S.K. Mal Lodha J.
1. At the instance of Commissioner of Income-tax, Jodhpur, the Income-tax Appellate Tribunal, Jaipur Bench, Jaipur (the ' Tribunal ' herein), has referred the following questions for the opinion of this court which are said to arise out of its order dated June 17, 1978, passed in ITA No. 21/JP/77-78 :
' 1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified holding that on the death of Shri Surajbhan, the firm was dissolved on July 1, 1974
2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified holding that there should be two assessments (one up to July 1, 1974, and the other from July 1, 1974, up to the end of the accounting year) and not one assessment for the whole accounting year '
2. The assessee is a partnership firm known as Surajbhan Om Prakash, Raisinghnagar. The assessment year involved is 1975-76. The assessee for the previous year relevant to the assessment year 1975-76 filed two returns of income declaring an income of Rs. 40,320 and Rs. 20,403. Prior to the formation of the assessee-firm, there was an old firm, Surajbhan Om Prakash. Its two partners were : (1) Surajbhan and (2) Om Prakash. The partnership deed executed by them is dated August 31, 1957. The relevant two clauses of the aforesaid partnership deed are 6 and 11 which are as follows :
' 6. That the partnership is a partnership at will.
11. That all other relations of the parties shall be governed by the provisions of the Indian Partnership Act save and except that on the death or demise of any partner, the firm shall not stand dissolved but shall remain continued by the surviving partner and the legal heirs or representatives of the deceased on such terms and conditions as may be agreed upon by them thereafter.'
3. According to Clause 11 of the partnership deed, on the death of any partner, the firm could not stand dissolved but was to be continued by the surviving partner and the legal heirs or representatives of the deceased partner. Surajbhan was one of the partners of the old firm. Surajbhan Om Prakash died on July 1, 1974. The business of the firm was taken over by the only surviving partner, Om Prakash, and the two legal heirs of the deceased partner, Surajbhan, whose names are Smt. Santradevi and Ved Prakash, and one third person was also taken as a partner. A partnership deed dated July 13, 1974, was executed by Om Prakash, Smt. Santra Devi, Ved Prakash and Banshidhar. The Income-tax Officer, B-Ward, Sri Ganganagar, made one single assessment for the two periods: (i) up to the date of death of Surajbhan, i.e., July 1, 1974, and (ii) the other from July 1, 1974 (the date of death of Surajbhan) to the end of the previous year relevant to the assessment year. The income of both the periods was assessed together. An appeal was filed by the assessee and the Appellate Assistant Commissioner, Bikaner Range, Bikaner, by his order dated March 5, 1977, dismissed the appeal observing that, on the facts of the case, the old firm continued the business with only a change in the constitution of the firm. Feeling dissatisfied, the assessee-firm lodged a further appeal. The Tribunal considered the authorities cited by the assessee as well as the departmental representative. It also examined the provisions of Section 42(c) of the Partnership Act (Act No. IX of 1932) (for short ' the Partnership Act'). The Tribunal was of the opinion that after the death of Surajbhan on July 1, 1974, the old firm was dissolved and after its dissolution, a new firm was constituted. In this view of the matter, it came to the conclusion that there would be two assessments on the assessee, namely, one on the old firm up to July 1, 1974, and the other assessment will be from July 1, 1974, to the end of the accounting year. The Commissioner of Income-tax submitted an application under Section 256(1) of the Act for making a reference to this court. In these circumstances, the reference is before us.
4. Before we proceed further in the matter, we may usefully extract the following from the order dated June 17, 1978, of the Tribunal;
' After the death of Shri Surajhhan on July 1, 1974, the old firm was dissolved. After that a new firm was constituted. So there will be two assessments, one on the old firm up to July 1, 1974, and the other assessment will be on the new firm from July 1, 1974, to the end Of the accounting year.'
5. ' Partnership at will' has been defined in Section 7 of the Partnership Act as under:
' 7. Partnership at will.--Where no provision is made by a contract between the partners for the duration of their partnership, or the determination of their partnership, the partnership is a 'partnership at will'.'
6. Chapter VI of the Partnership Act deals with dissolution of a firms. Section 42 which occurs in Chapter VI relates to the dissolution on the happening of certain contingencies. The relevant portion of Section 42 of the Partnership Act for our purpose is as follows;
' 42. Dissolution on the happening of certain contingencies.--Subject to contract between the partners a firm is dissolved--......
(c) by the death of a partner ; and......'
7. A careful examination of Section 7 and Clause (c) of Section 42 of the Partnership Act clearly shows that a partnership at will is dissolved by the death of a partner but this is, however, subject to the contract between the partners. There is no doubt that Clause 11 of the partnership deed provides for continuance of the partnership after the death of one of the partners, if the surviving partner and the legal heirs or representatives of the deceased partner agree on the terms and conditions to be settled by them to continue the old partnership and, in such circumstances, despite the death of one of the partners, the old partnership firm does not stand dissolved. It is this Clause 11 of the partnership deed dated August 31, 1957, which was executed by Om Prakash, surviving partner, and Suraj-bhan, the deceased partner, which has considerably influenced the Income-tax Officer as well as the Appellate Assistant Commissioner in coming to the conclusion that there should be one assessment on the assessee-firm in respect of both the periods, namely, up to the date of death of Surajbhan, and the other after the date of death of Surajbhan up to the end of the accounting year relevant to the assessment year under consideration. The Tribunal has mentioned Dahi Laxmi Dal Factory v. 1TO : [1976]103ITR517(All) , Kaithari Lurtgi Stores v. CIT : [1976]104ITR160(Mad) and CIT v. Seth Govindram Sugar Mills : [1965]57ITR510(SC) which were relied on by the assessee-firm. It also noticed Nandlal Sohanlal v. C7T and after considering these authorities, it came to the conclusion that after the death of Surajbhan on July 1, 1974, the old firmstood dissolved. It is the correctness of this finding with which we are concerned in this reference. We shall refrain from referring to the catena . of cases of the various High Courts of the country and in particular of this court as they have little bearing on the question with which we are concerned in this reference. The principles laid down are, of course, well established.
8. The old firm consisted of two partners, Surajbhan and On Prakash. Surajbhan died on July 1, 1974, and after his death there was only one surviving partner, namely, Om Prakash. It was on July 13, 1974, that a partnership under the name of M/s. Surajbhan Om Prakash came into existence between Om Prakash, surviving partner, Smt. Santra Devi, widow of Surajbhan Agarwal, Ved Prakash, son of Surajbhan Agarwal (legal heirs and legal representatives of the deceased partner, Surajbhan) and Banshidhar Sarda (third party). There is a recital in the partnership deed dated July 13, 1974, that the firm has been formed in partnership at Raisinghnagar consisting of the aforesaid four partners on July 1, 1974, which is the date of death of Surajbhan. In this very deed, the following has been mentioned :
'...partnership in the name and style of M/s. Surajbhan Om Prakash on the terms and conditions mutually settled between them verbally and took over the assets and liabilities of the firm, M/s. Surajbhan Om Prakash, Raisinghnagar, and its branch an old firm which had been dissolved on account of death of Shri Surajbhan on July 1, 1974, at book value appearing in the books of the said dissolved firm and whereas since then, that is, July 1, 1974, the parties have been acting upon those terms arid conditions mutually settled between them on July 1, 1974.'
(Emphasis supplied)
9. Section 42(c) of the Partnership Act was examined in CIT v. Seth Govindram Sugar Mills : [1965]57ITR510(SC) . In that case, the firm consisted of two partners who represented their joint families. There was a provision in the deed for a heir or nominee taking the place of the deceased partner. One partner out of the two died leaving his widow and minor sons. The question arose whether the firm which consisted of two partners had dissolved after the death of one of the partners. Their Lordships have expressed themselves in the following words (p. 514 and 515):
' Partnership, under Section 4 of the Partnership Act, is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. Section 5 of the said Act says that the relation of partnership arises from contract and not from status. The fundamental principle of partnership, therefore, is that the relation of partnership arises out of contract and not out of status. To accept theargument of the learned counsel is to negative the basic principle of the law of partnership. Section 42 can be interpreted without doing violence either to the language used or to the said basic principle. Section 42(c) of the Partnership Act can appropriately be applied to a partnership where there are more than two partners. If one of them dies, the firm is dissolved ; but if there is a contract to the contrary, the surviving partners will continue the firm. On the other hand, if one of the two partners of a firm dies, the firm automatically comes to an end and, thereafter, there is no partnership for a third party to be introduced therein and, therefore, there is no scope for applying Clause (c) of Section 42 to such a situation. It may be that pursuant to the wishes or the directions of the deceased partner, the surviving partner may enter into a new partnership with the heir of the deceased partner, but that would constitute a new Partnership. In this light, Section 31 of the Partnership Act falls in line with Section 42 thereof. That section only recognises the validity of a contract between the partners to introduce a third party without the consent of all the existing partners ; it presupposes the subsistence of a partnership : it does not apply to a partnership of two partners which is dissolved by the death of one of them, for, in that event, there is no Partnership at all for any new partner to be inducted into it without the consent of others.'
(Emphasis added)
10. It is thus clear that Section 42(c) of the Partnership Act can only be made applicable to a partnership where there are more than two partners. If a partnership consists of two partners and when one of them dies, the firm is dissolved. If one of the two partners of a firm dies, the firm on the death of one of the partners will come to an end and, in such a situation, the question of inducting a third person as a partner does not arise. In this case, as stated above, the partnership consisted of Om Prakash and Surajbhan, out of whom Surajbhan died and, therefore, on his death, the firm, Surajbhan Om Prakash, automatically came to an end and there was no occasion or question for Om Prakash to have inducted the legal representatives of Surajbhan and Banshidhar Sarda (thirty party) as partners to the old firm, Surajbhan Om Prakash, so as to infer in law that the old firm was continuing and it was merely a change in the constitution of the firm within the meaning of Section 187 of the Act. Mr. C.R. Mehta, learned counsel appearing for the Revenue, has placed reliance on Nandlal Sohanlal's case [1977] 110 ITR 1170 which is a Full Bench decision of the Punjab and Haryana Court which was held not applicable to this case by the Tribunal. We have carefully read the aforesaid decision of the Full Bench of the Punjab and Haryana High Court. In our opinion, this authority has no bearing on the facts of the case on hand for the simple reason that in the partnership deed before it, there was no provision in the deed as to the dissolutionof the firm on the death of the partner. Of course, in that case, the son of the deceased partner was taken as a partner and the business was continued and a new deed of partnership was executed. It may also be mentioned that in that case, originally there were six partners. In the face of the decision in Seth Govindram Sugar Mills' case : [1965]57ITR510(SC) which is applicable to this case, there is no escape from the conclusion that the old firm which consisted of Surajbhan and Om Prakash automatically stood dissolved on the death of Surajbhan and, in these circumstances, there was no question of continuing the old firm by taking the widow and the son of Surajbhan and Banshidhar (third party) as partners by means of the partnership deed dated July 13, 1974, which was made operative from July 1, 1974, the date of death of Surajbhan. In these circumstances, the Tribunal was right in holding that on the death of Surajbhan, the firm stood dissolved on July 1, 1974. Question No. 1 is, therefore, answered in the affirmative, i.e., in favour of the assessee and against the Revenue.
11. Question No. 2. It has been held that on the death of Surajbhan, the old firm, Surajbhan Om Prakash, stood dissolved and there was no question of continuing it. It follows from the answer given to question No. 1 that the Tribunal was quite right and justified when it came to the conclusion that there should be two assessments :
One up to July 1, 1974, and the other from July 1, 1974, up to the end of the accounting year and not one assessment for the whole of the accounting year. This question is also answered in the affirmative, in favour of the assessee and against the Revenue.
12. Both the questions referred to us are answered in the affirmative, in favour of the assessee and against the Revenue.
13. We leave the parties to bear their own costs of this reference.
14. The Tribunal may be informed of this order in accordance with the provisions of Section 260(1) of the Act.