Income Tax Appellate Tribunal - Madras
P. Sarada vs Inspecting Assistant Commissioner on 28 May, 1987
Equivalent citations: [1987]23ITD604(MAD)
ORDER
George Cheriyan, Vice President
1. The appeals in the present case relate to the assessment years 1979-80 and 1980-81 and are presented by two assessees, one Miss P. Sarada and another the legal representative of one Shri A.P. Madhavan. Shri Madhavan had passed away in 1985. The appeals have been preferred against the orders passed by the Commissioner of Wealth-tax in exercise of his powers under the provisions of Section 25(2) of the Wealth-tax Act, 1957. According to the Commissioner in completing the wealth-tax assessments for the respective assessment years, the WTO had omitted to include the market value of certain properties which according to each of the assessees had been transferred by them prior to the valuation date.
2. To appreciate the finding of the Commissioner, we would set out, in brief, certain facts. On the 26th May, 1975 a deed of partnership was entered into between four persons, two of whom were limited companies, i.e. M/s. Universal Radiators Ltd. and M/s. Madras Radiators & Pressings Ltd. and two of whom were individuals, i.e. Shri A.P. Madhavan and Miss P. Sarada, the latter two being the appellants before us. According to the instrument of partnership, the firm came into existence on the first day of April, 1975. Clause 3 sets out the business of the firm to be as under :-
3. The business of the firm shall be that of dealing in Real Estates, Owner of properties, Letting out or hiring out of properties, construction of Flats, Shops, houses, small residential houses and owning and dealing in agricultural lands and carrying out agricultural operations and horticultural operations, acting as Brokers and such other business or businesses as may be decided upon from time to time.
The capital of the firm in terms of clause 6 was to be Rs. 1,00,000. The two companies were to make contributions towards capital as and when required by the firm. Clause 8 stated that Shri Madhavan and Miss Sarada owned in equal shares certain immovable property consisting of factory building and agricultural lands at Coimbatore in Survey No. 272/2A and having a total area of about 3 acres and 31 cents. The deed stated that the aforesaid property "which shall with effect from 1-4-1975 vest in the firm and shall be treated as the property of the firm." The clause further stated that the entire property including the factory building and agricultural lands was to be valued at Rs. 12 lakhs. Credit was to be given to Shri Madhavan for Rs. 6,00,000 and to Miss Sarada for Rs. 6,00,000. The value of the land included in the estimated value of Rs. 12,00,000 was again estimated at Rs. 2,00,000.
3. Out of the amount of Rs. 6,00,000 credited to Shri Madhavan, Rs. 25,000 was to be credited to his capital account in terms of the deed and the balance, i.e. Rs. 5,75,000 was to be credited to the current account of Shri Madhavan. So also in the case of Miss Sarada Rs. 25,000 was to be credited to her capital account and the balance of Rs. 5,75,000 was to be credited to her current account.
4. In addition, the two individuals had certain properties situated in Ward No. 129, Avadi Road, Ambattur, Madras including certain structures and also a vacant site. The total area was 4.58 acres and clause 9 of the partnership deed stated that the aforesaid property "shall with effect from 1-4-1975 vest in the firm and shall be treated as the property of the firm". The value of the entire property was fixed at Rs. 10,00,000 made up of Rs. 9,00,000 representing the value of buildings and structures and Rs. 1,00.000 representing value of land which belonged exclusively to. Miss Sarada. The value of Rs. 1,00,000 relating to the land was credited to the current account of Miss Sarada. The balance of Rs. 9,00,000 was divided equally and Rs. 4,50,000 was credited to the current account of Shri Madhavan and Rs. 4,50,000 was credited to the current account of Miss Sarada and this finds mention in clause 9 of the partnership deed.
5. On the amounts to be credited to the current account of Shri Madhavan and Miss Sarada interest was payable at 6% per annum. There was a specific clause that the partnership would be dissolved by any partner giving to the other partner a notice of not less than one month and in all other matters which are not specifically referred to, it was stated, that the firm would be governed by the provisions of the Partnership Act.
6. Subsequently, a deed of dissolution was executed on the 30th of March, 1976 to which the four partners referred to were signatories. It was mentioned that "whereas the Urban Land Ceiling and Regulations Act, 1976 was passed subsequent to the formation of the partnership and the Act received the assent of the President of India on 17-1-1976 and the Act had the object of providing imposition of ceiling on vacant land and regulating construction of buildings, it was considered that the objects with which the partnership was formed could not be carried out in view of the policy of the Government and, therefore, no useful purpose would be served by continuing the partnership". The partnership", it was stated, would therefore stand dissolved from the date of execution of the document i.e. 30-3-1976. The terms of the dissolution were set out and to the extent of the appeals now under consideration the relevant clauses as under :-
1. The partnership firm of Universal Real Estate Agency constituted under the Deed of Partnership dated 26-5-75 shall stand dissolved with effect from 30-3-76.
2. A Balance Sheet of the firm on 30-3-1976 has been drawn up and has been signed by all the partners hereto in token of the acceptance of the correctness thereof and it is annexed hereto.
3. The property situate in Mettuppalaiyam Road, Coimbatore, belonging to the firm and consisting of Factory Buildings and Agricultural Lands, in S.P. No. 272/2A and having a total extent of 331.5 cents shall be taken over by Universal Radiators Ltd., which shall be entitled thereto in absolute right.
4. The property situate in Ambattur, Madras, including Buildings and Superstructures and vacant sites in Ward No. 129, Avadi Road, all covered by T.S. No. 23, 24(a), 25, 27/1 to 4, 29, 43/1, 43/2A and 43/3 and having a total extent of 4.58 acres, shall be taken over by Madras Radiators & Pressings Private Ltd., which shall be entitled thereto in absolute right.
5. The accounts of the partnership shall be settled amongst the patners in the following manner :-
(a) The cash balance of Rs. 49,330 remaining after payment of Rs. 500 the audit fee, shall be taken over by Miss P. Sarada.
(b) Universal Radiators Ltd., shall pay Shri A.P. Madhavan and Miss P. Sarada, each a sum of Rs. 5,87,583.75 Ps.
(c) Madras Radiators & Pressings Private Ltd., shall pay Shri A.P. Madhavan a sum of Rs. 4,62,258.75 Ps. and shall also pay Miss P. Sarada Rs. 5,12,918.75 Ps.
The Revenue had considered that there was a transfer of the property by the two appellants before us to the respective companies when the companies concerned in terms of the deed of dissolution took over the properties referred to. Accordingly, capital gains tax was levied in the case of each of the appellants for the assessment year 1976-77 ostensibly because according to the Revenue the transfer took place on the date of dissolution i.e. 30-3-76.
7. Revision petition were preferred by each of the assessees to the Commissioner and the Commissioner passed an order on 26-2-1983 in the case of Shri Madhavan. A similar order was passed in the case of Miss Sarada also. In the case of Madhavan the Commissioner discussed the issue of liability to capital gains tax in paragraph 8 of his order The Commissioner came to the conclusion that according to the ratio of various judicial pronouncements of the Supreme Court it would appear that unless there was a duly registered document of transfer there would be no transfer of immovable property in the eye of law and consequently no capital gains would arise. The submission of the assessee was that there was no registered document in the present case alienating the properties to the companies. The Commissioner finally directed the WTO to verify the matter and delete the capital gains included in the assessments of each assessee if he found that no deed of sale was in fact executed and/or registered during the previous year relevant to the assessment year. It is found as a fact that there was no such registered document and, therefore, the assessment to capital gains holding that there was transfer of profits to the companies fell through. In the course of his order of revision the Commissioner made certain observations which had a bearing on the genuineness of the firm of M/s. Universal Real Estate Agency which was constituted under the deed of 1-4-1975. In the orders passed Under Section 25(2) the Commissioner set out in extenso the observations on this point in the earlier order dated 26-2-1983 and we set out paragraph 5 of the order of the Commissioner now under appeal where such observations have been reproduced as under :-
5. The Commissioner of Income-tax (Central-I) Madras in the same case in his order No. C. 1511 (18)/81-Central-I dated 26-2-1983 held inter alia as under :
8:7: I have carefully considered the assessee's submission. I am unable to agree with the a"ssessee's Representative that the firm was genuine. I agree with the Inspecting Assistant Commissioner who issued the directions under Section 144B and on the basis of which the Income-tax Officer has completed the assessment, that no genuine firm was brought into existence as claimed. The firm had not carried on any business. The properties which were transferred by the assessee and his elder sister to the firm were already under the tenancy of the two companies and it was hardly possible for the firm to have carried on any business in Real Estate or letting out on hire those buildings. I am therefore convinced that whatever may have been the reason for drawing up the deed of partnership dated 26-5-1975, the firm did not carry on any business as contemplated by the objects enunciated in the partnership Deed. The firm no doubt, came into existence on 1-4-1975 as narrated in the Partnership Deed ostensibly with a view to carry on Real Estate Business. But the fact remains that the firm did not carry on any such business as per the objects of the Partnership deed and ultimately dissolved on 31-3-1976. Be that as it may, as per the Indian Partnership Act, 1932, the firm cannot be recognized as a real entity as it did not carry on any business. I would therefore agree with the Income-tax Officer and ignore the existence of the firm and proceed to consider the matter on the footing that the firm did not exist for our present discussion.
As concluded by the Income-tax Officer, what has taken place in reality is that Shri Madhavan and Miss Sarada have passed on the properties in question to the two companies. So the real question for determination before me is whether there was an effective transfer in law giving rise to the capital gains as held by the Income-tax Officer. In this context, the assessee's representative has contended that the properties in question are still in the names of Shri Madhavan and Miss Sarada in the registers of the Sub-Registrar and have not so far been alienated to the Companies. He has also submitted that no deed of conveyance was executed transferring the properties. He has also pointed out that in the case of an immovable property of the value equal to or exceeding Rs. 100 the title to the property does not pass to the transfereetill a conveyance is executed and registered. The learned Representative therefore pleaded that in any event capital gains did not accrue or arise to the assessee and therefore it was wrong onthe part of the Income-tax Officer to have computed and assessed capital gains in this assessment year i.e. 1976-77.
After quoting various decisions of the Supreme Court the Commissioner held in para 8:11.
In this case the contention of the assessee is that no registered deed has been executed alienating the properties to the companies. If this contention is factually correct, there cannot be any capital gains in the light of the Supreme Court's decisions in Commissioner of Income-tax v. Bhurangaya Coal Co. (34 ITR 802) and Alapati Venkatratnaiahv. Commissioner of Income-tax (57 ITR 185). Therefore, respectfully following the Supreme Court's decisions, I would direct the Income-tax Officer to verify and delete the capital gains included in the assessment made if he finds that no deed of sale was in fact executed and registered during the previous year relevant to this assessment year.
8. The Commissioner in the present case then went on to consider whether in the aforesaid background the value of the land and other properties should be included in the hands of each of the assessees or not. The submission of the assessees was that the property became the property of the firm on 1-4-75 and on dissolution of the firm the properties became those of the two companies. The assessees had sought to rely on an order passed by the Commissioner of Income-tax Under Section 154 read with Section 264 dated 1-7-1983 where on the contention raised by the assessee that it was not necessary for the Commissioner to make certain observations about the genuineness of the firm the Commissioner had stated as under :-
2. I have carefully considered the submissions made by the assessee in his petition in particular his prayer for deleting the observations made by me about the genuineness of the firm in para 8(7) of my order mentioned above. In the case on hand, a sum of Rs. 6,90,329 was sought to be taxed by the Income-tax Officer, Central Circle, Coimbatore, under the head 'Capital gains' in respect of certain alleged transfers of the properties of land and buildings at Madras and Coimbatore by the assessee to a firm and subsequently by the firm to the companies, M/s. Universal Radiators (P.) Ltd. and M/s. Madras Radiators and Pressings (P.) Ltd. On the facts reported by the Income-tax Officer, I have observed that the firm did not carry on business and that its existence itself is doubtful in the absence of any ostensible business activity.
3. As the Income-tax Officer sought to tax the capital gains in the hands of the individual, I hold that as there has been no registered deed evidencing transferring the properties by the individual to the companies concerned, there was no valid tranfer in the eye of law in this case and that, therefore, the taxing of capital gains did not arise. In the petitions, the assessee now wanted the observations regarding the existence and genuineness of the firm should be deleted as it was not relevant to the conclusion that there was no liability to capital gains tax in this case.
4. As already stated, I have only repeated the facts stated by the Income-tax Officer and the Inspecting Assistant Commissioner regarding the genuineness of the firm while disposing of the revision petition filed by the assessee. As the conclusion that the assessee was not liable to capital gains tax was mainly -based on the view that there was no valid transfer between the assessee and the company, I am inclined to agree with the assessee that the observations regarding the genuineness of the firm are not germane to the issue.
5. Accordingly, I direct that the observations made by me in para 8(7) are treated to be as deleted to the extent as noted above.
This contention was considered by the Commissioner in his order Under Section 25(2) under appeal and he stated that in view of the clear finding of the department in the extracts quoted in paragraph 5 of his order and also by the assessing authorities the fact remains that the firm which was formed on 1-4-75 was a sham one and never existed and the subsequent observations of the Commissioner in his order Under Section 154 did not alter the position because the earlier observations of the ITO and the IAC in bringing to tax capital gains still stood ground. The Commissioner, therefore, concluded that each of the assessees continued to be the owner of the immovable properties, referred to and since the value thereof was not included in the wealth-tax proceedings, there was an error on the part of the WTO which is prejudicial to the Revenue in each of the assessments.
9. The Commissioner of Wealth-tax directed the WTO to arrive at the market value of the property and include 50% of the value thereof being the share of interest of each assessee in the net wealth for the assessment years 1979-80 and 1980-81. He stated that before finalising fresh assessments each assessee would be given adequate opportunity.
10. The learned counsel submitted before us that the firm was a genuine one formed for the genuine purpose of doing business in real estate as well as brokers and, therefore, a valid firm had come into existence under the deed of 26-5-75 by the name of Universal Real Estate Agents. In particular, the learned counsel submitted that even in the observations in the earlier order of the Commissioner, reproduced in paragraph 5 of the order of the Commissioner now under appeal, there is a specific finding, "the firm no doubt, came into existence on 1-4-1975 as narrated in the Partnership Deed ostensibly with a view to carry on Real Estate Business". It was only thereafter stated that the firm did not carry on such business as per the objects of the partnership deed and was ultimately dissolved. In view of this, the then Commissioner had held that the firm cannot be recognised as a real entity because it did not carry on any business and he had stated that he agreed with the ITO that the existence of the firm could be ignored. But even the observations to such extent were deleted by the order passed Under Section 154 dated 1-7-1983. The learned counsel stated that once a genuine firm had come into existence, as it did, in the present case with effect from 1-4-1975 and each of the assessees before us had brought into the common stock of the firm their immovable property as was categorically mentioned in the partnership deed, there was no need for registration of the document and this was clear from the observations in the case of Sunil Siddharthbhai v. CIT (1985) 156 ITR 509, 520 (SO). Since there was a valid transfer by each of the assessees of their immovable property to the firm, the learned counsel submitted that the value of the properties could not be included in the hands of the assessees any longer. He also stated that it was clear that the firm had shown the properties which were the subject of transfer in its accounts as its properties and in the copies of accounts of the firm, which were filed, where the respective entries as stipulated in the partnership deed were also made bifurcating the values between the current accounts and capital accounts of the assessee-partners. For the fact that the firm did try to do business in some real estate the learned counsel relied on certain letters of 15-5-1975 and earlier dates where certain parties had made enquiries from the firm regarding construction of property, approval of blue-print etc. and one letter where the firm itself had mentioned to one Shankar Rajaram and Associates in a letter dt. 10-4-1975 on the firm's letter-head that they had registered a new firm for the purpose of dealing in real estates. He clarified that the use of the term "registered" only meant that a firm had been formed. This was stated to be in conformity with the narration in the partnership deed which stated that the firm had come into existence from 1-4-1975 though the deed was executed only on 28-5-1975.
11. The learned Departmental Representative relied also on the decision of the Supreme Court in the case of Sunil Siddharthbhai (supra) and stated that it was essential that the veil should be pierced and the Income-tax Department had to go behind the facade of the document to find out the real nature of the transaction and in the present case the alleged firm of Universal Real Estate Agency was only a sham one. In such circumstances, there could never be any transfer of properties from the assessees to the firm because there was no genuine firm in existence, Secondly it is submitted that the immovable properties brought in by the assessees were not their capital contribution but only a negligible value was contributed towards capital, viz. Rs. 25,000 and the balance of value which came to about Rs. 21,50,000 was credited to the current account of the assessees. Therefore, the properties had not been brought into the common stock of the firm and since there was no registered document, there was no transfer of property by the assessees to the firm. Even if it was assumed for the sake of argument that the firm was in existense since there was no registered deed there was also no transfer of properties by the assessees to the companies. The properties, therefore, continued with the assessees and the value thereof had rightly to be included in their assessments.
12. In reply the learned counsel submitted that if the value of the property was to be included if in the event of his argument that there was transfer of property not being accepted, then straightaway deduction would have to be given for the consideration paid by the companies to each of the assessees which stood included in the wealth of the assessees. That apart, because the properties used by the companies were reflected in their balance sheets and depreciation was also being allowed from year to year where admissible, no willing buyer would pay the price as if the properties were encumbered and there would be virtually no market value for the properties as far as the assessees were concerned, since in any event the companies were, in any view of the matter, in adverse possession.
13.We have considered the rival submissions. Section 14 of the Partnership Act reads as under :-
14. The property of the firm :- Subject to contract between the partners, the property of the firm includes all property and rights and interests in property originally brought into the stock of the firm, or acquired by purchase or otherwise, by or for the firm, or for the purposes and in the course of the business of the firm and includes also the goodwill of the business.
Unless the contrary intention appears, property and rights and interests in property acquired with money belonging to the firm are deemed to have been acquired for the firm.
The property of the firm includes all proporties and rights and interests in property originally brought into the stock of the firm. We have already referred to the relevant clauses of the partnership deed dated 26-5-1975. It was categorically mentioned in respect of each of the items of property that from 1-4-75 the property in question would "vest in the firm and shall be treated as property of the firm". The statement is unambiguous, The properties in question were brought into the stock of the firm at the inception of the firm itself, i.e. 1-4-1975 according to the aforesaid statement. Merely because an apportionment of value was made and the major value was apportioned towards the current account of each of the assessees and only a negligible value was apportioned towards capital account it would not make the immovable property one which was not brought into the stock of the firm. Therefore (subject to our finding as to whether there was a firm in existence or not which we shall deal with later), the property in question was brought into the stock of the firm in terms of Section 14 of the Partnership Act and again in terms of the aforesaid Section became "the property of the firm". The Supreme Court has categorically held in the case of Sunil Siddharthbhai (supra), already referred to, that where an assessee brought property as capital contribution into the partnership firm, there was a transfer of a capital asset. Whether the contribution was its capital or an allocation was made between capital accounts and current account, there would in our view have been a transfer. The further point to be examined is whether registration was a prerequisite for such a transfer. At page 520 of 156 ITR, their Lordships observed as under :-
Our attention has also been invited to Clause (b) of Sub-section (1) of Section 17 of the Registration Act, which requires the registration of non-testamentary instruments which purport or operate 'to create, declare, assign, limit or extinguish, whether in present or in future, any right, title or interest, whether vested or contingent, of the value of one hundred rupees and upwards to or, in immovable property' and to the view taken by the courts in this country that when a person brings in even his immovable property as his contribution to the capital of the firm, no written document or registration is required under that clause. The view was expressed in Firm, Ram Sahay Mall Rameshwar Dayal v. Bishwanath Prasad AIR 1963 Pat. 221. The learned Judges relied on the English Jaw that the personal assets introduced by a partner into the firm as his contribution to its capital become the property of the firm by reason of the intention and agreement of the parties. The view does not spring from the consideration that there is no transfer, the view is that no document of transfer is required and that, therefore, registration is unnecessary. The Patna High Court reiterated that view in Sudhansu Kanta v. Manindra Nath AIR 1965 Pat. 145.
Though the observations speak of immovable property brought in as contribution to capital of the firm, as we have already observed, as long as immovable property is brought in as contribution by the partner at the inception an allocation of value between capital account and current account would not make any difference and we have to hold that registration would not be necessary for effecting the transfer. Hence the absence of registration in the present case does not make the transaction anytheless of one the transfer by each assessee to the firm (subject to our finding regarding the firm being in existence).
14. In the case of Sunil Siddharthbhai (supra) Supreme Court had observed at page 523 as under :-
We have decided these appeals on the assumption that the partnership firm in question is a genuine firm and not the result of a sham or unreal transaction and that the transfer by the partner of his personal asset to partnership firm represents a genuine intention to contribute to the share capital of the firm for the purpose of carrying on the partnership business. If the transfer of the personal asset by the assessee to a partnership in which he is or becomes a partner is merely a device or ruse for converting the asset into money which would substantially remain available for his benefit without liability to income-tax on a capital gain, it will be open to the income-tax authorities to go behind the transaction and examine whether the transaction of creating the partnership is a genuine or a sham transaction and, even where the partnership is genuine, the transaction of transferring the personal asset to the partnership firm represents a real attempt to contribute to the share capital of the partnership firm for the purpose of carrying on the partnership business or is nothing but a device or ruse to convert the personal asset into money substantially for the benefit of the assessee while evading tax on a capital gain. The Income-tax Officer will be entitled to consider all the relevant indicia in this regard, whether the partnership is formed between the assessee and his wife and children or substantially limited to them, whether the personal asset is sold by the partnership firm soon after it is transferred by the assessee to it, whether the partnership firm has no substantial or real business or the record shows that there was no real need for the partnership firm for such capital contribution from the assessee. All these and other pertinent considerations may be taken into regard when the Income-tax Officer enters upon a scrutiny of the transaction, for, in the task of determining whether a transaction is a sham or illusory transaction or a device or ruse, he is entitled to penetrate the veil covering it and ascertain the truth.
The aforesaid observations clearly show that cases were contemplated where the partnership itself may be genuine when it would have to be examined further whether bringing in of property was a device to convert the personal asset into money substantially for the benefit of the assessee while evading tax on capital gains. The partnership, on the other hand, may be a sham one also. So we have to decide in the present case whether the partnership is is genuine or not. Section 4 of the Partnership Act reads as under:-
4. Definition of "partnership", "partner", "firm" and "firm name" : Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.
Persons who have entered into partnership with one another are called individually "partners" and collectively "a firm" and the name under which their business is carried on is called the "the firm name.
Here the four parties are genuine persons. They have agreed to share the profits. There is the finding of the Commissioner in his order Under Section 264 of 20-2-1983 which stated, "the firm no doubt, came into existence on 1-4-1975 as narrated in the Partnership Deed ostensibly with a view to carry on Real Estate Business." This is reproduced in paragraph 5 of the order of the Commissioner now under appeal and he has, therefore, relied on this amongst other observations in the earlier order of the Commissioner. No doubt, in the order of the Commissioner dated 1-7-1983 Under Section 154 he had stated that some of his observations would stand modified but the Commissioner had categorically stated that all he did was to reiterate the findings of the ITO and the IAC. So the effect of the order Under Section 154 was only that there was no independent finding by him on the genuineness of the firm. The Commissioner, whose order is now under appeal, in dealing with the assessee's plea on the order Under Section 154 stated with reference to his findings in the order Under Section 154 as under :-
8. These observations do not in any way advance the case of the assessee. What all the Commissioner said here is that some of the observations of his regarding the genuiness of the firm are not essential in respect of the dispute before him. Even then the observations of the Income-tax Officer and the Inspecting Assistant Commissioner to the effect that there was no genuine firm still hold good.
It is therefore clear that the Commissioner in his order relied on the orders of the ITO and the IAC and the statement that the firm no doubt, came into existence on 1-4-1975 as narrated in the partnership deed ostensibly with a view to carry on real estate business does not stand washed away. The case that is sought to be made out is that because subsequently the firm did not, in fact, do any business it could not be recognised as a real entity. Section 6 of the Partnership Act lays down criteria for determining existence of a partnership and it is stated that regard shall be had to the real relationship between the parties as shown by all relevant facts taken together. So here, as we have already stated, there were genuine parties who executed a document stating that they wanted to do business in real estate including brokerage. So the incidence of the genuineness of the firm qua the parties and objects of business exist. The expression "business carried on" in Section 4 of the Partnership Act cannot be interpreted in a restricted manner to mean that the business should have been in existence even when the persons came together and agreed to form the partnership. In the Commentary on the Indian Partnership Act by A.K. Aggarwal (1982 Edition at page 51), there are the following observations :-
In Sita Ram Kalani v. Manmal Gattani, the business was started when the cardinal points were agreed upon and it was only after this, that steps were taken for receiving the engine and for purchasing the machinery etc. The mere fact that a formal agreement with other minor details and stipulations was to be drawn up later. In this case it was held : "There is no doubt that it is she carrying on a business, not an agreement to carry it on, which is the test of partnership. But each and every step taken for the erection of the factory, which was to manufacture utensils would be considered within the purview of "carrying on business". This term has been used in the Partnership Act in a broad and general sense. It may be observed that as soon as a partnership starts its commercial life having its own capital, its own assets and liabilities, its own employees and its own credit in the market in short as soon as it becomes a business entity it would be regarded as 'carrying on business' within the meaning of Section 4, Indian Partnership Act.
The term carried on business as used is in all commercial and general terms. Here the partnership deed stated that it had its own capital when the properties were brought into its common stock by the partners and, therefore, had its own assets and liabilities. We do not express any opinion on the correspondence sought to be relied upon by the learned counsel between the firm and various persons because we do not know whether they were before the Income-tax authorities but we have restricted ourselves solely to documents which admittedly were before the Income-tax authorities. It is clear, therefore, that this is a case where there was a genuine firm which had come into existence. When a genuine firm had come into existence if partners brought their property into the common stock, there was a transfer of such property from the partners to the firm and the question of treating the property as continuing to be the separate property of the partners no longer arises. In the present case, we are not concerned with the further aspect mentioned in the case of Sunil Siddharthbhai (supra), viz. whether the subsequent dissolution did have any effect of being a device or ruse to convert the personal assets into money substantially for the benefit of the assessee with a view to evading tax or not. In filing the wealth-tax returns each of the assessees had stated that the properties stood transferred to the firm in relation to the assessment year 1976-77. The statements of the assessees in the returns are in conformity with the position in law, That being so, we are unable to hold that there was any error prejudicial to the Revenue committed by the WTO in framing the assessments in the case of each of the assessees for the respective assessment years leaving out of consideration the value of the immovable properties under reference because before the valuation dates they ceased to be the properties of the firm also. We, therefore, set aside the order of the Commissioner of Wealth-tax and restore the orders of the Wealth-tax Officer.
15. In the view that we have taken it is not necessary for us to express any opinion on the various points made by the learned counsel, viz. that the market value of the property would be virtually negligible because other parties, in any view of the matter, had adverse possession or that the amounts received in consideration would have to be excluded if values of the property are to be included etc.
16. The result is, the appeals are allowed.