Commissioner of Income Tax vs Agency Hamdard Waqf Limited

R.K. Gulati, J.—This is a reference u/s 256(1) of the Income Tax Act, 1961 (hereinafter to be referred as "the Act"), at the instance of the Revenue, to answer the following question of law :

"Whether, on the facts and in the circumstances of the case, there should have been two separate assessments for the two periods as claimed by the assessee or one consolidated assessment as framed by the Income Tax Officer?"

The assessee is a registered firm. The assessment year in dispute is 1980-81 and the relevant previous year ended on December 31, 1979.

Originally the assessee-firm consisted of five partners. During the course of the accounting year relevant to the assessment year under reference, Mahboob Alam, one of the partners of the firm, died on June 10, 1979, and Smt. Quamarunnisa retired from the firm. The remaining three partners along with Saghir Ahmad and Athar Hussain entered into a new partnership to carry on business from June 11, 1979. The assessee-firm filed two returns of income, one for the period April 1, 1979, to June 10, 1979, and the other for the period June 11, 1979, to December 31, 1979. It requested the Income Tax Officer to frame two separate assessments for the aforesaid two periods. The Income Tax Officer was of the opinion that the assessee''s case was fully covered by the provisions of Section 187 of the Act and, therefore, there should be one single assessment for both the periods. After working out the income of the two periods separately, the Income Tax Officer framed one consolidated assessment for both the periods. Being aggrieved, the assessee filed an appeal before the Appellate Assistant Commissioner who allowed the same and held that two separate assessments ought to have been made for the aforesaid two periods. In taking this view, he relied upon a Full Bench decision of this court in BADRI NARAIN KASHI PRASAD Vs. ADDL. COMMISSIONER OF INCOME TAX. FANCY STORES v. COMMISSIONER OF INCOME TAX. R. C. GUPTA and SONS v. COMMISSIONER OF INCOME TAX. BENI PD. SIDGOPAL v. COMMISSIONER OF INCOME TAX., .

Against the order of the Appellate Assistant Commissioner, the Department took the matter before the Income Tax Appellate Tribunal in second appeal. The Income Tax Appellate Tribunal affirmed the order by saying that it was bound by the Full Bench decision of this court which was followed by the Appellate Assistant Commissioner. However, it noticed in its order some decisions of other High Courts taking a contrary view. The view taken by the Income Tax Appellate Tribunal has been challenged by this reference.

We have had the benefit of hearing learned standing counsel for the Income Tax Department as nobody has appeared on behalf of the assessee.

Section 187 deals with the procedure to be adopted where there is a change in the constitution of the firm and directs that the assessment shall be made on the firm as constituted at the time of making the assessment. The effect of Sub-section (1) of Section 187 is that where there is a change in the constitution of the firm in the middle of the previous year, there shall be a single assessment for the whole of the income of the previous year, profit being apportioned between the partners. Sub-section (2) of Section 187 defines the expression "change in the constitution of the firm". Sub-section (2) of Section 187 as it stood at the relevant time read as under :

" (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."

At the outset, it was pointed out to us that the Full Bench decision relied upon by the Income Tax Appellate Tribunal has since been overruled by this court in a later case by a Bench of five judges in Vishwanath Seth Vs. Commissioner of Income Tax, . Interpreting Section 187 and overruling the earlier view, it was observed (at page 257) :

" The view taken by this court in Commissioner of Income Tax Vs. Shiv Shanker Lal Ram Nath, and followed up in the Full Bench case of BADRI NARAIN KASHI PRASAD Vs. ADDL. COMMISSIONER OF INCOME TAX. FANCY STORES v. COMMISSIONER OF INCOME TAX. R. C. GUPTA and SONS v. COMMISSIONER OF INCOME TAX. BENI PD. SIDGOPAL v. COMMISSIONER OF INCOME TAX., has also been dissented from by the Punjab & Haryana High Court in Hoshiarpur Electric Supply Co. Vs. Commissioner of Income Tax, ..... In all these decisions, it has been held that in cases of reconstitution u/s 187, the same firm continues and is assessable in respect of the income for the entire previous year. In our opinion, this is the correct legal position.

It thus appears that under the general law of partnership under the Indian Partnership Act as well as under the Income Tax Acts, the position is that a firm retains its identity and assessable entity in case of its reconstitution. It is hence the same person. "

Thus, it is contended that the reference should be returned in favour of the Department.

If the controversy had rested at that stage and in view of the Full Bench decision in Vishwanath Seth Vs. Commissioner of Income Tax, , the content of learned standing counsel deserved to be accepted.

However, Section 187 was amended by Section 33 of the Taxation Laws (Amendment) Act, 1984. It reads :

"33. Amendment of Section 187.--In Section 187 of the Income Tax Act, to Sub-section (2), the following proviso shall be added and shall be deemed to have been added with effect from the 1st day of April, 1975, namely :--

'' 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 ''."

As would be evident from the above proviso added to Sub-section (2) Of Section 187, it was introduced retrospectively and shall be deemed to have come into effect from April 1, 1975. In these circumstances, the amendment will have to be given effect to as if it existed at the time when the assessment in dispute was made on December 2, 1980.

Since the amendment came into force in October, 1984, the Income Tax Appellate Tribunal, while deciding the appeal or even at the stage when it drew up the reference, had no occasion to consider the impact of this amendment.

In order to record any answer to the question referred to us, it would be necessary to find out whether the firm was dissolved on the death of Mahboob Alam who was one of the partners before the change in the constitution of the firm. For that purpose, it will be necessary to look into the partnership deed and the clause relating to continuance of the partnership business in the eventuality of death of any partner. In the absence of such a clause, it may be necessary to determine the position emerging as a result of the law contained under the provisions of the Indian Partnership Act. In such a situation, the conduct of the surviving partners may also be relevant. In view of the changed position in the law and in the absence of material and relevant findings, there are two options before us, either to call for a supplementary statement of the case from the Income Tax Appellate Tribunal or to return the reference unanswered with a direction to decide the appeal afresh. On the facts of the present case, we do not propose to answer the question referred to us. We remand the matter to the Income Tax Appellate Tribunal to rehear and decide the appeal afresh. The Tribunal, if necessary, may take further evidence. The course we have adopted in this case was taken by the Supreme Court and it considered it fit to remand the case to the Tribunal with a direction that it should rehear the appeal (see Commissioner of Income Tax, West Bengal and Another Vs. George Henderson and Co. Ltd., and Commissioner of Income Tax, Bombay City I Vs. Greaves Cotton and Co. Ltd., .

In the result, we return the question referred to us unanswered with a direction that the Income Tax Appellate Tribunal may rehear the appeal as indicated above in this judgment. There shall be no order as to costs.