COMMISSIONER OF INCOME TAX Vs. SHAMIAH SETTY B BROTHERS
LAWS(KAR)-1966-8-3
HIGH COURT OF KARNATAKA
Decided on August 11,1966

COMMISSIONER OF INCOME TAX Appellant
VERSUS
B.SHAMIAH SETTY Respondents


Cited Judgements :-

COMMISSIONER OF INCOME TAX VS. VEERARAGHAVULU CHETTY T AND SONS CO [LAWS(APH)-1974-6-11] [REFERRED TO]
COMMISSIONER OF INCOME TAX VS. ARVIND CONSTRUCTION CO [LAWS(DLH)-1972-2-23] [REFERRED TO]


JUDGEMENT

SOMNATH IYER J. - (1.)IN this reference sought by the CIT under s. 66(1) of the IT Act, 1922, the question before us is whether two sets of income derived during the same accounting year by firms which purported to be distinct firms, could be added to one another for the purpose of assessment.
(2.)THE assessment year was 1958-59. THEre was a partnership which was first constituted under an instrument of partnership on 7th May, 1951. THEre were three partners and one of them retired from the partnership on 31st July, 1957. According to the statement of the case submitted to us by the Tribunal, the remaining two partners " formed a partnership " under an instrument of partnership executed on 1st Aug., 1957. What the ITO did was to add to the income of the period antecedent to 1st Aug., 1957, the subsequent income, and to make an assessment in respect of the aggregate income. This the ITO did on the postulate that what happened in consequence of the retirement of one of the partners, was no more than a mere change in the constitution of the old firm.
But, in appeal, the AAC recorded a finding that there were two distinct firms and according to him, the income earned prior to 1st Aug., 1957, was earned by the old firm and that which was earned during the period subsequent to 1st Aug., 1957, was earned by the new firm of which two of the partners of the old firm were partners.

That finding was also affirmed by the Tribunal and so in consequence of the orders made by the AAC and the Tribunal, the ITO had to proceed to make a new assessment on the basis that they were two distinct firms. It is in this situation that the CIT sought a reference and the question referred to us, reads :

"Whether, on the facts and in the circumstances of the case, the aggregation of the income from 1st Aug., 1957, to 31st March, 1958, with that of the income from 1st April, 1957, to 31st July, 1957, was justified ?"
It seems to us that we should answer this question in favour of the assessee.
(3.)IT is a familiar principle of partnership law that if one of the partners in the firm retires and the firm continues with the remaining partners, the partnership continues to exist notwithstanding the change in the composition of the firm. IT is equally well-settled that when a partner of the firm retires from partnership, the remaining partners have an option to continue to remain in the old firm and to continue it or to dissolve that firm and enter into a new partnership. If a new partnership is so formed by the remaining partners, that firm which is so brought into being is a firm distinct from the old firm, and that would be the position notwithstanding the nature of the business of the two firms being similar or identical.
The question whether there was a new partnership or whether the old partnership continued is a question of fact. It may sometimes happen that, although the remaining partners purport to form a new partnership, the old partnership nevertheless continues to exist and that the new partnership masquerades as a new partnership although it is not one.



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