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TMI Blog1979 (2) TMI 12X X X X Extracts X X X X X X X X Extracts X X X X ..... case, the assessee-firm was liable to gift-tax in respect of the transaction by which the properties of the firm were taken over by the partners ? " The assessee is a firm consisting of two partners, P. S. Ramakrishna Rao and P. Bhanumathi (a well-known film actress), governed by an instrument dated 25th March, 1948, carrying on business in film production. By a document dated 10th March, 1951, the firm purchased for a sum of Rs. 76,000, 14.82 acres of lands in Saligramam village, Saidapet Taluk, suburb of Madras. The property consists of agricultural and non-agricultural lands. A building was put upon the non-agricultural property, and the firm claimed and obtained depreciation on the building in all its earlier income-tax assessments. On 9th of February, 1968, a document, styled " deed of release " came into existence. The property released was valued at Rs. 75,900. To this document P. S. Ramakrishna Rao and P. Bhanumathi are parties, Ramakrishna Rao is referred to as the party of the first part and Bhanumathi as the party of the second part. Ramakrishna Rao released and relinquished in favour of the party of the second part all his rights in 9.18 acres of lands described in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n which gift-tax had been properly levied and, therefore, the transfer could not be taken for the purposes of levy of capital gains under s. 45. The result was the deletion of Rs. 1,38,000. The assessee as well as the ITO filed appeals before the Tribunal. The assessee contested the confirmation of the assessment regarding the sum of Rs. 15,000 under s. 41(2), while the department contended that the sum of Rs. 1,38,000 assessed as capital gains should not have been deleted. The Tribunal held that the transaction in question did not amount to do sale " attracting the operation of ss. 41(2), 45 and 52 of the Act. The result was that the assessee's appeal was allowed and the department's appeal was dismissed. It is as against the order of the Tribunal in the proceedings relating to the assessment for income-tax, the questions extracted already have been referred. We, shall deal with the reference under the G.T. Act separately. The learned counsel for the Commissioner submitted that the firm had transferred the properties in favour of P. Bhanumathi and that the transfer would attract liability to tax under ss. 41(2) and 45. The learned counsel for the assessee, on the other hand, s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en no sale in the present case and that, therefore, the provision is not attracted. We have thus to find out whether there was a sale of the building. The learned counsel for the assessee took up two positions. The first was that in all the assets of the firm the partners were co-owners or tenants in common and that, therefore, there is no question of any sale of the property to the partner at the time when the partner withdrew the assets from the firm. He relies for this purpose on the entries in the books as showing that the asset was first taken out of the firm by the partners through the book entries, and that thereafter there was a readjustment of the relationship between the two co-owners by the execution of the document of release to which the firm is not a party. This contention is clearly contrary to the materials on record. In the " studio site account the following is the credit entry under date 9th February, 1968 : " By proportionate value (at cost) of 9 acres and 18 cents of land (Bharani Gardens) birfurcated to partners from partnership as per release deed dated February 9, 1968........... Rs. 48,016.00." As regard 'guest house', the entry in the building accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reof ever since the date of purchase; Whereas the party of the 1st part desires to constitute the party of the 2nd part as the absolute owner of the properties more fully described in the Schedule hereunder in accordance with an arrangement entered into between them; Whereas the party of the 1st part has in pursuance of the said arrangement placed the party of the 2nd part in absolute possession and enjoyment of the said properties; And whereas the parties desire that in order to assure and perfect the absolute title of the party of the 2nd part over the said properties described in the Schedule, a deed of release should be drawn up and executed by the party of the 1st part in favour of the party of the 2nd part." (underlined by us). These recitals are clear to show that even from the date of purchase, the parties considered themselves to be the owners of the property. They thought that being partners, they were co-owners of each of the firm's assets. They also expressed their desire to constitute one of them (Bhanumathi) as the absolute owner by executing a release. They do not refer to any antecedent arrangement by which they had become the co-owners. Thus, the document i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the relinquishment of the interest of a particular partner, for instance, on retirement, does not require registration. The question whether a document of relinquishment executed by one of the partners in favour of another in a firm which had immovable assets could be looked into as evidence in the absence of its registration was gone into by the Supreme Court in the case of Addanki Narayanappa v. Bhaskara Krishnappa, AIR 1966 SC 1300. After referring to the earlier decisions, their Lordships came to the conclusion that the document did not require registration, since the interest of a partner in the firm is only movable property even though the firm has immovable property as part of its assets. In other words, the document of release could not be taken as dealing with any particular immovable property as such. In a later case in Ratan Lal v. Purshottam, AIR 1974 SC 1066, the partners of a firm, which had immovable properties as its assets, fell out and referred their dispute to arbitration. The arbitrators gave their award allotting the partnership assets and liabilities to one of the two partners, making him absolutely entitled to the same in consideration of a sum of money ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interests of the 3 Singhania brothers in the assets of the firm in favour of the trust did not require registration, even though the assets of the firm included immovable property. Thus, these decisions clearly lay down the proposition that a partner cannot deal with any individual asset of the firm, as he cannot claim any specific share with reference to any individual property either movable or immovable. During the subsistence of the partnership the partner has right only to get his share of profits from time to time as may be agreed upon, and after the dissolution of the partnership, or with his retirement from it, to get the value of his share in the net partnership assets as on the date of dissolution or retirement after deduction of all liabilities and prior charges. It may happen that even during the subsistence of the partnership the partner may assign his share to another; but the assignee would also, as shown by s. 29(1) of the Partnership Act, have only the right to receive the share of profits of the assignor and accept the account of profits agreed to by the partners. He does not become a partner and can have, and has, no better rights. The learned counsel for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t empower him to acquire immovable property for the firm or transfer immovable property belonging to the firm. In the absence of any agreement between the partners, if any occasion arises for dealing with the immovable property of the firm, then it would be necessary for all the partners to join the instrument. However, it is a far cry from this proposition to state that whatever is held by the firm can be dealt with by the partners as if they are the co-owners. The question whether there is a sale or transfer in a case like this is already concluded by the decision of this court in CIT v. Rikadas Dhuraji [1976] 103 ITR 111.In that case the firm consisted of 4 partners. It purchased a house property. During the currency of the partnership on November 1, 1962, three of the four partners executed a release deed by which they released all their rights and interest in the said property in favour of the other. The question was whether any liability to capital gains arose by reason of the transaction. It was held that the firm conveyed the property to the individual partner and that there was a valid and effective conveyance of the entirety of the interest in the property in favour of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dambaram, ILR [1970] (1) Mad 395 ; AIR 1970 Mad 5, that a partner can sell his property to a partnership firm which includes himself as a member and the question whether there was such a sale would depend upon the intention and the nature of the document. Conversely, a firm can sell a property to a partner, and whether there was such a sale would have to be gathered from the document and the surrounding circumstances. In this view, there is a sale in favour of Bhanumathi by the firm, and question No. 1 has to be and is answered in the affirmative and in favour of the revenue. As regards the second question, the Appellate Tribunal has come to the conclusion that there was no transfer within the meaning of s. 45 by the transaction in question. Transfer includes a sale (see s. 2(47)). The earlier discussion would clearly show that this view of the Tribunal of there being no transfer or sale is wrong. The result will be that the provisions of s. 45 would be attracted. However, the AAC has held in his order that there could be no liability to capital gains in this case, because of s. 47(iii). We have to examine ss. 45 and 47 in this context. Section 45 runs as follows: " Any pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rights of partners, and that there was no sale. Similarly, when a partner retired from the partnership and the amount due to him on a valuation of his share of the net partnership assets was given to him, what he received was only his share in the partnership assets, and not any consideration for transfer of his interest. It was held that there was no " transfer " in such a case, and that there was no liability to capital gains. See CIT v. Bankey Lal Vaidya [1971] 79 ITR 594 (SC). The principles laid down in these decisions do not apply to a case where a partner sold his assets to a firm as in CIT v. Dahanukar (1959] 36 ITR 459 (Bom). In A. s. Krishna Setty and Sons v. Addl. CIT [1975] 100 ITR 587 (Kar) a firm transferred an oil mill to four of its partners and a coir factory to three of them. Development rebate had been granted in respect of the machinery used in these factories. This allowance was sought to be withdrawn because of the sale to the partners. The Karnataka High Court, after referring to a passage in the decision of the Supreme Court in Addanki Narayanappa v. Bhaskara Krisnappa, AIR 1966 SC 1300, at p. 590 of 100 ITR held: " From the observations of the Supreme Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d not discuss the points separately, apparently because of its view that there was no transfer when the property was taken by the partner, Bhanumathi, from the firm. The gift-tax appeal was, therefore, allowed. This part of the order of the Tribunal gives rise to the question in T. C. No. 220 of 1975 already extracted. The learned counsel for the assessee submitted that a firm is not an entity liable to gift-tax and that, therefore, there could be no proceedings under the G. T. Act against the firm, as such. Section 3 of the G. T. Act provides for levy of gift-tax in respect of gifts made by a " person " during the relevant previous year. The word " person " has been defined in s. 2(xviii) as including an HUF or a company or an association or a body of individuals or persons, whether incorporated or not. The contention of the learned counsel for the assessee is that this definition would not cover a firm. We are unable to agree with him. A firm is only a body of individuals or persons, and is, as such, an entity comprehended by s. 2(xviii). In the I.T. Act, the procedure for registration, and the inclusion of the share income in the partner's hands required separate reference to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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