Commissioner of Income Tax vs Bharati Engg. Corpn.

S.S. Sodhi, J.—The matter here concerns the transfer of immovable property by a firm to its partners. The controversy being whether such transfer can be effected by mere entries in the books of the firm? The assesses Bharati Engg. Corpn. owned three immovable properties described as a building near Paradise Cinema, Phagwara; a Plot No. 32, Industrial Area, Phagwara and a plot near the Octroi Post, Grand Trunk Road, Phagwara. The assessee purported to make over these three properties at their book value to three of its partners, namely, Sarvshri S.R. Uppal, S.P. Uppal and S.K. Uppal, respectively by debiting their personal accounts with the book value of the properties in question and making corresponding entries in the property account of the firm.

According to the ITO, the market value of the three properties in question was much more than their book value and the assessee-firm was, consequently, called upon to show why capital gains u/s 52(2) of the income tax Act, 1961 be not assessed. After considering the reply of the assessee, the ITO held the assessee-firm liable to both long-term and short-term capital gains.

On appeal, the Commissioner deleted the additions as made by the ITO on account of both long-term and short-term capital gains by holding that the entries in the books of the assessee-firm did not have the effect of transferring the properties from the firm to its partners. The Tribunal agreed with this view and held that mere entries without conveyance of the properties by a deed of registration would not have the effect of transferring ownership over the properties from the firm to the partners. It is in this context that the following question has been referred for the opinion of this Court, namely:

Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in confirming the deletion of capital gain of Rs. 6,39,876 by the Commissioner (Appeals) by holding that there was no transfer of any capital asset within the meaning of section 2(47) of income tax Act, 1961?

It is a well settled proposition of law that mere entries in the books of a partnership firm cannot convert partnership property into individual property of its partners. The judicial precedent for this view is provided by the judgment of the Karnataka High Court in Jansons Vs. Commissioner of Income Tax, Karnataka, , where, the Court further went on to hold that even an agreement entered into by the partners treating the firm''s property as individual property would not have such effect unless the agreement was followed by a deed of conveyance, known to law. A similar view has been taken in a string of authorities. Those cited in this behalf being CIT v. Dadha & Co. (1983) 142 ITR 792 (Mad.), Ram Narain & Bros. v. CIT (1969) 73 ITR 423 (All.) and Abdul Kareemia & Bros. v. CIT (1984) 145 ITR 442 (AP). The question posed has, thus, clearly to be answered in the affirmative, in favour of the assessee and against the revenue. This reference is disposed of accordingly. There will, however, be no order as to costs.