Judgment:
1. This is an income-tax reference under Section 256(1) of the Income-tax Act, 1961, in which the following questions have been referred :
'(1) Whether, on the facts and in the circumstances of the case, the learned Tribunal was legally correct in upholding the order of the Commissioner of Income-tax (Appeals) directing the Income-tax Officer to assess the income of the periods separately ?
(2) Whether, on the facts and in the circumstances of the case, it was not the case of mere change in the constitution of the firm within the meaning of Section 187(2) of the Income-tax Act, 1961?'
2. The assessee is a firm. The relevant assessment year, in the present case is 1979-80. There were 19 partners in the said firm and one of them Sri Sunder Lal retired. Under the partnership deed the partnership would stand dissolved on the death or retirement of a partner. Hence, the assessee filed two returns, one for the period April 1, 1978, to July 29, 1978, and the other for the period September 21, 1978, to March 31, 1979, alleging that there was dissolution of the firm and hence there should be two assessments in that assessment year. However, the Income-tax Officer, made one assessment, but the Commissioner of Income-tax (Appeals) accepted the plea of the assessee. The Department went in further appeal to the Tribunal. But the Tribunal rejected the appeal following the decision of the Full Bench in Badri Narain Kashi Prasad v. Addl. CIT : [1978]115ITR858(All) .
3. Section 187(2) of the Income-tax Act states :
'(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 : Provided that nothing contained in Clause (a) shall apply to a case where the firm is dissolved on the death of any of its partners.'
4. A perusal of Section 187(2)(a) of the Income-tax Act shows that by legal fiction for the purposes of the Income-tax Act, if even one of the partners continues to remain in the firm then the firm will not be deemed to be dissolved. Hence, even if the partnership deed says that the firm will stand dissolved on the retirement of a partner, for the purposes of the Income-tax Act, it will not be deemed to be dissolved in view of Section 187(2)(a) of the Act.
5. For the reasons given above we decide the question referred to us in favour of the Department and against the assessee.