Bombay High Court
Commissioner Of Income-Tax vs J.M. Mehta And Bros. on 30 September, 1992
Equivalent citations: [1995]214ITR716(BOM)
JUDGMENT
V.A. Mohta J.
1. The following questions are referred to this court by the Tribunal of the instance of the Commissioner of Income-tax, Nagpur, under section 256(1) of the Income-tax Act, 1961 ("the 1. T. Act") :
"1. Whether, on the facts and in the circumstances of the case, the 'transfer if immovable property' by means of book entries is valid in spite of the fact that no registration has been made as required under the Transfer of Property Act, 1882 ?
2. On the facts and in the circumstances of the case whether the capital gain is rightly assessable in the hands of the firm ?"
2. The assessee is a duly registered partnership-firm. It was constituted by four partners : (i) Wanmalidas Maganlal, (2) Chaganlal Maganlal, (3) Jagjivandas Maganlal, and (4) Nagindas Maganlal. The firm purchased a plot of land for Rs. 31,338 on February 27, 1967. The plot was all through treated as the property of the firm up to March 17, 1976, when by an agreement between the partners, the said asset was taken out of the partnership by crediting the price of the plot to the plot account and debiting the partners' capital accounts in equal proportion in the books of account of the firm. The plot was sold for Rs. 60,000 on June 15, 1976. The partner, Nagindas, died on January 7, 1977. He was replaced by his widow, Smt. Nirmalaben, and the firm was reconstituted on January 8, 1977.
3. The Income-tax Officer assessed the capital gains in the hands of the firm for the assessment year 1977-78. He took a view that by the agreement dated March 17, 1976, and the relevant entries made in the books of account, the partners had not legally and effectively taken out the immovable property of the firm from its ownership and vested the same in the partners. According to the Income-tax Officer, the transfer could not have been effected without a registered document. The capital gains, therefore, arising from the sale of the property were taxed at the hands of the firm only. This view was upheld in appeal by the Commissioner of Income-tax (Appeals). However, in the second appeal, the Tribunal held the transaction as valid transfer relying upon the decision of the Supreme Court in the case of Malabar Fisheries Co. v. CIT [1979] 120 ITR 49.
4. Having heard learned counsel for the parties, it seems to us that the view taken by the Tribunal cannot be legally supported. It will have to be borne in mind that this transfer has not taken place either on the dissolution of the firm or upon retirement of a partner, but has taken place during the subsistence of the partnership. Sections 14, 15, 29 and 48 of the Indian Partnership Act, 1932, section 5 of the Transfer of Property Act and section 17(1)(b) of the Indian Registration Act, 1908, fall for scrutiny.
5. No doubt, a partnership firm is not, in a strict sense, a legal entity, and is a compendious name for the partners who constitute it. But for certain purposes, some degree of personality is attached to the firm, e.g., it can acquire and own property for the purposes of its business either by regular purchase or by a contribution of a partner. Sections 14 and 15 of the Partnership Act, 1932, make this position clear. Since the firm is not a legal entity, the property no doubt vests in the partners and in that sense every partner has an interest in the property. But during the subsistence of the partnership no partner can deal with any portion of the property as his own, not even to the extent of his share in the partnership. The partner's right is to obtain profits as they fall to his share from time to time; and upon dissolution of the firm to a share in the assets of the firm which remain after satisfying the liabilities set out as per section 48. The whole concept of the partnership is to embark upon a joint venture and for that purpose to bring in as capital, money or 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. No partner, not even a person who brought in the particular property, would be able to claim or exercise any exclusive right, over any property, the reason being that no partner can during subsistence of partnership, predict an ascertainable share in a specific item of firm property. After all, the share of a partner is nothing more than his proportion of the partnership assets (which may include even immovable property) after they have been turned into money and applied in liquidation of the partnership. He may during the subsistence of the partnership assign his share in the firm. But, in that case, the assignee gets only a right to receive the share of the profits of the assignor under section 29(1) of the Partnership Act.
6. Section 22 of the English Partnership Act, 1890, introduces a legal fiction whereby partnership realty is to be treated as movable property as between the partners inter so. Despite this provision, it has been held there that when partnership property is converted into separate property of the partners a deed is necessary. Lindley on Partnership, 12th edition, page 370, states thus :
"It is competent for partners by mutual agreement amongst themselves to convert that which was partnership property into the separate property of an individual, or vice versa. And the nature of the property may be thus altered by any agreement to that effect : for neither a deed nor (save where the property consists of land) even a writing is absolutely necessary;. . . ."
7. It may be noted that there is no provision in the Indian Partnership Act corresponding to the above provision of the English Act.
8. The case of Malabar Fisheries Co. pertains to the legal position obtained upon dissolution of the firm under section 48. It holds that in the distribution, division or allotment of assets in the partnership, which flows upon dissolution after the discharge of the liabilities, there is mutual adjustment of rights between the partners and there is no question of any extinguishment of the firm's right in the partnership assets amounting to transfer of assets within the meaning of section 2(4) of the Income-tax Act. We fail to appreciate as to how the situation obtained upon dissolution of a firm can be equated with the situation obtained upon actual transfer of a firm's property between partners during the subsistence of the partnership. No doubt, in the course of discussion it has been observed by the Supreme Court that the property of the firm means the property in which all the partners have a common interest. But even on that basis there cannot be a division of the properties purchased in the name of the firm between the partners by mere entries in the books during subsistence of the partnership. Common immovable properties cannot be divided, possessed and enjoyed in severalty without registered document in writing if its value is Rs. 100 or more in view of section 17(1)(b) of the Indian Registration Act, because it involves a declaration that the interest of the firm in the properly is extinguished and thereafter the property would belong to the partners. In common ownership each is entitled to every particle of the property and when there is division of the property there is actual transfer of interest, because there is mutual release by one in favour of the other as regards the interest transferred in favour of the other. The transaction in question amounted to release of a share in specific immovable property of the firm and, therefore, a transfer of an interest which could not have been legally made without a registered document.
9. The view which we are taking is supported by several High Courts in the following decisions : (1) the Allahbad d High Court in the case of Ram. Narain and Bros. v. CIT [1969] 73 ITR 423; (2) the Madras High Court in the ease of CIT v. Dadha and Co. [1983] 142 ITR 792; (3) the Andhra Pradesh High Court in the case of Abdul Kareemia and Bros v. CIT[1984] 145 ITR 442; (4) the Karnataka High Court in the case of Jansons v. CIT [1985] 154 ITR 432; (5) the Punjab and Haryana High Court in the case of CIT v. Bharati Engineering Corporation [1989] 180 ITR 32 and (6) the Orissa High Court in the case of CIT v. T Omer and Co. [1992] 196 ITR 736; 64 Taxman 190.
10. Shri Thakar, learned counsel for the assessee, submitted that the transaction merely amounted to taking the property out of the firm to be held by the partners in proportion to their share and hence, it does not amount to transfer. He placed strong reliance upon the decision of the Madhya Pradesh High Court in the case of Narsibhai Patel v. CWT [1981] 127 ITR 633. This submission cannot be accepted for the reasons already indicated above. The ratio of the Madhya Pradesh decision does not apply. It was a case of computation of wealth of the firm under section 4(1)(b) after taking into consideration the exemptions contained in section 5(1)(xxvi) of the Wealth-tax Act, 1957.
11. In the case of Firm Ram Sahay Mall Rameshwar Dayal v. Bishwanath Prasad, , it has been held that no registered document is necessary when a partner contributes his immovable property as his share of the partnership because of section 14 of the Partnership Act. In this case, we are not even concerned with such a situation.
12. Under the circumstances question No. 1 is answered in the negative and in favour of the Revenue and question No. 2 is answered in the affirmative and in favour of the Revenue. No order as to costs.