Law:

Section:

Section 187 of the Income-tax Act, 1961 [Corresponding to section 26(1) of the Indian Income-tax Act, 1922] - Firm - Change in constitution of - Assessment year 1958-59 -- After retirement of one partner, two remaining partners of assessee firm formed a new partnership under an instrument of partnership - ITO, however, aggregated two sets of income derived during same accounting year by both old and new firms for purpose of assessment - On appeals, both AAC and Tribunal concluded that there were two distinct firms and directed ITO to make assessment on that basis - Whether since it was not urged before Tribunal or before AAC that formation of new firm was a mere cloak or that new partnership was a mere sham conclusion reached by Tribunal was justified - Held, yes FACTS There were three partners in a firm. One of the partner retired from the partnership on 31-7-1957. The remaining two partners formed a new partnership under an instrument of partnership executed on 1-8-1957. What the ITO did was to add to the income of the period antecedent to 1-8-1957, the subsequent income, and to make an assessment in respect of the aggregate income. This the ITO did on the postulate that what happened in consequence of the retirement of one of the partners, was no more than a mere change in the constitution of the old firm. But, in appeal, the AAC recorded a finding that there were two distinct firms and according to him, the income earned prior to 1-8-1957, was earned by the old firm and that which was earned during the period subsequent to 1-8-1957, was earned by the new firm of which two of the partners of the old firm were partners. That finding was also affirmed by the Tribunal. On reference: HELD It is a familiar principle of partnership law that if one of the partners in the firm retires and the firm continues with the remaining partners, the partnership continues to exist notwithstanding the change in the composition of the firm. It is equally well-settled that when a partner of the firm retires from partnership, the remaining partners have an option to continue to remain in the old firm and to continue it or to dissolve that firm and enter into a new partnership. If…

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