1969 (2) TMI 24 - HC - Income Tax

Income from partnership property - Firm s property was transferred to the partners of the firm in their profit sharing proportions - can the income from property be taxed in the hands of the firm - property of the firm as envisaged in section 14 of the Partnership Act is a part of the assets of the firm

Issues Involved:
1. Whether the property admittedly once owned by the firm ceased to be so owned by it by reason of the entries made in the account books of the firm.
2. Whether the property owned by the firm can be held to have been owned by its partners with definite and ascertainable shares, so as to constitute themselves into an association of persons, making each partner's share in the income from the property includible in his total income.

Issue-Wise Analysis:

1. Ownership of Property by the Firm:
The first issue addresses whether the property, once owned by the firm, ceased to be owned by it due to entries made in the firm's account books. The court examined the nature of the firm's ownership of the property, referencing the Indian Partnership Act, 1932, and the English Partnership Act, 1890.

The court noted that the property was acquired by the firm through one of its partners and paid for out of the firm's funds. It was contended by the assessee that, based on the Supreme Court's decision in Dulichand Laxminarayan v. Commissioner of Income-tax, a firm is not a legal entity capable of owning property, and thus, it is the partners who own the property. However, the court rejected this contention, stating that sections 14 and 15 of the Indian Partnership Act clearly postulate that a firm can own property for the purposes of its business.

The court further elaborated that while a partner has implied authority to act for the firm, this does not extend to transferring immovable property without a registered instrument, as required under section 54 of the Transfer of Property Act. The court emphasized that the conversion of firm property into personal property of the partners necessitates a written instrument, as supported by English case law and the principles outlined by Lindley on Partnership.

The court concluded that mere book entries do not effectuate the transfer of immovable property from the firm to the partners. Therefore, the property in question continued to remain the property of the firm despite the entries made in the account books.

2. Applicability of Section 9(3) of the Indian Income-tax Act:
The second issue concerns whether the property owned by the firm can be considered as owned by its partners with definite and ascertainable shares, thereby making the income from the property assessable in the hands of the individual partners under section 9(3) of the Act.

The court clarified that for section 9(3) to apply, the property must be owned by co-owners with definite and ascertainable shares. The court observed that the property in question is the property of the firm under section 14 of the Indian Partnership Act and must be held and used exclusively for the firm's business. Before dissolution, no partner can claim a definite and ascertainable share in any specific item of partnership assets, as emphasized by section 48 of the Indian Partnership Act.

The court referenced the Rajasthan High Court's decision in New Cotton and Wool Pressing Factory v. Commissioner of Income-tax, which held that section 9(3) does not apply to the income from partnership property, as the property belongs to the firm and not to the individual partners.

The court concurred with this view, stating that the co-partners of a firm cannot be assessed under section 9(3) of the Act in respect of the income from the firm's properties as co-owners having specified shares.

Conclusion:
Both questions were answered in the negative and against the assessee-firm. The court held that the property continued to be owned by the firm despite the book entries and that the income from the property could not be assessed in the hands of the individual partners under section 9(3) of the Act. The Commissioner of Income-tax was awarded costs of Rs. 200.

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