The presence of a contract to the contrary in the partnership deed excluding dissolution on the death of a partner influenced the interpretation and application of section 187 of the Income-tax Act, 1961.

1. This reference under section 256(1) of the Income-tax Act, 1961, is at the instance of the Revenue for answering the following question of law, namely :

"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that as soon as Shri Indramal, partner, died on November 5, 1976, the assessee-firm was automatically dissolved meaning thereby that it was a case of succession and not a change in constitution and that section 187 of the Income-tax Act, 1961, does not govern cases of this type ?"

2. The assessee-firm consisted of three partners constituted by a deed of partnership dated May 14, 1965. One of the terms of the deed was that the partnership would not stand dissolved on the death of any of its partners. One of the partners, Indramal, died on November 5, 1976, during the accounting period of the relevant assessment year 1978-79. The remaining partners continued the business of the firm after admitting some more partners therein. The assessee claimed the making of two assessments, one for the period up to November 5, 1976, on the date of death of Indramal and another for the subsequent period. The Income-tax Officer rejected the contention and made one assessment for both the periods. The assessee's contention was accepted on appeal by the Appellate Assistant Commissioner. The Revenue's appeal to the Tribunal has filed. The Tribunal held that on the death of one of the partners of the firm, it stood dissolved by operation of law, according to section 42 of the Indian Partnership Act and, therefore, it was a case of succession governed by section 188 of the Act and not of a mere change in the constitution of the firm governed by section 187. This view of the Tribunal has given rise to this reference at the instance of the Revenue.

3. As already stated, there was a specific term in the partnership deed dated May 14, 1965, mentioning that the firm would not be dissolved on the death of any of its partners. This was accordingly a contract to the contrary excluding the applicability of the general principle of dissolution of a firm on the death of a partner contained in section 42(c) of the Indian Partnership Act. For the same reason, the proviso inserted in sub-section (2) of section 187 of the Income-tax Act, 1961, retrospectively with effect from April 1, 1975, has no application for the reasons given by us in D.B. Income-tax Reference No. 15 of 1984, decided on July 29, 1987 [CIT v. Gharsana Beriwal Road Works [1988] 170 ITR 500 (Raj) (supra)]. Obviously, in a case like the present where there is no dissolution of the firm on the death of any of its partners on account of a contract to the contrary in the partnership deed, the said proviso inserted in sub-section (2) of section 197 of the Act not being applicable, it is a case governed by section 187 since it is merely a case of a change in the constitution of the firm as contemplated by section 187(2) of the Act. Accordingly, one assessment for the entire period was required to be made and the Tribunal's view to the contrary is unjustified.

4. Consequently, the reference is answered in favour of the Revenue and against the assessee as under :

"The Tribunal was not justified in holding that the assessee-firm was automatically dissolved on the death of one of its partners in spite of a contract to the contrary in the deed of partnership and, therefore, it was also not justified in holding that it is a case of succession and not merely of a change in the constitution of the firm governed by section 187 of the Income-tax Act, 1961. "
No costs.

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