Rambilas Chandram Vs. Commissioner of Income-tax - Court Judgment

S.K. Mal Lodha, J.

1. The Income-tax Appellate Tribunal, Jaipur Bench, Jaipur (hereinafter referred to as ' the Tribunal '), has referred the following questions for our decision I

'1. Whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that even though no addition was made by the Income-tax Officer to the trading results of the tilli account and alsi account while framing the original assessment order, he could have re-examined the issue de novo and made additions to them during the reassessment proceedings completed by him after the original assessment had been set aside by the Appellate Assistant Commissioner, vide his order dated November 11, 1968

2. Whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that the salaries said to Shri Ramgopal and Shri Omprakash by the firm were not allowable deduction under Section 37 of the Income-tax Act, 1961

3. Whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that the firm had not been dissolved on the death of Shri Chandram on May 6, 1966, and that it was a case of change in the constitution of the firm in terms of the provisions of Section 187 of the Income-tax Act, 1961, and that, therefore, only one assessment should have been made on the assessee-firm in respect of the assessment year 1967-68 ?'

2. The petitioner-assessee is a firm which carries on business of crushing oil and running trucks. The ITO, Bhilwara, completed the assessment relating to the assessment year 1967-68 by order (annexure 'A') dated November 6, 1967. Against that order, the assessee went in appeal to the AAC, who by his order (annexure 'B') dated November 11, 1968, setaside the assessment with the direction that the ITO should make reassessment after giving proper opportunity of hearing to the assessee. In pursuance of the directions given by the Appellate Assistant Commissioner (AAC), the ITO by his order (annexure ' C') dated November 27, 1971, passed a fresh assessment order. While doing so, the ITO made the following additions in the oil accounts :

Rs.(i)Groundnut oil 5,075(ii)Tilli account 8,710(iii) Alsi account 1,730

3. It may be stated here that at the time of the original assessment, the ITO had made no addition to the results of the trading accounts pertaining to tilli and alsi. He made addition only with regard to the groundnut account. The ITO rejected the accounts of the assessee on the ground that there were some defects in the books of account of the assessee, that many of the expenses were unvouched or unsupported by proper vouchers ; that there was no log-book for recording the daily movement of the trucks and that there was no record for consumption of diesel, spare parts and tyre sets. He, therefore, applied the proviso to Sub-section (1) of Section 145 of the I.T. Act, 1961 (No. XLIII of 1961) (for short 'the Act' herein) and estimated the hire receipts of the assessee at Rs. 60,000 on which a net profit of 25% subject to depreciation was applied. The firm had debited in its accounts salaries paid to Shri Ramgopal and Shri Omprakash. The partners of the assessee-firm were also partners in their individual capacity of another firm of Bhilwara bearing the same name. The assessee had made very considerable investment in the Bhilwara firm. As the partners of the assessee-firm did not find adequate time to look after the business of the Bhilwara firm, they appointed Shri Ramgopal and Shri Omprakash to look after their interests in that firm. The income of the Bhilwara firm did not come to the assessee-firm, instead it was received directly by the partners. The assessee claimed that the salary of Ramgopal and Omprakash should be allowed as deduction from the firm's income as they are looking after the capital of the assessee-firm, invested in the Bhilwara firm and that, therefore, the salaries paid to them were business expenditure. The ITO did not accept the aforesaid contention of the assessee and added back the salaries paid to Ramgopal and Omprakash amounting in all to Rs. 6,000 to the total income of the firm.

4. The accounting year of the assessee-firm in respect of the assessment year 1967-68 ended on Diwali Samvat 2023, i.e., on Diwali of the year 1966. The following were the partners of the firm at the beginning of the accounting year :

1. Shri Chandram. 3. Shri Nandlal2. Shri Jorawarmal 4. Shri Mohanlal

5. Shri Chandram expired on May 6, 1966. On the death of the partner, Chandram, accounts of the firm were not closed. The same books of account continued and the transactions of the firm after his death were recorded in the same books which were ultimately closed on Diwali 1966. A combined trading and profit and loss account for the entire period from Diwali 1965 to Diwali 1966 was drawn up. The balance-sheet was also prepared on that basis. On the death of Chandram, another partnership deed was executed on July 16, 1966. A contention was raised on behalf of the assessee that the firm stood dissolved on the death of the partner Chandram and, therefore, two separate assessments should be made on the firm as below :

(i) in the respect of the period beginning with the first day of the accounting period and ending on May 6, 1966 ; and

(ii) on the firm which was constituted afresh after the death of the partner, Chandram, from May 7, 1966 to Diwali 1966.

6. The ITO did not accept the above contention of the assessee and instead clubbed the income of both the periods and made a single assessment thereon.

7. The assessee appealed against the aforesaid order of the ITO to the AAC, who after considering the submissions of the assessee in detail, deleted the following additions made by the ITO:

Rs.1. In tilli account 8,7102. In alsi account 1,730

8. In the groundnut oil account, the addition was reduced by him from Rs. 5,075 to Rs. 3,100. He also allowed deduction of salary paid to Shri Om prakash, but sustained the addition of salary paid to Shri Ramgopal. He did not accept the assessee's contention that the ITO should have made two separate assessments on the firm (i) up to the date of death of Chandram, and (ii) after his death to the closing of accounts on Diwali, 1966.

9. Aggrieved by the order of the AAC, the assessee as well as the Department both filed separate appeals. The Tribunal in its order, annexure-F, dated June 27, 1974, found that the AAC had definitely erred in law in presuming that the ITO could not make any addition on account of tilli account and alsi account simply because he made no such addition at the time of framing the original assessment order. The AAC was directed to examine on merits the question of additions made to tilli and alsi accounts. The deduction of payment of salary to Ramgopal andOmprakash was disallowed. The Tribunal also held that the assessee's case squarely falls within the purview of Section 187(2) of the Act. On the basis of the aforesaid findings, the Tribunal has referred the aforesaid three questions for our opinion.

10. We have heard Mr. Dinesh Maheshwari, learned counsel for the petitioner (assessee), and Mr. J. P. Joshi, learned counsel for the Revenue.

11. We propose to examine the three questions seriatim.

12. Question No. 1 : The ITO by his order dated November 6, 1967, passed the assessment order. An appeal was filed and the AAC by his order (annexure-B) dated November 11, 1968, set aside the assessment order observing as follows :

' The perusal of the record would leave no doubt that the assessment has been made without examination of the matter in detail and also without giving an adequate opportunity to the appellant before the additions are made. Hence this assessment is also set aside with directions to the Income-tax Officer to reframe the assessment after examining the various factors involved in detail. He will be at liberty to make further enquiries but before any material is acted upon, the appellant should be given an opportunity to rebut the same.

In the result, the assessment is set aside as above.'

13. In pursuance of that, a fresh assessment order was made by the ITO, vide annexure ' C ', dated November 27, 1971. On appeal against that order, the AAC was of the view that the ITO could not go beyond the directions as given in the original assessment order and enquire into other matters adversely against the assessee and after so deciding, he deleted the additions of Rs. 8,710 and of Rs. 1,730 in tilli account and alsi account, respectively. The Tribunal on appeal by the Department opined that the AAC had definitely erred in law in presuming that the ITO could not make any additions on account of tilli account and alsi account, simply because he had made no such additions at the time of framing the original assessment order. The ITO in this case had power during the course of reassessment to pass a fresh order when the original assessment order was set aside by the AAC. Section 251 of the Act deals with the powers of the AAC. The material portion Section 251 of the Act is as follows :

' Section 251. (1) In disposing of an appeal, the Appellate Assistant Commissioner or, as the case may be, the Commissioner (Appeals) shall have the following powers :--

(a) in an appeal against an order of assessment, he may confirm, reduce, enhance or annul the assessment, or he may set aside the assessment and refer the case back to the Income-tax Officer for making a fresh assessmentin accordance with the directions given by the Appellate Assistant Commissioner or, as the case may be, the Commissioner (Appeals) and after making such further inquiry as may be necessary, and the Income-tax Officer shall thereupon proceed to make such fresh assessment and determine, where necessary, the amount of tax payable on the basis of such fresh assessment :......

(c) in any other case, he may pass such orders in the appeal as he thinks fit. '

14. Section 251(1) of the Act sets out the various powers which can be exercised by the AAC in appeal against the orders. In an appeal against an order of assessment, the AAC may confirm, reduce, enhance or annul the assessment or he may set aside the assessment and direct the ITO to make fresh assessment. A perusal of the order (annexure 'B') dated November 11, 1968, shows that the AAC set aside the order of assessment and directed the ITO to reframe the assessment after examining the various factors involved in detail. The order that was passed was an open order of remand and it was not limited to particular questions or particular points.

15. Here, it will be relevant to refer to the decisions that were cited by the learned counsel for the petitioner (assessee).

16. In Katihar Jute Mills (P.) Ltd. v. CIT : [1979]120ITR861(Cal) the assessment made by the ITO was set aside by the AAC and he remanded the case to the ITO. The appeal that was filed before the AAC was only on a particular point. It was observed as under (p. 871):

'The order of the AAC setting aside the assessment was only partial and to the extent as to the question of treatment of a loss in speculative transaction, as clearly indicated in the order itself. The order of the AAC, if read as a whole, in its proper context, would clearly show that it was neither the intent nor the purpose nor the import of the order that the whole assessment was set aside and everything is kept at large so as allow the ITO to make a fresh assessment on all the aspects of the matter and give a free hand to the assessee to make all claims and all arguments in that assessment. In that view of the matter, we are unable to accept the contentions of Mr. J. C. Paul. The hands of the ITO and, in appeal against his order, of the AAC were tied. '

17. In Surendra Overseas Ltd. v. CIT : [1979]120ITR872(Cal) it was held that the ITO can make a fresh assessment if the AAC sets aside an order of assessment under Section 31 of the Indian I.T. Act, 1922, or Section 251 of the Act and directs the ITO to make a fresh assessment. It was further observed as under (head note) :

' The power and jurisdiction of the ITO to make a further enquiry while making a fresh assessment will be governed by and should strictly conform with the order of the AAG. The AAC may direct the ITO to make further enquiry as the ITO may think fit or he may indicate the points or specify the matters on which further enquiry is to be made by the ITO. Where the order of the AAC is specific, it is not open to the ITO to conduct a fresh enquiry beyond the said directions and to make a fresh assessment without reference to the earlier assessment. '

18. The authorities relied on by the learned counsel for the petitioner are clearly distinguishable and cannot be availed of in the case on hand.

19. On the other hand, Mr. J. P. Joshi, learned counsel for the Revenue, has cited J. K. Cotton Spinning & Weaving Mills Co. Ltd. v. CIT : [1963]47ITR906(All) Abhai Ram Gopi Nath v. CIT : [1971]79ITR339(All) Seth Manicklal Fomra's case : [1975]99ITR470(Mad) and Kundanlal Maru v. CIT : [1982]135ITR84(MP) to show that in the case on hand after setting aside the order of assessment by the AAC, the ITO could frame an assessment order de novo after following the directions given by the AAC.

20. In J.K. Cotton Spinning & Weaving Mills Co. Ltd.'s case : [1963]47ITR906(All) the question of scope of powers of the ITO after remand came up for consideration. It was observed as under (p. 910):

' When an Income-tax Officer makes a fresh assessment in compliance with the Appellate Assistant Commissioner's directions, he is of course bound by the directions, but, subject to them, he has the same powers as he had originally when making an assessment under Section 23. The reassessment is nothing but a second assessment in substitution of the assessment made previously and set aside by the Appellate Assistant Commissioner on appeal. There are no restrictions at all on the powers of the Income-tax Officer when he proceeds to reassess the income ; subject to the directions given in the Appellate Assistant Commissioner's order, he has to proceed as if he were making an assessment under Section 23 at the time when he proceeds to reassess. He is not bound or restricted by anything that had happened, either when he made the original assessment or when the appeal was heard by the Appellate Assistant Commissioner; he is governed only by the findings of the Appellate Assistant Commissioner, He is not bound by his own findings arrived at in the original assessment; they do not operate as res judicata and undoubtedly have not the force of an order. The findings arrived at by the Appellate Assistant Commissioner and the directions given by him are binding on him, not as res judicata, but as orders to which he is subject. He is free to take into consideration any relevant material that came into existence for the first time after the original assessment order was made by him. Consequently, the Income-tax Officerin the instant case was competent, when reassessing the income of the assessee, to consider the orders passed by him under Section 23A and to treat the assessee as having derived larger income from the dividends than that shown by it in its returns and accepted as correct in the original assessment orders. ' (Underlining is ours)

21. J.K. Spinning 6- Weaving Mills Co. Ltd.'s case : [1963]47ITR906(All) was relied on in Abhai Ram Gopi Nath's case : [1971]79ITR339(All) . In Abhai Ram Gopi Nath's case, it was held that where, in an appeal from an assessment, the AAC sets aside the assessment and directs the ITO to make a fresh assessment, the ITO is bound by the directions of the AAC in making the fresh assessment. But, subject to those directions, he has the same powers in a fresh assessment as he had originally in making an assessment under Section 23 of the Act. There are no restrictions at all on the powers of the ITO when he proceeds to make a fresh assessment, for the fresh assessment is nothing but a second assessment in substitution of the one set aside.

22. In Seth Manicklal Forma's case : [1975]99ITR470(Mad) the question referred to the High Court was whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the AAC was justified in directing that the sum of Rs. 87,595 should be excluded from the assessment made by the order dated March 1, 1967. After applying /. K. Cotton Spinning & Weaving Mills Co. Ltd.'s case : [1963]47ITR906(All) and Abhai Ram Gopi Nath's case : [1971]79ITR339(All) and considering Section 251 of the Act, a Division Bench of the Madras High Court answered the question in the negative and in favour of the Department. It was observed as follows (p. 474):

' Once the order of assessment is set aside and the matter comes up for fresh assessment before the Income-tax Officer, we are of opinion that the powers will have to be decided with reference to the provisions under Section 143(3) and not with reference to any observations made by the Appellate Assistant Commissioner in his order or with reference to the scope of the appeal before the Appellate Assistant Commissioner. '

23. Having examined the order of the AAC dated November 11, 1968, by which the assessment order dated November 6, 1967 of the ITO was set aside and the case was sent back to the ITO for reframing the assessment order after examining the various factors involved in detail, giving an opportunity to the assessee before the additions are made, is an order of remand without any limitations or restrictions. In our opinion, as the case was sent back to the ITO without any restrictions, the ITO could exercise all powers which he could otherwise exercise at the time of makingthe original assessment. The Tribunal was right when it held that though no additions were made in tilli and alsi accounts while framing the original assessment, the ITO could re-examine the matter after remand by the AAC without any limitation and restriction.

24. Question No. 2:--Under the expenses head, salary of Rs. 6,000 has been claimed, which is said to have been paid to Ramgopal and Omprakash. In the assessment order (annexure-D) dated November 27, 1971, the ITO has disallowed the claim of salary paid to Ramgopal and Omprakash amounting to Rs. 6,000 on the ground that both these persons were close relations of the partners and bogus claim of salary was made in their names only to reduce the taxable income. On appeal, the AAC did not agree with the ITO and came to the conclusion that the payment of salary to Ramgopal does not stand proved. He further held that the payment of salary amounting to Rs. 2,500 to Omprakash should be allowed. The Tribunal, on second appeal, opined that the assessee was having no income from the Bhilwara firm and, therefore, it could not claim any expenditure on account of the employment of the persons who are said to look after the interests of the assessee in the Bhilwata firm. Section 37 of the Act, inter alia, lays down that any expenditure laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head ' Profits and gains of business or profession'. The two most important ingredients in allowing the expenditure laid out or expended in computing the income chargeable under the head ' Profits and gains of business or profession ' are that the expenditure should be in respect of the business which was carried on by the assessee and that it should have been laid out or expended wholly and exclusively for the purposes of such business or profession. The Tribunal has found that the assessee had no business connection with the Bhilwara firm and, therefore, it could not claim any expenditure on account of the employment of the persons who are said to look after the interests of the assessee in the Bhilwara firm. In these circumstances, the payment of salary to Raragopal and Omprakash was rightly disallowed by the Tribunal, for, that deduction was not allowable under Section 37 of the Act.

25. Question No. 3:--The assessee-firm consisted of the following four partners:

1. Shri Chandram2. Shri Jorawarmal3. Shri Madanlal4. Shri Mohanlal

26. A perusal of the partnership deed (annexure-D) dated April 22, 1957, shows that originally there were three partners': (1) Chandram, (2) Jorawarmal, and (3) Madanlal. Clause (10) of the partnership deed dated May 8, 1957, reads as under :

^^fdlhHkh i{kdkj dk fu/ku gksus ij 'ks'ki{kdkj dh vuqefr gksusij ,sls i{kdkj dhokfjl dks mDr i{kdkj dh txg lk>snkj j[kk tk ldsxk vkSj ,sls ifjorZu esa lk>snkjhO;ogkj ;Fkkor pkyw jg ldsxk A**

27. Madanlal, one of the partners, expired and a fresh partnership deed was executed on June 8, 1959, between Chandram, Jorawarmal, Nandlal and Mohanlal as is evident on the record. Clause 8 of the partnership deed is similar to Clause (10) of the partnership deed dated May 8, 1957. Clause (10) of the partnership deed dated May 8, 1957, or for that matter Clause (8) of the partnership deed dated June 8, 1959, when translated into English reads as under :

' In the event of death of any partner, his successor may be taken in his place as partner and under such circumstances the firm may be kept continued.'

28. Chandram died on May 6, 1966, and after his death, another partnership deed was executed on July 16, 1966. The preamble of this partnership deed when translated into English is as follows :

'The business of the above mentioned firm was being carried out jointly by Shri Chandram, Shri Jorawarmal, Shri Nandlal and Shri Mohanlal in Shahpura. With effect from May 6, 1966, because of the death of Shri Chandram, the remaining partners accepted Shri Narsinghlal to work in the place of his father, Shri Chandram. Since Shri Narsinghlal is a minor being aged 17 years, he would acquire his share in the profits only when he becomes a major. He would not be held liable for the losses of the firm. After attaining the age of majority, if Shri Narasinghlal accepts to continue as partner in the firm, he would share the profits and losses of the firm.'

29. The ITO clubbed the income of the period from the first day of the accounting period to May 6, 1966, and from May 7, 1966, to Diwali, 1966. The Tribunal was of the opinion that the case squarely falls within the provisions of Section 187 of the Act and, therefore, the authorities were correct in taxing the income for the entire accounting period in the hands of the firm as constituted at the time of the assessment.

30. Section 187 of the Act deals with the change in the constitution of a firm. The material portion of Section 187 of the Act is as follows :

' 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 :

Provided that......

(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.'

31. Section 188 of the Act deals with succession of one firm by another firm and Section 189 deals with firms dissolved or business discontinued. The contention of the learned counsel for the petitioner-assessee is that the Tribunal has erred in holding that after the death of Chandrarn, there was merely a change in the constitution of the firm. According to him, the firm stood dissolved after the death of Chandram and the business of the firm was succeeded to by another firm which came into existence by means of the partnership deed (annexure D-2). Section 40 of the Partnership Act (No. IX of 1932) ('the Act of 1932' herein) deals with dissolution by agreement. It lays down that a firm may be dissolved with the consent of all the partners or in accordance with a contract between the partners. Section 42 of the Act of 1932 deals with dissolutions on the happening of certain contingencies. The material part of it is as under:

' Section 42. Dissolution on the happening of certain contingencies,-- Subject to the contract between the partners a firm is dissolved--......

(c) by the death of a partner; and.........'

32. Dissolution under Section 42 of the Act is subject to the contract between the partners. If the partnership agreement provides for the continuance of the partnership after the death of a partner, then, on the death of a partner, the firm will not be dissolved. In this case, Chandram died on May 6, 1966. The partnership deed between the partners which was in force at the time of the death of Chandram amongst others provided that in the event of the death of any partner of the firm, the successor of the deceased partner would be made as partner with the consent of the remaining partners and in such a situation, the partnership business would continue as usual. On July 16, 1966, another partnership deed was executed and the preamble of that partnership deed hasalready been reproduced above. The accounting year of the assessee ended on Diwali, 1966. It was not stall disputed that on the death of the partner, Chandram, accounts of the assessee were not closed. The account books were continued and even after his death, the transactions were recorded in them. These account books were closed on Diwali, 1966. One consolidated and combined trading and profit and loss account for the period from Diwali, 1965, to Diwali, 1966, was drawn up and the balance-sheet was also prepared on that basis. The question before the taxing authorities was whether the assessee-firm stood dissolved on the death of the partner Chandram and, therefore, two separate assessments should be made on the firm 1(i) in respect of the period beginning with the first day of the accounting period and ending on May 6, 1966; and (ii) on the firm which was constituted afresh after the death of the partner, Shri Chandram, from May 7, 1966, to Diwali, 1966. In other words, the precise question that arose was whether merely a change in the constitution of the firm has occurred and liability for the tax is to be assessed in accordance with Section 187 of the Act. Section 187 of the Act deals with a case where at the time of making the assessment, it is found that a change has occurred in the constitution of the firm. Section 188 of the Act deals with succession of one firm by another firm. In this connection, it will be relevant to refer to the various decisions cited by the learned counsel appearing for the parties.

33. First we propose to refer to the cases cited by the learned counsel for the petitioner-assessee.

34. In Dahi Laxmi Dal Factory v. ITO : [1976]103ITR517(All) there were two partners of a firm to the benefits of which three minors were admitted. One of the partners died and after his death, his son and two others took over the business of that firm and a fresh partnership deed was executed. To the benefits of this partnership also, the three minors were admitted. During the course of the assessment, the firm claimed that on the death of one of the partners, the old firm stood dissolved and on the following day, the new firm took over the business and, therefore, two assessments should be made, one against the old firm and the other against the new firm for the respective periods during which they were in existence during the relevant previous year. There was no stipulation in the partnership deed that the firm shall not stand dissolved on the death of a partner. Even if there had been such a stipulation, the firm could not have been saved from dissolution, because, after the death of one of the two partners, only one partner was left and one man cannot constitute a firm and the firm automatically came to an end. It was, therefore, held that since the erstwhile firm stood dissolved on the death of one of the partners, the petitioner firm whichtook over the same business could be assessed only in accordance with Section 188 and a single assessment for the whole year was not valid.

35. In Mahabir Rice & Dal Mills v. CIT : [1978]115ITR557(All) one partner of a firm died and two other partners retired and under a fresh partnership deed, the firm continued with three continuing partners and three fresh persons and a miner was admitted to the benefits of the partnership. The books of the firm were closed and profits were divided amongst the partners. The assessee filed two returns of income, but the ITO made a single assessment of the firm for the entire period. In those facts, it was observed as under (headnote):

' ...that the two periods could not be combined. There was no stipulation that the firm would not stand dissolved on the death of a partner. The conduct of the parties showed that the firm stood dissolved in fact as well as in law and a new partnership took over as from March 15, 1967. Therefore, the Tribunal was not justified in holding that it was a mere change in the constitution of the firm and that one single assessment for the entire period could be made.'

36. In Venkateswara Stone Co. v. CIT : [1978]115ITR236(AP) one of the partners died and after his death his two widows were taken as partners. Books of accounts were not closed on the death of the partner. There was no stipulation in the partnership deed that the firm may continue in spite of the death of a partner. In those facts, it was held that on the death of the one of the partners, the firm stood dissolved and, therefore, the two firms should be assessed separately.

37. In Addl. CIT v. Vinayaka Cinema : [1977]110ITR468(AP) there was a partnership firm and death and retirement of partners had taken place during the accounting year. There was no provision in the partnership deed that the firm was not to be dissolved in such events. Hence, as a result of the death of a partner, the old partnership firm stood dissolved under the Partnership Act and a new partnership was constituted with the remaining partners of the old firm together with two new partners. In those facts, it was observed as under (AIR headnote) :

' that, on the facts and circumstances of the case, and in view of Section 187(2)(e), a single assessment could not be made on the aggregate of the incomes for the two periods (viz., one for the period April 1, 1968, to August 17, 1968, and the other, for August 18, 1968, to March 31, 1969), but there should be two separate assessments. In the absence of any provision in the partnership deed to continue the firm even after the death of a partner, the firm stood dissolved on August 17, 1968, when one of the partners died and the firm which came into existence on August 18, 1968, was a new firm. There was succession to the old firm by a new firmwithin the meaning of Section 188 which continued the old business as before. Therefore, the case was not covered by Section 187 and, hence, it was obligatory on the part of the ITO to make two separate assessments, one on the dissolved firm and the other on the new partnership firm.'

38. In Ganesh Dal Mills v. CIT : [1982]136ITR762(MP) originally the firm was constituted by four partners. There was no Clause in the partnership deed to the effect that on the death or retirement of any of the partners, the firm will continue. One of the partners died and another partner retired. A fresh deed of partnership was executed between the surviving partners and one new partner. The firm also admitted four minors to the benefits of partnership. The business of the original firm was continued by the newly constituted firm. The same accounting year and the same books of account continued after the new partnership came into existence. The newly constituted firm took over the assets and liabilities of the old firm. As there was no Clause in the partnership deed to the effect that on the death of the partner or retirement of a partner, the firm will continue, it was held as under (headnote) :

' ......it will not be a case of change in the constitution of the firm ascontemplated by Section 187(2)(a) of the I.T. Act, 1961, but it will be a case of succession of one firm by another firm and two assessments will have to be made under s, 188 for the two different periods, one for the period before dissolution and the other for the period after dissolution.'

39. The cases relied on by the learned counsel for the assessee are distinguishable because in the partnership deed there was no stipulation that the partnership can continue after the death of one or more of the partners. The principles laid down therein are not applicable to the case on hand, for, in those cases, there was no stipulation or condition that the firm shall not stand dissolved on the death or retirement of a partner.

40. On the other hand, Mr. J. P. Joshi, learned counsel for the Revenue, has relied on Sandersons & Morgans v. ITO : [1973]87ITR270(Cal) and CIT v. Sri Rama Talkies : [1973]87ITR615(AP) .

41. In Sandersons' case, the partnership deed provided that on the death of a partner, the firm will not be dissolved. While considering Section 184(4) of the Act, the question arose whether there is a change in the constitution of the firm. It was held that a change in the constitution of the firm normally and ordinarily would mean every alteration in the set up of the firm, viz., death, retirement, incapacity of partners, alteration in the shares of the partners in the firm, etc. There was a change in the constitution of the petitioner-firm consequent on the death of the partner.

42. In Sri Rama Talkies' case : [1973]87ITR615(AP) it was held that a firm is constituted by its partners and even if in accordance with theterms of the deed of partnership a partner is replaced by another, without the firm being dissolved, there is a change in the constitution of the firm for the purpose of Section 184(7) of the I.T. Act 1961.

43. In Kaithari Lungi Stores v. CIT : [1976]104ITR160(Mad) it was held by a Division Bench of the Madras High Court as under (headnote) :

' A change in the constitution of a firm may arise by admission, retirement, explusion, insolvency, or death of one or more partners subject to the conditions referred to in Sections 31 to 35 of the Partnership Act. In the case of death of a partner, there should be a contract express or implied between the partners that the firm shall not be dissolved by the death of a partner...... The Partnership Act struck a medial note as between these two extreme propositions and recognised the continued existence of the firm in spite of a change in its constitution. The Income-tax Act went a little further and recognised the firm for the purpose of assessment as a unit independent of the partners constituting it.'

44. It was further observed as under:

' In view of the specific clauses in the various partnership deeds implying that the partners intended that death of one partner shall not bring about a dissolution of the partnership as well as the conduct of the parties showing that it was never intended that death of a partner should dissolve the partnership, a single assessment made on the firm as constituted at the time of the assessment was proper and the aggregation of the incomes of the three different firms constituted under three different deeds during the year in the hands of the assessee-firm was justified.'

45. We shall bear in mind the principles laid down in the aforesaid decisions.

46. It is clear from the relevant Clause of the partnership deed read with the preamble of the partnership deed dated July 16, 1966, that the firm was not dissolved on the death of Chandram as there was an agreement amongst the partners that the death of one of the partners would not automatically dissolve the firm in case the surviving partners agreed to take the legal representatives of the deceased partner in place of the deceased in the business. The business of the firm continued uninterrupted in the same sets of account books in which transactions of the firm up to the date of the death of Chandram were recorded. In our opinion, the Tribunal was right in coming to the conclusion that it was merely a change in the constitution of the firm within the meaning of Section 187(2) of the Act and that the old firm had not been dissolved and, therefore, only one assessment could be made from Diwali 1965 to Diwali 1966. We, therefore, hold that the Tribunal was right and justified in coming to the conclusion that the firm had not been dissolved on the death of Chandramon May 6, 1966, and that it was a case of change in the constitution of the firm in terms of Section 187(2) of the Act, and, therefore, only one assessment should have been made on the assessee firm in respect of the assessment year 1966-67.

47. For the reasons aforesaid, questions Nos. 1 to 3 referred by the Tribunal are answered in the affirmative, i.e., in favour of the Revenue (Department) and against the assessee.

48. In the circumstances of the case, the parties are left to bear their own costs of this reference.

49. Copy of this order be sent to the Tribunal concerned as required by Section 260(1) of the Act.