1966 (10) TMI 28 - SC - Income Tax

Whether on the facts and circumstances of this case the non-registration of the relinquishment deed can invalidate the transfer of the business assets to the new partnership ? Can the registration application be rejected merely on the ground that the business assets were not legally transferred to the new partnership ? Held that - The deed of relinquishment in this case was in respect of the individual interest of the three Singhania Brothers in the assets of the partnership firm in favour of the Kamla Town Trust and consequently did not require registration even though the assets of the partnership firm included immovable property and was valid without registration. As a result of this deed all the assets of the partnership vested in the new partners of the firm. A deed of relinquishment or a deed of gift differs from a deed of partition in which it is not possible to hold that the partition is valid in respect of some properties and not in respect of others because rights of persons being partitioned are adjusted with reference to the properties subject to partition as a whole. In the case before us therefore the deed of relinquishment was valid at least in respect of movable properties and the partnership seeking registration thus became owner of all the movable assets of the partnership in addition to having contributed a sum of 50, 000 as capital investment in it. The Kamla Town Trust and Jhabbarmal Saraf constituted the partnership under a deed of partnership which was properly executed and in these circumstances the partnership that came into existence was clearly valid in law. There is therefore no force in this appeal

Issues Involved:
1. Validity of the partnership deed dated December 1, 1942.
2. Requirement of registration for the deed of relinquishment dated December 2, 1942.
3. Legal existence of the partnership for the purpose of registration under section 26A of the Income-tax Act.
4. Impact of the non-registration of the relinquishment deed on the transfer of business assets.
5. Whether the partnership firm seeking registration was genuine.

Detailed Analysis:

1. Validity of the Partnership Deed Dated December 1, 1942:
The partnership deed executed on December 1, 1942, between Jhabbarmal Saraf and the Kamla Town Trust, represented by the three trustees, was held to be valid. The Tribunal found that the Kamla Town Trust had been constituted and that the deed of partnership specified the shares in the profits and losses. The Income-tax Officer also noted that the Kamla Town Trust introduced a sum of Rs. 50,000 as its capital in the partnership firm. Thus, the partnership deed was considered legally valid.

2. Requirement of Registration for the Deed of Relinquishment Dated December 2, 1942:
The Tribunal initially rejected the registration application on the ground that the deed of relinquishment was unregistered and thus could not legally transfer rights and title to the immovable properties owned by the firm. However, the Supreme Court held that the deed of relinquishment did not require registration, even though the partnership assets included immovable property. The court cited the case of Addanki Narayanappa v. Bhaskara Krishnappa, where it was held that a partner's interest in partnership assets, whether movable or immovable, is considered movable property and does not require registration under section 17(1) of the Registration Act, 1908.

3. Legal Existence of the Partnership for Registration Under Section 26A of the Income-tax Act:
The High Court and the Supreme Court both focused on whether the partnership legally came into existence as a valid entity. The High Court concluded that the partnership firm, as evidenced by the deed of December 1, 1942, did come into existence legally and should be registered under section 26A of the Income-tax Act. The Supreme Court agreed, noting that the partnership was valid in law based on the executed partnership deed and the contribution of capital by the Kamla Town Trust.

4. Impact of the Non-Registration of the Relinquishment Deed on the Transfer of Business Assets:
The Supreme Court held that even if the relinquishment deed required registration, its non-registration would not invalidate the transfer of movable business assets to the new partnership. The court noted that the deed could be divided into parts dealing with movable and immovable properties. The part dealing with movable assets would remain valid without registration, thereby allowing the partnership to legally own the movable assets and the capital introduced by the Kamla Town Trust.

5. Whether the Partnership Firm Seeking Registration Was Genuine:
The High Court initially remanded the case to the Tribunal to determine whether the firm was genuine. However, the Supreme Court clarified that the High Court should not have entertained this question as it was a question of fact, not law. The Tribunal had not recorded a finding that the firm was not genuine. The Supreme Court emphasized that the High Court should have confined itself to the legal aspect of the partnership's existence. Ultimately, the Supreme Court proceeded on the basis that the firm did exist in fact and addressed its legal validity.

Conclusion:
The Supreme Court dismissed the appeal, affirming that the partnership firm, as constituted by the deed of December 1, 1942, was legally valid and should be registered under section 26A of the Income-tax Act. The court found no legal flaw in the partnership's constitution, and the non-registration of the relinquishment deed did not affect the transfer of movable assets to the new partnership. The appeal was dismissed with costs.

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