The death of one partner and the subsequent formation of a new partnership constituted a change in the constitution of the firm under Section 187(2) of the Income-tax Act, 1961.

Bhopinder Singh Dhillon, J.

1. The brief facts giving rise to this income-tax reference are that Sarvshri Dharam Pal, Sat Dev and Ram Rattan entered into a partnership, vide partnership deed dated December 8, 1954, for carrying on the business of wholesale cloth dealers. Shri Ram Rattan died on June 6, 1966. There was no provision in the partnership deed for the continuance of the partnership in the event of death of any partner and, therefore, it is pleaded by the assessee that, in view of the provisions of Section 42(c) of the Indian Partnership Act, the firm stood dissolved on June 6, 1966, On June 9, 1966, a new partnership was formed between Sat Dev and Dharam Pal, partners of the dissolved firm, and Shri Sham Lal, son of the deceased partner, Shri Ram Rattan, Two returns were filed for the assessment year 1967-68, the first for the period from December 18, 1965, to June 8, 1966, and the second for the period from June 9, 1966, to March 31, 1967. The Income-tax Officer, while assessing, vide his order dated March 13; 1968, clubbed the income of the two firms and passed a single assessment order holding the view that it was a case of a change in the constitution of the firm. The appeal filed by the assessee before the Appellate Assistant Commissioner failed and, similarly, the second appeal filed before the Tribunal also having failed, this reference was made to this court at the instance of the assessee, in the following terms:

"Whether, on the facts and in the circumstances of the case, the assessment for both the periods was justified in view of the provisions of Section 187(2) of the Income-tax Act, 1961 ? "

2. The main contention of the learned counsel for the assessee is that the provisions of Section 188 of the Income-tax Act, 1961, are applicable to the facts of the present case as, according to the learned counsel, the firm of which Ram Rattan, deceased, was a partner stood dissolved in view of the provisions of Section 42(c) of the Indian Partnership Act, as there was no provision in the partnership deed providing that, in the event of death of any partner, the partnership would continue. It is contended that a completely new entity came into being on June 9, 1966, when a new partnership was formed with Sat Dev and Dharam Pal, the two partners of the previous firm and Sham Lal, son of the deceased partner, Ram Rattan. It is, therefore, contended that, keeping in view the provisions of the Partnership Act, this was a new entity coming into existence and, therefore, it was a case of succession of one firm by another. It is contended that provisions of Section 187(2) of the Income-tax Act, 1961, have been wrongly applied by the income-tax authorities and a legal entity which stood dissolved by the death of one of the partners cannot be said to be continuing when another legal entity was brought into existence by the partnership deed by way of a new firm.

3. In order to appreciate the point involved in the case, a few relevant provisions of the Income-tax Act, 1961, may be reproduced.

4. Section 170 of the Income-tax Act deals with the succession of business or profession by another person who continues to carry on the business or profession, whereas Section 188 of the Income-tax Act deals with succession of one firm by another which may be reproduced as under :

"188. Succession of one firm by another firm.--Where a firm carrying on a business or profession is succeeded by another firm, and the case is not one covered by Section 187, separate assessments shall be made on the predecessor-firm and the successor-firm in accordance with the provisions of Section 170."

5. Section 187 of the Act deals with the change in the constitution of the firm and is in the following terms :

"187. Change in constitution of a firm.-- (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 cons