

"It is clear that this case turned upon the special provisions of a taxing statute as to which the majority of the House of Lords were anxious to maintain uniformity in its application to England and to Scotland, but it incidentally illustrates the general principles that a change in the personnel of a partnership determines the former partnership and creates a new one; see also Section 33(1) of the Act of 1890."

12. Again, at page 842 (12th Edns.):

"4. CHANGE IN PARTNERSHIP Change in partners prima fade results in discontinuance.

Taxation of discontinued partnership.

The position, where a change in the partnership occurs, be it by reason of death, retirement, dissolution or admission of new partners, is now regulated by Section 154 of the Income and Corporation Taxes Act, 1970. In the case of such change, the partnership is deemed to be permanently discontinued at the date of change and the cessation and commencing provisions are applied as from such date."

13. After considering the expressions "change in constitution" and "succession" under the Partnership Act, we may now proceed to examine the provisions under the I.T. Act. Relevant sections of the I.T. Act are as follows :

"187. Change in constitution of a firm.--(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. Succession of one firm by another firm.--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.,"

14. It is clear that Section 187 deals with the case where at the time of making an assessment it is found that a change has occurred in the constitution of a firm, while Section 188 deals with the case of succession. These two sections are concerned not with the computation of tax but with the person upon whom liability is to be imposed : [See Indian Iron & Steel Co. Ltd. v. CIT [1943] 11 ITR 328 at 337 (PC)]. This basic idea behind these provisions has sometimes been overlooked and single assessments are framed by the revenue authorities only for the purpose of raising the total income so that tax may be charged at a higher rate on a higher slab of income.

15. Section 187(2) explains what is "change in the constitution of a firm". This explanation does not make any departure from the expression as used in the Partnership Act. Section 26(1) of the Indian I.T. Act, 1922, did not contain any such definition or explanation, but the interpretation was always the same. "Any change in constitution", as explained under Section 187(2), only emphasises the continuity of the original firm in spite of changes due to "incoming and outgoing" of partners as mentioned in Chap. V of the Partnership Act. By no means one can conceive continuity after dissolution. The terms are contradictory and Section 187(2) cannot be taken as creating a fiction to give an extended meaning to the term "change" as it has been used in the Partnership Act.

16. Kanga and Palkhivala in The Law and Practice of Income Tax, 7th Edn., Vol. II, at p. 1025 and Sampath Iyengar in The Law of Income Tax, 6th Edn. at pp. 1810-11, have put similar construction on these provisions.

According to the learned authors, there cannot be a "change in the constitution of a firm" if the firm is dissolved in terms of the Partnership Act.

17. Learned counsel for the department, Shri Bagadiya, argued that if the above construction is accepted, the words "and the case is not one covered by Section 187" occurring in Section 188 will become redundant. This method of construing a provision by reference to another provision is not correct. The correct method will be to examine the provision itself and find out its true meaning. Section 187 speaks about "change in constitution" and, therefore, it is not necessary to refer to Section 188 for understanding the meaning and scope of Section 187. We are not supposed to search for a hypothetical case wherein there may be a succession of one firm by another and "a case is not covered by Section 187". Such a situation might arise for aught we know. Indeed, Sampath Iyengar at p. 1815 observes:

"These words create some difficulty in properly construing the provisions of Sections 187 and 188. They suggest that there may be cases of succession of one firm by another which may be covered by Section 187 and lend to the interpretation that where a firm is dissolved and a fresh partnership is constituted with some common partners, the case would fall under Section 187 and not Section 188. It has, however, been pointed out that the language of Section 187 does not warrant such an interpretation and implies the continued existence of a firm in law. A case of succession cannot be one covered by Section 187 and to that extent, these words in Section 188 would appear to be redundant. It could not have been the intention of the Legislature that even where the partners of a firm dissolve it and then a new firm takes over the business, the change in the firm's personality should be ignored merely because one or more partners are common. Such an interpretation does not flow from the language of Section 187."

18. The case-law on this vexed issue is voluminous and conflicting. The Allahabad High Court in Dahi Laxmi Dal Factory v. ITO [1976] 103 ITR 517 [FB], the Madras High Court in Kaithari Lungi Stores v. CIT [1976] 104 ITR 160, Tyresoles (India), Calcutta v. CIT [1963] 49 ITR 515, Mavukkarai (N.) Estate Tea Factory v. Add. CIT [1978] 112 ITR 715, the Andhra Pradesh High Court in Addl. CIT v. Vinayaka Cinema [1977] 110 ITR 468 [FB] & Venkateswara Stone Co. v. CIT [1978] 115 ITR 236 and the Gujarat High Court in Addl. CIT v. Harjivandas Hathibhai [1977] 108 ITR 517 have taken the view that when there is a dissolution (either by contract or by operation of law under the Partnership Act) and then a new partnership is formed, it cannot be a "change in the constitution" within the meaning of section 187 of the i.t. act. The contrary view has .been expressed by the Punjab and Haryana High Court in Nandlal Sohanlal v. CIT [1977] 110 ITR 170 [FB]. There are observations, though obiter in nature, by the Jammu and Kashmir High Court in Ali Shah v. TRO [1980] 121 ITR 620 and the Karnataka High Court in Sangam Silks v. CIT [1980] 122 ITR 479, which to some extent support Nandlal Sohanlal [1977] 110 ITR 170 (P & H) [FB].

19. The Punjab and Haryana High Court in Nandlal Sohanlal had followed their earlier decision in Dharam Pal Sat Dev v. CIT [1974] 97 ITR 302. Kanga and Palkhivala (The Law and Practice of Income Tax, 7th Edn., Vol. I) at p. 1025, footnote 23, have remarked that the decision is incorrect and "proceeds on a misconstruction of Section 187(2)".

20. We may also point out the distinguishing features in Ali Shah [1980] 121 ITR 620 (J & K) and Sangam Silks [1980] 122 ITR 479. In Ali Shah, the court was dealing with a writ petition challenging the notice of demand issued to the petitioner without a prior notice under section 143 of the i.t. act, though the firm had been dissolved and a new firm had taken over. The court while making observations about reconstitution and succession, held that, whether Section 187 was applicable or Section 188, a notice under Section 143 was mandatory.

21. In Sangam Silks [1980] 122 ITR 479 (Kar), the question was entirely different. There it was not in dispute that the assessee-firm had been reconstituted, i.e., "there was a change in the constitution" only. The contention of the assessee was that even on such reconstitution, there should be two assessments though the liability may be fixed on the new firm for the entire income. Repelling this argument, the court held thus (p. 485) :

"...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 Section 187(1) of the Act."

22. Paragraph 2 at p. 488 of the report makes it clear that the question before the Karnataka High Court in Sangam Silks' case [1980] 122 ITR 479 was not the same as it is before us. Thus, we find that only the Punjab and Haryana High Court in Nandlal Sohanlal [1977] 110 ITR 170 [FB] has taken the view which supports the contention of the revenue. The majority of the High Courts have taken a contrary view. With respect, we differ from the view expressed by the Punjab and Haryana High Court in Nandlal Sohanlal.

23. Before finally answering the question referred to us by the Tribunal, we may consider some remarks made by their Lordships of the Supreme Court in Shivram Poddar v. ITO [1964] 51 ITR 823. The question before the Supreme Court was whether the income earned by the assessee-firm could be assessed to tax under Section 44 of the Indian I.T. Act, 1922, after the firm was dissolved. The matter had been raised in a writ petition and the court was dealing with the effect of Section 44 of the I.T. Act

"upon the liability of partners to be assessed in respect of the income of a firm which had discontinued its business on account of dissolution"

"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."

24. It was further observed thus (p. 828):

"Where the firm is dissolved, but the business is not discontinued, there being a 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)."

25. These observations have been interpreted variously by the High Courts. The Andhra Pradesh High Court in Addl. CIT v. Vinayaka Cinema [1977] 110 ITR 468 [FB] at pp. 48L to 483 has discussed in detail the effect of the observations of the Supreme Court in the case of Shiv ram Poddar [1964] 51 ITR 823. It has held that the observations made in Shivram Poddar's case in the context of the provisions of Section 26(1) and Section 44 of the 1922 Act cannot entirely help in interpreting the provisions of Section 187(1) of the 1961 Act which depart from the provisions of Section 26(1) in very many particulars. It was observed thus :

"The Gujarat High Court has properly brought out the distinction between the provision contained in Section 26(1) of the 1922 Act and Section 187 of the 1961 Act."

26. The observations in Shivram Poddar's case. [1964] 51 ITR 823 (SC), therefore, cannot be pressed into service for supporting the contention of the revenue that even when there is a dissolution by contract or statute, it will be treated under the I.T. Act as merely a change in the' constitution of the firm provided one of the partners of the old firm becomes a partner in the new or successor firm.

27. In view of the discussion above, we hold that when a firm is dissolved due to the death of a partner, in view of the provision contained in Section 42(c) of the Partnership Act, the new firm will be a successor firm and two assessments will have to be made under section 188 of the i.t. act. Our answer to the referred question is that:

"On the facts and circumstances of the case, the Appellate Tribunal was not right in law in holding that it was a case of change in the constitution of the firm as contemplated, by Section 187(2)(a) of the Income-tax, Act, 1961, and was not a case of succession of one firm by another firm as provided for in Section 188 of the Act and that one assessment of the income of the assessee for the whole period was liable to be made."