Karnataka High Court
K.A. Gundu Rao And Others vs Shri Ramanarayana Avadhani And Others on 10 January, 1994
Equivalent citations: AIR1994KANT217, ILR1994KAR642, 1994(1)KARLJ340, AIR 1994 KARNATAKA 217, (1994) 2 CIVILCOURTC 23, (1994) 2 CIVLJ 34, (1994) 1 KANT LJ 340, (1994) 2 LJR 278, ILR(1994) KANT 642
JUDGMENT
1. The appeal is by the plaintiff now represented by the legal representatives. The first respondent is the first defendant, referred hereinafter either as the contesting respondent or as the first defendant.
2. The suit was for a declaration that the firm by name Uday Motor Transport, Shimoga stands dissolved from 23rd February, 1976 or in the alternative to have the firm dissolved by the order of the court. The plaintiff also sought for the appointment of a Receiver to realise the assets for distribution. Other consequential reliefs such as for accounting and for payment of plaintiff's share are also sought for by the plaintiff. There is no dispute regarding basic facts.
3. A deed of partnership was executed on 1st February, 1957 at Shimoga between the first defendant, second defendant and the plaintiff. The partnership deed states that the first defendant was carrying on the business in stage carriage transport service in the name and style of Uday Motor Transport and that the other two partners were taken into the business as partners resulting in the formation of the firm. The partnership was at will. The business of the firm commenced on 1st February, 1957. The capital of the firm was Rs. 42,500/- out of which Rs. 40,000/- was contributed by the first defendant and Rs. 25,00/- by the second defendant. The net profits or losses of the firm must be shared by the partners as follows :
i) the first defendant = 6 annas. ii) plaintiff = 5 annas. iii) second defendant = 5 annas.
It is unnecessary to refer to the other clauses in the partnership deed except the statement that in the event of death, retirement, disability etc. of any partner or partners the partner or partners shall not be entitled to claim anything towards goodwill. Since the question involved in this appeal pertains to the scope of the accounting to be taken, it is unnecessary to refer to the various contentions raised by the defendants. The first defendant contended that all the assets of the firm belonged to him since they were the buses which originally belonged to him.
4. The trial court framed the following issues :
1) Whether the plaintiff proves that he has a right in the assets of the firm of Udaya Motor Transport, Shimoga?
2) Whether the defendants prove that the notice dated 23-2-1976 is bad in law and as such the suit is not maintainable.
3) Whether the suit is not maintainable in view of the Arbitration clause in the Partnership Deed?
4) Whether the 4th defendant is not a necessary party?
5) Whether the firm is dissolved? If so, to what reliefs, if any, the plaintiff is entitled?
6) What decree or order?
The dispute in the appeal pertains to the first issue.
5. The trial court held that the plaintiff was entitled to 5 annas share in the profits and losses of the firm and the accounts of the said firm regarding profits and losses are to be taken with the assistance of the Commissioner for the period from 1-2-57 to 23-2-76. The firm was declared as having dissolved with effect from 23-2-76. However, under issue No. 1, the trial court held that the plaintiff was not entitled to any share in the assets of the firm and the said assets shall be excluded while taking the accounts. The trial court also held that though some buses were acquired by borrowing loans from the banks, the plaintiff was not entitled to derive any benefit out of the said acquisition. Indications are that all the buses belonged to defendant No. 1, even though the trial court found that buses and parts were acquired by borrowing loans from the bank and the permits were changed in the name of the firm. The trial court also noted that the value of the buses and spare parts have been shown in the income-tax returns of the firm. However, that was held to be irrelevant to consider those assets as the assets of the firm. According to the trial Court, there is no reference to the assets in the partnership deed Ex. D1. The trial Court held that the plaintiff was entitled to a share in the profits and losses of the firm only.
6. The short question is whether the trial court was justified in holding that the assets should be excluded while taking the accounts of the firm for distribution under S. 48 of the Indian Partnership Act ('the Act' for short).
7. Mr. U. L. Narayana Rao, learned Sr. Counsel for the plaintiff contended that there is a difference between capital contributed by the partner and the assets which belonged to the partnership. Relying on S. 14 of the Act, learned counsel pointed out that the property of the firm includes all properties and rights and interests in the property acquired with the money belonging to the firm are deemed to have been acquired by the firm. Learned counsel also pointed out that the partnership deed nowhere denies any right to the plaintiff to claim any share in the assets of the firm on its dissolution in the manner laid down under S. 48 of the Act.
8. A perusal of Ex. D1 shows that the first defendant contributed a sum of Rs. 40,000/-towards capital and Rs. 2,500/- was contributed by defendant No. 2. Plaintiff did not contribute any particular sum towards the capital. The first defendant as D. W. I. admitted that the sum of Rs. 40,000/- was the value of the buses belonging to him and the said sum of Rs. 40,000/- represented the buses which stood transferred to the firm. In other words the contribution of the first defendant towards capital of the firm was the value of the huses. D. W. 1 also admitted that all the buses were treated as the assets of the firm and in fact while seeking loans, from the bank all these buses were shown as the assets of the firm and loans were obtained by offering the buses and other assets as security and all the partners joined in obtaining the loans from the banks. D. W. 1 also admitted that even under the balance sheets the various buses were shown as the assets of the firm. Evidence on record undisputedly shows that new buses were acquired and some of the old buses were sold by the firm. According to the learned counsel for the first defendant the plaintiff cannot be given the benefit of the assets as these assets were created or obtained out of the capital contributed by the partners. This submission cannot be accepted at all because assets of the firm are acquired in the course of the business. No doubt the capital of the firm is used for the purposes of the business but the assets are acquired not merely by the use of the initial capital but also the skill and the enterpreneural quality of the partners. The mode of taking accounts of dissolution is specified in S. 48 of the Act. In the absence of any agreement between the parties, the partners would be governed by the provisions of S. 48 of the Act.
9. Section 48 of the Act provides for the settlement of accounts between the partners after dissolution. The mode provided here, is subject to any agreement by the partners. Therefore, if there is no agreement governing the settlement accounts on dissolution, S. 48 would govern. As per clause (a), losses, including deficiencies of capital shall be paid first out of profits, next out of capital, and lastly, by the partners individually as provided in the clause. Clause (b) provides for the application of the assets of the firm, including any sums contributed by the partners to make up the deficiencies of capital. At first, debts due to third parties shall have to be paid; thereafter each partner shall be paid the advances (as distinguished from capital) made by him to the firm and this refund of the advance is to be made rateably. After this, each partner shall be paid what is due to him on account of capital, rateably. The residue, if any shall be divided among the partners in proportions in which they were entitled to share profits.
10. Sub-clauses (ii) and (iii) use the term 'rateably'. As per sub-clause (ii) of clause (b) of S. 48, a partner shall be refunded the advances made by him to the firm rateably; in other words, if a partner had advanced a particular sum, it shall have to be refunded to him to the extent balance of assets are available; only the rateable fraction of the advance shall have to be repaid if the amount available is insufficient to refund advances made by all or any one of the partners. In similar manner, out of the further balance, capital contributed by the partners shall be returned under sub-clause (iii).
11. Mr. B. M. Krishna Bhat contended that when a partner has not contributed any sum towards the capital, said partner cannot claim a portion of the assets under clause (iii) of S. 48(b). He is right. But, the learned Counsel is not right in contending that all the assets remaining after applying sub-clauses (i) and (ii) shall be paid over to the partners who contributed to the capital, in proportion to the capital contributed by them; according to the learned Counsel, if there are three partners A, B and C, and capital contributed by A is Rs. 100/-, B Rs. 50/- and 'nil' by C, then, the total capital is Rs. 150/- and the partner is entitled to be paid not merely Rs. 100/- (the actual capital contributed), but that portion of the assets remaining, which is proportional to the capital he contributed. In other words, in case, a sum of Rs. 1,000/- is left over being the value of the assets or as assets after the payments referred to in sub-clauses (i) and (ii), partner 'A' has to be refunded with 2/3rd of the said Rs. 1,000/-, which comes to nearly Rs. 666/-. The learned counsel urged that the assets of the firm are acquired out of the capital of the firm and should be equated to the capital and the benefit of the entire asset should accrue only to the partners who contributed to the capital.
It is impossible to accept this contention. Section 48(b)(iii) provides for the refund of the actual capital contributed and if the available assets are insufficient to refund the said amount, a rateably reduced amount shall have to be refunded. The term 'capital' referred here, has the same meaning, as referred elsewhere in the Act; it cannot be equated to the term "assets" of the firm at all. Capital contributed by a partner is in the nature of the advance or a loan advanced to the firm by a partner; it has no higher quality at all. Just as the loan advanced by the partner does not get expanded in proportion to the enhanced value of the assets, the capital contributed by a partner also does not get augmented in proportion to the assets of the firm.
Assets are acquired for the purposes of the business of the firm; it may have been acquired initially when the firm was constituted or subsequently in the course of its business. Acquisition of assets of a firm is in the course of the joint venture of all the partners. Assets are acquired not merely by the utilisation of the capital contributed by a few partners; credibility and the skill of all the partners are as much necessary as the actual capital to acquire the assets. It is stated in Lindley On Partnership (15th Edition) at page 494 :
"By the capital of a partnership is meant the aggregate of the sums contributed by its members for the purpose of commencing or carrying on the partnership business, and intended to be risked by them in that business. The capital of a partnership is not therefore the same as its property; the capital is a sum fixed by the agreement of the partners; whilst the actual assets of the firm vary from day to day and include everything belonging to the firm and having any money value."
It is said at page 498 :
"Whatever at the commencement of a partnership is thrown into the common stock, and whatever has from time to time during the continuance of the partnership been added thereto or obtained by means thereof, whether directly, by purchase or circuitously by employment in trade, belongs to the firm, unless the contrary can be shown."
After some discussion the learned author observes at page 500 :
"..... it is to be observed that property which has been used and treated as partnership property cannot be presumed to belong to one partner only, simply because he paid for it; for the presumption in such a case is rather that the property in question was his contribution to the common stock. But the vital question always remains, was the property used and treated as partnership property? The mere use of property by the partnership without any indication as to whom the property was treated as belong will not usually bring about any change in the beneficial ownership of such property which will, therefore, remain vested in the partner or partners previously entitled thereto."
In the instant case, evidence is clinching to show that the old buses belonging to the contesting respondent were considered as the assets of the firm and their value was taken as the contribution made by him to the capital of the firm. These buses were shown as belonging to the firm by transfer of the registration, etc. In the balance sheets, these buses were shown as part of the assets of the firm. Old buses were sold and new buses were acquired, again, in the name of the firm. All the partners participated in the business of the firm and all of them were parties to the borrowings from the bank by hypothecating the buses.
The very fact that in the balance sheets and books of the firm buses are treated as assets of the firm, is sufficient to dislodge the contention of the learned counsel for the contesting respondent.
No partner can insist that the value of the partnership property or any portion of it should be divided 'in specie' and no partner can claim as his one the increase in value of the assets (also see page 736 of Lindley).
After the losses are made up, debts due to third parties are paid, advance made by the partners are refunded or repaid in full or rateably, from the balance remaining, the capital contributed by each partner shall have to be paid to him rateably. After, these payments are made if further funds are available, referred to as the residue, same shall be distributed amongst the partners in proportion in which they were entitled to share the profits. In other words, the "residue" is equated to the profits of the firm to be shared by all the partners, in the manner they were sharing the profits of the firm. In law, there is no question of any 'asset' of the firm being left over 'in specie', at this stage. Each erstwhile partner takes the residue as the available profit out of their joint venture. Value of the assets would have already gone into the hotchpot of the firm, while applying the various clauses of S. 48.
While constituting the partnership the value of buses belonging to the first defendant was taken as his contribution to the capital; the buses thereafter ceased to be his exclusive property; his absolute right over the buses stood reduced by the co-ownership interest created in other partners. This principle is no more in doubt.
In M/s. Malabar Fisheries Co. v. The Commissioner of Income-tax, Kerala question was whether distribution of assets of a firm consequent on its dissolution amounts to a transfer of assets, to attract the relevant provision of the Income-tax Act, 1961. Answer was in the negative. The Supreme Court pointed out that the assets of the firm belonged to all the partners and on the dissolution of the firm, the allotment of any asset to one of the partners in the process of dissolution is not a transfer at all, but it is a case of mutual adjustment of rights between the partners. At page 183 the Court observed:
"..... it seems to us clear that a partnership firm under the Indian Partnership Act, 1932 is not a distinct legal entity apart from the partners constituting it and equally in law the firm as such has no separate right of its own in the partnership assets and when one talks of the firm's property or firm's assets all that is meant is property or assets in which all partners have a joint or common interest. If that be the position, it is difficult to accept the contention that upon dissolution the firm's right in the partnership assets are extinguished. The firm as such has no separate right of its own in the partnership assets but it is the partners who own jointly in common the assets of the partnership and, therefore, the consequence of the distribution, division or allotment of assets to the partners which flows upon dissolution after discharge of liabilities is nothing but a mutual adjustment of right between the partners and there is no question of extinguishment of the firm's right in the partnership assets amounting to a transfer of assets within the meaning of S. 2(47) of the Act. In our view, therefore, there is no transfer of assets involved even in the sense of any extinguishment of the firm's right in the partnership assets when distribution takes place upon dissolution."
In Sunil Siddharthabhai, etc. v. Commissioner of Income-tax, Ahmedabad, Gujarat the Supreme Court considered, the relevant principle once again. The Court held the view "'when a partner hands over business asset to the partnership firm as his contribution to its capital he cannot be said to have effected a sale" as a correct view (at page 371). However, such a contribution results in the reduction of his exclusive right in the asset to the shared rights in it with the other partners of the firm (vide page 372). The Court observed:
"..... While he does not lose his rights in the asset altogether what he enjoys how is an abridged right which cannot be identified with the fullness of the right which he enjoyed in the asset before it entered the partnership capital."
Thereafter the Court, after referring to Addanki Narayanappa's case , held :
"It is apparent, therefore, that when a partner brings in his personal asset into a partnership firm as his contribution to its capital, an asset which originally was subject to the entire ownership of the partner becomes now subject to the rights of other partners in it. It is not an interest which can be evaluated immediately, it is an interest which is subject to the operation of future transactions of the partnership, and it may diminish in value depending on accumulating liabilities and losses with a fall in the prosperity of the partnership firm. The evaluation of a partner's interest takes place only when there is a dissolution of the firm or upon his retirement from it. It has sometimes been said, and we think erroneously, that the right of a partner to a share in the assets of the partnership firm arises upon dissolution of the firm or upon the partner retiring from the firm. We think it necessary to state that what is envisaged here is merely the right to realise the interest and receive its value. What is realised is the interest which the partner enjoys in the assets during the subsistence of the partnership firm by virtue of his status as a partner and in accordance with the terms of the partnership agreement. It is because that interest exists already before dissolution, as was held by this Court in Malabar Fisheries Co. (supra), that the distribution of the assets on dissolution does not amount to a transfer to the erstwhile partners. What the partner gets upon dissolution or upon retirement is the realisation of a pre-existing right of interest. It is nothing strange in the law that right or interest should exists in presenti but its realisation or exercise should be postponed. Therefore, what was the exclusive interest of a partner in his personal asset is, upon its introduction into the partnership firm as his share to the partnership capital transformed into a shared interest with the other partners in that asset. Qua that asset, there is shared interest. During the subsistence of the partnership the value of the interest of each partner qua that asset cannot be isolated or carved out from the value of the partner's interest in the totality of the partnership asset. And in regard to the latter, the value will be represented by his share in the net assets on the dissolution of the firm or upon the partners retirement."
What an erstwhile partner gets on dissolution is his share in the net assets and not in any particular asset in specie.
In Narayanappa v. Bhaskara Krishanappa, , the question whether a karar reflecting the dissolution of partnership under which the assets of the firm were distributed between the partners required registration under S. 17 of the Registration Act. Supreme Court held that the registration was unnecessary since question of transfer did not take place while the assets were allotted on dissolution. Supreme Court pointed out that the concept of partnership is to embark upon a joint venture and for that purpose to bring in as capital, money or even property including immoveable property. Once that is done whatever is brought in would cease to be the exclusive property of the person who brought it in. It would become the trading asset of the firm in which all the partners of the firm would have interest in proportion to their share in the joint venture of the business of partnership. At page 1304, Supreme Court observed as follows :
"As already stated his right during the subsistence of the partnership is to get his share of profits from time to time as may be agreed upon among the partners and after the dissolution of the partnership or with his retirement from partnership of the value of his share in the net partnership assets as on the date of dissolution or retirement after a deduction of liabilities and prior charges."
Sri B. M. Krishna Bhat, learned counsel, relied in the last portion of the observation to contend that the erstwhile partner is entitled to the value of his shares in the net partnership assets which presupposes a right to claim the value of the assets contributed by him.
The above submission overlooks the basic principle enunciated by the Supreme Court in several decisions referred to already. The sentence relied on by Sri Krishna Bhat should be understood in the light of S. 48 of the Act. The particular assets contributed by the partner does not represent the share in the partnership assets but it amounts to his share in the capital of the firm. His right is to claim the capital contributed or the proportionate capital that would be available for payment. Thereafter whatever balance is left which is termed as the 'residue' shall have to be distributed amongst all the partners as stated already.
In view of the above it is not possible to accept the contentions of the first defendant. The assets of the firm cannot be excluded for the purposes of dissolution and they cannot be exclusively set apart for allotment to the first defendant. All the assets of the firm are to be taken into the hotch-pot for dissolution and distribution in terms of S. 48 of the Act as explained already.
It is clarified that defendants 1 and 2 will be entitled to the refund of the capital to the extent, which is permissible under S. 48(b)(iii) rateably. The Commissioner appointed by the trial court shall proceed to distribute the assets and take further steps as provided for in S. 48 of the Act.
The appeal is accordingly allowed. No costs.
12. Appeal allowed.