Punjab-Haryana High Court
Commissioner Of Income-Tax vs Bharati Engineering Corporation on 27 April, 1989
Equivalent citations: [1989]180ITR32(P&H)
JUDGMENT S.S. Sodhi, J.
1. The matter here concerns the transfer of immovable property by a firm to its partners, the controversy being whether such transfer can be effected by mere entries in the books of the firm ?
2. The assessee, Bharati Engineering Corporation, owned three immovable properties described as a building near Paradise Cinema, Phagwara, Plot No. 32, Industrial Area, Phagwara, and a plot near the Octroi Post, Grand Trunk Road, Phagwara. The assessee purported to make over these three properties at their book value to three of its partners, namely, Sarvshri S.R. Uppal, S.P. Uppal and S. K. Uppal, respectively, by debiting their personal accounts with the book value of the properties in question and making corresponding entries in the property account of the firm.
3. According to the Income-tax Officer, the market value of the three properties in question was much more than their book value and the assessee-firm was consequently called upon to show why capital gains under Section 52(2) of the Income-tax Act, 1961, be not assessed. After considering the reply of the assessee, the Income-tax Officer held the assessee-firm liable to both long-term and short-term capital gains.
4. On appeal, the Commissioner of Income-tax deleted the additions made by the Income-tax Officer on account of both long-term and short-term capital gains by holding that the entries in the books of the assessee-firm did not have the effect of transferring the properties from the firm to its partners. The Tribunal agreed with this view and held that mere entries without conveyance of the properties by a deed of registration would not have the effect of transferring ownership over the properties from the firm to the partners. It is in this context that the following question has been referred for the opinion of this court, namely:
"Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in confirming the deletion of capital gains of Rs. 6,39,876 by the Commissioner of Income-tax (Appeals) by holding that there was no transfer of any capital asset within the meaning of Section 2(47) of the Income-tax Act, 1961 ?"
5. It is a well-settled proposition of law that mere entries in the books of a partnership firm cannot convert partnership property into individual property of its partners. The judicial precedent for this view is provided by the judgment of the High Court of Karnataka in Jansons v. CIT [1985] 154 ITR 432, where, the court further went on to hold that even an agreement entered into by the partners treating the firm's property as individual property would not have such effect, unless that agreement was followed by a deed of conveyance known to law. A similar view has been taken in a string of authorities. Those cited in this behalf are CIT v. Dadha and Co. [1983] 142 ITR 792 (Mad), Ram Narain and Brothers v. CIT [1969] 73 ITR 423 (All) and Abdul Kareemia and Bros. v. CIT [1984] 145 ITR 442 (AP).
6. The question posed has thus clearly to be answered in the affirmative, in favour of the assessee and against the Revenue. This reference is disposed of accordingly. There will, however, be no order as to costs.