Commissioner of Income Tax vs S. Rajamani and Thangarajan Industries

N.V. Balasubramanian, J.—The assessee is a partnership firm styled M/s. S. Rajamani and Thangarajan Industries carrying on business in

manufacture and sale of soapnut power. The assessment year with which we are concerned is 1974-75, for which the relevant previous year

ended on 31st March, 1974.

The assessee-firm was originally constituted by a deed of partnership between two partners, namely, Rajamani and Thangarajan dt. 22nd

March, 1955 w.e.f. 1st April, 1954.

Certain properties situate at Thiruvathiyur High Road, Chennai were purchased by the said two partners in their names and it was a common

ground that the cost of the purchase was debited to the asset account of the books of partnership firm and it was also shown as an asset in the

balance sheet. The assessee-firm also claimed depreciation on the provisions for several assessment years. Similarly, other properties and assets

were purchased subsequently in the names of the said two partners. During the accounting year relevant for the asst. yr. 1973-74, the original

partners, namely, S. Rajamani and Thangarajan took five more partners and executed a fresh partnership deed. The original two partners, namely,

Rajamani and Thangarajan, during the previous year relevant to the asst. yr. 1974-75 took over all the assets of the firm at book value. According

to the assessee, taking over of the properties of the firm originally purchased by the said two partners in their names did not result in any transfer

attracting either the provisions of s. 41(2) of the Act or the capital gains. The ITO, however, held that there was a sale or transfer which attracted

the provisions of s. 41(2) of the Act. He further held that by applying the provisions of s. 52(2) of the Act, the fair market value of the assets

should be taken into account to determine the capital gains arising on the transaction. He accordingly, made the assessment bringing to charge not

only the profit under s. 41(2) of the Act, but also the capital gains. The CIT(A) deleted the profits under s. 41(2) of the Act and the capital gains

under s. 52(2) of the Act, on the ground that the properties being the immovable properties continued to be the properties of the firm and there

was no valid transfer of the properties consisting of land and building by the firm to the said two partners. The Tribunal, on appeal, decided the

case on two issues. One issue that was raised before the Tribunal was that no registered document was necessary for the transfer of immovable

property of the firm to the partners when the properties were purchased in the names of the said two partners. The second issue that was posed

before the Tribunal was that the taking over of the properties of the firm by the two partners resulted in a transfer by the firm to the said two

partners.

On the first question, the Tribunal held that the properties and assets belonged to only the said two partners and by taking over of the said

properties, there was no transfer of the properties which originally belonged to the partners even prior to the alleged taking over. The Tribunal also

held that even assuming that the firm was the owner of the properties, there was no valid or effective transfer in the absence of a registered deed

for the transfer of the immovable properties. The Tribunal held that as the properties involved were immovable properties and in the absence of

any valid transfer, no question of any addition of profit under s. 41(2) of the Act or charge to capital gains would arise. Aggrieved by the order of

the Tribunal, the Revenue has sought for and obtained a reference and on the basis of the directions of this Court in Tax Case Petition No. 54 of

1983, dt. 4th July, 1983, the Tribunal has stated a case and referred the following questions of law for our opinion :

Whether the Tribunal''s view that a partnership firm cannot be the owner of any property or assets and therefore, there cannot be a transfer

from the firm to the two partners who took over all the properties and assets at book value, is sustainable in law ?

Whether the Tribunal''s conclusion that the two partners have taken over the properties and assets belonging to them is reasonable and valid

having regard to the fact that the assessee-firm had treated the properties and assets as its own and obtained the benefits of depreciation allowance

in respect of the assets used for its business ?

Whether the Tribunal is justified in law in holding that the charge under s. 41(2) and the liability to capital gains tax are not attracted in this case ?

Whether, on the facts and in the circumstances of the case, the Tribunal is justified in holding that the transfer, in order to be valid and effective

so as to attract the provisions of s. 41(2) and liability to capital gains tax, must be by means of an instrument in writing ?

Mr. C. V. Rajan, learned counsel for the Revenue, submitted that the views of the Tribunal on both the issues are not correct as the properties

were purchased out of the funds of the firm and depreciation was claimed by the firm and further the properties were shown as assets of the firm in

its balance sheet. He, therefore, submitted that the view of the Tribunal that the original partners were the owners of the properties is not correct.

He also submitted that the view of the Tribunal that there was no transfer is not justified in law.

Though notice was served on the respondent, there was no representation on behalf of the assessee.

We have carefully considered the arguments of the learned counsel for the Revenue and perused the records also.

The Tribunal considered two points and the Revenue canvasses the correctness of the views of the Tribunal and unless it is established that both

the views of the Tribunal are incorrect, the Revenue is not entitled to succeed in the reference. The reasoning given by the Tribunal for the second

issue that there should be a registered deed when the firm transferred the immovable properties to its partners is more appealing than the view of

the Tribunal on the first issue. The view of the Tribunal that there should be a registered deed when the firm transfers its immovable properties to its

partners is in conformity with the decision of this Court in the case of Commissioner of Income Tax Vs. Dadha and Company, , wherein this Court

held that even assuming that the firm''s properties were owned and enjoyed in common by the partners, such common properties cannot be

possessed or enjoyed in severalty unless there is a document in writing and the document is registered. This Court further held that where there is

release of the partner''s share in specified properties of the firm, there will be a valid transfer of the interest in immovable properties of the firm only

where a document is written and registered according to the provisions of the Registration Act. This Court further held that mere book entry would

not be sufficient for valid transfer of the interest of the partners in the immovable properties of the firm. The view of the Tribunal holding that in

order to effect valid and effective transfer of immovable properties of the firm in favour of the partners, there must be a deed in writing and it must

be registered especially where the properties involved are immovable properties is legally sustainable. In this view of the matter, we are not inclined

to go into the further question whether the properties really belonged to the partners or not, and if the second issue is decided by the Tribunal

against the Revenue on this point, it will not be necessary to decide the first issue. The fourth question of law raised before us relates to the

question whether there was a valid and effective transfer and we hold that the Tribunal was justified in holding that there was no valid and effective

transfer so as to attract the provisions of s. 41(2) of the Act, and the provisions relating to the liability under capital gains. Accordingly, we answer

the fourth question of law referred to us in the affirmative and against the Revenue. In view of our answer to the fourth question, it is not necessary

for us to provide for an answer to the question of law 1 to 3 referred to us, and accordingly, we are not answering the said questions. There will be

no order as to costs in the circumstances of the case.