A partner died mid-year, the deed said nothing about the firm continuing, and the survivors carried on the business under a fresh deed. The officer has clubbed the whole year into one assessment. Can he?
No. The Supreme Court held that where the partnership deed contains no provision for the firm continuing on the death of a partner, the firm stands dissolved by force of s.42(c) of the Indian Partnership Act 1932; the case is then not one of a change in the constitution of the firm and falls outside s.187, and where the surviving partners continue the business in partnership there is a succession of one firm by another, which attracts s.188 and separate assessments on the predecessor and the successor firm. Two returns and two assessments, not one.
Decided by the Supreme Court (S.P. Bharucha J, Jagdish Saran Verma J and Sujata V. Manohar J (judgment delivered by Bharucha J)) on 1996-01-29, reported as (1996) 218 ITR 355 (SC); 1996 SCC (2) 345; JT 1996 (1) 675; 1996 AIR SCW 950; (1996) 1 SCR 1004; (1996) 85 Taxman 153; (1996) 132 CTR 221. It bears on section 187, section 187(2), section 188, section 170, section 257 of the Income Tax Act 1961, in Assessment & Scrutiny and How Tax Law Is Read matters.
This decides whether the year is broken in two, and with it the rate slabs, the set-off of losses across the break, and which entity carries the liability. The Court resolved a conflict between High Courts — Allahabad, Andhra Pradesh, Gujarat and Calcutta on one side against Punjab and Karnataka on the other — and did so by putting the whole weight on the deed: the boundary between s.187 and s.188 turns not on whether the same business continued, nor on whether some partners are common, but on whether the firm survived the death as a matter of partnership law. A clause saying that death shall not dissolve the firm is lawful, because s.42 of the Partnership Act is subject to contract between the partners; if there is such a clause, the firm survives, the case is a change in constitution and there is one assessment. If there is not, there are two. The Court's own examples make this concrete: in CIT v. Basant Behari Gopal Behari and Company and CIT v. Indralok Picture Palace the deeds provided that death would not dissolve the firm, and single assessments were rightly made. Read the case with its statutory sequel: a proviso to s.187(2) was inserted by the Taxation Laws (Amendment) Act 1984 with retrospective effect from 1 April 1975, taking a firm dissolved on the death of a partner out of clause (a) altogether, and the Court recorded that the assessee's case was not affected by it because the partner had died on 12 January 1974. For years from AY 1975-76 the proviso reaches the same result by statute where the dissolution is caused by death; Empire Estate remains the reasoning for dissolutions brought about otherwise, and for the anterior question of whether the firm was dissolved at all.
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The assessee was a partnership firm constituted under a deed dated 18 July 1968 with three partners, Mrs. Ellen Keki Modi, Mr. Rustom Keki Modi and Ms. Maneck Keki Modi. Mrs. Ellen Modi died on 12 January 1974. The deed contained no provision contemplating the continuance of the partnership on the death of a partner. No deed of dissolution was executed, but the surviving partners executed a fresh deed of partnership for carrying on the business on and from 13 January 1974, which recited that the earlier partnership had stood dissolved on 12 January 1974. For the relevant previous year, the accounting year ending 30 June 1974 and the assessment year 1975-76, the assessee filed two returns, one for the period 1 June 1973 to 12 January 1974 and the other for 13 January 1974 to 30 June 1974, contending that the earlier firm had been dissolved on the death and that this was a succession under s.188 and not a reconstitution under s.187. The Income Tax Officer rejected the contention and the appeal to the CIT(A) failed. The Tribunal, noting a conflict between the Allahabad, Andhra Pradesh, Gujarat and Calcutta High Courts on one side and the Punjab and Karnataka High Courts on the other, followed the former view, held the case did not fall within 'change in the constitution of the firm' in s.187 and directed two assessments; it referred the question directly to the Supreme Court under s.257.
The question was answered in the affirmative and in favour of the assessee, with no order as to costs: the Tribunal was justified in holding that there should be two assessments, one for each of the two periods, the case not falling within s.187(2). Where the deed does not provide that death shall not dissolve the partnership, s.42 of the Partnership Act operates and the firm stands dissolved on the death of a partner; the partnership does not survive the death, the case is not one of a change in the constitution of the partnership, and it falls outside the scope of s.187. Where the surviving partners then continue the business in partnership, s.188 is attracted because there is a succession of one partnership by another, and separate assessments must be made on the predecessor and successor firms in accordance with s.170.
The Court set out ss.187 and 188 and s.42 of the Indian Partnership Act 1932, under which, subject to contract between the partners, a firm is dissolved by the death of a partner. Because the deed between Mrs. Ellen Modi and the surviving partners did not provide that the death of a partner would not dissolve the partnership, the firm stood dissolved on 12 January 1974, as the Tribunal had rightly found. The definition of 'change in the constitution of the firm' in s.187(2)(a) — one or more partners ceasing in such circumstances that one or more of the pre-change partners continue after the change — applies to a firm which SURVIVES the death of a partner, that is, where the deed lawfully provides, as s.42 permits, that death shall not dissolve the partnership. Where there is no such provision the partnership does not survive, so there is no change in its constitution and s.187 has no application; s.188 is then attracted. The Court found the issue covered by its own earlier decision in Wazid Ali Abid Ali v. CIT, 169 ITR 761, which it quoted, and therefore did not need to examine the conflicting High Court decisions that had prompted the reference. It distinguished the two Allahabad decisions relied on by the Revenue, CIT v. Basant Behari Gopal Behari and Company, 172 ITR 662, and CIT v. Indralok Picture Palace, 188 ITR 730, on the ground that in both the deeds provided that the death of a partner would not dissolve the firm, so the partnerships were not dissolved and the businesses were continued by reconstituted partnerships. The Court also noted that the proviso to s.187(2) inserted by the Taxation Laws (Amendment) Act 1984 with retrospective effect from 1 April 1975, which excludes from clause (a) a case where the firm is dissolved on the death of a partner, did not affect the assessee's case because Mrs. Ellen Modi had died on 12 January 1974.
If there is no such provision and a partner dies, the partnership stands dissolved. The partnership does not then survive upon the death of the partner. The case is not one of a change in the constitution of the partnership. It falls outside the scope of Section 187.
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Handle my notice → Ask a CA on WhatsAppNo. The Supreme Court held that where the partnership deed contains no provision for the firm continuing on the death of a partner, the firm stands dissolved by force of s.42(c) of the Indian Partnership Act 1932; the case is then not one of a change in the constitution of the firm and falls outside s.187, and where the surviving partners continue the business in partnership there is a succession of one firm by another, which attracts s.188 and separate assessments on the predecessor and the successor firm. Two returns and two assessments, not one. This was decided by the Supreme Court (S.P. Bharucha J, Jagdish Saran Verma J and Sujata V. Manohar J (judgment delivered by Bharucha J)) and bears on section 187, section 187(2), section 188, section 170, section 257 of the Income Tax Act 1961. It is reported as (1996) 218 ITR 355 (SC); 1996 SCC (2) 345; JT 1996 (1) 675; 1996 AIR SCW 950; (1996) 1 SCR 1004; (1996) 85 Taxman 153; (1996) 132 CTR 221. This decides whether the year is broken in two, and with it the rate slabs, the set-off of losses across the break, and which entity carries the liability. The Court resolved a conflict between High Courts — Allahabad, Andhra Pradesh, Gujarat and Calcutta on one side against Punjab and Karnataka on the other — and did so by putting the whole weight on the deed: the boundary between s.187 and s.188 turns not on whether the same business continued, nor on whether some partners are common, but on whether the firm survived the death as a matter of partnership law. A clause saying that death shall not dissolve the firm is lawful, because s.42 of the Partnership Act is subject to contract between the partners; if there is such a clause, the firm survives, the case is a change in constitution and there is one assessment. If there is not, there are two. The Court's own examples make this concrete: in CIT v. Basant Behari Gopal Behari and Company and CIT v. Indralok Picture Palace the deeds provided that death would not dissolve the firm, and single assessments were rightly made. Read the case with its statutory sequel: a proviso to s.187(2) was inserted by the Taxation Laws (Amendment) Act 1984 with retrospective effect from 1 April 1975, taking a firm dissolved on the death of a partner out of clause (a) altogether, and the Court recorded that the assessee's case was not affected by it because the partner had died on 12 January 1974. For years from AY 1975-76 the proviso reaches the same result by statute where the dissolution is caused by death; Empire Estate remains the reasoning for dissolutions brought about otherwise, and for the anterior question of whether the firm was dissolved at all. If it applies to you, the first step is this: Read the partnership deed first and look for a clause providing that the firm shall not be dissolved on the death of a partner — that clause, and nothing else, decides whether the year is one assessment or two.
The assessee was a partnership firm constituted under a deed dated 18 July 1968 with three partners, Mrs. Ellen Keki Modi, Mr. Rustom Keki Modi and Ms. Maneck Keki Modi. Mrs. Ellen Modi died on 12 January 1974. The deed contained no provision contemplating the continuance of the partnership on the death of a partner. No deed of dissolution was executed, but the surviving partners executed a fresh deed of partnership for carrying on the business on and from 13 January 1974, which recited that the earlier partnership had stood dissolved on 12 January 1974. For the relevant previous year, the accounting year ending 30 June 1974 and the assessment year 1975-76, the assessee filed two returns, one for the period 1 June 1973 to 12 January 1974 and the other for 13 January 1974 to 30 June 1974, contending that the earlier firm had been dissolved on the death and that this was a succession under s.188 and not a reconstitution under s.187. The Income Tax Officer rejected the contention and the appeal to the CIT(A) failed. The Tribunal, noting a conflict between the Allahabad, Andhra Pradesh, Gujarat and Calcutta High Courts on one side and the Punjab and Karnataka High Courts on the other, followed the former view, held the case did not fall within 'change in the constitution of the firm' in s.187 and directed two assessments; it referred the question directly to the Supreme Court under s.257. The matter was decided on 1996-01-29 by the Supreme Court (S.P. Bharucha J, Jagdish Saran Verma J and Sujata V. Manohar J (judgment delivered by Bharucha J)). On those facts the Supreme Court held as follows. The question was answered in the affirmative and in favour of the assessee, with no order as to costs: the Tribunal was justified in holding that there should be two assessments, one for each of the two periods, the case not falling within s.187(2). Where the deed does not provide that death shall not dissolve the partnership, s.42 of the Partnership Act operates and the firm stands dissolved on the death of a partner; the partnership does not survive the death, the case is not one of a change in the constitution of the partnership, and it falls outside the scope of s.187. Where the surviving partners then continue the business in partnership, s.188 is attracted because there is a succession of one partnership by another, and separate assessments must be made on the predecessor and successor firms in accordance with s.170.
The Court set out ss.187 and 188 and s.42 of the Indian Partnership Act 1932, under which, subject to contract between the partners, a firm is dissolved by the death of a partner. Because the deed between Mrs. Ellen Modi and the surviving partners did not provide that the death of a partner would not dissolve the partnership, the firm stood dissolved on 12 January 1974, as the Tribunal had rightly found. The definition of 'change in the constitution of the firm' in s.187(2)(a) — one or more partners ceasing in such circumstances that one or more of the pre-change partners continue after the change — applies to a firm which SURVIVES the death of a partner, that is, where the deed lawfully provides, as s.42 permits, that death shall not dissolve the partnership. Where there is no such provision the partnership does not survive, so there is no change in its constitution and s.187 has no application; s.188 is then attracted. The Court found the issue covered by its own earlier decision in Wazid Ali Abid Ali v. CIT, 169 ITR 761, which it quoted, and therefore did not need to examine the conflicting High Court decisions that had prompted the reference. It distinguished the two Allahabad decisions relied on by the Revenue, CIT v. Basant Behari Gopal Behari and Company, 172 ITR 662, and CIT v. Indralok Picture Palace, 188 ITR 730, on the ground that in both the deeds provided that the death of a partner would not dissolve the firm, so the partnerships were not dissolved and the businesses were continued by reconstituted partnerships. The Court also noted that the proviso to s.187(2) inserted by the Taxation Laws (Amendment) Act 1984 with retrospective effect from 1 April 1975, which excludes from clause (a) a case where the firm is dissolved on the death of a partner, did not affect the assessee's case because Mrs. Ellen Modi had died on 12 January 1974. In the words reproduced by the source cited on this page: "If there is no such provision and a partner dies, the partnership stands dissolved. The partnership does not then survive upon the death of the partner. The case is not one of a change in the constitution of the partnership. It falls outside the scope of Section 187." The decision followed or applied Wazid Ali Abid Ali v. Commissioner of Income-tax, Lucknow, 169 ITR 761 (SC) — followed; the issue held covered by it; CIT v. Basant Behari Gopal Behari and Company, 172 ITR 662 (All.) — distinguished; CIT v. Indralok Picture Palace, 188 ITR 730 (All.) — distinguished; Section 42 of the Indian Partnership Act 1932 — applied.
It was decided by the Supreme Court on 1996-01-29 and is reported as (1996) 218 ITR 355 (SC); 1996 SCC (2) 345; JT 1996 (1) 675; 1996 AIR SCW 950; (1996) 1 SCR 1004; (1996) 85 Taxman 153; (1996) 132 CTR 221. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 187, section 187(2), section 188, section 170, section 257, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The question was answered in the affirmative and in favour of the assessee, with no order as to costs: the Tribunal was justified in holding that there should be two assessments, one for each of the two periods, the case not falling within s.187(2). Where the deed does not provide that death shall not dissolve the partnership, s.42 of the Partnership Act operates and the firm stands dissolved on the death of a partner; the partnership does not survive the death, the case is not one of a change in the constitution of the partnership, and it falls outside the scope of s.187. Where the surviving partners then continue the business in partnership, s.188 is attracted because there is a succession of one partnership by another, and separate assessments must be made on the predecessor and successor firms in accordance with s.170. It arises in Assessment & Scrutiny and How Tax Law Is Read matters, on section 187, section 187(2), section 188, section 170, section 257 of the Income Tax Act 1961, and was decided by S.P. Bharucha J, Jagdish Saran Verma J and Sujata V. Manohar J (judgment delivered by Bharucha J). Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Where there is no such clause, take the point that s.42(c) of the Partnership Act dissolved the firm automatically on the death, and that the absence of a deed of dissolution is irrelevant; in Empire Estate none was executed and the Court still held the firm dissolved. File two returns for the two broken periods and say in terms that the case falls under s.188 and not s.187, so that the point is on record from the outset rather than raised for the first time in appeal. Point to the fresh deed executed by the surviving partners and to its recital of the date the earlier firm stood dissolved, as the assessee did here. For a death on or after 1 April 1975, rely on the proviso to s.187(2) inserted by the Taxation Laws (Amendment) Act 1984 as well as on this decision — the proviso says nothing in clause (a) applies where the firm is dissolved on the death of a partner. Where the dissolution arises from something other than death — by agreement, by notice, or by operation of some other provision — the proviso does not apply and Empire Estate's construction of the boundary between s.187 and s.188 is the argument to run. Remember that s.188 routes the separate assessments through s.170, so identify the predecessor and successor correctly before computing.
Still good law. A citator search returns 58 later decisions citing the judgment. The Allahabad High Court applied it in CIT v Hindustan Motors Finance Co. (21 September 2004), quoting the holding that where the deed provides that death shall not dissolve the firm section 187 does not apply, and that in the absence of such a provision the partnership stands dissolved, and using it to work the distinction between section 187 and section 188. The Bombay High Court applied the same proposition of partnership law in its judgments of 11 July 2016 in the Maharashtra State Warehousing Corporation group of cases. Nothing overruling or doubting it was found. What the judgment itself records must be carried with it: a proviso to section 187(2) was inserted by the Taxation Laws (Amendment) Act 1984 with retrospective effect from 1 April 1975, providing that nothing in clause (a) shall apply where the firm is dissolved on the death of any of its partners - and the Allahabad judgment notes the Andhra Pradesh High Court's view in Raj Bros. that the proviso recognises only a dissolution brought about by death. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The reference came to the Supreme Court directly from the Tribunal under s.257 of the Act because of a conflict among the High Courts, so there is no High Court judgment below on this question. The report as printed gives the previous year as ending 30 June 1974 and the two periods as 1 June 1973 to 12 January 1974 and 13 January 1974 to 30 June 1974; the opening date of the first period is printed as 1 June 1973, which does not sit with an accounting year ending 30 June 1974 — it is probably 1 July 1973, but I reproduce the report as it stands and nothing in the reasoning turns on it. The relevant assessment year is given as 1975-76. The report also carries a stray opening quotation mark in the sentence beginning '"Change in the constitution of the firm is defined for the purpose', which is reproduced as printed in the passage I read. I fetched the judgment twice with ?type=print and the paragraph used for the key_quote came back word for word identical on both passes. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The question was answered in the affirmative and in favour of the assessee, with no order as to costs: the Tribunal was justified in holding that there should be two assessments, one for each of the two periods, the case not falling within s.187(2). Where the deed does not provide that death shall not dissolve the partnership, s.42 of the Partnership Act operates and the firm stands dissolved on the death of a partner; the partnership does not survive the death, the case is not one of a change in the constitution of the partnership, and it falls outside the scope of s.187. Where the surviving partners then continue the business in partnership, s.188 is attracted because there is a succession of one partnership by another, and separate assessments must be made on the predecessor and successor firms in accordance with s.170.
TaxSphere, “CIT v Empire Estate — a firm dissolved by the death of a partner is succeeded, not reconstituted, so there are two assessments”, https://taxnotice.vittsphere.com/caselaw/case/cit-v-empire-estate-187-versus-188-firm-dissolved-on-death-of-partner/ (validity last checked 2026-09-07)
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