Judgment:
1. The revenue has made this appeal against the order dated 29-11-1983 of Shri B.D. Roy, the Commissioner (Appeals), Rajkot, who allowed the appeal against the order dated 13-1-1982 of Shri S.M. Dube, the ITO, Bhuj.
2. The relevant facts in brief are: that the assessee is a registered firm. The previous year relevant for the assessment year 1979-80 is the samvat year 2034. For the previous year relevant for the assessment year under consideration, the assessee filed two returns of income ; first return of income for the period from 10-11-1977 to 24-5-1978 while for the second period which pertains from 25-5-1978 to 30-10-1978. For filing two separate returns for the periods mentioned above, the assessee explained that late Shri Nathulal Gangwal expired on 25-5-1978 and Shri Bhagchand Chiranjilal P. retired from the firm.
Thus, on account of it, it was contended before the ITO that on the death and retirement of the partners mentioned above, the old firm came to an end and a new firm came into existence and, therefore, two separate assessments are to be made for the periods mentioned above--one on the old firm and the another on the new firm. Reliance was placed on the decision of the Hon'ble Gujarat High Court in the case of Addl. CIT v. Harjivandas Hathibhai [1977] 108 ITR 517 wherein it was held that on expiry of one partner the firm is dissolved and new firm comes into existence.
3. The ITO did not accept the aforesaid contention of the assessee on the ground that the decision of the Hon'ble Gujarat High Court in the case of Harjivandas Hathibhai (supra) has not been accepted by the revenue. Further the facts of the case of the assessee are distinguishable from the facts of Harjivandas HathibhaVs case (supra) ; that in the case of the assessee there is Clause 11 in the partnership deed dated 5-11-1971 which, inter alia, says as under: (11) That the death say partners hereto shall not dissolve the partnership firm. Anyone legal heir or legal representative, at his option will be entitled to admittance to the partners in the place of demise party, from the date of his demise.
The ITO relying upon this clause concluded that the partnership deed is a contract and in this partnership it was narrated that on the expiry of any partner the firm should not dissolve and, therefore, to this extent the facts of the case are distinguishable from the facts of Harjivandas Hathibhai's case (supra). So taking into consideration the facts of the case, thus, same business, same partners, same place, he viewed that there was only a change in the constitution of the firm and there was no dissolution of the old firm. In consequence of it, he clubbed the income of both the periods and thereby made only one assessment in the assessment year under consideration.
4. The assessee went in appeal before the Commissioner (Appeals) who on considering the arguments of the assessee and going through the record held that the action of the surviving partners and their conduct after the death of a partner is very relevant in deciding whether a new partnership has come into existence or not; or whether there has been only a change in the constitution of the earlier firm. Since the subsequent conduct of the surviving partners showed that the old partnership was dissolved and new partnership was born as per the partnership deed and according to the ratio of judgment of the Tribunal, where the Tribunal observed as under: It is further noticed that a new partnership deed was made on 21-11-1977 between the two surviving partners Shri SD and Shri AG. Now, when there is a specific deed of dissolution made by the partners and when they agree to dissolve the firm, it is difficult to accept the revenue's submission that Clause 10 of the partnership deed would still operate.
is applicable to the facts of this case, and, therefore, two assessment orders are to be passed. So he directed the ITO to make two assessments in the assessment year under consideration for the two periods mentioned above.
5. The revenue being aggrieved has preferred this appeal. Shri Malik, the learned departmental representative, contends that the Commissioner (Appeals) has erred in law and on facts in directing the ITO to make two separate assessments instead of one. Reliance is placed on the order of the ITO and the paper book from pp. 1 to 6 which is the decision of their Lordships of the Hon'ble Gujarat High Court in the case of CIT v. Mangal-das and Mohanlal [IT Reference No. 95 (Guj.) of 1974, dated 9-12-1975]. He further contends that their Lordships of the Gujarat High Court in this case has held that there was no dissolution but only a change in the constitution of the firm and, therefore, only one assessment is to be made for the entire previous year under Section 187 of the Income-tax Act, 1961 ('the Act') ; that this view was taken by their Lordships in view of Clause 4 of the partnership deed which provided that the heir of the deceased shall be taken in the partnership and if that be not possible, then the accounts of the deceased should be settled after taking into account whatever amounts has to be paid or should be paid according to the convenience of persons concerned. Relying on Clause 4 mentioned above, the decision in the case of Harjivandas Hathibhai (supra) was considered and while following it held as we have mentioned above. Thus, in view of it, the learned departmental representative further contended that the reliance placed by the Commissioner (Appeals) on Harjivandas HathibhaVs case (supra) is misconceived and, therefore, the order of the ITO is to be restored. He further contends that if the intention of the partners to continue the firm is clear from the partnership deed then no other meanings are to be taken or inferred. He further contends that if the conduct of the partners of the partnership is otherwise than that of the terms and conditions of the partnership deed, it is for the assessee to prove. The conduct of the surviving partners is immaterial.
The conduct to be considered is that of the partners of the original partnership and if the same is contrary to the partnership deed, then it is for the assessee to prove. The subsequent conduct of the surviving partners cannot overrule the intention and terms and conditions of the original partnership deed by their own acts, conduct and doings.
6. On the other hand Shri Shah, the learned counsel for the assessee, relying on the order of the Commissioner (Appeals) and paper book containing pp. 1 to 6 contends that in the partnership deed, there is Clause 11 which says that the death of any parties hereto shall not dissolve the partnership and any one legal heir or legal representative, at his option, will be entitled to admittance to the partnership in the place of demise party, from the date of his demise ; but the surviving partners have to dissolve the partnership and their intention is brought in writing for it in the shape of new agreement which is an endorsement to it. Therefore, relying on it, he contends that the surviving partners can dissolve the firm on giving contrary view to that of the original partnership and, therefore, two assessments are to be made in the case of the assessee, in view of it and also in particular view of the proviso inserted by the Taxation Laws (Amendment) Act, 1984, with retrospective effect from 1-4-1975 to Section 187.
7. In rebuttal, Shri Malik contends that the aforesaid proviso is of no help to the assessee rather it is in favour of the revenue on the facts and in the circumstances of the case. No other meaning or interpretation can be taken or made of this proviso except that the firm is to be dissolved by the partners of the partnership and not by the surviving partners.
8. We have heard the rival contentions and have gone through the records. The controversy among the parties is very much limited in view of the fact that their Lordships of the Gujarat High Court have considered in the cases of Harjivandas Hathibhai (supra) and Mangaldas and Mohanlal (supra) relied upon by the departmental representative mentioned above. Their Lordships came to the conclusion that the meaning and ratio of the decision in the case of Harjivandas Hathibhai (supra) is not applicable as understood and pleaded by Shri Kaji before them since according to their decision the deciding factor is the terms and conditions of the original partnership if the original partnership categorically says that the firm will continue and on the death of a partner his legal heir comes in place of him, then there is no question of dissolution of the firm on the death of a partner or retirement of a partner. In this case before us, Clause 11 of the partnership deed says that the death of any parties shall not dissolve the partnership as the legal heirs of the deceased or legal representative would be entitled to admission to the partnership in the place of the deceased partner.
Thus, the facts of the case are identical with that of Mangaldas and MohanlaVs case (supra). Accordingly, we hold that the contentions of the learned departmental representative are well founded and acceptable and particularly when he says that the case of Mangaldas and Mohanlal (supra) is applicable to the facts of this case and not Harjivandas Hathibhai's case (supra) relied upon by the Commissioner (Appeals) in arriving at his conclusion.
9. Furthermore, the proviso to Section 187(2) mentioned above cannot be construed if there is a death of the partner or retirement then there is dissolution of the firm even if the partnership deed says that the firm will continue after the death or retirement of the partner in the manner mentioned in the partnership deed. Hence, on account of this proviso it cannot be held that the surviving partners can dissolve the firm contrary to the terms and conditions of the original partnership deed. Thus, we hold that as in this case, the surviving partners have entered into partnership which is an endorsement to the original partnership (page 3 of the assessee's paper book) vide which they have dissolved the firm on the death and retirement of the partners mentioned above contrary to Clause 11 of the original partnership deed mentioned above cannot be taken as dissolved. The proviso to Section 187(2) nowhere gives the power to dissolve the firm to the surviving partners as the words 'firm is dissolved on the death of any partner' clearly shows that it is to be dissolved if so dissolved by the original partnership or partners of the partnership and not the surviving partners. No other interpretation is possible and can be there. Reliance can be placed on the decision in the case of Mangaldas and Mohanlal (supra). Thus, the firm can be dissolved by the partners in the original partnership which is possible if the terms and conditions or clauses of the partnership clearly says that on the death and retirement of the partners, the firm will be dissolved. If it says that it will continue on the death of a partner or retirement of a partner then it cannot be held that firm is dissolved. However, it can be held to be dissolved if the conduct of the partners which are the partners in the original partnership show that the firm is to be dissolved on the death of a partner for which the onus is on the assessee to prove the specific and particular facts to show this conduct. This conduct cannot be held to be proved if subsequently the surviving partners make any endorsements to the original partnership that the partnership is dissolved on the death of a partner or retirement of a partner, since, it is the conduct of the surviving partners and not of the partners of partnership. The Taxation Laws (Amendment) Act is helpful in the cases where the partnership deed does not categorically state that the firm will continue in a particular manner as there on the death of a partner or retirement no other inference can be drawn except that the firm is dissolved and it cannot be held otherwise on the ground that there is no categorical clause in the partnership deed and, therefore, the firm cannot be held as dissolved and it can be held as non-dissolved if it is so stated in the partnership deed specifically or clearly. Reliance can also be placed on the decision in the case of CIT v. Shambulal Nathalal & Co. [1984] 145 ITR 329 (Kar.). The case of CIT v. Ganesar Industries [1984] 149 ITR 48 (Mad.) also supports the aforesaid views. The meaning of the proviso as contended by Shri Shah does not get support from any section of the Indian Partnership Act, 1932, nor from any decision relied upon by him. In the case of Shivram Poddarv. ITO [1964] 51 ITR 823 (SC), their Lordships held that Section 44 of the Indian Income-tax Act, 1922, provides an added incident that all persons who were partners at the time of discontinuance are jointly and severally liable to pay the tax payable by the firm. Thus, relying on it, Shri Malik contends that the surviving partners cannot dissolve the firm, which in our opinion has some force and also is supported indirectly not directly from this decision.
10. In view of our decision and reason thereto, we hold that the firm is not dissolved in view of Clause 11 of the original partnership deed and there is no material tin the record to show that despite this clause, there was an understanding among the partners of the original partnership deed and their conduct shows that on the death and retirement of the partner, rather it is proved otherwise by clause 11, the firm has been dissolved. Thus, in view of Clause 11 it cannot be held that in view of proviso to Section 187(2), the surviving partners are competent to dissolve the firm contrary to Clause 11, as we have discussed above.
11. In this view, we also get light from the decision of the Hon'ble Delhi High Court in the case of C1T v. Raghumal Ashok Kumar [1984] 149 ITR 466 where their Lordships considered the proviso to Section 187(2) inserted by the Taxation Laws (Amendment) Act, with retrospective effect from 1-4-1975 and it is clear from it that on account of this proviso, there is no dissolution of the firm if the original partnership deed categorically says that the firm would continue in accordance with the terms and conditions mentioned therein on the death or retirement of a partner. Since therein their Lordships have held that if the terms and conditions of the original partnership deed do not say that the firm would continue then the firm is to be taken as dissolved otherwise not observing as under: Where a partnership deed does not contain any provision that the death of a partner would not dissolve the firm and one of the partners dies in the middle of the accounting year and, thereafter, a fresh deed is executed under which the surviving partners take in a new partner in the place of the deceased and continue to carry on the business, the case is one of succession and not change in the constitution and separate assessments have to be made in regard to the income of the period from the first day of the accounting period up to the date of death of the partner and of the rest of the accounting period up to the last day of the accounting period--CIT v. Sant Lai Arvind Kumar [1982] 136 ITR 379 (Delhi) followed.
[N.B.: Section 187 has been amended with retrospective effect from 1-4-1975 by TLA Act, 1984, by adding a proviso to Sub-section (2) to the effect that the provisions of Clause (a) of the sub-section will not apply to a case where the firm is dissolved on the death of any of the partners -Ed.]" (p. 466) Accordingly, in view of our discussions and reasons thereto, we hold that the Commissioner (Appeals) has committed an error in law and on facts in holding that the firm is dissolved on the death and retirement of the partner mentioned above relying on the said endorsement made by the surviving partners of the partnership and, therefore, two assessments are to be made for the two periods mentioned above. Hence, we set aside the order of the Commissioner (Appeals) and restore that of the ITO on the totality of the facts and circumstances of the case.
1. I disagree with the decision taken by my learned brother. In my opinion, considering the facts and evidence and in view of the insertion of proviso to Section 187(2) by the Taxation Laws (Amendment)rfAct, retrospectively with effect from 1-4-1975, as mentioned in paragraph 11, i.e., at end of the order of my learned brother, the decision taken by the Commissioner (Appeals) is required to be upheld. The intention of the amendment and that too with retrospective effect, is to reduce litigation as borne out by Notes on Clauses.
As in deciding this matter, we have differed with each other and, therefore, the difference of opinion among us is now to be settled by the Third Member of the Tribunal, therefore, we make reference under Section 255(4) of the Act to the worthy President of the Tribunal for the appointment of the Third Member for this purpose. We frame the following questions for the determination of the Third Member: 1. Whether insertion of the proviso to Section 187(2) of the Income-tax Act, 1961, by the Taxation Laws (Amendment) Act, 1984, retrospectively with effect from 1-4-1975 gives blanket licence to the surviving partners of the partnership (original) to dissolve the firm, on the death and retirement of the partners, against the terms and conditions of partnership deed wherein it is categorically stated that on the death and retirement of the partner, the firm would continue 2. Whether, on the'facts and in the circumstances of the case, there is change in the constitution of the firm so as to warrant only one assessment under Section 187 of the Income-tax Act, 1961, and not two assessments for two periods as claimed by the assessee 1. The only point involved in this departmental appeal is whether there should be two separate assessments for the two periods as claimed by the assessee or one consolidated assessment for both the periods as framed by the ITO.2. As there was a difference of opinion between the Members, who heard this appeal, the appeal is placed before me under Section 255(4) of the Act by the President. The questions framed by the Members who heard the appeal originally read as under: 1. Whether insertion of the proviso to Section 187(2) of the Income-tax Act, 1961, by the Taxation Laws (Amendment) Act, 1984, retrospectively with effect from 1-4-1975 gives blanket licence to the surviving partners of the partnership (original) to dissolve the firm, on the death and retirement of the partners, against the terms and conditions of the partnership deed wherein it is categorically stated that on the death and retirement of the partner, the firm would continue 2. Whether, on the facts and in the circumstances of the case, there is change in the constitution of the firm so as to warrant only one assessment under Section 187 of the Income-tax Act, 1961, and not two assessments for two periods as claimed by the assessee 3. The facts in brief are: the assessee is a firm. The assessment year is 1979-80 and the relevant previous year is the Samvat year 2034 (10-11-1977 to 30-10-1978). Originally, under a deed of partnership dated 5-11-1971, Shri Kundanmal Kastufmal, Sureshkumar Kundanmal, Nathumal Motilal and Bhagchand Chiranjilal carried on business in the name and style of Kundanmal Sureshkumar. The registration/continuation of registration was allowed to the said firm under Section 185 of the Act. During the relevant accounting year, Shri Nathumal Motilal expired on 25-5-1978 and Shri Bhagchand Chiranjilal retired from the said firm with effect from 26-5-1978. In this view of the matter, the books of account were closed on 24-5-1978 and the legal heir of late Shri Nathumal Motilal and Shri Bhagchand Chiranjilal were given their share of profit as well as other amounts standing to their credits as on 24-5-1978. Thereafter, Shri Kundanmal Kasturmal and Sureshkumar Kundanmal executed a fresh deed of partnership and carried on business under the name and style of Kundanmal Sureshkumar & Co.
4. For the year under appeal, the assessee filed two returns, one for the period from 10-11-1977 to 24-5-1978 and the other for the period from 25-5-1978 to 30-10-1978 and requested the ITO to frame two separate assessments for the said two periods. In this connection, reliance was placed on the decision of the Hon'ble Gujarat High Court in the case of Harjivandas Hathibhai (supra). The ITO, however, noticing the following clause: 11. That the death of any parties hereto shall not dissolve the partnership. Any one legal heir or legal representative, at his option, will be entitled to admittance to the partnership in the place of demised party, from the date of his demise.
in the deed of partnership, came to the conclusion that the firm was not dissolved on the death of Shri Nathumal Motilal. He, therefore, framed one consolidated assessment for the two periods involved after determining the total income of the said two periods separately.
5. In appeal, the assessee once again relied on the aforesaid decision of the Hon'ble Gujarat High Court as well as one order of the Tribunal referred to in the order of the Commissioner (Appeals) and urged that the ITO should be directed to frame two separate assessments for the two periods involved. In this connection, the assessee had also filed written submissions dated 25-11-1983 before the Commissioner (Appeals) wherein it was stated that on the death/retirement of partners it had closed its books of account and thereafter, new books of account were maintained by the new partnership consisting of two partners, viz., Shri Kundanmal Kasturmal and Sureshkumar Kundanmal. It was further submitted that keeping in mind the subsequent events of the partners, a new firm came into existence on the death/retirement of partners. In the said written submissions it was also stated that the accounts of the business till the death/retirement of the partners were drawn. It was, therefore, urged that the ITO should be directed to frame two separate assessments for the two periods involved. The Commissioner (Appeals) accepted the assessee's submissions as under: 4. Here, in the books of account of the first period, it has been mentioned that the old partnership is discontinued with effect from 25-5-1978. There is no entry made in the register after that. New register has been started and new partnership deed has been executed. This conduct of the partners are relevant to consider whether the earlier partnership was dissolved. In showing the income of the second period, the statement of income has been given as under: Statement of income from 25-5-1978 to Aso Vad Amas new partnership constituted on death and retirement of partners:Profit as per profit and loss account 60,910Add: Partnership deed stamp and fees 1,100 62,010Less: Firm tax 4,947 57,063 There, they have mentioned that 'new partnership' has been constituted on the death and retirement of partners. The ratio of the judgment in the case of Harjivandas Hathibhai (supra) is also applicable to this case. The intention of the surviving partners and their conduct after the death of a partner is very relevant in deciding whether a new partnership has come into existence or not; or whether there has been only a change in the constitution of the earlier firm. Hence, the subsequent conduct of the surviving partners show that the old partnership has been dissolved and a new partnership has been born as per the partnership deed. Accordingly, the ratio of the judgment of the Bombay Bench 'B' of the Tribunal in the above referred case that though the partnership deed may require that the partnership will continue by admittance of the heir can still form a fresh firm with effect from the death and that there will have to be two separate assessments, are applicable to this case and two separate assessment orders are to be passed. The Income-tax Officer is directed to take action accordingly.
6. Being aggrieved by the order of the Commissioner (Appeals), the revenue came up in appeal before the Tribunal. Relying on an unreported decision of the Hon'ble Gujarat High Court in the case of Mangaldas and Mohanlal (supra) wherein the aforesaid decision in the case of Harjivandas Hathibhai (supra) was considered, the revenue took up a stand that the Commissioner (Appeals) was not justified in directing the ITO to frame two separate assessments for the two periods involved.
The asses-see, on the other hand, strongly supported the order of the Commissioner (Appeals). It also relied on the retrospective amendment made in Section 187(2) by the Taxation Laws (Amendment) Act, with effect from 1-4-1975, wherein the following proviso was added: 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.
The learned Judicial Member, for the reasons stated in his order, came to the conclusion that the Commissioner (Appeals) had committed an error in law and on facts in holding that the firm was dissolved on the death and retirement of the partners relying on the said endorsement made by the surviving partners in the partnership deed and concluding that two assessments were to be made for the two periods involved. The learned Accountant Member, in his order, held that in view of the retrospective amendment made in Section 187(2), the decision taken by the Commissioner (Appeals) was required to be upheld. In coming to this conclusion, the learned Accountant Member also kept in mind the intention of bringing retrospective amendment in Section 187(2), with a view to reduce litigation.
7. The learned representative for the department strongly relied on the order of the learned Judicial Member and submitted that the Commissioner (Appeals) was not justified in accepting the stand taken on behalf of the assessee. According to him, since the business was not closed by the remaining partners, there was no dissolution of the business carried on by the four partners prior to the death/retirement of the partners. He further submitted that even though the partnership may have come to close on the death/ retirement of the partners, the business continued by the surviving partners. Referring to the decision of the Hon'ble Gujarat High Court in the case of Addl.CIT v. United Commercial Co. [1977] 108 ITR 264, the learned representative for the department stated that in the said case, the Hon'ble High Court has explained the meaning of 'dissolution'. If we were to apply the tests laid down in the said decision, there was no dissolution of the business in the instant case. He also referred to the aforesaid decision in the case of Harjivandas Hathibhai (supra), more particularly, the observations appearing in paragraph 1 at p. 527 with a view to impress upon me that the dissolution of the firm can be only done by the partners who had originally constituted the firm. However, since in the instant case the dissolution of the firm has been done by the two surviving partners, the ITO was fully justified in framing one consolidated assessment for the two periods involved. He, therefore, urged that the order of the Commissioner (Appeals) should be reversed.
The learned counsel for the assessee, on the other hand, strongly supported the order of the Commissioner (Appeals). In this connection, he referred to Section 40 of the Indian Partnership Act, which reads as under: Dissolution by agreement - A firm may be dissolved with the consent of all the partners or in accordance with a contract between the partners.
Thereafter, he invited my attention to the endorsement made by the partners in the deed of partnership dated 5-11-1971 with a view to impress upon me that the partners had closed original firm consisting of four partners. He also invited my attention to the written submissions dated 25-11-1983 filed before the Commissioner (Appeals) to show that the books of the original firm were closed and the balances in the accounts of the partners were drawn up, thereafter, new sets of books were started for the business carried on by Shri Kundanmal Kasturmal and Sureshkumar Kundanmal. He also referred to the aforesaid retrospective amendment made in Section 187(2), and submitted that the proviso inserted with effect from 1-4-1975 would override the provisions contained in the deed of partnership. In this connection, he also stated that even though under the Indian Partnership Act, a firm may not be dissolved on the death of a partner if specific provisions in this regard are contained in the deed of partnership. However, in view of the aforesaid retrospective amendment made in Section 187(2) for the income-tax purposes, a firm will be dissolved on the death of a partner irrespective of any contract to the contrary contained in the deed of partnership. In order to support his submissions, he also referred to the relevant Notes on Clauses to the Taxation Laws (Amendment) Bill, 1984--[1984] 149 ITR (St.) 56- and Circular No. 349 dated 14-9-1984 [see Taxmann's Direct Taxes Circulars, Vol. 2, 1985 edn., p. 1,037] containing Explanatory notes to the Taxation Laws (Amendment) Act, 1984. He, therefore, urged that I should uphold the order of the Commissioner (Appeals).
8. I have carefully considered the rival submissions of the parties as well as gone through the orders of the learned brothers who originally heard this appeal and the material placed before me and I am inclined to agree with the view taken by the learned Accountant Member. The assessee's stand can be supported both on facts as well as on the interpretation of the relevant provisions of the 1961 Act. As regards the facts, it is not in dispute that on the death/retirement of the partners, the accounts of the firm consisting of four partners were closed. The remaining two partners executed a fresh deed of partnership and new sets of accounts were maintained from 25-5-1978. Again, it is not in dispute that in the original deed of partnership itself (dated 5-11-1971) the retiring partner as well as Shri Kundanmal Kasturmal and Sureshkumar Kundamal have made endorsement to the effect that on the death of Shri Nathumal Motilal and the retirement of Shri Bhagchand Chiranjilal, the firm came to an end.
Therefore, factually the firm consisting of four partners came to an end on 24-5-1978.
8.1 Now we have to consider how far Clause 11 of the original partnership deed dated 5-11-1971 would nullify the factual position.
The decision in the case of Mangaldas and Mohanlal (supra) is in favour of the revenue while the decision in the cases of Harjivandas Hathibhai (supra) and United Commercial Co. (supra), would support the stand taken on behalf of the assessee. It may be mentioned that all these decisions were rendered prior to the retrospective amendment made in Section 187(2) by the' Taxation Laws (Amendment) Act. Here it would be necessary to reproduce below the entire Section 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: (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: 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.'' The proviso to Sub-section (2) of Section 187 was inserted by the Taxation Laws (Amendment) Act, with effect from 1-4-1975. It is pertinent to note that the proviso is very specific that the provisions of Clause (a) of Subsection (2) of Section 187 would not be applicable 'to a case where the firm is dissolved on the death of any of its partners'. Nothing is mentioned in the said proviso regarding any contract to the contrary between the partners of a firm. In other words, as soon as a death occurs, a firm will be automatically dissolved under the Act, irrespective of any contract entered into between the partners in this regard. This position becomes very clear if we refer to the Notes on Clauses on the Taxation Laws (Amendment) Bill, in this regard. At page 56 of the statute portion of 149 ITR it is observed that 'the proposed amendment seeks to insert a proviso to Sub-section (2) of Section 187 to the effect that the provisions in Clause (a) above shall not apply to a case where the firm is dissolved on the death of any of its partners'. Paragraph 24.2 of Circular No.394 dated 14-9-1984 is still more specific and reads as under: 24.2 The question whether the provisions of Section 187(2) of the Act would also apply in cases where a firm stands dissolved by operation of law or by virtue of an agreement among the partners, has given rise to considerable litigation and conflict of judicial decisions. With a view to ending uncertainty and litigation on this issue the Amending Act has inserted a proviso to Sub-section (2) of Section 187 to provide that nothing contained in Clause (a) of the said sub-section shall apply to a case where the firm is dissolved on the death of any, of its partners. The effect of this amendment will be that where a firm is dissolved on the death of any of its partners, it shall not be regaredas a case of change in the constitution of the firm under the special provisions contained in Section 187(2)(a) of the Income-tax Act. (p. 1,048) It would appear from the above that the Parliament wants to end the litigation as to whether on the death of a partner, the firm is said to be dissolved or not. Therefore, on the legal aspects also, I have no hesitation to hold that the assessee was fully justified in claiming that there should be two separate assessments for the two periods involved. Before ending discussion on the legal aspect, I may add that the submissions made on behalf of the assessee regarding the provisions of Section 40 carry considerable force.
9. In view of the aforesaid discussion my answers to the questions framed are: (i) in affirmative, and (ii) there should be two separate assessments for the two periods involved as claimed by the assessee.
10. In view of the aforesaid answers, I agree with the view taken by the learned Accountant Member.
11. The matter will now go back to the Division Bench for the disposal according to the majority view.