Dissolution of firm due to death does not constitute as change in constitution!

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Dissolution of firm due to death does not constitute as change in constitution!

The concept in regards to change in constitution is given in Section 187 of the Income Tax Act, 1961. As per sub-section 2 of the section

(2) For the purposes of this section, there is a change in the constitution of the firm—

(a)  if one or more of the partners cease to be partners or one or more new partners are admitted, in such circumstances that one or more of the persons who were partners of the firm before the change continue as partner or partners after the change ; or

(b)  where all the partners continue with a change in their respective shares or in the shares of some of them

The clause (a) of the sub-section has an proviso. The proviso reads as under:

Provided that nothing contained in clause (a) shall apply to a case where the firm is dissolved on the death of any of its partners.

 

As per this proviso, if a firm is dissolved on the death of any of its partner it shall not be treated as dissolution of the firm.  Such dissolution is covered under section 189 of the Income Tax Act, 1961.

In case of death of a partner the firm shall stand dissolved. This shall not prevail if anything contrary to this is mentioned in the partnership deed. This was held in the case of CIT vs. Ayyanarappan & Co.

Refer the case below:

Commissioner Of Income Tax, … vs Ayyanarappan And Co.

ORDER

  1. This is a reference made by the Income Tax Appellate Tribunal under Section 257 of the Income Tax Act, 1961, to answer the following question of law, namely: “Whether on the facts and in the circumstances of the case, and having regard to the provisions of Section 187(2) of the Income Tax Act, the Appellate Tribunal is correct in law in holding that consequent to the death of partner Alagappan on 28-5-1976, two separate assessments and not one assessment should be made for the Assessment Year 1977-78?”
  2. The two assessee firms consisted of five and six partners respectively. Shri T. Alagappan was one of the partners in each of the two firms. He died on 28-5-1976. The relevant assessment year is 1977-78 for the period ending on 31-3-1977. The two firms claimed that on 28-5-1976, they were dissolved on the death of the said partner and fresh partnerships were entered on 29-5-1976. The Income Tax Officer did not accept the claim of the assessees and held that there was only a change in the Constitution of the firms according to Section 187(2)(a)of the Act and not their dissolution. Accordingly, he clubbed the income of the old and new firms in respect of each of the two assessees. The appeals of the assessees were allowed by the Commissioner. The appeals by the Revenue to the Tribunal have been dismissed. At the instance of the Revenue, the Tribunal has made this reference in view of the conflicting decisions of different High Courts.
  3. By the Taxation Law (Amendment) Act, 1984, amendment has been made retrospectively, w.e.f. 1-4-1975 in Section 187whereby the following proviso has been added in Sub-section (2): “Provided that nothing contained in Clause (a) shall apply to a case where the firm is dissolved on the death of any of its partners.”
  4. In view of this retrospective amendment prior to the relevant assessment year, Section 187has to be read together with this proviso. By virtue of the said proviso, the applicability of Clause (a) of Sub-section (2) is excluded since the firms were dissolved on the death of one of its partners.
  5. Accordingly, the question referred is answered in the affirmative against the Revenue and in favour of the assessee.
  6. No costs.

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