Pathak, J. - (1.) THE assesses, M/s Sharma and Company, was a registered partnership firm consisting of two members, Sheo Nath Sharma and Chandran Devi. This partnership was dissolved on December 31, 1947, when the entire business was transferred to Pt. Deo Snarma, who thereafter carried it on as sole proprietor of the business. Subsequently, he entered, into a partnership with his brother Sheo Nath Sharma, it being agreed that the partnership would be deemed to have come into existence on January 1, 1948, and that Sheo Nath Sharma would be entitled to a share of 6 annas in the rupee in the profits of the business.
(2.) THE assessee filed a return of its income for the period. May 3, 1946, to June 20, 1947, relating to the assessment year 1948-49, and was assessed by the income Tax Officer on March 30, 1953. It was also assessed for the period June 21, 1947, to December 31, 1947, of which the relevant assessment year is the assessment year 1949-50, the assessment order being made on January 30, 1954. THE income assessed was apportioned between Sheo Nath Sharma and Pt. Deo Sharma, Smt. Chandan Devi being held to be the latter's benamidar. THE assessee proceeded in appeal before the appellate Assistant Commissioner and thereafter to the income Tax Appellate Tribunal. It was urged before the Appellate Tribunal that the assessee firm having been dissolved on December 31, 1947, no assessment order could be made against it thereafter. This contention was rejected by the Appellate Tribunal, which held that the business had not been discontinued, that certain changes had merely taken place in the constitution of the firm and that the firm as a unit of assessment had continued throughout. Apparently, the appellate Tribunal placed' reliance upon the provisions of Section 26 (1) of the Indian Income Tax Act. THE appellate Tribunal however, referred to the decision in S.M.S. Karuppiah Pillai v. Commissioner of Income Tax Madras 1941-9 ITR 1 : (AIR 1941 Mad 255) (FB), which was a decision of the Madras High Court involving the application of Section 26 (2). THEreafter, upon application by the assessee, the Appellate Tribunal has made the above reference to this court. Income Tax Reference No. 738 of 1962 arises out of the case relating to the assessment year 1949-50, and I. t. Kef. No. 739 of 1962 arises out of the case for the assessment year 1948-43. In both cases the question referred is in the following terms. "Whether on the facta and in the circumstances of the case the assessment in question was a valid assessment in law?" The entire argument on behalf of the assessee is that no assessment proceedings can be taken against a firm after it is dissolved because, it is said, a firm is a distinct assessable entity in itself and upon its dissolution it must be treated as if it had ceased to exist altogether. It is contended that there was no provision in the Indian Income Tax Act at the time when the relevant assessments were made entitling an income Tax Officer to take assessment proceedings against a firm after its dissolution. Learned counsel for the commissioner contends that the case falls under Section 44, which permits an assessment proceeding against a firm even after its dissolution. He further urges that in case it is found that Section 44 does not apply it must be held that Section 26 (2) covers the case. Neither party relied upon the provisions of Section 26 (1) which apparently the appellate Tribunal had in mind when it decided the case.
(3.) BEFORE we proceed to consider which of the rival contentions should be accepted, it is desirable to clear the ground by considering whether the provisions of Section 26 (1) can be applicable. Section 26 (i) applies only where it ts found, at the time of making an assessment under Section 23, that, a change has occurred in the constitution of a firm or that a firm has been newly constituted. In the instant case the partnership was dissolved on December 31, 1947, and thereafter the entire buss-ness was taken over by Ft. Deo Sharma as sole proprietor thereof, it cannot be said that when he took over the business from January 1,1048, there was a mere change in the constitution of the assessee or that a firm was newly constituted. It is true that some time alter carrying on the business as sole proprietor, Ft. Deo Sharma entered into a partnership agreement with Sheo Nath Sharma, and one of the stipulations in that agreement was that the partnership would be deemed to have commenced on January 1, 1948. Now, merely because the par-ties to a partnership agreement agree that the partnership will be deemed to have come into existence retrospectively does not so far as third parties are concerned, entitle a plea to be raised that the partnership must indeed be said to have commenced on a date before it was entered into. Lindley in his Treatise on the Law of Partnership (11th Ed p. 116) declares the law to be:-- "Again, persons may agree that as between themselves, the partnership between them shall be deemed to have commenced at some time before its actual commencement. Proof of such an agreement as this would not enable a stranger to make the parties to it liable to him as partners for what took place before the parties in point of fact began. As to third parties, such an agreement is res inter alios acta which does not affect them in any way....." Reference has been made to Wilsford v. wood (1794) 1 Esp. 182 and Vere v. Asbby, (1829) 10 B and C 288. To the same effect is the rule stated in the British Tax Encyclopedia Page 1226 Paragraph, 1.466). "An agreement cannot alter the position before it is executed; "it is beyond the power of the gods to alter the past." Upon the facts of the instant case, therefore it cannot be said that what happened on January 1, 1948, was merely a change in the constitution of the assessee or that a firm was newly constituted. It must be taken, despite the term in the partnership agreement Between Pt. Deo Sharma and Sheo Nath Sharma that the partnership should be deemed to have been constituted on January 1, 1948, that the Business was taken over from the assessee. by Pt. Deo Sharma as sole proprietor and not by a partnership firm, in this view of the matter it is clear that Section 26 (1) does not apply. If the Tribunal can be said to have decided the case on the application of Section 26 (1), then it must be held that its finding that the assessment orders are valid is erroneous. We may now consider whether the contention of the assessee that the assessment proceedings taken against the assessee after its dissolution are not supported by law is a valid contention in view of the provisions of Section 44 or Sec. 26 (2).;