1. ' SALEEM AKHTAR, J.-- The Department has filed application under section 66 (1) raising the following question:- "Whether on the facts and in the circumstances of the case the Income-tax Appellants Tribunal was right in holding that on the death of Azhar Hussain there was mere change in the constitution of the firm and no registration with the Registrar of the Firms was necessary as required under section 26-A(5) of the Income-tax Act ?
2. ' The respondent firm was constituted under a partnership deed dated 1-4-1963 consisting of three partners namely (1) Mazhir Hussain (2) Tahir Hussain and (3) Azhar Hussain. The firm was registered with the Registrar of Firms on 6-12-1969 Azhar Hussain died and on 15-8-1969 Haseena widow of Azhar Hussain was taken as a partner. This change was recorded with the Registrar of the Firm on 13-4-1970. Therefore, during the period 1-4-1969 to 11-8-1969 (A.Y. 1970-71) the firm constituted of the aforestated three partners and after the death of Azhar Hussain from 15-8-69 to 31-3-1970 the firm was constituted of the two surviving partners and Haseena the widow of Azhar Hussain. The Income-tax Officer reject the request for registration of the firm during the period 15- 8-1970 on the ground that the firm was registered with the Registrar of Firm on 13-4-1970 after the closing of account. The Respondent filed an appeal and the learned Tribunal while allowing it held that the firm had not dissolved with the death of Azhar Hussain and had continued. Consequently direction was issued to register the firm for the second period also.
3. ' Mr.I.N. Pasha, the learned counsel for the respondent has contended that after the death of Azhar Hussain the firm had continued to exist and bringing Haseena widow of Azhar Hussain as a partner was merely a change in the constitution of the Firm. According to the learned counsel it was not necessary to obtain a fresh registration from the Registrar of the Firm before applying for registration under section 26-A of the Income-tax Act. The registration granted by the Registrar of the Firm earlier was to continue.
4. ' The constitution and dissolution of the Firm is governed by the provisions of the Partnership Act.
5. Section 42 of the Partnership Act specifies the circumstances in which the Firm is dissolved. It reads as follows:- "42. DISSOLUTION ON THE HAPPENING OF CERTAIN CONTINGENCIES.
6. ' Subject to contract between the partners a firm is dissolved.
(a) if constituted for a fixed term, by the expiry of that term;
(b) if constituted to carry out one or more adventures or undertakings, by the completion thereof;
(c) by the death of a partner; and
(d) by the adjudication of a partner as an insolvent."
7. ' These four events or contingencies specified in this section on happening of which a partnership is dissolved, are subject to contract between the partners. Therefore, if the partners agree that in spite of happening of these events the partnership will not dissolve then such agreement shall prevail. Unless there is an agreement to the contrary, on a partner's death firm stands dissolved.
8. The opening words of section 42 are, therefore, material for determining its effect, and are directly relevant to the controversy in the present case. A contract between the partners governs the existence continuance and dissolution of the firm. The words "subject to the contract between the partners" does not mean that such contract should be in writing or under an instrument. Such contract can be express or implied. The implied contract between the parties can be spelt out from their conduct and subsequent events. It is, therefore, to be seen whether bringing in the legal heir of a deceased partner in the firm as a partner will amount to an implied contract between the parties that the death of the deceased will not dissolve the firm. Mr. A.W.Farooqui the learned counsel for the Department has contended that such an agreement should be between the original partners and not between the existing partners and the legal heirs of the deceased partner. In similar circumstances as in the present same question arose in Lala Ram Kumar v. Kishori Lal A 1 R 1946 All.
9. 259 where following observation was made:- "This case is governed by clause (c) i,e, the death of a partner. The question is: did the death of Masumal necessarily cause a dissolution? The key to the solution of the problem is furnished by the controlling clause: ,'Subject to contract between the partners a firm is dissolved'. How is that contract to be ascertained? Does the law require an express contract; does it allow a contract by implication or,, in other words, contract to be deduced from the conduct of the parties? While considering the relevant provision of section 253 (10), Contract Act, which was the corresponding provision of law before the present Act, it was held by Subrahmania Ayyar and Boddam, JJ, in 28 Mad. At page 346 that 'A fresh contract to continue the business could be inferred from the conduct of the parties.' To the same effect are 16 C.W.N. 299 at page 300, 20 C.W.N. 7084 and 25 C.W.N. 847 at page 849. It might also be mentioned that 20 C.W.N. 7084 was subsequently affirmed by their Lordships of the Privy Council. It is contended that the intention or the conduct must be that of the original contracting parties and, as there is nothing on the record to indicate intention or contract, this plea is not available to the 'plaintiff. In 16 C.W.No, 2993 Sir, Asutosh Mookerji has distinctly said that the subsequent conduct, after the death of one of the partners, can be evidence of the intention of the original contracting parties."
10. ' In Punjab & Sind Bank Ltd. v. Kishen Singh Gulab Singh AIR 1935 Lah. 350 where one of the partners had died it was held that "the dissolution of the firm, in such a contingency is subject to contract between the parties (vide section 42 of Partnership Act), and an intention to continue the business in partnership with legal representative may be gathered from conduct of parties.
11. ' In M/s. Tara Chand v. Pakistan and others PLD 1957 Kar. 557 it was observed that a Contract to continue the business of the firm after the death of a partner could be assumed from the conduct of the parties. Similar view was taken in 25 All. 378; AIR 1931 All.
225. It is, therefore, a settled view that where one of the partners dies and the remaining partners continue business and bring the legal heir of the deceased partner in the partnership it will amount to an implied contract to the contrary that the firm will be dissolved by the death of a partner. The conduct of the parties establishes that they had agreed not to dissolve the firm on the death of a partner. Such conduct is a clear evidence of common intention of all parties to continue the old firm. This is a common phenomenon that on the death of a partner the surviving partners continue with the business and take son or widow of the deceased as a partner. Such a course does not offend against law and provides a practical and convenient mode to meet the business exigencies.
12. In the present case on death of Azhar Hussain his widow was taken as a partner and the business continued as usual without any interruption. This in the circumstances of the case was a change in the constitution of the firm and no new firm was constituted.
13. ' We, therefore, answer the reference in the affirmative.