9911796707
TMI Blog1984 (3) TMI 149X X X X Extracts X X X X X X X X Extracts X X X X ..... ainly in respect of the property styled as Amritsar Cotton Mills (ACM) and set aside the order of the ITO. A fresh order has been passed after the order of the Tribunal with which we are concerned now. The ITO in para 46 has stated that the assessee's claim of partition of the amount of Rs. 1,25,000 and all with effect from the other immovable properties except ACM is accepted 17-11-1970. He rejected claim of partition of the property of ACM. The assessee went in appeal to the AAC and he has passed a somewhat peculiar order with which both the sides are aggrieved and both have come in appeal. In brief, his conclusion in the last para of his order is as follows and we quote the relevant extract : " Keeping in view the above observation and discussion, I am of the opinion that at the time of partition, the HUF styled as Sobha Singh Jairam Singh was owning 2/16 share and the HUF styled as Sobha Singh Harbhajan Singh was owning 5/16 share in the property of the firm. The remaining share was held by individual partners. In the absence of clear demarcation of shares in the dissolution deed, judicial interpretation will be taken that the property belonging to various partners of the fir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roperty which reverted back finally to the two HUFs and its two members, became a joint property of the following co-owners : 1. S. Harbhajan Singh representing the HUF Sobha Singh Harbhajan Singh 5 annas share 2. S. Jairam Singh representing the HUF Sobha Singh Jairam Singh 5 annas share 3. S. Joginder Singh 3 annas share 4. S. Kirpal Singh 3 annas share The ITO has recorded that Joginder Singh and Kirpal Singh owned their shares independently of their HUFs and this was proved from the fact that in all later years they have admitted their interests to be separate from the HUFs. 4. In the statement of facts of the assessee, it is pointed out that the property of ACM repurchased from Shri Balkishan Dass Munjal comprised of a total land measuring 43,000 sq. yds. out of which 2,200 sq. yds. was covered by roads and pavements. It is also stated that there were 196 quarters, 25 sheds and 13 shops which were mainly rented out at what we will call today as a very small rent ranging from Rs. 2 per month onwards to Rs. 50, and in some cases to Rs. 150, Rs. 400 and Rs. 550, etc. S. A partnership business of cotton ginning mill came into existence in the year 1953 with the follo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that 'it was brought to the notice of the ITO that it was notional value which was put with regard to the two sheds and machinery to bring about partnership into existence'. The controversy here is that, according to the assessee, it was only two sheds and machinery, with which ginning business was carried on, which had been brought into partnership business. But the ITO, on the other hand, holds that the entire property of ACM was a partnership asset. In support of the ITO's conclusion, the relevant paragraphs are paras 22 to 24, which are quoted below : " 22. The firm is claimed to have dissolved on the death of Harbhajan Singh. However, the deed of dissolution was drawn on 31-8-1973--five years after. All the while and even till today, the books of ACM continue in which rental income and ancillary expenses are recorded and the net income is divided. 23. The building account in the books of ACM which started with a debit of Rs. 5,000 in 1953 swelled to Rs. 2,05,356 as on 30-6-1970. During the period of seventeen years, expenses excluding sales of material amounted to more than Rs. one lakh fifty-five thousand. On 30-6-1970, the debit balance of the above mentioned amount in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rani Pictures [1981] 129 ITR 244 (Mad.) and K.D. Pandey, v. CWT [1977] 108 ITR 214 (All ) and decision of the Amritsar Bench of the Tribunal in the case of ITO v. Bharati Engg. Corpn. [IT Appeal No. 417 (Asr.) of 1980, dated 7-11-1981] to which one of us, the Judicial Member, was a party. We do feel that once it is found that the entire ACM property had been brought in the firm by the partners as their capital contribution, the real issue will be, which is pinpointed by the revenue by moving the additional ground. 9. Now we will take up the question about the property contributed as capital by the partners. The assessee had claimed that the immovable ACM property consisting of land and building was always owned by the two HUFs--Sobha Singh Harbhajan Singh and Sobha Singh Jairam Singh in equal shares. Further, it was claimed that only two sheds were given to the firm for carrying on its ginning business and the rest of the property was never assigned to it. On considering the submissions of both the sides, we find that the ITO was justified to reject both of them by considering the totality of circumstances. Para 26 of his order appears to have a little factual inaccuracy. He want ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITO or up to this stage has backed the claim about the real cost of two sheds and what is meant by the notional valuation made. When the position is not clearly brought out by exact data, the true position has to be found out by looking into the two circumstances including the conduct of the parties. In this respect, the ITO's paragraphs 22 to 24 and 31 to 35 are relevant. The ITO has taken note of the fact that the rental income all along of the entire property has been accounted for in the books of the firm and divided in the profit-sharing ratio. The result of this manner and treatment has been that all the partners have courted assessments on that footing and not on the basis that barring two sheds, the income of the rest of the property was to be assessed differently. In fact when we keep in mind the position that property purchased from the branch of S. Hardyal Singh was acquired by the two members of the two families in their individual capacity, the real ratio to divide the property income will be the same as is reflected by the profit-sharing ratio of the firm. Further, the ITO has also relied on the fact that the expenditure on the property was dealt with again through th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -tax authorities by the partners for income-tax assessments, we are inclined to hold that the entire ACM property was brought into the firm. At this stage another relevant fact has been pointed out by the ITO in para 39 that the property always stood in the name of the firm and not in the name of the partners. This will also show along with the other facts pointed out above that the property belonged to the firm. If there was any contrary intention then at the time of repurchase, the property could be got registered in the name of the HUFs. 10. Now we take up the second aspect which is pointedly raised through the additional ground quoted above moved by the revenue, namely, whether the property belonging to the firm could be transferred only through an instrument in writing and whether that should be registered also. We have also pointed out above that the property stood in the name of the firm but apart from that aspect, it is also held that in reality the entire property was introduced as capital contribution by the partners and, therefore, it was the property of the firm. On this issue, the relevant case law is Ram Narain Bros.' case and the two Supreme Court decisions namel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... share of profits of the assignor. [See Narayanappa's case at p. 407 (of 1966 3 SCR 400)]. 6. Now the award does not transfer the share of the respondent, interpreted in the aforesaid sense, to the appellant in express words. Nor such is the necessary intendment of the award. It expressly makes an exclusive allotment of the partnership assets including the factory and liabilities to the appellant. It goes further and makes him 'absolutely entitled to the same'. In consideration of a sum of Rs. 17,000 (see clause 4) plus half of the amount of Rs. 1,924.88 to the respondent and the appellant's renouncement of the right to share in the amounts already received by the respondent. So, in express words it purports to create rights in immovable property worth above Rs. 100 in favour of the appellant. It would accordingly require registration under section 17, Registration Act. As it is unregistered, the Court could not took into it. If the Court could not, as we hold, look into it, the Court could not pronounce judgment in accordance with it. Section 17, Arbitration Act presupposes an award which can be validly looked into by the Court. The appellant cannot successfully invoke section 17 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... set worth the name of the defunct firm at present, except that Old Ginning Mills machinery, in the shape of scrap. 3. That thus the immovable property in which the ginning mills business was carried on and all the godowns, etc., belonged to the said two Hindu undivided families equally. 4. That S. Jairam Singh, karta of the family, partially partitioned his half share in the said immovable properties of 'Amritsar Cotton Mills' in 1970. 5. And similarly, there took place a partial partition between the coparceners of the family of S. Kirpal Singh Babbar and his brothers. 6. That now this deed of dissolution is executed as a memorandum of the dissolution which automatically took place on the death of S. Harbhajan Singh Babbar." 11.1 Before dealing with what is stated in the dissolution deed clauses, it may be pointed out that the instrument in writing, which is contemplated for the purpose of transfer of immovable property from a firm to a partner, has to be executed before the property can move from the firm to the partners. A dissolution deed written on 31-8-1973 cannot be that instrument which will transfer the property to the HUFs on 30-6-1970 and those HUFs then can su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the appeal of the revenue is allowed. Per Shri U.S. Dhusia, Judicial Member-- I have read through the order of the learned Accountant Member but have not been persuaded that his finding can be accepted by me. His finding is mainly based on the finding of the ITO. I would, therefore, first examine the finding of the ITO. 17. The only issue that arises for consideration in this appeal is whether there was a partition of property, known as ACM property, comprising of 43,000 sq. yds. (out of which 2,200 sq. yds. is roads and pavements), 196 quarters, 25 sheds, 13 shops as a result of the partition effected on 17-11-1970. The assessee, Sobha Singh Jairam Singh, who claims to be a joint Hindu family and its claim as joint Hindu family has been accepted by the revenue. The claim of the assessee is based on the provisions of a partition agreement, which was duly registered. The agreement brought about a partition among the coparceners of the assessee joint family and Smt. Pukhrajwati, wife of S. Jairman Singh. Other coparceners were Joginder Singh, Mohan Singh, Harbhajan Singh and Avtar Singh. The partition was effected of not only immovables, inter alia, capital of Rs. 1,25,000 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tals and covenant Nos. 3, 4 and 5 : " 3. And whereas, this firm has been showing income from the property, in fact, this property belonged to the two Hindu undivided families, headed by S. Jairam Singh Babbar, S. Mohan Singh Babbar and S. Joginder Singh Babbar (parties of the first, second and third parts) on the one hand and late Harbhajan Singh (which, on his death) succeeded by S. Kirpal Singh Babbar, as karta on the other hand." " iii. That thus the immovable property, in which the ginning mills business was carried on, and all the godowns, etc., belonged to the said two Hindu undivided families equally. iv. That S. Jairam Singh, karta of the family, resorted to the partial partition of his half share in the said immovable properties of 'Amritsar Cotton Mills' in 1970. v. And, similarly, there took place a partial partition between the coparceners of the family of S. Kirpal Singh Babbar and his brothers." A perusal of the foregoing does not leave any doubt that although the income of the ACM properties was being shown in the income of the firm, property belonged to two HUFs only and not to the partnership firm. The dissolution deed was executed on 31-8-1973 with a vie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CED was made on 27-2-1971, long before the issue of order under section 171 had arisen before the ITO. But before this had happened, the question of ownership had been considered both by the ITO and the WTO. I refer to the appellate order passed on 31-10-1973 for the assessment years 1970-71, 1971-72 and 1972-73. I reproduce the two passages to show the position of the ACM properties vis-a-vis the firm : " 2. It was contended by the authorised representative that the appellant had filed the returns of income in all these three years in the status of firm and had shown nil income. In fact, this firm, which was being assessed up to 1969-70, discontinued its business activities by the end of that assessment year and the firm was also dissolved. Now the only source of income was income from property for which there could be no question of existence of the firm. It is true that the ITO has not raised any demand in these cases though the assessments were completed in the status of the AOP but authorised representative's objection in this regard is that the assessments cannot be made in the status of the AOP when the returns were filed in the status of firm as, admittedly, there is no b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has always been shown by the two HUFs in their own wealth-tax returns and the same have been accepted by the WTO till the date the assessments have been finalised. . ." " On carefully considering the authorised representative's contention and the foregoing facts, I am inclined to agree with the assessee's counsel. It is clear that the property owned by the two HUFs was never transferred to 'the firm though a part of it was used by it for the purposes of carrying on business. At no time did it become the property of the firm. As regards the investment in the firm, in the form of repair and reconstruction done from the funds of the firm, the same were transferred to the accounts of both the HUFs. This was also done before the date of partition. On the date when the partition was effected, Shri Jairam Singh and Shri Harbhajan Singh owned half of the Amritsar Cotton Mills. This is further confirmed from the fact that the property has been shown in the wealth-tax returns of both the assessees, which has also been accepted by the WTO . . ." When the ITO passed the first order under section 171 on 22-11-1973, refusing to accept partition, one of the objections of the ITO was that, alt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TO had the advantage, as compared to his predecessors, to reach a finding on the issue in the light of the settled position. If there had been any error or exaggeration in the claim of the assessee, regarding the partition, the same would have surfaced or had been highlighted in these 13 years since the partition was effected, Law of adverse possession begins to operate after the twelfth year. Law does not favour an unsettled position regarding the property to continue for more than 12 years. Dejure owner of the property must pose a challenge to the defacto owner only with this period. If he fails, he loses the right to claim his title to the property. If the position stated in the partition agreement had been at variance with the facts, there would have emerged in this period some challenge to the arrangement brought about by the partition agreement as valid and effective. The revenue does not operate in air, but in a real world, peopled with actual claimants and rivals, who have conflicting interests and desires and who never miss an opportunity to pose a challenge if some one transgresses his lawful boundary. 25. The ITO, however, did not proceed on the basis of the above over ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... operty, if properly considered by the ITO, would have deterred him from making this finding that the entire ACM property was transferred as capital by the partners. There appears more sense in the claim of the assessee that Rs. 50,000 represented the value of the building, i.e., 2 sheds placed at the disposal of the firm for carrying on the ginning business rather than the entire ACM properties for which the ITO had no corroborating evidence. Therefore, one has to disabuse his mind of this finding of the ITO that the entire ACM properties were placed at the disposal of the firm, which on the facts and in the circumstances of the case, suggests a proposition, which cannot be sustained on serious reflection, on the basis of this entry. If the ACM property in the entirety was not transferred to the firm, could it be held in the alternative, that a part of the ACM property was transferred to the firm. The entry refers to the building only, which, as has been explained by the assessee and had been accepted by the income-tax and wealth-tax authorities, should be considered as confined only to the structure standing on the land. I am not prepared to accept, after a consideration of the am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Property Act, 1882. The claim of the revenue that the ACM properties should be considered as transferred to partnership because the income derived from it was allowed to be clubbed with the other income of the firm, will not find any support on fact in civil law from the provisions of the Transfer of Property Act. The revenue has not realized that clinging to this view would put the property beyond its reach. Neither the two HUFs, alleged to be the transferors, nor the partnership firm, alleged to be the transferee, accept this claim. No title or right vests in the dead person natural, legal or semi-legal. In an appeal, filed by the partnership firm for the assessment year 1973-74, the AAC had correctly endorsed the finding of the ITO that the property which was let on hire, i.e., two sheds, was also to be assessed in the hands of the HUFs as owners. I reproduce a part of her observation as under : " The ITO, while framing the assessment, observed that the status of the firm was not acceptable on the ground that the firm was dissolved on 20-10-1968 and as such the group of persons owned property, which was let out on hire and their shares being defined, the property was to be a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the two HUFs only and not to all the five partners of the firm. Therefore, a fair and reasonable consideration of income derived from the property or from the expenses for making extension and construction together with the other facts does not support the case of the ITO that the ACM property should, either in full or in part, belong to the firm and not to the two HUFs and, for that reason, could not be partitioned among the coparceners of the two HUFs. If the property had belonged to the firm, the expenses would have been apportioned in the hands of the five partners and not in the hands of the two HUFs only. If any conclusive evidence was wanted in favour of the claim, that property belonged to the two joint families, here was one based on the entries of the accounts on which the ITO himself had relied. The ITO carried away by his zeal referred to this aspect, but missed to appreciate the correct impact of the entry. 29. Another feature, which has been taken note of by the ITO, is that even after the partition, the income derived from rent had continued to be accounted for in the books of the ACM. It is not appreciated by me what is aimed at by the ITO by taking note of thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de the assessment of the estate left by late Shri Harbhajan Singh. He ignored not only the finding of the WTO and the ACED, but also the finding of the AAC of income-tax and also the ITO, whose finding for the assessment year 1973-74, we have extracted. It is true that an ITO is required to reach a finding independently, but, at the same time, it is imperative for him to see that an issue which arises for consideration in several proceedings, leads to a finding which is consistent with the findings arrived at in other proceedings of the revenue. 32. There is yet another plea advanced by the ITO in para 43 of his order, which he relied to reject the claim of partition. According to him, the ACM properties were not partitioned by metes and bounds. In this connection, I am to note that the ITO did not go through the earlier records on the subject at all. If he had gone into those records, he would have noticed the findings recorded by the AAC, in his order dated 9-12-1975, which had been set aside by the Tribunal, but to which the ITO was himself a party. I reproduce a passage as below : "Another stand, which was taken by the ITO during the course of the appellate proceedings, was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which he proceeded to discredit the claim of the assessee for the partition of the ACM properties. I may now refer to the findings of the learned Accountant Member which has endorsed the findings of the ITO to reject the appeal of the assessee and allow the appeal of the revenue. Although it is not strictly required after I have examined the pleas of the ITO, I would still refer to it to pinpoint a few aspects. 34. The learned Accountant Member, on the basis of the findings of the ITO, proceeded to hold that the ACM property belonged to the firm. The basis of his finding was partly the original entry relating to the introduction of the capital by the partners joining to carry on the ginning business as a partnership firm and partly the consideration of the rental income having been included in the income of the firm. These were the two grounds on which the ITO had proceeded to hold that the entire ACM property belonged to the partnership firm. I have already dealt with the nature and the purport of the entry as also the aspect of the matter arising from the assessment of the rental income in the hands of the firm. It is needless to repeat them again. In this connection, I again ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the ITO under section 171 for the assessment year 1971-72. The other appeals are consequential orders. Since there was a difference of opinion between the Accountant Member and the Judicial Member in respect of the appeals in IT Appeal Nos. 53 and 90 (Asr.) of 1982, the matter was referred to me as Third Member for resolution of the dispute. The consequential orders also involving difference of opinion between the two members, these appeals were also referred to me as Third Member. 2. Before dealing with the matter, it requires to be mentioned that the assessee's appeal relating to the order under section 171 creates a peculiar situation. The assessee applied for an order under section 171 claiming partial partition Of certain assets. The ITO accepted the partition with regard to certain assets but held that one of the assets did not belong to the assessee-HUF. The appeal of the assessee before the Commissioner (Appeals) relates to this asset and in effect is a prayer for a declaration that this asset belongs to the assessee and has been partitioned in the partial partition. As far as I can see, neither the Commissioner (Appeals) nor the Tribunal is an authority competent to de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngh and Jairam Singh HUFs and three others, Kirpal Singh, Joginder Singh and Mohan Singh. This firm continued till 20-11-1968 on which date Harbhajan Singh died. The firm is stated to have been dissolved on the death of the above partner but a memorandum of dissolution expressing it was stated to be drawn up on 31-6-1971. In connection with the claim for partition and order under section 171, the ITO considered the position of the ACM. According to him the books of ACM continued in which rental income and ancillary expenses were recorded and a net income divided. The building account in the books, which started with the debit balance of Rs. 50,000 in 1953, came up to Rs. 2,05,356 as on 30-6-1970 on which date, according to the ITO, the debit balance in the account was written off equally to the accounts of Sobha Singh Harbhajan Singh and Sobha Singh Jairam Singh, two of the partners. 5. The ITO also found that the income of the property had been accounted for in the books against the partners in their profit-sharing ratio right up to 30-6-1970. No instrument in writing was drawn on 30-6-1970 on which date the property was claimed to have been transferred in equal shares to Harbha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e decision on the question of partition, the question of inclusion of the income or wealth, as the case may be, in the quantum assessments will have to be decided." 8. The parties were heard. Before me the points and arguments advanced before the Tribunal earlier and the Commissioner (Appeals) were elaborated. The learned departmental representative pointed out that the property even though originally belonged to the two HUFs became the property of the firm, the income therefrom was considered in the firm and even thereafter it was divided among the five partners. The statement of the assessee, therefore, based on the extracts in the alleged dissolution deed that this property, namely, ACM, was equally divided between the two HUF partners, was neither factually correct nor legally valid. According to the learned counsel, the other partners had their shares and this has been ignored. Reference was also made to the income-tax, wealth-tax assessments and the conduct of the partners to indicate that there was no transfer of the property from the firm to the two HUFs. Even the claim of the assessee that only a portion of extensive immovable properties was transferred to ACM and that c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtition is considered in these appeals. According to the accounts of the firm and the extracts from the books, the capital accounts of the five partners stood at certain figures on the liability side balanced by corresponding assets on the asset side. The balance sheet as on 30-6-1969, i.e., the last balance sheet after the date of the death of the partner showed the building account at Rs. 1,69,584 as an asset of the firm. The capital of the two HUFs stood at Rs. 49,300--Harbhajan Singh and Rs. 43,558--Jairam Singh. The capitals of other three partners were also found recorded in the balance sheet. It was clear from this factual position that the HUF was a partner in the firm with a capital account on the one hand and the ACM represented by the building account was an asset in the partnership. The deed of dissolution of 1973 generally lays down that : " The capital of the dissolved firm has already been withdrawn by the said partners and there is no asset worth the name of the defunct firm at present, except that old Ginning Mills Machinery, in the shape of scrap. 3. That thus the immovable property in which the ginning-mills business was carried on and all the godowns, etc., ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 211. The law is clearly settled that where on a dissolution of the firm the assets of the firm are distributed in specie to the partners, even if they are immovable properties, there is no 'transfer' from one entity to another requiring registration under section 170 of the Registration Act. In my opinion, the authorities below have gone on the basis that there was a 'transfer' of certain immovable properties from the firm to the partners. The question whether such a transfer requires registration, an instrument in writing, etc., was considered. As the above would clearly indicate in the present case, there is no 'transfer' of property at all from the firm to the partners. Registration, therefore, is not necessary for vesting the ownership of ACM in the two HUFs as they have claimed. These properties, therefore, constituted the assets of the HUFs and since they have been partitioned by the partition deed, dated 17-11-1970, effect has to be given to this. Though not, therefore, for the reasons mentioned by the learned Judicial Member, I agree with him for the above reasons that the relevant portion of the property known as ACM should be treated as the asset of the assessee-HUF and t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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