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TMI Blog1983 (12) TMI 31X X X X Extracts X X X X X X X X Extracts X X X X ..... o depreciation on the building. In two of the three cases relating to Arjun Singh, partner, for the assessment years 1965-66 and 1966-67, the questions, respectively, are as to whether Arjun Singh was liable to be assessed on the rental income of the property in question under s. 22 of the I.T. Act, 1961 (hereinafter called as " the Act "), and whether he was entitled to the deduction of depreciation in respect of the property which was used by the firm. The last reference, i.e., ITR No. 66 of 1975, relates to the question of leviability of penalty under s. 271(1)(c) of the Act on Arjun Singh, partner, for the non-inclusion of his rental income from the property receivable from the firm in the two revised returns as filed by him, for the assessment year 1964-65. The undisputed facts are that Arjun Singh had constructed a building bearing municipal No. 71/1, Najafgarh Road, New Delhi. He carried on business in a portion of this building under the name and style of M/s Manjeet Engineering Industries as a sole proprietary concern up to November 7, 1960. The balance-sheet as on November 7, 1960 of the proprietary business of Arjun Singh showed the building in question at the value o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... artnership firm as on November 8, 1960: Proprietary period April 1, 1960, to November 7, 1960. Balance-sheet as on 7th November, 1960, of M/s. Manjeet Engineering Industries, 71/1, Najafgarh Road, New-Delhi-15. Rs. Rs. Rs. Rs. Capital a/c Building a/c S. Arjun Singh a/c As per old ledger 3,32,960.87 As per old ledger 3,43,778.66 Addition 7,108.70 Addition 5,005.20 --------------------- 3,40,069.57 -------------------- Machinery a/c 3,48,783.86 As per old ledger 23,933.54 Less loss 6,938.34 3,41,845.52 Addition 1,535.51 25,469.05 -------------------- --------------------- Sundry Creditors: As per list attached 1,10,150.85 Furniture a/c As per old ledger 747.47 Addition 688.50 1,435.97 ------------- Motor Vehicle a/c As per old ledger 2,321.94 Patterns a/c As per profit loss a/c 3,500 Closing stock As per trading a/c 60,186.00 Sundry Debtors As per list attached 8,644.00 Cash in hand 10,368.00 ------------------------ ------------------- 4,51,996.37 4,51,996.00 -------------------- Messrs Manjeet Engineering Industries, 71/1, Najafgarh Road, New Delhi-15. Balance Sheet as on 8-11-1960 Rs. Rs. Capital a/c Buil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing authority taking assessment proceedings for the year 1963-64. The assessment for that year was completed by the ITO on February 20, 1968. This deed states that it shall form a part of the partnership deed of the firm executed on November 8, 1960, and it was agreed between the three partners that the parties thereto agreed that the property in question which was owned by Arjun Singh, a partner, has been pooled with the partnership property and it shall be the property of the partnership thereafter. Further, Arjun Singh shall not be entitled to any rent of the property whatsoever and the rent of Rs. 500 per month received by him shall be treated as his drawings and it was also stated therein that the deed shall be deemed to have commenced from November 8, 1960. This agreement was signed on a stamp paper of Rs. 1.50 and was signed by the three partners of the firm and three witnesses. The firm relied on this document in the course of assessments for the assessment year 1963-64 and 1964-65. The Tribunal, however, declined to place reliance on this document in those years and it was held to be document fabricated later in order to reduce or nullify clause 6 of the original partnersh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of that order of the Tribunal. For the assessment year 1965-66, the Appellate Tribunal in the second appeal taken to it by the firm noted with approval the view taken by it in earlier years that no registration was necessary for conveying separate property by a partner into the stock of his firm. It was further noted that the Tribunal did not allow depreciation to the firm in the assessment years 1963-64 and 1964-65, for the main reason that the deed dated November 9, 1962, was found by it as not being a genuine document. The Tribunal examined the question as to whether a different view of the matter could be taken on the facts and circumstances of the case in the assessment year 1965-66. The Tribunal took note of certain facts and circumstances as brought out on the record. It was observed that the firm in the earlier years did commit certain obvious mistakes, but these mistakes need not haunt the firm even in the year 1965-66, wherein they had been rectified and that whatever be the position in the past, the firm had treated the property as its own in the assessment year 1965-66. It was pointed out that the value of the property had been incorporated in the books of the firm a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nch of the Tribunal in the assessment year 1966-67, held against the firm. For the subsequent years 1969-70 to 1971-72, reliance was placed by the assessee on the further material also consisting of the new partnership deed executed by the partners of the firm on December 18, 1968, effective from April 1, 1968 It was submitted that clause 6 of the old partnership deed did not find a place in the new partnership deed and, therefore, the assessee-firm no longer remained a lessee of Arjun Singh as was stated in that clause and that, therefore, in those years, in any case, the position had altogether changed and the firm should be held to have become the owner of the property in question at least with effect from April 1, 1968. This contention also did not prevail with the Tribunal. The Tribunal observed that the new partnership deed was based on the earlier agreement dated November 9, 1962, and since that agreement had already been held to be a non-genuine document, the new partnership deed did not enhance the case of the assessee-firm. The appeals of the firm for these years were also accordingly dismissed. The following questions of law have been referred for the opinion of this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... perty No. 71/1, Najafgarh Road, New Delhi, for the assessment year 1969-70 and onwards? 2. Whether, on the facts and in the circumstances of the case, the, Tribunal was justified in holding that the partnership deed drawn up on December 18, 1968, was not an independent and self-contained document, but was dependent on the earlier two documents dated November 8, 1960, and November 9, 1962 ? 3. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that property No. 71/1, Najafgarh Road, New Delhi, does not belong to the partnership firm, but to S. Arjun Singh ? 4. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in upholding the disallowance of depreciation in respect of property No. 71/1, Najafgarh Road, New Delhi, in the assessment of this firm ? 5. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in applying the judgment of the Full Bench of the Tribunal which was delivered by the latter in the context of the facts found by it for the assessment year 1966-67 ? " I.T.R No. 59 of 1975 (Assessment year 1966-67): " Whether, on the facts and in the circ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y a partner in favour of a partnership firm of which he is a partner except by executing conveyance deed drawn on due stamp paper and getting the same duly registered under the Indian Registration Act. Before we deal with the relevant contentions, it may be stated here that for the allowance of claim of depreciation on the property in question, it was necessary that the property was owned by the firm. We, therefore, have to see as to whether the ownership of the property in question stood transferred to the firm. Now, the Tribunal on a perusal of the relevant entries in the cash book of the firm as also the relevant balance-sheet of Arjun Singh, individual, as on November 7, 1960, and of the firm as on November 8, 1960, as reproduced above, has found that in the capital account of Arjun Singh, credit was given as capital for the sum of Rs. 3,48,784 being the full value of the building and the building was disclosed as part of the assets of the partnership firm as on November 8, 1960, i.e., the date on which the partnership came into being between Arjun Singh and his two sons. There was no change in that position and the very same position continued for all the assessment years in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n though the terms of the partnership deed as executed by them stood somewhat to the contrary. Shri Wadhera submitted that the balance-sheet entries of the firm as reproduced above only showed that Arjun Singh placed the property in question at the disposal of the firm, but the ownership therein was not transferred by him and further that credit of the amount being the value of the property was made in his favour only as a security. Shri Wadhera was unable to show as to how this conclusion could be reached on the construction to be placed on the entries in the two balance-sheets and we find no merit in this submission. These entries clearly show that Arjun Singh Was given credit in the sum of Rs. 3,48,784, being the full value of the property in his capital account. Shri Wadhera in support of his above contention referred to the decision of the Supreme Court in the case of Kedarnath lute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363. The decision of the Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. is of no help to the case of the Revenue in the said regard as it has no bearing on the point at issue. The question for consideration is as to whether the property was brought in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ffect of the passing of the said entries could not be to transfer the personal property of Arjun Singh to the firm, i.e., that the apparent position did not reflect the true intention of the partners of the firm. The onus to prove that was thus on the Department. Now, clause 6 of the partnership deed no doubt states that the first party, i.e., Arjun Singh, shall place at the disposal of the firm the building in question for the use of the partnership for which he will be entitled to a rent of Rs. 500 per month from the partnership. It further states that this user by the partnership will not entitle the partnership tenancy rights in the property Clause 4 also relied on by the Revenue, however, is of no real consequence on the point at issue. Support is sought to be derived from that clause only indirectly on the submission that if the building was also to be brought by Arjun Singh into the pool of partnership assets as his capital, it would have been so mentioned in clause 4 as was done with regard to the machinery installed by Arjun Singh in the building, the value of which was estimated in that clause at about Rs. 25,000. It may also be pointed out here that whereas as per clau ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessment year 1965-66, the firm reversed entries in its books by which it had credited rent of the property in favour of Arjun Singh in the previous years relevant to the assessment years 1962-63 to 1964-65. Then the document dated November 9, 1962, was executed by the partners of the firm (held by the Tribunal as forged, being ante-dated) wherein the partners confirmed that the property was originally transferred by Arjun Singh to the stock of the firm and that Arjun Singh will not be entitled to any rent whatsoever and the rent of Rs. 500 per month received by him shall be treated as his drawings. We may at this stage deal with the question relating to the genuineness or otherwise of the document dated November 9, 1962, produced on behalf of the assessee before the ITO in the course of the assessment proceedings for the assessment years 1963-64 to 1965-66. The Tribunal. In the case of the assessee for the assessment year 1963-64 held that this document was not a genuine document. According to the Tribunal, the same was ante-dated. It was observed that this document was not produced before the ITO in the course of the assessment proceedings for the assessment year 1963-64 wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... three partners of the firm in the previous year relevant to the assessment year 1965-66 in question and that from that year onwards, the firm became the owner of the property. In this connection, reliance was placed by Shri Agnihotri on s. 11 of the Partnership Act. It was submitted by Shri Agnihotri that so far as the assessment years 1969-70 to 1971-72 are concerned, the firm had executed a new partnership deed on December 18, 1968, and as per that deed the property clearly stood in favour of the firm and that, therefore, in any case, the firm had become the owner of the property in the previous year relevant to the assessment year 1969-70, and as such the Tribunal was in error in not allowing depreciation on the property to the firm for the assessment years 1969-70 and 1971-72. In view of our clear finding above that the property stood transferred from Arjun Singh to the partnership firm originally, i.e., when Arjun Singh took his two sons in the business carried on by him and when the firm was constituted, we need not go into these alternative contentions of Shri Agnihotri. It may, however, be pointed out here that the subsequent act and conduct of the partners of the firm was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ereof. As per s. 14 of the said Act, the contribution by a partner of his separate immovable property by throwing the same into the stock of the partnership firm has the effect of transferring the partner's share therein to that of the firm. No particular mode or form is provided for so bringing in a separate property of the partner into the stock of the firm and no deed whatsoever registered or otherwise is required to be executed by the partner for doing so. There is ample authority in support of this view of ours. There is a very early decision of the English Court, namely, Robinson v. Ashton [1875] LR 20 Eq 25, which embodies this principle. In that case, a man became a member of a partnership and the agreement was that the business should be conducted at the mill belonging to him and he was credited in the books of the partnership with the value of the mill. It was observed that it makes no difference that his contribution was in the form of a mill and machinery and not in the form of money. It was held in that case that the property became the property of the partnership firm. The Calcutta High Court in the case of Prem Raj Brahmin v. Bhani Ram Brahmin [1946] ILR [1946] 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e same into the stock of the partnership firm has the effect of transferring the partner's interest in that property to that of the firm. Next is the decision of the Allahabad High Court in the case of Pandey v. CWT [1977]; 108 ITR 214. In that case, the assessee who was running a hotel as its sole proprietor, entered into a partnership with his son in 1966. He transferred his entire business assets including the hotel building which belonged to him individually to the new partnership firm, without executing a deed of conveyance for the same. The assessee in his wealth-tax assessment for the year 1967-68 claimed that he had transferred the said business including the hotel building in favour of the partnership firm and as such, only 75% share in the building as per his share in the firm was includible in his net wealth. The Allahabad High Court held that the business assets of the assessee consisting of the building stood transferred to the partnership without executing any deed of conveyance in that behalf as such a position was permissible as per s. 14 of the Partnership Act. The provisions of s. 5 of the Transfer of Property Act and that of s. 17(1)(b) of the Registration Act, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of the assessee for the assessment year 1965-66 that the assessee-firm had become the owner of the property in question and as such was entitled to the allowance of depreciation in respect of the same for the assessment year 1965-66 to the extent the property was used for purposes of the firm's factory. We accordingly answer the question referred to us in ITR No. 10 of 1974 in the affirmative, i.e., in favour of the assessee-firm and against the Revenue. ITR No. 121 of 1974 (Assessment year 1965-66) : Arjun Singh, the assessee, did not include any income from the property in question in the return filed by him in his individual assessment for the assessment year 1965-66. It was contended before the ITO that the building stood transferred to the partnership firm. The ITO rejected this contention of the assessee on the ground that the property stood in the name of Arjun Singh (in the municipal records). He included the net income from the property at Rs. 32,779 on an estimated basis. The AAC deleted this inclusion of income and observed that it was common ground that the assessee, Arjun Singh, was not in receipt of any rent or compensation from the firm in respect of the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rded by the Tribunal in that regard. For that reason also we need not go into the said contention of Shri Wadhera. ITR No. 66 of 1975 (Assessment year 1964-65): Arjun Singh, the assessee, in the return of income originally filed by him for the assessment year 1964-65, bad included a sum of Rs. 6,000 as his income from the property in question. He filed revised returns for that year. He, however, excluded them from income from the property. In the penalty proceedings taken by the IAC under s. 271(1)(c) of the Act as referred to him by the ITO, he rejected the plea of Arjun Singh that he was under a bona fide belief that be was not entitled to any rental income from the firm. It was pointed out that different Benches of the Tribunal had taken different views on that issue in different years, even though it was held for the assessment year 1964-65 that Arjun Singh was entitled to rental income from the firm and the firm had credited Rs. 6,000 as rental income in the account of Arjun Singh. This plea of the assessee did not find favour with the IAC and be levied a penalty of Rs. 7,500 on the assessee. The Tribunal in appeal by the assessee accepted the said version of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X
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