MOHATTA BROTHERS Vs. COMMISSIONER OF INCOME TAX
LAWS(GJH)-1983-11-5
HIGH COURT OF GUJARAT
Decided on November 23,1983

MOHATTA BROTHERS Appellant
VERSUS
COMMISSIONER OF INCOME TAX Respondents

JUDGEMENT

MEHTA,J. - (1.) WE are concerned with the asst. year 1970 71 and the accounting period corresponding to the assessment year in question ended on June 30, 1969. The assessee firm consisted of six partners including one Shri Shivratan G. Mohatta, who died on April 8, 1969. In other words, Shri Shivratan G. Mohatta died about 2 1/2 months before the close of the accounting year. The firm was granted registration in the earlier assessment years. It appears that the surviving five partners claimed the benefit of the continuity of registration granted in the earlier assessment years by filing the prescribed form as required under S. 184(7) of the IT Act, 1961 (hereinafter referred to as "the Act of 1961"), r/w r. 24 of the I.T. Rules, 1962 (hereinafter referred to as "the Rules"), for the period till the date of death of the said Shri Shivratan G. Mohatta. It was common ground that no fresh deed of partnership had been executed on the demise of the said partner and no application for registration was filed for the remaining period. The ITO noted that the books of account were closed on the day when the accounting year ended, i.e.., on June 30, 1969, and the assessee had filed only one return for the whole period. The assessee claimed before the ITO that the profits or losses may be apportioned for the two periods, i.e., (1) from the date of commencement of the accounting year till the date of death of the partner, and (2) from the date of demise till the end of the accounting year. This contention did not find favour with the ITO who held that the profit or loss arose when the accounts were closed; and since no fresh partnership deed was executed, the firm was dissolved and the registration originally granted cannot be continued under S. 184(2) of the Act. The assessee took the matter in appeal to the AAC, who following the decision of the Andhra Pradesh High Court in CIT vs. Sri Rama Talkies (1973) 87 ITR 615 (AP), held that the assessee firm had been rightly assessed as an unregistered firm; and, therefore, dismissed the appeal. The assessee carried the matter in further appeal to the Tribunal. The Tribunal following the decision of the Andhra Pradesh High Court in Sri Rama Talkies' case (supra) and of the Allahabad High Court in Panna Lal Babu Lal vs. CIT 1969) 73 ITR 503 (All), held that where only one return of income was filed and the accounts were closed on the last date with only one profit and loss account and balance sheet drawn up for the whole period, the assessment can be one only and the registration, if at all, that could be granted could be for the whole year. The Tribunal observed that the firm was not dissolved and that the option to take the heir of the deceased partner as a partner was not exercised and the firm was continued under the original partnership deed executed in 1967 ; and, therefore, the assessee was not entitled to registration. The Tribunal, therefore, dismissed the appeal. At the instance of the assessee, the following question has been referred to us for our advice: "Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee was not entitled to renewal of registration under S. 184(7) ?"
(2.) THE problem which is simple enough, viz., whether the assessee firm is entitled to registration has been complicated by considerations which are not wholly germane to the question at issue. We should remind ourselves that the assessee firm had claimed the benefit of the continuity of registration granted in Form No. 12 under r. 24 of the Rules for the period up to the date of dissolution of the firm upon the death of one of the partners of the firm and for the period subsequent to the demise of the said partner, the assessee firm has thought it fit to allow it to be treated as an unregistered firm. In that context, the whole dispute arose between the assessee and the Department. The assessee firm claimed that it is entitled to the benefit of the continuity of registration granted earlier till the date of the demise of the partner as a result of which the firm stood dissolved. On the other hand, the Department was claiming that since the condition precedent for the continuity of registration granted earlier has not been satisfied, inasmuch as there was a change in the constitution of the firm, the assessee was not entitled to the benefit of s. 184(7). At the time of hearing of this reference, the grievance made on behalf of the assessee is that the Tribunal has not addressed itself to the relevant aspects of the matter and has decided the question on facts which are not relevant and germane to the controversy. On behalf of the Revenue, it was urged that having regard to the agreement between the erstwhile partners as contained in cl. 15 of the partnership deed, the firm would not stand dissolved by the demise of one of the, partners and the jural relationship amongst the surviving partners would continue subject to the right of the representative of the deceased partner to join the partnership firm; and, therefore, in the present, case there was no dissolution of the partnership, but there was merely a change in the constitution of partnership so far as the partners and their shares were concerned. In order to answer the question which has been referred to us, we may set out the relevant part of s. 184 so far as is material for the purpose of this reference. "184. (7) Where registration is granted to any firm for any assessment year, it shall have effect for every subsequent assessment year: Provided that: (i) there is no change in the constitution of the firm or the shares of the partners as evidenced by the instrument of partnership on the basis of which the registration was granted ; and (ii) the firm furnishes, before the expiry of the time allowed under Sub S. (1) or Sub S. (2) of S. 139 (whether fixed originally or on extension) for furnishing the return of income for such subsequent assessment year, a declaration to that effect, in the prescribed form and verified in the prescribed manner, so, however, that where the ITO is satisfied that the firm was prevented by sufficient cause from furnishing the declaration within the time so allowed, he may allow the firm to furnish the declaration at any time before the assessment is made. (8) Where any such change has taken place in the previous year, the firm shall apply for fresh registration for the assessment year concerned in accordance with the provisions of this section." The scheme of registration of firms is materially altered than what it was under S. 26A of the Act of 1922. It is not necessary to set out in detail as to what precisely the changes which were effected by the Act of 1961 in the matter of grant of registration to firms. Broadly stated, under the Act of 1922, the registration enured for a year only and fresh application for renewal of registration was required to be submitted every year even in cases where there was no change in the constitution of the firm or shares of the partners. Under the Act of 1961, the benefit of registration once, granted continued for subsequent years till a change in the constitution of the firm took place. Under S. 184(7), which we have set out above, the registration once granted to any firm for any assessment year continued to be effective for every subsequent assessment year provided the firm furnishes, before the expiry of the time allowed for furnishing the return of income under s. 139, a declaration signed by all the partners that there is no change in the constitution of the firm or in the shares of the partners. However, as provided in Sub S. (8) of S. 184, if and when any change in the constitution of a firm or in the shares of partners takes place, in any accounting year, the firm has to apply for fresh registration. The meaning of the term "change in constitution of a firm is well recognised on principle and on authority. In partnership law, a change in the constitution of a firm postulates continued existence of the firm. It would, therefore, cover cases where a partner ceases to be a partner or a new partner is introduced in a firm. The change in the shares of partners of the firm would also result in a change in the constitution of the firm. On authority also, this position is well recognised. [See Addl. CIT vs. Harjivandas Hathibhai (1977) 108 ITR 517 (Guj)] . In the income tax law also, the concept of a change in the constitution of a firm is interpreted on the same lines as in the partnership law, though S. 187 of the Act of 1961 clearly specifies as to what would amount to a change in the constitution of a firm. The meaning which has been given to this concept of change in the constitution of a firm under S. 187 is also applied while considering the question of continuous effect of registration once granted under S. 184(7) of the Act of 1961. (See The Law and Practice of Income tax by Kanga and Palkhivala, seventh Edn., vol I, p 1020).
(3.) ON a construction of S. 184(7) of the Act of 1961, the true effect is that registration once granted to any firm for any assessment year shall be continued to be effective for every subsequent year provided there is no change in the constitution of the firm or the shares of partners as evidenced by the instrument of partnership on the basis of which the registration was obtained and the firm furnishes before the prescribed period a declaration to that effect in the prescribed form. A strenuous debate ensued between the learned counsel for the Revenue and the assessee as to what would be the effect if a partner dies during a given accounting period without jural relationship being snapped and the firm continuing in existence with or without the heir of the deceased partner as a partner in the firm. According to the learned counsel for the Revenue, in such a situation, the firm must obtain a fresh registration and it cannot have the benefit of the continuity of registration granted in the earlier year. On the other hand, the learned counsel for the assessee apprehended that the construction as advanced on behalf of the Revenue would result in deprivation of the benefit of registration to such firms where the event of the demise of a partner takes place on the eve of the close of the accounting year in which case, the firm, if it had not been able to execute a fresh instrument of partnership in that very accounting year, would not be entitled to claim the benefit of registration. The learned counsel for the assessee, in order to make the point more explicit, gave an extreme illustration of the demise of a partner taking place on the last day of the accounting period in which case the fresh partnership deed could not be executed in the very nature of things on the very day of the demise and if executed subsequently in the next accounting year, would be of no avail since the declaration which is required to be furnished for a fresh registration as per S. 184(8) in Form No. 11 A, enjoins an assessee claiming registration to furnish the partnership deed as executed in the given accounting period in which the change has taken place. We have given our anxious consideration to this aspect of the matter; and we do not think that the difficulty is so insurmountable as to result in the apprehensions expressed by the learned counsel for the assessee. Even in an extreme case of the demise of a partner on the last day of the accounting period or for that matter on the eve of the close of the accounting period making it difficult to have the instrument of partnership executed in the very accounting period, we do not think that it would result, ipso facto, in the assessee being deprived of the benefit of registration even though the, partnership deed for continuance of the partnership in spite of the death as provided in the agreement might have been executed in the subsequent accounting year. We do not find any limitation as apprehended by the learned counsel for, the assessee in the pro forma which has been prescribed for obtaining registration in case of a change in the constitution of the firm. The requirement of the filing of form for obtaining registration is with a view to satisfy the ITO that there is a change in the constitution of the firm, inasmuch as provided in the partnership deed executed between the surviving partners and the deceased partner, the partnership has not been dissolved as a result of the demise and the firm has continued to be in existence with or without new partners. This fact is to be established not only from the point of view of the assessee but also from the point of view of the Revenue in order to enable the ITO to grant registration as provided in S. 184(8) of the Act of 1961. The fact of a change in constitution of the firm can thus be established by producing the original partnership deed which was executed between the surviving partners and the deceased partner and also by production of the new partnership deed by which the firm is continued with or without new partners. It should be recalled that r. 22(2)(ii) of the Rules provides that the application for registration is to be made in Form No. II A where any change or changes in the constitution of the firm or shares of the partners had taken place during the previous year before the date of the application. Para 2 of Form 11A requires the assessee to enclose the original or certified copy of the instrument or instruments evidencing the partnership in existence from time to time during the previous year up to the date of the application together with a copy or duplicate thereof. It does not presuppose that the instrument of partnership should necessarily have been executed in a given accounting period in which the change has taken place. The instrument of partnership is to be produced to show the continuous existence of the partnership from time to time; and if there is any change which has taken place in the meanwhile, it can very well be pointed out by reference to the instrument evidencing the partnership in existence during the previous year and by reference to the new deed of partnership that might have come into existence as a result of the change in the partnership by continuance of the partnership firm with or without new partners. The learned counsel for the Revenue also agreed that the Department also does not interpret S. 184(8) of the Act of 1961 together with r. 22 of the Rules r/w Form No. 11A, to mean that in order to establish a change in the constitution of the firm, the assessee must annex along with his application, the partnership document evidencing the change in the partnership to have been executed in the accounting period or in the previous year in which the change has taken place. It is in the context of this construction of the section that we have to see whether the Tribunal was right in holding that the assessee firm was not entitled to the renewal of registration under S. 184(7) of the Act of 1961.;


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