1984 (7) TMI 167 - AT - Income Tax

Issues Involved:
1. Validity of partial dissolution of a partnership firm.
2. Requirement of registration under Section 17(1)(b) of the Indian Registration Act, 1908.
3. Ownership and income assessment of properties post-dissolution.

Detailed Analysis:

1. Validity of Partial Dissolution:
The primary issue revolves around whether a partial dissolution of a partnership firm is legally permissible. The assessee contended that the firm had two sources of income, one from the business of manufacturing and selling N.P.K. Granulated Fertilizer and the other from letting out 9 godowns to the Food Corporation of India. The assessee argued that the godown business was a branch that was dissolved via a dissolution deed dated 31-01-1979, while the other business continued with the firm.

The Commissioner (Appeals) and the IAC were of the view that dissolution means the complete dissolution of the firm and not partial. They relied on the Allahabad High Court judgment in Ram Narain & Bros. v. CIT [1969] 73 ITR 423, which stated that a partnership property is distinct from the property of the partners and that during the continuance of the firm, no partner can claim ownership of any specific portion of the property of the firm. Therefore, the property remains with the firm until the necessary formalities, including registration, are completed.

2. Requirement of Registration under Section 17(1)(b) of the Indian Registration Act, 1908:
The IAC and Commissioner (Appeals) held that the dissolution deed, which provided for the distribution of assets, was not complete without registration under Section 17(1)(b) of the Indian Registration Act, 1908. This section mandates that any non-testamentary instrument which purports to create, declare, assign, limit, or extinguish any right, title, or interest in immovable property of the value of Rs. 100 and upwards must be registered.

The assessee argued that the partnership property and its application are subject to the contract between the partners as per Sections 14 and 15 of the Indian Partnership Act, 1932. The assessee cited several judgments, including CIT v. Amber Corpn. [1981] 127 ITR 29 (Raj.), Dulichand Laxminarayan v. CIT [1956] 29 ITR 535 (SC), and Addanki Narayanappa v. Bhaskara Krishnappa AIR 1966 SC 1300, to support the contention that the partners could mutually agree to exclude certain properties from the firm's assets without the need for registration.

The Tribunal agreed with the assessee's argument, stating that the adjustment of mutual rights among partners, if reduced to writing, does not require specific registration. The Tribunal also referred to the CBDT Circular No. 330, dated 6-3-1982, which recognized that the property of the firm is jointly and severally held by the partners.

3. Ownership and Income Assessment of Properties Post-Dissolution:
The Tribunal examined whether the income from the 9 godowns should be included in the firm's income or assessed as co-ownership income of the partners. The Tribunal noted that the partners had clearly stated their intention of excluding the godowns from the firm's assets and had informed the bank and the Food Corporation of India accordingly.

The Tribunal concluded that the 9 godowns should be treated as assets jointly owned by the partners in their individual capacity from 01-02-1979. Consequently, the income from letting out the godowns should be assessed as co-ownership income under Section 26 of the Indian Income-tax Act, 1922.

Conclusion:
The Tribunal allowed the assessee's appeal, holding that the partial dissolution of the partnership firm was valid, the dissolution deed did not require registration under Section 17(1)(b) of the Indian Registration Act, 1908, and the income from the 9 godowns should be assessed as co-ownership income of the partners.

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