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I. Ramakrishnaiah & Sons v. Commissioner Of Income-Tax, Orissa
High Court Opinion Summary — R.N. Misra, J. (with Panda, J. concurring)
Factual and Procedural Background
The case concerns I. Ramkrishnaiah & Sons, Berhampur, a partnership firm originally constituted by seven partners under a deed dated 10 October 1963. The deed recorded the percentage interests of each partner (listed in the opinion). During the relevant previous year (ending 31 March 1972), partner Kanakaraju died on 4 August 1971. Clause 10 of the partnership deed provided that the firm "shall not be dissolved by the death or retirement of a partner but may be continued by the surviving or remaining partners on such terms and conditions as may be agreed upon."
In fact, the partners wound up accounts on 4 August 1971 and, on 5 August 1971, executed a new partnership deed among the six surviving partners. For the assessment year 1972–73, the assessee filed two returns: one for the period 1 April 1971 to 4 August 1971, and another for 5 August 1971 to 31 March 1972. The Income-tax Officer (ITO) made a single assessment with respect to the firm by invoking section 187 of the Income-tax Act. The ITO treated the partners' incomes for the two periods separately but treated the firm as a single entity for assessment, which produced an additional tax demand of Rs. 10,610 as compared to aggregating the two period assessments.
The assessee appealed; the Appellate Assistant Commissioner upheld the ITO's demand, invoking section 187 and relying upon clause 10 of the partnership deed and section 42 of the Partnership Act. The Tribunal also concluded against the assessee after reference to authorities. The High Court was asked to answer a specific question of law by reference.
Legal Issues Presented
- Whether, on the facts and in the circumstances of the case, and on a true interpretation of section 187 of the Income-tax Act, the total income of the entire previous year in which a change in the constitution took place is liable to be assessed to income-tax in the hands of the firm as constituted at the time of assessment?
Arguments of the Parties
Appellant's (Assessee's) Arguments
- The assessee filed two returns reflecting two separate accounting periods (before and after 4–5 August 1971) and contended that section 187(2) did not contemplate clubbing together and charging tax in respect of two different periods in accounts.
- Counsel for the assessee relied upon the ratio of the Full Bench decision of the Allahabad High Court in Dahi Laxmi Dal Factory v. Income-tax Officer ([1976] 103 ITR 517).
Respondent's (Revenue's) Arguments and Administrative Position
- The Income-tax Officer treated the firm as a single entity for assessment by invoking section 187 of the Income-tax Act and demanded additional tax accordingly.
- The Appellate Assistant Commissioner upheld the ITO's assessment, relying upon section 42 of the Partnership Act, clause 10 of the partnership deed, and the definition in section 187(2) of the Income-tax Act; he also disapproved the ITO's separate display of figures for the two periods.
- Learned standing counsel for the revenue relied upon two decisions: Dharam Pal Sat Dev v. Commissioner of Income-tax ([1974] 97 ITR 302) (Punjab High Court) and Kaithari Lungi Stores v. Commissioner of Income-Tax, Madras ([1976] 104 ITR 160) (Madras High Court).
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Dahi Laxmi Dal Factory v. Income-tax Officer, [1976] 103 ITR 517 (Full Bench, Allahabad High Court) | Relied upon by counsel for the assessee (ratio not reproduced in detail in the opinion). | The court noted that counsel for the assessee relied upon this Full Bench decision; the opinion records the reliance but does not set out or expressly adopt its ratio in the narrative. |
| Dharam Pal Sat Dev v. Commissioner of Income-tax, [1974] 97 ITR 302 (Punjab High Court) | Relied upon by learned standing counsel for the revenue (specific principle not detailed in the opinion). | The court records that learned standing counsel relied upon this decision; the opinion does not record express reliance on or adoption of its reasoning in its final analysis. |
| Kaithari Lungi Stores v. Commissioner Of Income-Tax, Madras-1., [1976] 104 ITR 160 (Madras High Court) | Relied upon by learned standing counsel for the revenue (specific principle not detailed in the opinion). | The court records that this decision was relied upon by revenue's counsel; the opinion does not reproduce or expressly apply its ratio in the court's statutory analysis. |
| Shivram Poddar v. Income-tax Officer, [1964] 51 ITR 823 (Supreme Court) | Earlier Supreme Court decision cited in submissions; the opinion notes it was a decision under section 26 of the Indian Income-tax Act, 1922. | The court distinguished this decision on the ground that it arose under the 1922 Act (section 26) where the statutory provisions and the definition of "change in the constitution of the firm" were different and thus not directly applicable to the 1961 Act provisions being construed. |
| Cit Bihar v. M/S Kirkend Coal Co., [1969] 74 ITR 67 (Supreme Court) | Earlier Supreme Court decision cited in submissions; noted to be under section 26 of the Indian Income-tax Act, 1922. | The court observed that this case was under the 1922 Act where the provisions differed and the definition of "change in the constitution" was not available; it was therefore treated as distinguishable for the purposes of the present statutory construction. |
Court's Reasoning and Analysis
The court's analysis proceeded by statutory construction and by applying the statutory definitions to the undisputed facts:
- The court first identified the relevant statutory regime: sections 170, 187 and 188 of the Income-tax Act (1961). It explained the different purposes of these provisions. Section 170 governs succession where a person carrying on a business is succeeded by another person (predecessor and successor); section 187 deals specifically with assessments of a firm where a change in the constitution of the firm has occurred; and section 188 contemplates succession of one firm by another where the case is not covered by section 187.
- The court examined the definition in section 187(2), which describes a "change in the constitution of the firm" as occurring when one or more partners cease to be partners or new partners are admitted while one or more of the old partners continue, or when all partners continue but their shares change. The court emphasised the essential feature: retention of one or more of the old partners as partners after the change.
- The court explained the legal consequences where a case falls within the 187(2) definition: a single assessment for the entire previous year is made on the reconstituted firm (the firm as constituted at assessment time), with apportionment of income between the two sets of partners for the broken periods; the reconstituted firm pays the assessed tax on the firm and partners are assessed on their respective shares.
- By contrast, if one firm is succeeded by another firm (even if some partners remain common to both), section 188 applies and separate assessments should be made for predecessor and successor firms in accordance with section 170.
- The court considered how to determine whether there was a continuation (mere change) or a dissolution and reconstitution (succession). This is a question of construction of the partnership deed and of the factual matrix. The court noted that where there is no clause to continue the firm despite death, dissolution is deemed under section 42(c) of the Partnership Act; and continuation of the business alone does not necessarily indicate mere change in constitution.
- Applying those principles to the present facts: although clause 10 of the deed contained an enabling provision permitting continuance by surviving partners, the contemporaneous facts showed that the partners dissolved the first firm, settled accounts and, on the following day, executed a new partnership deed among the six surviving partners. The court treated these as factual acts showing that the first firm had ended and the second firm succeeded to the business.
- Because the factual act was dissolution and the creation of a new firm, the court held that the situation was not within the definition of "change in the constitution of the firm" in section 187(2). Therefore section 188 (and section 170 applied by reference) governed assessment; section 187 had been wrongly applied by the revenue authorities.
- The court also noted that two earlier Supreme Court decisions relied upon by parties were decided under the Indian Income-tax Act, 1922 (section 26) where the provisions differed and the definition of "change in the constitution of the firm" was not available; accordingly, those decisions were distinguishable on statutory grounds.
Holding and Implications
Holding: The court held that, on the facts and in the circumstances of the case, and on a true interpretation of section 187, the total income of the entire previous year in which a change in the constitution took place was not liable to be assessed to income-tax in the hands of the firm as constituted at the date of assessment. Instead, the assessment should have been completed under section 188 of the Income-tax Act read with section 170.
Implications / Consequences:
- The direct effect for the parties is that two separate assessments (predecessor firm and successor firm) ought to have been made in accordance with section 188 read with section 170, rather than a single assessment under section 187 on the reconstituted firm.
- The court specifically made no order as to costs.
- The opinion distinguishes earlier Supreme Court authority decided under the 1922 Act as being based on different statutory provisions; the decision therefore rests on construction of the 1961 Act and the facts before the court. The opinion does not purport to set out broader novel precedent beyond its statutory interpretation on the facts; the ruling's immediate effect is confined to the correct statutory route for assessment when the facts show dissolution and succession rather than a mere change in constitution.
Note: This summary is based exclusively on the text of the provided opinion and does not add or infer facts not contained therein.
R.N Misra, J.:— I. Ramkrishnaiah & Sons, Berhampur, was a partnership firm with seven partners. The deed of partnership dated October 10, 1963, indicated the interest of each of the partners in the following manner:
1. I. Rammurty 12% 2. I. Ramchandra Rao 13% 3. I. Ananda Rao 13% 4. I. V.N Rao 12% 5. I. Kanakaraju 17% 6. I. Ramkrishna Rao 17% 7. I. Budhikrishna 16%
2. During the relevant assessment year 1972-73 (previous year ending with March 31, 1972), Kanakaraju died on August 4, 1971. Clause 10 of the partnership deed provided:
“The partnership shall continue until such time as the partners determine. The firm shall not be dissolved by the death or retirement of a partner but may be continued by the surviving or remaining partners on such terms and conditions as may be agreed upon.”
3. As a fact, however, the partners dissolved the firm, settled the accounts and drew up a new partnership with effect from August 5, 1971, with the remaining six partners. For the assessment year in question, two returns were filed by the assessee, one for the period from April 1, 1971, to August 4, 1971, and the other from August 5, 1971, to March 31, 1972. The Income-tax Officer, however, made one assessment only so far as the firm is concerned by invoking section 187 of the Income-tax Act (hereinafter referred to as “the Act”). In the case of the partners, the Income-tax Officer treated the two periods separately for computing the taxable income. For the first period income was assessed at Rs. 62,020 and tax thereon worked out to Rs. 4,888 leaving a divisible profit of Rs. 57,132. For the second period, the total income was computed at Rs. 85,370 with a tax liability of Rs. 8,754 and the divisible profit of Rs. 76,616. In the hands of the firm, the Income-tax Officer demanded tax of Rs. 24,252 in place of Rs. 13,642 being the total of the two tax amounts indicated above. There was thus an additional demand of Rs. 10,610 on account of the two periods having been treated as one in the hands of the firm. The assessee appealed to the Appellate Assistant Commissioner and contended that section 187(2) of the Act did not contemplate the clubbing together and charging tax in respect of two different periods in accounts. The appellate authority, however, was of the view that section 187 of the Act directly applied. Relying upon the provisions of section 42 of the Partnership Act and clause 10 of the partnership deed and the definition in section 187(2) of the Act, the Appellate Assistant Commissioner upheld the demand raised by the Income-tax Officer while disapproving of the action of the Income-tax Officer in showing the figures of the two periods separately.
4. Before the Tribunal, the assessee reiterated its stand. The Tribunal held:
“………The facts of the case are quite simple and, as found by the Appellate Assistant Commissioner, the assessee, in both cases, being a firm, on the death of a partner, the firm was reconstituted and continued to carry on the same business with the same assets and liabilities and under the same name. In both cases the partnership deed provided that the firm shall not be dissolved by the death or retirement of a partner. The firm as reconstituted has been assessed. But the only dispute is whether the assessment should be made on the total income of the entire previous year or whether the income for the period before the reconstitution and the income for the period after the reconstitution should be separately assessed. The answer to this question depends entirely on the construction of section 187 of the Income-tax Act, 1961.”
5. The Tribunal referred to certain, authorities and ultimately concluded against the assessee.
6. Upon the assessee's application, the following question has been referred for the opinion of this court:
“Whether, on the facts and in the circumstances of the case, and on a true interpretation of section 187, the total income of the entire previous year in which a change in the constitution took place is liable to be assessed to income-tax in the hands of the firm as constituted at the time of assessment?”
7. Sections 170, 187 and 188 of the Act, which are relevant, as far as material, provide:
“170.(1) Where a person carrying on any business or profession (such person hereinafter in this section being referred to as the predecessor) has been succeeded therein by any other person (hereinafter in this section referred to as the successor) who continues to carry on that business or profession,—
(a) the predecessor shall be assessed in respect of the income of the previous year in which the succession took place up to the date of succession;
(b) the successor shall be assessed in respect of the income of the previous year after the date of succession.”
“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.”
8. Section 170 obviously does not apply to succession on death of the person carrying on a profession, business or vocation while section 187 deals with a case of assessment of a firm involving a change in the constitution. Sections 187 and 188 are intended to meet two different situations in regard to assessment of firms. Under section 187, the mandate to the Income-tax Officer is that assessment shall be made on the firm as constituted at the time of making the assessment, while under section 188 which involves a case of succession of one firm by another, separate assessments—one up to the date of succession and the other from the date of succession—are contemplated. To avoid the overlapping in the provisions of sections 187 and 188 of the Act, in the latter section, it has been clearly stated “and the case is not covered by section 187”.
9. In section 187(2) of the Act, a definition of the phrase “change in the constitution of the firm” has been given. If one or two of the partners cease to be partners or one or more new partners are admitted, the circumstances being 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 where all the partners continue with a change in their respective shares or in the shares of some of them, a change in the constitution of the firm is said to take place. The essential feature is that one or more of the old partners is or are retained as partner or partners while the others may change; or all the partners may remain the same but their respective profit-sharing ratio may undergo a change. In a case coming within this range and the change taking place in the midst of a year, section 187(1) indicates that there shall be only one assessment for the entire year made on the reconstituted firm but the apportionment of the profits will separately be made on the two sets of partners for the two broken periods. In other words, the reconstituted firm pays the assessed tax on the firm for the whole year and the partners pay tax on their respective individual shares earned by them. When, however, the firm carrying on business is succeeded by another firm, notwithstanding the feature that some of the partners of the old and new firms may be the same, section 188 would be applicable.
10. When a partner retires from a firm it will be open to the remaining partners to continue it or dissolve it and constitute a new firm to carry on the business. In the former event, the firm continues with a change, but in the latter event, the new firm is a separate entity which has succeeded to the business and merely because the business is similar or identical, it cannot be taken to be a change in the constitution. Whether there is a change in the constitution or dissolution would be a question to be decided on the interpretation of the relevant clauses in the partnership deed and other circumstances available in each case. Where a partner dies and there is no clause in the original deed or other implied agreement to continue the firm despite death, there is a dissolution as provided under section 42(c) of the Partnership Act and the mere fact that the business has been continued cannot lead to the inference that there has been only a change in the constitution.
11. In the present case, clause 10 had an enabling provision that the surviving or remaining partners could continue the business on such terms and conditions as may be agreed upon. On the death of one of the partners, however, as a fact, the partners brought their business to a close, settled the accounts and on the following day drew up a new partnership deed with the remaining six partners. These being the facts, we are of the view that the first firm came to an end and the second firm succeeded to the business. The process would not be covered by a change in the constitution of the firm as defined in section 187(2) of the Act and, therefore, section 188 of the Act would apply to the present case.
12. Counsel for the assessee relied upon the ratio of a Full Bench decision of the Allahabad High Court in the case of Dahi Laxmi Dal Factory v. Income-tax Officer, [1976] 103 ITR 517, while learned standing counsel relied upon two decisions, one being of the Punjab High Court in the case of Dharam Pal Sat Dev v. Commissioner of Income-tax, [1974] 97 ITR 302 and the other of the Madras High Court in the case of Kaithari Lungi Stores v. Commissioner Of Income-Tax, Madras-1., [1976] 104 ITR 160. We had also been referred to two earlier decisions of the Supreme Court in the cases of Shivram Poddar v. Income-tax Officer, [1964] 51 ITR 823 and Cit Bihar v. M/S Kirkend Coal Co. , [1969] 74 ITR 67. Both these cases were under section 26 of the Indian Income-tax Act of 1922 where the provisions were somewhat different and the definition of the term “change in the constitution of the firm” was not available.
13. On our analysis of the provisions of sections 170, 187 and 188 of the Act and taking the tell-tale features of the case into account, we are of the view that the revenue has gone wrong in applying section 187 of the Act to the facts of this case. Two separate assessments should have been made in accordance with the provisions of section 170. Our answer to the question referred, therefore, is:
On the facts and in the circumstances of the case, and on a true interpretation of section 187, the total income of the entire previous year in which a change in the constitution took place was not liable to be assessed to income-tax in the hands of the firm as constituted at the date of assessment, but the assessment should have been completed under section 188 of the Act read with section 170 thereof.
14. We make no direction for costs.
Panda, J.:— I agree.
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