Law:

Section:

Section 187 of the income-tax act, 1961-Firm-Change in constitution of-Assessee-firm was dissolved in middle of accounting year-Dissolution deed provided that partner a be allowed to carry on its business-Thereafter, a new partnership deed with a as one of the partners was executed, having effect from the day following the date of dissolution of old firm-New firm continued business and took over assets and liabilities of old firm-Whether there was only a change in constitution of the firm requiring only a single assessment under section 187(1)-Held, on facts, yes Facts The assessee-firm was dissolved during the course of the accounting year and according to the dissolution deed, one of the partners, A, was allowed to carry on the business hitherto run by the partnership. All the other partners were paid their respective shares in the assets of the firm in cash. Thereafter, a new partnership deed, having A as one of the partners, was executed having effect from the day following the date of dissolution of the old partnership. The new firm continued the business of the old firm and its partnership deed contained a clause which provided that the assets and liabilities of the business carried on by the dissolved firm would constitute its assets and liabilities. For the relevant assessment year the ITO made two assessments, one in respect of the dissolved firm and the other in respect of the new firm. However, the Commissioner exercising his powers under section 263 set aside the two assessments on the ground that there was only a change in the constitution of the firm and that there should, therefore, be only a single assessment under section 187(1). The assessee contended that A had become the proprietor of all the assets and liabilities of the dissolved firm and he had become partner of the reconstituted firm with his own assets and liabilities and that, therefore, the assessment could be only under section 189 and not under section 187. On reference: HELD If dissolution of a firm is followed by the constitution of a new firm with at least one common partner and the new firm takes over the assets and liabilities of the dissolved firm, then it would be a case…

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