Vimal And Amae Talkies, Dhamtari v. Commissioner Of Income Tax, Madhya Pradesh High Court, Judgment, Law, casemine.com

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Case Number

Misc. Civil Case No. 335 of 1975

Attorney(S)

For Applicant— K.M Agarwal.
For Opposite Party— P.S Khirwadkar.

Judges

G.P Singh, C.J
Faizanuddin, J.

Acts

Indian Partnership Act, 1932, and Sub-section (2)(a) of Section 187 of the I.T. Act
I.T. Act, 1961, in Sections 187, 188 and 189(1). These Sections
Section 26(1) of the 1922 Act from Section 187
Clause (a) of Sub-section (2) of Section 187.
Section 187 and not Section 188
Section 188 of the I.T. Act, 1961.
provisions of Section 170. 189. (1)
Sub-section (2) of Section 187.
Section 26(1) of the 1922 Act,
Section 143 or Section 144

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Smart Summary

Factual and Procedural Background

This is a reference made by the Income-tax Appellate Tribunal to the High Court presenting three questions of law concerning the correct mode of assessment for the assessment year 1972-73 (accounting period 30 October 1970 to 19 October 1971) in respect of a firm engaged in exhibiting cinema films.

The original firm comprised five partners: Smt. Manubai, Natholal, Amarchand, Anupchand and Smt. Rupibai. On 30 April 1971 four partners (Nathulal, Amarchand, Anupchand and Rupibai) retired, leaving Smt. Manubai alone; because a firm cannot continue with only one partner it stood dissolved. On 1 May 1971 Smt. Manubai entered into a new partnership with Madanlal and admitted two minors to the benefits of the partnership; all the assets and liabilities of the dissolved partnership were taken over by the new partnership.

The assessee filed two returns for the accounting period: one for 30 October 1970 to 30 April 1971 (pre-dissolution) and one for 1 May 1971 to 19 October 1971 (post-constitution of new firm). The Income-tax Officer (ITO) treated the events as a mere change in constitution and assessed the income for both periods by a single assessment order. The Appellate Assistant Commissioner (AAC) directed separate computation for the two periods, holding the case to be governed by Section 188 rather than Section 187. The Tribunal, in departmental appeal, agreed with the ITO and set aside the AAC's order, and the Tribunal referred the stated legal questions to the High Court for answer.

Legal Issues Presented

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. Vimal and Amar Talkies, Dhamtari, for the A.Y. 1972-73 in regard to its income for the periods from October 30, 1970, to April 30, 1971, and May 1, 1971, to October 19, 1971?
Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in holding that the two firms were one entity and were to be treated as one firm for the purposes of income-tax assessment?
Whether, on the facts and in the circumstances of the case, when there was a dissolution on April 30, 1971, and a new firm was constituted, the Appellate Tribunal was justified in law in holding that only one assessment should be made for both the periods?

Arguments of the Parties

Assessee's Arguments (as presented by learned counsel for the assessee)

The provisions of Sections 187, 188 and 189 of the Income-tax Act, 1961 should be construed harmoniously with the Indian Partnership Act, 1932.
Sub-section (2)(a) of Section 187 should not be read to include the case where one firm has been dissolved and is succeeded by another firm, even if some partners of the old firm are partners in the new firm.
Reference was made to Section 26(1) of the 1922 Act (which expressly used the words "or that a firm has been newly constituted") to argue that omission of similar language from Section 187 of the 1961 Act indicates that succession after dissolution was intended to fall under Section 188 rather than under Section 187.

Revenue / ITO / AAC Positions (as reflected in the record)

The ITO treated the events as a change in the constitution of the firm and computed income for both periods by a single assessment order (applying Section 187).
The AAC held that the case was governed by Section 188 and therefore directed separate assessments for predecessor and successor firms (i.e., separate computation for the two periods).
The Tribunal (in departmental appeal) agreed with the ITO that the matter was a change in constitution covered by Section 187 and set aside the AAC's order, prompting the reference of questions to the High Court.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Nandlal Sohanlal v. CIT [1977] 110 ITR 170 (Full Bench, Punjab & Haryana)	Held view that Section 187 applies where a firm is dissolved and succeeded by another firm in which one or more partners of the old firm continue.	The court stated that its view is in line with this Full Bench and relied upon it as authority supporting application of Section 187 to the facts of the instant case.
Addl. CIT v. Visakha Flour Mills [1977] 108 ITR 466 (Full Bench, Andhra Pradesh)	Earlier Full Bench view aligning with the position that such successions fall under Section 187.	The court noted this Full Bench supported the same view and treated it as persuasive authority for applying Section 187.
Addl. CIT v. Vinayaka Cinema [1977] 110 ITR 468 (Andhra Pradesh) (Fuller Bench)	This fuller Bench majority overruled the Visakha Full Bench on the point; there was a majority decision contrary to the view adopted by the present court, with a minority judgment agreeing with the present court.	The court respectfully disagreed with the majority in Vinayaka Cinema and expressly relied upon the minority judgment in that case as supportive of its conclusion.
Dahi Laxmi Dal Factory v. ITO [1976] 103 ITR 517 (All)	Adopted a view contrary to the present court's view on whether Section 187 applies to a dissolved firm succeeded by another firm with some continuing partners.	The court stated it did not agree with the view taken by the Allahabad High Court in this case.
Addl. CIT v. Harjivandas Hathibhai [1977] 108 ITR 517 (Gujarat)	Expressed a contrary view to the one adopted in the present judgment.	The court recorded that it did not agree with the view expressed by the Gujarat High Court in this case.

Court's Reasoning and Analysis

The court examined Sections 187, 188 and 189 of the Income-tax Act, 1961 and emphasised their distinct roles:

Section 187 governs cases of a "change in the constitution of the firm" and provides that assessments shall be made on the firm as constituted at the time of making the assessment; subsection (2) of Section 187 provides a definition of "change in the constitution of the firm" including clause (a) identifying the situation where one or more partners cease to be partners or new partners are admitted and one or more of the persons who were partners before the change continue as partners after the change.
Section 188 provides that where a firm carrying on business is succeeded by another firm and the case is not covered by Section 187, separate assessments are to be made on predecessor and successor firms.
Section 189 provides that where a business carried on by a firm has been discontinued or a firm is dissolved and is not succeeded by another firm, the ITO shall make an assessment as if no discontinuance or dissolution had taken place.

Applying the language of the statute, the court concluded that:

The definition in Section 187(2)(a) is comprehensive and plainly covers a case where, after dissolution of a firm, another firm is constituted in which one or more partners of the old firm continue as partners. Such a situation falls within the statutory expression "a change in the constitution of the firm."
The omission from Section 187 of the express phrase that appeared in the earlier 1922 Act ("or that a firm has been newly constituted") does not indicate an intention to exclude cases of succession after dissolution; the 1961 Act contains its own, new definition of "change in the constitution of the firm" and the presence of the qualifying phrase in Section 188 ("and the case is not one covered by Section 187") demonstrates that the legislature contemplated scenarios in which succession after dissolution would still fall under Section 187 when some partners continue.
The court applied the interpretive principle against treating statutory words as surplusage and preferred a construction which gives effect to each provision: if a firm is dissolved and not succeeded by another firm -> Section 189; if dissolved and succeeded by another firm in which some old partners continue -> Section 187; if dissolved and succeeded by another firm in which none of the old partners continue -> Section 188.
The court also held that, because the scheme of Sections 187–189 is clear and unambiguous on its terms, recourse to the Indian Partnership Act, 1932 was neither necessary nor appropriate to alter the plain statutory meaning enacted in the Income-tax Act.

On these grounds the court concluded that the Tribunal was right to apply Section 187 (and not Section 188) to the facts: Smt. Manubai was a partner in the old firm and also in the new firm, so the matter was one of change in constitution rather than succession falling under Section 188.

Holding and Implications

HOLDING: The court answered all the questions referred by the Tribunal in the affirmative, in favour of the Department and against the assessee. The Tribunal was correct in holding that only a single assessment could be made under Section 187 in the circumstances of this case.

Implications:

Direct effect on the parties: The assessment method adopted by the Tribunal and ITO (single assessment under Section 187 for the entire accounting period despite dissolution and reconstitution where a partner continued) is upheld; the AAC's direction for separate assessments under Section 188 is set aside.
The court expressed its view in the context of a demonstrable division of judicial opinion and expressly aligned with the Full Bench of the Punjab & Haryana High Court and an earlier Full Bench of the Andhra Pradesh High Court as well as the minority judgment in Vinayaka Cinema's case, and it disagreed with other High Court decisions that took an opposite view.
Costs: Having regard to the sharp difference of opinion among courts, there was no order as to costs of the reference.

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Vimal And Amae Talkies, Dhamtari v. Commissioner Of Income Tax

JUDGMENT G.P. Singh, C.J.

1. This is a reference made by the Income-tax Appellate Tribunal referring for our answer the following questions of law :

"(1) 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. Vimal and Amar Talkies, Dhamtari, for the A.Y. 1972-73 in regard to its income for the periods from October 30, 1970, to April 30, 1971,, and May 1, 1971, to October 19, 1971 ?

(2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in holding that the two firms were one entity and were to be treated as one firm for the purposes of income-tax assessment ?

(3) Whether, on the facts and in the circumstances of the case, when there was a dissolution on April 30, 1971, and a new firm was constituted, the Appellate Tribunal was justified in law in holding that only one assessment should be made for both the periods ? "

2. The relevant assessment year is 1972-73 for which the relevant accounting period is from 30th October, 1970, to 19th October, 1971. The assessee is a firm carrying on business of exhibiting cinema films. The firm initially consisted of five partners, namely, Smt. Manubai, Natholal, Amarchand, Anupchand and Smt. Rupibai. On 30th April, 1971, four partners, namely, Nathulal, Amarchand, Anupchand and Rupibai retired. The result of this was that Smt. Manubai was left alone in the firm and as the firm could not continue without there being at least two partners, it stood dissolved. Smt; Manubai inherited the assets of the firm as a result of the retirement of the other partners. Smt. Manubai then on 1st May, 1971, entered into another partnership with one Madanlal. Two minors, Gautam-chand and Lalitkumar, were admitted to the benefits of this partnership. All the assets and liabilities of the dissolved partnership were taken over by this new partnership. The assessee filed two returns, one for the period from 30th October, 1970, to 30th April, 1971, and the other for the period from 1st May, 1971, to 19th October, 1971. The ITO held that there was merely a change in the constitution of the firm and he computed the income for both the periods by one assessment order. The AAC, in the appeal filed by the assessee, directed that the tax be separately computed for the two periods. According to the AAC, it was not a case covered by Section 187 but by Section 188 of the I.T. Act, 1961. The Tribunal, in the further appeal by the Department, agreed with the view taken by the ITO and set aside the order of the AAC.

3. The effect of changes in constitution or succession and dissolution of a firm, as they concern the assessment of income-tax, are taken notice of by the I.T. Act, 1961, in Sections 187, 188 and 189(1). These Sections read as follows :

"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 income 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.

189. (1) where any business or profession carried on by a firm has been discontinued or where a firm is dissolved, the Income-tax Officer shall make an assessment of the total income of the firm as if no such discontinuance or dissolution had taken place, and all the provisions of this Act, including the provisions relating to the levy of a penalty or any other sum chargeable under any provisions of this Act, shall apply, so far as may be, to such assessment."

4. A perusal of the aforesaid provisions will go to show that when the case is merely of a change in the constitution of the firm, the assessment is to be made under Section 187 on the firm as constituted at the time of making the assessment. When the case is one of a firm being succeeded by another firm and it is not covered by Section 187, separate assessments have to be made on the predecessor firm and the successor firm as directed by Section 188 ; and when a firm discontinues carrying on a business or profession or when it is dissolved and it is not succeeded by another firm, the assessment has to be made in accordance with Section 189, on the total income of the firm, as if no such discontinuance or dissolution had taken place. The expression " a change in the constitution of the firm " is defined in Sub-section (2) of Section 187. When one or more partners ceased 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, the case is one of change in the constitution of the firm being covered by clause (a) of sub-section (2). It is clear that if all the partners go out and an entirely new set of partners come in, it would not amount to a change in the constitution of the firm, but would amount to succession of one firm by another. The difficulty arises when a dissolved firm is succeeded by another firm, in which some of the partners of the old firm are members. Such a case would also be prima facie covered by the expression "a change in the constitution of the firm" as defined in Clause (a) of Sub-section (2) of Section 187.

5. It is, however, argued by the learned counsel for the assesses that Sections 187, 188 and 189 must be construed harmoniously with the Indian Partnership Act, 1932, and Sub-section (2)(a) of Section 187 of the I.T. Act should not be construed to include the case of the succession of one firm after it is dissolved by another firm, although some of the partners in the new firm are the same. Reference in this connection is also made to Section 26(1) of the 1922 Act, which provided that " where, at the time of making an assessment, it is found that a change has occurred in the constitution of the firm or that a firm has been newly constituted, the assessment shall be made on the firm as constituted at the time of making the assessment ". It is argued that the words" or that a firm has been newly constituted " as they occurred in Section 26(1) of the 1922 Act do not find place in Section 187 which is a clear indication that when a firm is dissolved and is succeeded by another firm, the case will not fall under Section 187 and will fall under Section 188, even though some of the partners in the new firm are the same as in the old firm. The provisions of the 1961 act as contained in sections 187 to 189 must first be construed on their own terms. The definition of the expression " a change in the constitution of the firm " as contained in Section 187(2) is a new definition. Such a definition did not exist in the 1922 Act. The meaning of the definition so enacted has to be gathered from the language that it uses. Plainly construed, if one or more of the partners of the old firm continue to be the partners in the new firm, it is a case of change as defined, in section 187(2)(a). It is not possible to restrict the definition to cases where there is no dissolution of the old firm and no succession of one firm by another. The inference that section 187(2)(a) also covers a case where one firm after dissolution is succeeded by another, is strongly supported by the use of the words " and the case is not one covered by Section 187 " as they occur in Section 188. Now, these words would become redundant in Section 188 if it is held that all cases in which a firm after dissolution is succeeded by another firm fall under Section 188. It is a well-settled principle of interpretation that words used by the Legislature are not readily to be accepted as surplusage. The scheme of the Sections appears to be that if a firm discontinues business or is dissolved without being succeeded by another firm, the case would be covered by Section 189. If a firm is dissolved and succeeded by another firm which has as its partners one or more partners of the old firm, the case will be one covered by Section 187, as it would be merely a change in the constitution of the firm as denned in Sub-section (2) thereof. If a firm is dissolved and is succeeded by another firm and none of the partners of the old firm is a partner in the new firm, the case would be covered by Section 188. The omission of the words " or that a firm has been newly constituted " as they occurred in Section 26(1) of the 1922 Act from Section 187 is not indicative of any contrary intention because of the comprehensive definition enacted in the latter of the expression " a change in the constitution of the firm " and also because of the presence of the words " and the case is not one covered by Section 187 " as they occur in Section 188. As the scheme of Sections 187, 188 and 189 is clear and there is no ambiguity in them, recourse to the provisions of the partnership act cannot be taken for construing them. In this view of the matter, the Tribunal, in our opinion, was right in applying Section 187 and not Section 188 to the facts of the instant case for the reason that Smt. Manubai who was a partner in the old firm was also a partner in the new firm and it was thus a case of the change in the partnership and not a case of succession of one firm by another falling under Section 188.

6. We are conscious that the question which we have to decide in this case has given a sharp difference of opinion amongst the different High Courts. The view we have taken is in line with the view taken by the Full Bench of the Punjab and Haryana High Court in Nandlal Sohanlal v. CIT [1977] 110 ITR 170. A Full Bench of the Andhra Pradesh High Court in Addl. CIT v. Visakha Flour Mills [1977] 108 ITR 466, had also taken the same view. This decision of the Full Bench case of Andhra Pradesh High Court was overruled in Addl. CIT v. Vinayaka Cinema [1977] 110 ITR 468 by (a fuller Bench by) a majority of three against two. We respectfully agree with the view of the Punjab High Court and the earlier Full Bench view of the Andhra Pradesh High Court and the minority judgment in Vinayaka Cinema's case [1977] 110 ITR 468 (AP) [FBJ. For the same reason we respectfully do not agree with the view taken by the majority in Vinayaka Cinema's case and by the Allahabad High Court in Dahi Laxmi Dal Factory v. ITO [1976] 103 ITR 517 (All) [FB] and with the view expressed by the Gujarat High Court in Addl. CIT v. Harjivandas Hathibhai [1977] 108 ITR 517.

7. For the reasons given above, we answer all the questions in the affirmative, in favour of the Department and against the assessee. Having regard to the sharp difference of opinion, there will be no order as to costs of this reference.

Vimal And Amae Talkies, Dhamtari v. Commissioner Of Income Tax

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Assessee's Arguments (as presented by learned counsel for the assessee)

Revenue / ITO / AAC Positions (as reflected in the record)

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Vimal And Amae Talkies, Dhamtari v. Commissioner Of Income Tax

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