Law:

Section:

Section 188 of the Income-tax Act, 1961 - Firm - Succession of one firm by another - Assessment year 1974-75 - Whether where assessee firm consisting of two partners was dissolved by a deed of dissolution and, a fresh firm consisting of five partners was constituted including two partners of earlier firm, it was a case of succession of one firm by another - Held, yes - Whether, therefore, two separate assessments for two different periods should have been framed - Held, yes Section 40(b) of the Income-tax Act, 1961 - Business disallowance - Interest salary, etc. paid by firm by firm to partner - Assessment year 1974-75 - Whether interest paid to its partners irrespective of fact whether they joined firm in their individual capacities or as kartas of their respective HUF's was disallowable under section 40(b) - Held, yes FACTS The case of assessee firm was that a firm was consisting of two partners. During the relevant assessment year, it was dissolved by an agreement. Thereupon assessee partnership firm was constituted in which two of the partners of the earlier firm continued as partners and three more partners were taken in. A deed of dissolution of the former partnership was duly executed. The assessee, therefore, claimed that it was a case of succession of the partnership firm by another firm and, therefore, two separate assessments for the two different periods should have been framed. The ITO held that since the two partners of the former firm continued as partners of the latter firm, it was a case of only change in the constitution of the firm and under section 187 only one assessment for both the periods had to be framed. Further, the ITO noted that interest on capital and loans had been paid to partners of the firm. The ITO disallowed that interest under section 40(b). The AAC and the Tribunal confirmed the decision of the ITO on both the points. On reference: HELD Admittedly, the former firm consisting of two partners had been dissolved by a dissolution deed. Thereafter, a fresh partnership came into being consisting of five partners including the two partners of the earlier firm. The earlier partnership having been constituted consisting of five…

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