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TMI Blog1981 (9) TMI 202X X X X Extracts X X X X X X X X Extracts X X X X ..... r relevant for the assessment year 1973-74, the two partners, Shri Rajamani and Shri Thangarajan, took five more partners and executed a fresh partnership deed. During the previous year relevant for the assessment year 1974-75 under consideration, the two partners Shri Rajamani and Thangarajan had taken over all the assets of the firm at book value. According to the claim of the assessee, this taking over of the property of the firm originally purchased by the two partners in their names did not result in any transfer so as to attract capital gains. The ITO, however, considered that there was a sale or transfer, which attracted not only assessment of Profit under section 41(2) of the Income-tax Act, 1961 ("the Act") in regard to the assets on which depreciation had been allowed to the assessee, but also capital gains in regard to other assets. He further held that the fair market value of the assets have to be taken for the purposes of determining the amount of capital gains by resort to section 52(2) of the Act. He, accordingly, made the assessment bringing to charge not only the profit under section 41(2), but also capital gains. In appeal, the Commissioner (Appeals) deleted both ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d during the relevant previous year when the partnership consisted of other partners also besides them, by means of entries in the books of account and no document in writing was executed. The questions that arise for consideration in this case, therefore, are, firstly, whether there is a transfer by the firm of the property and assets owned by it to the partners so as to attract either charge of profit under section 41(2) or capital gains charge under section 45 and secondly, if there was such a transfer, whether the transfer is not effective or valid in the absence of a duly registered instrument in writing, since it involved immovable properties of the firm. 5. In considering the question as to whether the properties and assets concerned belonged to the partnership firm as constituted during the relevant previous year when there were other partners besides the two, namely, Shri Rajamani and Thangarajan, or not, we may take note of certain relevant clauses in the partnership deeds. In the partnership deed dated 1-10-1972, in which the two partners, Shri Rajamani and Shri Thangarajan, took in five more partners, in clause 9 it is provided that the parties of the first and second ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontract between the partners, which means that the partners can agree to certain properties or assets not being treated as the property of the firm, but as their own individual properties. The question as to whether a property is not the property of the firm is one of fact depending upon the intention and agreement between the partners. The clauses referred to above in the two partnership deeds, according to us, clearly establish an intention to treat the properties and assets of the business as belonging only to the two partners, viz., Shri Rajamani and Shri Thangarajan, and not belonging to the partnership firm as such. It may be noted in passing that in the original deed dated 22-3-1955 when the partnership consisted of only the two partners, there are no such clauses as have been noted above which were present in the partnership deeds executed subsequently when more partners were admitted. If, therefore, the properties and assets of the business carried on by the firm belonged only to Shri Rajamani and Shri Thangarajan all along, and they have taken over the same in the relevant previous year by withdrawing it from the partnership assets, we fail to see how it can be said that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rred to, evidently with approval, the following observations of the Karnataka High Court in A.S. Krishna Setty Sons v. Addl. CIT [1975] 100 ITR 587, which has referred to the Supreme Court decision in Addanki Narayanappa v. Bhaskara Krishnappa AIR 1966 SC 1300: "From the observations of the Supreme Court extracted, it is clear that the individual partners of a firm have no exclusive interest in the assets belonging to the firm. They can become exclusive owners of any of the assets belonging to the firm only by all the partners acting on behalf of the firm conveying or transferring their interest to such individual partners. In that event, it is clear that there is an extinguishment of the rights of the firm in the assets in question on the one hand and acquisition of interest in them by such individual partners. In law, such a transaction does amount to a transfer...." 8. From the propositions of law as per the decision of the Madras High Court it is clear that according to the Madras High Court's view, the assets of a partnership firm acquired by it or brought in by the partners belonged to it and are owned by it and it is the firm which has rights over such assets and natur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d even in the sense of any extinguishment of the firm's rights in the partnership assets when distribution takes place upon dissolution." The Supreme Court was no doubt concerned in this case with distribution of the assets held by the firm amongst the partners on dissolution, but the fact of dissolution does not, according to us, make any difference to the law declared by the highest court of the country, namely, the Supreme Court, in this decision is that the firm in general law is not a distinct legal entity apart from the partners constituting it and equally so that the firm as such has no separate rights of its own in the partnership assets and all that one means when talking of the firm's property or firm's asset, is the property or assets in which all the partners have joint and common interest. In the Madras High Court decision notice has been taken of the fact that income-tax law recognises a partnership as a separate entity for the purpose of taxes. It only, according to us, means that the partnership is separately assessable apart from the partners as a distinct entity for the purpose of taxation or charge to income-tax. There is no reference to any other provisions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to attract capital gains or not is a question which we are not concerned with in this appeal, where the assessee is a partnership firm and the stand of the department is that there is a transfer by the firm to the partners resulting in capital gains or profits under section 41(2) arising to the firm. We, therefore, hold, respectfully following the law declared by the Supreme Court in Malabar Fisheries Co.'s case, which must be held to supersede or override the proposition of law stated by the Madras High Court in Bharani Pictures' case, that the charge under section 41(2) and capital gains is not attracted in this case. Lastly, even on an assumption that the firm is the owner of the property and assets and there is a transfer of the same to the two individual partners, we agree with the assessee's contention that the transfer in order to be valid and effective so as to attract capital gains in this case or addition of profit under section 41(2) must be by means of an instrument in writing since the property of the assessee involved immovable assets. We do so because the contention is supported by a decision of the Allahabad High Court in Ram Narain Brothers v. CIT [1969] 73 ITR 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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