Calcutta High Court
Commissioner Of Income-Tax vs Kedarnath Poddar And Co. on 12 January, 1993
Equivalent citations: [1993]201ITR639(CAL)
JUDGMENT Ajit K. Sengupta, J.
1. In this reference under Section 256(2) of the Income-tax Act, 1961, the following questions of law have been referred to this court for the assessment year 1971-72 :
" 1. Whether, on the facts and in the circumstances of the case, the Tribunal misdirected itself in law in holding that the assessee-firm was at no time the legal owner of the immovable property at Behala and so could not transfer the same and/or whether such finding of the Tribunal was otherwise arrived at by ignoring relevant materials and/or relying on irrelevant materials?
2. If the answer to question No. 1 is in the negative, then whether, on the facts and in the circumstances of the case and having regard to the admitted fact that the property at Behala had been purchased out of the funds of the assessee-firm and was all along disclosed as an asset of the assessee-firm, the interest and rights of the. assessee-firm in the said property represented a capital asset within the meaning Section of 2(14) of the Income-tax Act, 1961 ?
3. Whether, on the facts and in the circumstances of the case, the Tribunal misdirected itself in law in holding that there was no transfer of a capital asset of the assesse-firm within the meaning of Section 45 of the Income-tax Act, 1961, and/or whether such finding of the Tribunal was otherwise vitiated, having been arrived at by ignoring relevant evidence and relying on irrelevant materials ?
4. Whether, on the facts and in the circumstances of the case, the Tribunal erred in law in holding that no income chargeable to Income-tax under the head 'Capital gains' within the meaning of Section 45 of the Income-tax Act, 1961, arose to the assessee-firm ?"
2. The question relates to "capital gains" purportedly arising to the firm in respect of the immovable property in the wake of the transfer of the property in favour of the senior partner by necessary book entries in the accounts of the firm.
3. The background relating to this immovable property is that the property situate at Behala was purchased with the funds of the firm in the name of the said senior partner, viz., Shri Kedar Nath Poddar, some time during the second World War. The deed of conveyance was also registered at the time of purchase in the name of Shri Kedar Nath Poddar. However, the said partner allowed the assessee-firm to use the said property for business purposes of the assessee-firm and the firm took the assets in its accounts by crediting the value thereof to the capital account of Shri Kedar Nath Poddar. But, in the instant previous year, the assessee-firm made certain book entries whereby the aforesaid house property was transferred to the said senior partner and it ceased to be treated as the asset of the firm. Simultaneously, the value of the asset on the date of such entry was debited to the account of the said partner and the surplus in the asset account was transferred to the Capital Reserve Account. This led the Income-tax Officer to the view that the assessee-firm had transferred the aforesaid property to the said partner, Shri Kedar Nath Poddar, and such transfer involved the relinquishment of the rights of the firm in the said property within the meaning of Section 2(47) of the Income-tax Act, 1961, attracting capital gains tax under Section 45 which he computed at Rs. 39,105.
4. The Appellate Assistant Commissioner, in the appeal against the computation of capital gains, as aforesaid, upheld the order of the Income-tax Officer. Aggrieved thereby, the assessee came up in second appeal before the Tribunal. The Tribunal, after considering the respective contentions of the parties, accepted the contentions of the assessee, and deleted the additions of Rs. 39,105 being the capital gains computed.
5. The Tribunal found as an admitted fact that the property under consideration stood registered all along in the name of Sri Kedar Nath Poddar. It held that when he brought that property to be used for the purpose of the firm, it was obviously taken as a part of his contribution towards the share capital of the firm and when he took it back, it merely meant that he was withdrawing the amount equal to the value of the asset from his contribution towards his share capital of the firm.
6. It observed :
" Even though the property was treated as an asset of the firm, Sri Kedar Nath Poddar was also the owner thereof. All the partners of the firm jointly owned all the assets of the firm. When a dissolution takes place or when a partner retires, then the account is made up to ascertain the share of each partner in the then existing assets of the firm and each partner gets back what he owned jointly with the other partners. The Income-tax Officer as well as the Appellate Assistant Commissioner have proceeded on the footing that the entries made in the books of the firm amounted to a transfer or relinquishment of the rights over the property under consideration which, we think, is not correct. It is well-settled, as has been pointed out in the case of CIT v. Bhurangya Coal Co. , that rights in immovable property are neither created nor extinguished merely by adjustment entries in the account books. The law requires certain formalities before the title to an immovable property can pass from one person to another. Until such formalities are completed, there can be no transfer or extinguishment or relinquishment of the rights in immovable properties. Thus, in the instant case, we find that, in the eye of law, Sri Kedar Nath Poddar was all along the owner and there was no legal transfer of the property in question when he allowed the same to be treated as the asset of the firm. Nor was there any legal transfer when he took away the property out of the assets of the firm. Hence, we are of the opinion that the facts of the instant case did not amount to a transfer within the meaning of Section 2(47) of the Act, and, therefore, it did not attract 'capital gains' tax under Section 45 of the Act."
7. It recorded its final conclusion as under :
" We hold that the firm was never the legal owner of the house property under consideration and so it could not transfer it. Further, there has been no transfer at all because no registered deed of conveyance has been executed. Finally, there could be no transfer so far as the adjustment between a firm and its partners are concerned because a firm is not a separate entity from its partners so far as the law of property is concerned. In the circumstances, we reverse the orders of the authorities below and delete the aforesaid addition of Rs. 30,105."
8. At the hearing, counsel for the parties reiterated the arguments canvassed before the Tribunal. The case would have been covered by the decision of the Supreme Court in Addanki Narayanappa v. Bhashara Krishnappa, , if it were a case of distribution of assets either in the event of dissolution or retirement of a partner. In the said decision, the Supreme Court held that, where, upon dissolution, there is relinquishment of interest of a partner in a partnership and assets are distributed by way of adjustment, that is a transaction of transfer and such transaction is not compulsorily registrable. In that case, two members of two Hindu joint families 'A' and 'B' had entered into a partnership. A subsequent document showed the termination of the partnership, and family 'A' had given up its share in the machines, etc., and in the business and that it had made over the same to the family 'B' alone completely by way of adjustment. In a subsequent suit for dissolution of partnership and for accounts brought by the members of family 'A', it was contended that since the partnership assets included immovable property and the documents recorded relinquishment by the members of family 'A' of their interest in those assets, the said document was compulsorily registrable under Section 17(1)(c) of the Registration Act. The Supreme Court held that the partners' interest in the partnership asset was movable property ; therefore, the document evidencing the relinquishment of such interest needed no registration under Section 17(1) of the Registration Act. Thus, in the case of dissolution, any relinquishment of immovable property in favour of a particular partner does not require registration. But, that is not the case here. In this case, the firm continued, but the immovable property which the firm had been treating as the asset of the partnership was given over to the senior partner by book entries. From this, one cannot hasten to the conclusion that, on the basis of the decision of the Supreme Court cited above, there was a transfer attracting the provisions of Section 45. Before us is not the kind of transfer, which the Supreme Court held to take place on the dissolution of partnership. This transfer is during the subsistence of the firm, the transferee-partner continuing as a partner.
9. Now, Section 47 sets out certain transactions which are not to be regarded as transfers. Distribution of capital assets on the dissolution of a firm is one such excluded category of transactions. Therefore, even if, in the present case, there was a transfer in the wake of dissolution, the case would not have come within the mischief of Section 45 by virtue of the exception carved out by Section 47.
10. Here is a case where the firm transfers the immovable property to an existing partner by book entries. Therefore, it is a case where the ratio decidendi in Addanki Narayanappa, , does not come to operate.
11. It is a case where there is no transfer effective or valid in the eye of law unless it is by a registered deed of conveyance.
12. This transfer needed to be registered to become effective. The Tribunal was correct in relying upon CIT v. Bhurangya Coal Co. , which settled the principle that rights in immovable property are neither created nor extinguished merely by adjustment entries in the account books. The law requires the formalities of registration where the relevant law makes such formalities a categorical imperative. A question may arise whether the said assessee-firm acquired ownership of the said immovable property at any stage, since the property was purchased and the transaction of purchase was also registered in the name of the said partner instead of all the partners. But, the decision in Addanki Narayanappa, , clearly indicates that, at the stage of purchase, on the facts of the present case, there was a clear case of acquisition of the property by the firm. The Supreme Court, in Addanki Narayanappa, , has observed that the whole concept of partnership is to embark upon a joint venture and, for that purpose, to bring in as capital money or even property including immovable 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 be the trading asset of the partnership in which all the partners would have interest in proportion to their share in the joint venture of the business of the partnership. The person who brought it in would, therefore, not be able to claim or exercise any exclusive right over any property which he has brought in, much less over any other partnership property. So, there is no doubt as to the ownership of the partnership over the immovable property in question, because in the instant case, the partner, the ostensible purchaser of the property, after the purchase brought the property purchased in the partnership firm. The necessary entries for such transaction were also carried out in the accounts of the partnership firm. The asset has also all along been treated as the asset of the firm. Following the principle as stated by the Supreme Court in Addanhi Narayanappa, , the asset belonged to the firm. But the same principle does not apply in the case of reversion of the property to the same partner unless it takes place in the distribution of partnership assets on dissolution. In our view, the transfer of the property to an existing partner by mere adjustment of book entries otherwise than in connection with dissolution of the partnership or retirement of the partner from the partnership not accompanied by a duly registered deed of conveyance constitutes no transfer.
13. This has also been the view taken by the Madras High Court in CIT v. Dadha and Co. . We can draw indirect support from the view of the Madras High Court which held that the partners on behalf of the firm cannot divide an immovable property among themselves in the absence of a registered conveyance.
14. In that case, the book entries were made showing the common properties of the partners as the separate properties of each of the partners to the extent of his share. The Madras High Court held that the book entries cannot have any effect without there being any instrument evidencing the said conversion of a common interest into a separate and individual interest. If the book entries are not sufficient to constitute a transfer of the common interest in the properties into a separate interest of the partners, the properties will be taken as the firm's properties.
15. This shows that the firm is not divested of the ownership by the transaction carried out by book entries and not by a registered deed of conveyance.
16. We do not, however, agree with the Tribunal that the firm was at no time the legal owner of the immovable property and had no power to transfer. Following the principle laid down by the Supreme Court in Addanki Narayanappa v. Bhaskara Krishnappa, , we hold that the partner by bringing the property into the common stock of the firm invested the firm with the ownership of the property. But it had not effected any transfer of the property by releasing the property in favour of a partner inasmuch as the transfer was not accompanied by a registered deed of conveyance. Nor is it a release in settlement of accounts on dissolution. Accordingly, we answer question No. 1 in the negative and question No. 2 in the affirmative. But that does not advance the Revenue's case. Because, in our view, as expressed in the foregoing, there was no transfer by the firm of the property and Section 45 was not attracted.
17. Though the Tribunal is not correct in its view as assailed in the first two questions, its ultimate conclusion that there was no transfer of the property and no income by way of "capital gains" arose to the firm is consistent with the legal position as applied by us to the set of facts present in the case. We, therefore, answer question No. 3 and question No. 4 which form the crux of the matter, in the negative in favour of the assessee and against the Revenue.
18. There will be no order as to costs.
J.N. Hore, J.
19. I agree.