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TMI Blog1988 (8) TMI 160X X X X Extracts X X X X X X X X Extracts X X X X ..... /s. Batoola Hospital with effect from 1-5-1979, a partnership concern carrying on medical profession in which she is a partner along with her husband sharing profits or losses in the ratio of 60 percent and 40 per cent respectively. The assessment year involved is 1980-81 for which the previous year ended on 31-3-1980. The assessee offered income of Rs. 1,000 for part of the period, i.e. from 1-4-1979 to 30-4-1979. The Income-tax Officer was of the view that the transfer of the property was not effected by registered document and in the absence of such registration the property belonged to the assessee and not to the firm. Consequently, he computed the income from this property for the entire previous year at Rs. 31,125 and brought it to tax. 3. On appeal it was contended by the assessee that the Income-tax Officer ought to have held that the property was transferred by the assessee to the firm and registration was not necessary when an immovable property was contributed by a partner as his share capital. The Appellate Assistant Commissioner held that the transfer of immovable property by way of book entry by a partner to the firm was valid and relying on the order of the Tribuna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purposes, and in the course of the business of the firm, and includes also the goods will of the business. Unless the contrary intention appears, property and rights and interests in property acquired with money belonging to the firm are deemed to have been acquired for the firm." From the aforesaid section it is clear that the partnership property includes all properties and rights and interests therein originally brought into the stock of the firm, i.e., at the time of formation of partnership not to speak of property acquired by the firm. The latter part of the section also gives the clue that even when property is acquired with the money belonging to the firm it shall not be deemed to have been acquired for the firm if there is contrary intention in the contract. Thus both for inclusion of initial contribution of immovable property as capital by a partner or acquisition of property with the funds of the firm the intention or agreement of the partners is sine qua non to decide whether the property is that of the firm or individual partners. In the case of the assessee a copy of the deed of partnership dated 1-5-1975 has been filed which shows that the firm M/s. Batoola Hosp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from time to time. It is in this context that it is to be seen whether the transfer of property at No. 17, Clemens Lane to the partnership is evidenced by contract between the partners to treat such property as belonging to the partnership and not that of the individual partner who brought in the property. The Madras High Court in the case of P. R. M. S. Ramanathan Chettiar v. CIT [1969] 72 ITR 534 has categorically pointed out that such property initially contributed by partner becomes the property of the firm not by any transfer but by the very intention of the parties evidenced in the agreement between them to treat such property as that of the firm [page 533 in CIT v. Janab N. Hyath Batcha Sabib [1969] 72 ITR 528 (Mad.)]. In the absence of any fresh deed or codicil showing the agreement or contract of the parties as to the treatment of the specific property and the rights therein we hold that the book entries themselves may not be sufficient or adequate to transfer the rights in the property in favour of the firm through the intention could be gathered from the book entries. From the aforesaid observation of the Madras High Court it is clear that the question of contribution o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of section 48 of the Income-tax Act, 1961. Applying the same logic it could be said that the crediting and debiting of the assessee's account and the asset account in the books of the firm does not bring out a transfer but only represents the notional value of consideration. 7. The decision relied upon by the revenue in the grounds of appeal as well as relied upon by the learned departmental representative are not applicable to the facts of the assessee's case and therefore they are distinguishable. The case of CIT v. Dadha Co. [1983] 142 ITR 792 (Mad.), is a reverse case wherein immovable properties of the partnership were said to be treated as individual properties of the partners by making relevant book entries. The Madras High Court held that in the absence of actual dissolution of the firm there could be no division of properties purchased in the name of the firm as amongst the partners by making entries in the accounts of the firm and as there is a mutual release by one in favour of other as regards the interest transferred in favour of the other it will amount to transfer of interest in the immovable property and any such transfer will require registration if the value ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore the order of the Income-tax Officer as it is in accordance with law and facts and circumstances of the case. 8. In the result the appeal is allowed. Per Shri D. S. Meenakshisundaram, Judicial Member - I have had the advantage of perusing the order of my learned brother, Shri T. V. K. Natarajachandran. With great respect to him, I regret my inability to agree with him, for the following reasons. 2. In Kartikeya V. Sarabhai's case at pages 519 and 520 of the Reports, the Supreme Court held that the position is different when a partner brings is personal assets into the partnership firm as his contribution to the capital, that an individual asset is the sole subject of consideration, and that an exclusive interest in it before it enters the partnership is reduced on such entry into a shared interest. After referring to the provisions of section 17(1)(b) of the Registration Act and the two decisions of the Patna High Court in Firm Ram Sahay Mall Remeshwar Dayal v. Bishwanat Prasad AIR 1963 Pat. 221 and Sydgabsy Kanta v. Manindra Nath AIR 1965 Pat. 144, the Supreme Court held that the view taken by the learned Judges of the Patna High Court in these two decisions, does not spr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in proportion to their share in the business of partnership and that even if a property contributed by one partner by an immovable property, no document, registered or otherwise, is required for transferring the property to the partnership. Their Lordships of the Andhra Pradesh High Court relied on the decision of the Supreme Court in Addanki Narayanappa v. Bhaskara Krishnappa AIR 1966 SC 1300 at 1304, Col. 2 and further pointed out that the said decision of the Supreme Court has been followed by the Rajasthan High Court in two decision - CIT v. Amber Corpn. [1974] 95 ITR 178 and CIT v. Amber Corpn. [1981] 127 ITR 29. Their Lordships have also referred to the decision of the Madras High Court in R. M. Ramanathan Chettiar's case and the decision of the Patna High Court in Firm Ram Sahay Mall Rameshwar Dayal's case wherein a similar view was expressed. 4. In R. M. Ramanathan's case, Their Lordships of the Madras High Court have categorically held that no document of transfer is necessary when a partner brings into the partnership some of his assets with an intention to treat the same as partnership assets even though the assets so brought in consist of immovable property, and tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bove. The decision of the Appellate Tribunal, Hyderabad Bench A in Vishnu Industries' case relied on by the assessee's learned counsel, also supports the assessee's case. In fact, in this decision, the Hyderabad Bench of the Tribunal has relied on a decision of the Madras High Court in CIT v. Smt. M. Rajeswari Vedachalam [1972] 86 ITR 753 wherein it was held that the properties standing in the name of one of the partners was eligible for depreciation as it was treated as partnership property and used for its purpose, notwithstanding the fact that the working partners had no right or claim against partnership assets on dissolution as per terms of the partnership deed. In case of the present assessee, there is no such restriction as could be seen from the terms of the partnership deed dated 1-5-1975. 7. I do not agree that there is any accounting jugglery by passing credit and debit entries on 1-5-1979 in the books of the firm for the purpose of avoidance of the liability to income-tax and also to wealth-tax on the part of the assessee, which has been camouflaged in a well designed tax planning. It is not the case of the department at any stage either in the assessment order of bef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he said property for the period commencing from 1-5-1979 to 31-3-1980, is includable in the hands of the assessee in her individual assessment for the assessment year 1980-81 ? THIRD MEMBER ORDER 1. This is an appeal in which, on account of difference of opinion, on the following points, the matter was referred to me as Third Member. 2. The points on which the difference of opinion arose, as stated by the learned Members, are (i) whether, on the facts and in the circumstances of the case, there was a valid transfer by the assessee of the building No. 17, Clemens Road, Madras-7, to her partnership firm of M/s. Batoola Hospital on 1-5-1979, in terms of section 14 of the Indian Partnership Act, 1932 ? and (ii) whether the income from the said property for the period commencing from 1-5-1979 to 31-3-1980 is includable in the hands of the assessee in her individual assessment, for the assessment year 1980-81 ? 3. The resolution of this difference of opinion would present a difficulty, but with the help of the ratio laid down by the Supreme Court and other High Courts and the able assistance rendered to me by he learned Chartered Accountant for the assessee and the learned Depart ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f registration document notwithstanding, the department preferred an appeal before the Tribunal. 6. When the matter came before the Tribunal, the learned Accountant Member who wrote the leading order, did not agree with the view expressed by the AAC. Relying upon a decision of the Madras High Court in the case of R. M. Ramanathan Chettiar and observations of the Supreme Court in the case of Kartikeya V. Sarabhai, the learned Accountant Member disagreed with the view expressed by the AAC. From a perusal of his order, I got the impression that he did not go so much by the lack of registered document evidencing the transfer, but as much as that the facts of the case did not justify an inference to be drawn that the assessee had treated this property as the firm's property by her individual rights. By discussing the book entries made in the firm's books, as evidence of the transfer, the learned Accountant Member held that book entries even though show the intention to treat the property as the property of the firm, yet it was not sufficient to satisfy the test in section 14 of the Indian Partnership Act, 1932, according to which, an individual partner must divest his exclusive intere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agreement showing an unequivocal intention of treating the personal property as the firm's property. Again, relying upon the same Supreme Court decision, he held that the crediting and debiting of the assessee's account in the books of the firm did not bring about a transfer of the asset and the entries represented only the notional value of the consideration. This is how the learned Accountant Member proceeded to express himself to hold that the view taken by the AAC was erroneous in law and on fact. At one stage, he even doubted the passing of the entries in the books of account by describing them as matters of convenience not resulting in or bringing about a transfer of title of the property. 7. The learned Judicial Member, on the other hand, disagreed with these observations of the learned Accountant Member. Relying upon the very same Supreme Court decision, he held that there was a transfer and it did not require registration under section 17(1)(b) of the Registration Act. When there was a transfer of an immovable property by the assessee to the firm, not requiring registration under section 17(1)(b) of the Registration Act, the Department was not justified in holding that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in his individual property into the stock of the firm's property by giving up his exclusive rights there is a transfer within the meaning of sec. 45 of the Income-tax Act, 1961 because such an act results in diminishing his right over that property after such treatment, and (b) that no registration is required under sec. 17(1)(b) of the Registration Act. If this is the state of law, which indeed it is, as seen from the pronouncement of the Supreme Court in Kartikeya V. Sarabhai's case, it is no more open to the Revenue to contend that there was no transfer unless the act of treating the individual property as the firm's property was accompanied by a registered document. In this context, I would only refer to one paragraph from the judgment of Supreme Court, appearing at page 520 of the report : "Our attention has also been invited to clause (b) of sub-section (1) of sec. 17 of the Registration Act, which requires the registration of non-testamentary instruments which purport or operate 'to create, declare, assign, limit or extinguish, whether in present or in future, any right, title or interest, whether vested or contingent, of the value of one hundred rupees and upwards, to o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt observed : "The credit entry made in the partner's capital account in the books of the partnership firm does not represent the true value of the consideration. It is a notional value only, intended to be taken into account at the time of determining the value of the partner's share in the net partnership assets on the date of dissolution or on his retirement a share which will depend upon deduction of the liabilities and prior charges, existing on the date of dissolution or retirement. It is not possible to predicate beforehand what will be the position in terms of monetary value of a partner's share on that date. At the time when the partner transfers his personal asset to the partnership firm, there can be no reckoning of the liabilities and losses which the firm may suffer in the years to come. All that lies within the womb of the future. It is impossible to conceive of evaluating the consideration acquired by the partner when he brings his personal asset into the partnership firm when neither can the date of dissolution or retirement be envisaged nor can there by any ascertainment of liabilities and prior charges, which may not have even arisen yet... " 10. This explana ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be doubted by the department in the first instance. I have not found anywhere even a suspicion or a doubt cast upon these entries. On the contrary, the department proceeded on the basis that the entries were genuine, they did provide evidence of transfer, but the transfer was not valid for want of registration. I do not think that, at the stage of the Tribunal, it is open to doubt the entries suo motu, as it may amount to making out a new case for the parties, although I am not suggesting for a moment that it is not open to the Tribunal to go into this aspect. But going to this aspect must be again based upon either a challenge made before it by the parties or some evidence coming into its possession, led by the parties before it. In the absence of any such challenge or evidence coming before it, a mere casting of a doubt is, in my opinion, not enough, to doubt the veracity and authenticity of the entries by calling them as made for accounting convenience. The learned Accountant Member has also, in my opinion, contradicted himself when he observed that even though there was no doubt that the book entries made, show the intention to treat the property as the property of the firm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irm can, during the course of the business, be purchased with the money belonging to the firm or can be gifted by partners or can be acquired by myriad ways. Therefore, there is no particular requirement of section 14 to be satisfied, more than the presence of unequivocal intention of a partner to treat his personal property as the firm's property. Once this intention is declared, the property would then be the property of the firm with in the meaning of sec. 14 and that partner would cease to be exclusive owner of that property and his interest in that property would be the share interest or the limited interest, governed by the stipulation of the partnership deed. I am, therefore, unable to appreciate how, when it was conceded that the book entries showed the intention that the assessee treated this property as the property of the firm, still that was not sufficient to satisfy the requirement of sec 14, when section 14 did not, in terms require any particular procedure to be followed in order to complete that interest or intention. On the other hand, I find as an undisputed fact that, apart from the book entries which were not doubted by the department at any stage, the balance s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 was liable to capital gains tax. The assessee pleaded up to the Tribunal level successfully that, as there was no registered document, transferring this property to the firm there was no transfer and, consequently, there was no capital gain. The High Court held, on a reference made by the CIT that "For the transfer of a property worth more than Rs. 100 a stamped and registered document of transfer was necessary under the provision of Stamps Act as well as the Registration Act and as, in the instant case, there was no registered document, the Tribunal was right in holding that there was no liability to capital gains tax." This authority was cited for the proposition that for a valid transfer of property, there must be a registered document. There is no quarrel with this proposition and this, if I may say so, is to correct enunciation of law. But the point in issue before me is, not whether there was a transfer of a property or not requiring registration, but whether a partner can impress his individual property with the character of a property of a firm and in such an event, whether there is a transfer or not needing registration. Though this question was raised before the Madras ..... X X X X Extracts X X X X X X X X Extracts X X X X
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