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K. Laxminarayana Reddy, Since Died Per L Vs. Vardhi Reddy Dasrath Ram Reddy (Died)and - Court Judgment

LegalCrystal Citation
CourtAndhra Pradesh High Court
Decided On
Judge
AppellantK. Laxminarayana Reddy, Since Died Per L
RespondentVardhi Reddy Dasrath Ram Reddy (Died)and
Excerpt:
hon'ble sri justice c.v. nagarjuna reddy c.r.p.no.1554 o”9. 4-2012 k. laxminarayana reddy, since died per l.r. k. ranganadha reddy vardhi reddy dasrath ram reddy (died)and others head note: counsel for petitioner : sri m.v.s. suresh kumar counsel for respondent nos.2 & 9 : sri jithender rao veeramalla counsel for respondent no.3 : sri d. prakash reddy,senior counsel for sri p. venka reddy counsel for respondent nos.4 & 5 : sri p. venugopal counsel for respondent no.7 : sri ch. siva reddy ?cases referred:1. air 196.s.c.
Judgment:

HON'BLE SRI JUSTICE C.V.

NAGARJUNA REDDY C.R.P.No.1554 o”

9. 4-2012 K.

Laxminarayana Reddy, Since died per L.R.

K.

Ranganadha Reddy Vardhi Reddy Dasrath Ram Reddy (died)and others HEAD NOTE: Counsel for petitioner : Sri M.V.S.

Suresh Kumar Counsel for respondent Nos.2 & 9 : Sri Jithender Rao Veeramalla Counsel for respondent No.3 : Sri D.

Prakash Reddy,Senior Counsel for Sri P.

Venka Reddy Counsel for respondent Nos.4 & 5 : Sri P.

Venugopal Counsel for respondent No.7 : Sri Ch.

Siva Reddy ?CASES REFERRED:

1.

AIR 196.S.C.

2.

AIR 198.S.C.

3.

1993(1) SCC 58.4.

AIR 195.Madra”

5.

AIR 198.Calcutt”

6.

AIR 199.A.P.

7.

Weekly Law Reports Vol.1, 1975, p.1587 8.

AIR 194.Lahore 13 (FB) 9.

AIR 198.Calcutta 254 (DB)

JUDGMENT

: An interesting, nay, an important question, arises for adjudication in this case.

The question is, how, on dissolution of a partnership firm, the assets of the dissolved firm are distributed among the partners? The background facts: For convenience, the parties are referred as they are arrayed in the suit.

The plaintiff and the defendants constituted a firm called M/s.

Viraj Constructions.

The partnership appeared to have carried on construction works with the Railways.

It is not in dispute that the partnership was at will.

One of the partners by name Vallapa Reddy Sundara Rami Reddy died on 7-9-1976.

In his place, defendant Nos.5 and 6, the legal representatives of the deceased partner, joined as partners in the firm.

The plaintiff (since died) caused a legal notice issued on 15-10-1983 to the remaining six partners, through which he has informed that the partnership was dissolved with effect from the date of communication of the notice and a request was made to the remaining partners for rendition of accounts for ascertaining the profit or loss of the dissolved partnership firm and business.

It was stated in the legal notice that if the accounts are not rendered within 15 days of receipt of the notice, legal consequences will follow.

Following the said notice, plaintiff filed O.S.No.1601/1983 on 2-12- 1983 for a Judgment and decree directing the defendants to render the accounts, to appoint a Commissioner to the settle accounts and decide the profit or loss of the said dissolved firm and business, and in case any amounts are found payable to him, to pass a decree against the defendants accordingly.

The plaintiff also sought for a decree for payment of interest @ 12% p.a.

on the amount payable to him from 1-10-1969 till the date of realization of the decretal amount and for costs.

On the suit being contested by the defendants, a preliminary decree was passed by the learned II Additional Judge, City Civil Court, Hyderabad, on 6-11- 1995, which is as under:

1.

That it is hereby declared that the plaintiff is entitled to 0.25 ps.

share out of 100 ps.

capital amount of the partnership of M/s.

Viraj Constructions; 2.

that the defendant Nos.1 to 6 and defendant Nos.8 and 9 are hereby directed to render accounts on or before 31-3-1996 to the plaintiff towards his share of the partnership upto 31-3-1970; 3.

that if the defendants fail to render accounts as directed above, the plaintiff is at liberty to file a petition to pass a final decree by appointment of a Commissioner for settlement of accounts of the partnership firm in terms of this preliminary decree; 4.

that the plaintiff is hereby entitled to claim interest at 12% p.a.

on the amount, if found to be due to him towards his share after settlement of accounts from 1-4-1970 onwards till the date of realization; 5.

that the suit as against defendant No.7 be and the same is hereby dismissed; 6.

that defendant No.7 shall bear his own costs of the suit; and 7.

that defendant Nos.1 to 6, 8 and 9 do pay to the plaintiff a sum of Rs.4,788/- towards costs of the suit.

Feeling partly aggrieved by the said Judgment and decree, the plaintiff filed C.C.C.A.No.52/1999 before this Court and the defendants filed Cross-Objections.

This Court, by Judgment dated 28-3-2001 disposed of the C.C.C.A.

along with the Cross Objections, modifying the preliminary decree of the trial Court.

The modified decree reads as under: "That as the partnership is at will, under Section 43 of the Act, soon after the partner has expressed his willingness to dissolve the partnership firm, after giving notice, the partnership firm M/s.

Viraj Constructions was dissolved on 18-10-1983 and the defendants 1 to 6, 8 and 9 are liable to render accounts to the plaintiff towards his share upto 18-10-1983 and if any amount is due payable to the appellant, from out of the profits of the partnership firm, he is entitled to receive the same with interest at 12% per annum till the date of realization." Thereafter, the plaintiff has filed I.A.No.1247/2001 to pass final decree by appointment of a Commissioner and to direct him to take possession of the assets of the partnership firm, including the land in Sy.No.28/1 to 3, admeasuring Ac.3-27 guntas, situated at Begumpet, Hyderabad, and the account books of the firm M/s.

Viraj Constructions, the inventory of which was already taken by the Commissioner during the trial and to settle the accounts of the firm including the share of the plaintiff in the land as per the preliminary decree dated 6-11- 1995, as modified by this Court vide decree dated 28-3-2001 in C.C.C.A.No.52/1999.

The said application was contested by the defendants by pleading that in view of the interim order passed by this Court in C.M.P.No.18249/2001 in L.P.A.No.27/2001 restraining both the parties from alienating the partnership assets, the Commissioner cannot be appointed.

The lower Court, however, rejected the said objection by observing that while granting the interim order, this Court allowed the final decree proceedings to go on and granted only stay of passing of the final decree.

Accordingly, the lower Court appointed Sri J.

Prabhakar, Advocate, as the Commissioner for execution of the warrant.

Feeling aggrieved thereby, the defendants filed I.A.No.1404/2002 for review of the said order.

In the said review petition, it was pleaded by the defendants that they have failed to render accounts as directed in the preliminary decree; that the plaintiff is entitled to file an application for appointment of a Commissioner for settlement of accounts of the dissolved firm; that in terms of the preliminary decree, the plaintiff is entitled to claim interest @ 12% p.a.

on the amount found due to him towards his share and that in the preliminary decree, no where the Court has directed to take possession of the property by appointing a Commissioner.

It was further pleaded that the extent of land belonging to the firm was only Ac.2-27 guntas and not Ac.3-27 guntas; that the partnership was newly constituted with fresh partners and that the new partnership firm is not a party to I.A.No.1247/2001.

The defendants have thus pleaded that the order passed in I.A.No.1247/2001 travelled far beyond the scope of the preliminary decree.

In the counter affidavit, the plaintiff averred that on dissolution of the partnership firm, every partner is entitled to his share as against other partners or their representatives who are in possession of the firm's properties; that the partners are liable to discharge the debts and distribute the surplus among all the partners as on the date of dissolution of the partnership firm; that unless the assets of the firm are sold, the share of the partners cannot be determined and that none of the partners have exclusive right over the property of the firm.

While asserting that the defendants have admitted in the written statement that the asset of the firm is Ac.3-27 guntas and therefore the defendants cannot go back on the admitted facts, the plaintiff further averred that the assets of the dissolved firm cannot be transferred in favour of the new firm as such act is void ab initio and that after dissolution of the firm, he is entitled to a share in the assets of the firm which remain after satisfying the liabilities.

The lower Court, by order dated 26-4-2004, allowed the review petition i.e., I.A.No.1404/2002, by setting aside its earlier order dated 25-11-2002 in I.A.No.1247/2001 to the extent of directing the Commissioner to take possession of the assets of the dissolved firm.

While doing so, the lower Court has accepted the plea of the defendants that as per the preliminary decree, as modified in C.C.C.A.No.52/1999, the plaintiff is only entitled to his share in the profits of the business run in the name of the firm till 18-10-1983 and that therefore he is not entitled to any share in the properties of the firm which is being run with the remaining partners.

The lower Court further observed that as per the preliminary decree the Commissioner was appointed and he has taken possession of the account books and other relevant records for rendition of accounts; that the extent of land is also in dispute in view of the claim made by the Government and that the Commissioner need not be directed to take possession of the property as there is no need to sell same.

The lower Court further observed that the question of selling the property arises only when the other partners fail to pay the amount to the plaintiff.

Assailing the said order, the plaintiff filed C.M.A.No.1485/2004 before this Court.

While the said C.M.A.

was pending, defendant Nos.4 and 5 filed I.A.No.892/2005 for appointment of a Chartered Accountant or a person who is well versed with accounts as the Commissioner for determining the value of the share of the plaintiff as on 18-10-1983 in the dissolved partnership firm.

This application is in effect intended to effectuate the order dated 26-4-2004 in I.A.No.1404/2002 with the same averments.

It was asserted in the said application that the Commissioner has to determine the value of the plaintiff's share in the partnership firm as on 18-10-1983.

The plaintiff has reiterated his stand which was being consistently taken by him in the previous proceedings as noted above.

The lower Court conclusively rejected the plea of the defendant Nos.4 and 5 while dismissing I.A.No.892/2005 vide its order dated 25-7-2006.

It has held that the preliminary decree has not limited the right of the plaintiff to receive the value of his share as on 18-10-1983 in the asset of the dissolved firm and that his rights will exist till passing of the final decree.

The lower Court also observed that the plaintiff filed I.A.No.655/2003 in I.A.No.1247/2001 for appointment of an Advocate-Commissioner to sell the property and that the same was allowed.

On these premises, the lower Court dismissed I.A.No.892/2005.

Feeling aggrieved by the order in I.A.No.655/2003, defendant Nos.4 and 5 filed C.R.P.No.3825/2006.

Assailing the order in I.A.No.892/2005, they filed C.R.P.No.4063/2006.

This C.R.P.

was dismissed by a learned single Judge of this Court at the admission stage on 13-10-2006.

The S.L.P.

filed against this order was dismissed by the Supreme Court by order dated 5-1-2007.

Both C.M.A.No.1485/2004 and C.R.P.No.3825/2006 came to be disposed of by common judgment dated 30-1-2009 by a learned single Judge of this Court.

In its Judgment, this Court has framed two points.

Point No.1 relates to the maintainability of the C.M.A, which is not relevant for the purpose of adjudication of this case.

The second point framed by this Court is as under: "Whether there are any grounds to review the order passed by the lower Court in I.A.No.1247/2001?" On a detailed consideration of the respective pleas of the parties, this Court had set-aside the review order dated 26-4-2004 passed by the lower Court in I.A.No.1404/2002.

This Court has referred to the provisions of Sections 46 and 48 of the Indian Partnership Act, 1932 (for short "the Partnership Act") and dealt with the rights of the partners and mode of settlement of accounts following the winding up or dissolution of the partnership firm.

Referring to Section 48(b) of the Partnership Act, this Court, at para-27 of the Common Judgment, held in no uncertain terms, as under: "The language of the above Section is very clear that the outgoing partner is entitled to get his share of profits out of the assets also in addition to other sources available for them for distribution after discharging the liabilities of third parties.

When once there is a preliminary decree in favour of the plaintiff for ascertaining the profits on verification of the accounts rendered by the other partners value of the movable and immovable properties of the firm has to be ascertained and if the other partners who are running the subsequent partnership business are ready to pay the share of the plaintiff, there would not be any problem.

Otherwise, the properties have to be brought to sale and the sale proceeds have to be distributed rateably as per their share in the partnership firm." This Court also placed reliance on the Judgment of the Supreme Court in Addanki Narayanappa Vs.

Bhaskara Krishnappa1.

It further held that the lower Court has exceeded its jurisdiction in allowing the review petition i.e., I.A.No.1404/2002.

This Court has also taken note of the fact that even though the Receiver was described as the Commissioner, in fact, the Receiver was appointed under Order XL of the Code of Civil Procedure, 1908 (for short "the Code") and that he has taken possession of Ac.3-27 guntas after getting the land surveyed through the Mandal Surveyor and on verification of the T.S.L.R.

record.

This Court has rejected the plea of the defendants that the Commissioner (Receiver) ought not to have been appointed and held that under Order XL of the Code, the Receiver is entitled to take possession of the property and that there was no merit in the submission of the defendants that taking possession of the property by the Receiver is illegal.

This Court, at para-30, further gave the following categorical direction: "...

Now the Commissioner has to take steps to get the value of the property assessed.

After determining the value of the property, if the other partners come forward to pay 25% of the value of the property after deducting the liabilities, if any, the properties can be left to the partners after satisfying the share of the plaintiff, otherwise, the property has to be sold to realize the amount for the purpose of distribution.

If the parties come to an understanding, the plaintiff may also take 25% of the land towards his share instead of selling the property for the purpose of distribution of the same out of the sale proceeds among the partners...." Following the result in C.M.A.No.1485/2004, C.R.P.No.3825/2006 was dismissed.

Thereafter, the plaintiff filed I.A.No.541/2009 under Order VII Rule 7 of the Code and Section 47 of the Partnership Act for a direction to the Advocate- Commissioner to sell the extent of Ac.3-27 guntas of land and pay 25% of the sale proceeds to him after discharging the liabilities of the firm, if any, towards his share while passing the final decree.

Once again the parties have taken their respective positions in their pleadings as were taken in the previous rounds of litigation.

The lower Court accepted the plea of defendant Nos.4 and 5 that all that the plaintiff was entitled to receive is the value of the partnership asset assessed as on 18-10-1983 and that he is not entitled to insist on sale of the property and receive 25% of the sale proceeds.

Accordingly, the lower Court has dismissed I.A.No.541/2009 by its order dated 28-4-2010.

It is this order which is questioned in the present Civil Revision Petition.

Evidently, by the time the present C.R.P.

was filed, the plaintiff died.

His son has filed the present Civil Revision Petition.

Submissions of the learned counsel: I have heard Sri M.V.S.

Suresh Kumar, learned counsel for the plaintiff, Sri P.

Venugopal, learned counsel for defendant No.4 and 5 and Sri D.

Prakash Reddy, learned Senior Counsel for defendant No.3, at length.

Learned counsel for the plaintiff advanced the following submissions: (i) That under Sections 46 and 48 of the Partnership Act, the plaintiff, upon winding up of the firm, is entitled to receive his share from the surplus after applying the property of the firm in payment of the debts and liabilities and that therefore either the asset of the dissolved firm has to be sold or its present market value ascertained and paid by the other partners towards the plaintiff's share as directed by this Court in the Common Judgment dated 30-1- 2009 in C.M.A.No.1485/2004 & C.R.P.No.3825/2006.

(ii) That the lower Court committed a serious error in taking the same view in its order as was taken by it earlier in the order dated 26-4-2004 in I.A.No.1404/2002, which was set aside by this Court in C.M.A.No.1485/2004.

(iii) That order dated 25-7-2006 in I.A.No.892/2005 of the lower Court by which the pleas raised by the defendants and that were found favour with the lower Court in the order under revision were conclusively rejected and that the said order was affirmed in C.R.P.No.4063/2006 which has become final with the dismissal of the S.L.P.

by the Supreme Court and that therefore the view taken by the lower Court cannot be sustained.

In support of his submissions, the learned counsel placed reliance on the Judgments of the Supreme Court in Malabar Fisheries Company Vs.

Commissioner of Income-Tax2 and S.V.

Chandra Pandian Vs.

S.V.

Sivalinga Nadar3.

The learned counsel also explained the Judgment of the Supreme Court in Addanki Narayanappa (1-supra), on which heavy reliance was placed by the learned counsel for the contesting defendants.

Opposing the above submissions, the learned counsel for the contesting defendants submitted that the plaintiff is entitled to rendition of accounts as on 18-10-1983 as per the modified preliminary decree of this Court in C.C.C.A.No.52/1999 and the value of the partnership asset as on that date.

The learned counsel further submitted that the interlocutory orders passed in I.A.No.1247/2001 and I.A.No.892/2005 are contrary to the preliminary decree and that therefore they do not prevail over the preliminary decree and are accordingly liable to be ignored.

The learned counsel placed heavy reliance on the Judgment in Addanki Narayanappa (1-supra) and in particular, on paragraph-5 of the said Judgment, and submitted that the plaintiff is entitled to get his share of profits and also the value of his share in the net partnership asset as on the date of dissolution only and that he has no right to receive the value of the asset as on any other date subsequent to the date of dissolution of the partnership firm.

They also relied upon the Judgments in N.

Muhammad Ussain Sahib Vs.

S.N.

Abdul Gaffoor Sahib4 and Tilokram Ghosh Vs.

Gita Rani Sadhukham5 in support of these submissions.

The legal provisions: Section 4 of the Partnership Act defined "partnership" as a relationship between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.

The persons who have entered into partnership with one another are called individually "partners" and collectively "firm".

Section 5 thereof declares that the relationship of partnership arises from contract and not from status.

Section 7 described 'partnership at will' as the one where no provision is made by contract between the partners for the duration of their partnership or its determination.

Under Section 9, partners have general duties to carry on business to the greatest common advantage, to be just and faithful to each other and to render true accounts and full information of all things affecting the firm to any partner or his legal representative.

Section 11 envisages that the rights and duties of the partners are determined by the contract between them which may be express or implied in the course of dealing.

Section 14 provides that subject to the contract between the partners, the property of the firm includes all property and rights and interests in property originally brought into the stock of the firm, or acquired, by purchase or otherwise, by or for the firm, or for the purposes and in the course of business of the firm, and includes also the goodwill of the business.

Chapter V of the Partnership Act deals with Incoming and Outgoing Partners.

Section 32 thereof provides for the modes of retirement.

Under Section 37, where any member of a firm has died or otherwise ceased to be a partner and the surviving or continuing partners carry on the business of the firm with the property of the firm without any final settlement of accounts as between them and the outgoing partner or his estate, then, in the absence of a contract to the contrary, the outgoing partner or his estate is entitled, at the option of himself or his representatives, to such share of the profits made since he ceased to be a partner as may be attributable to the use of his share of the property of the firm or to interest at the rate of six per cent per annum on the amount of his share in the property of the firm.

Under the proviso to the said section, where, by a contract between the partners an option is given to the surviving or continuing partners to purchase the interest of a deceased or outgoing partner, and that option is duly exercised, the estate of the deceased partner, or the outgoing partner or his estate, as the case may be, is not entitled to any further or other share of profits.

Chapter VI of the Partnership Act deals with Dissolution of a partnership firm.

Under Section 43 thereof, where the partnership is at will, the firm may be dissolved by any partner giving notice in writing to all the other partners of his intention to dissolve the firm.

The firm is dissolved as from the date mentioned in the notice as the date of dissolution, or if no date is so mentioned, as from the date of communication of the notice.

Sections 46 and 48 of the Partnership Act, which are very material for the present purpose, are reproduced hereunder: Section 46: Right of partners to have business wound up after dissolution: On the dissolution of a firm every partner or his representative is entitled, as against all the other partners or their representatives, to have the property of the firm applied in payment of the debts and liabilities of the firm, and to have the surplus distributed among the partners or their representatives according to their rights.

Section 48: Mode of settlement of accounts between partners: In settling the accounts of a firm after dissolution, the following rules shall, subject to agreement by the partners, be observed:- (a) losses, including deficiencies of capital, shall be paid first out of profits, next out of capital, and, lastly, if necessary, by the partners individually in the proportions in which they were entitled to share profits; (b) the assets of the firm, including any sums contributed by the partners to make up deficiencies of capital, shall be applied in the following manner and order:- (i) in paying the debts of the firm to third parties; (ii) in paying to each partner rateably what is due to him from the firm for advances as distinguished from capital; (iii) in paying to each partner rateably what is due to him on account of capital; and (iv) the residue, if any, shall be divided among the partners in the proportions in which they were entitled to share profits.

Analysis: From the provisions of the Partnership Act discussed above, it is evident that a partnership is created by a contract and the firm is nothing but a collection or a compendium of partners.

Since the firm has no legal existence under the Partnership Act, the property held by the partnership is deemed to be held by the partners for the business of the partnership firm.

Every partner is an agent of the firm.

Position in case of retirement or death of a partner: The Partnership Act has dealt with the retirement of partners and its consequences separately from the dissolution of a firm and its consequences.

The former is included in Chapter-V of the Partnership Act and the latter is dealt with under Chapter-VI.

The reason for this segregation is not far to seek.

In the case of an outgoing partner either on account of his death or retirement, the partnership survives.

Unless an agreement to the contrary exists among the partners, the interest of an outgoing partner will be taken over by the firm by settling his accounts both in terms of profits or losses, as the case may be, and the capital contributed by him in the partnership business, in proportion to his share in the partnership business.

Under Section 37 of the Partnership Act, where the final settlement of accounts between the surviving or continuing partners and the outgoing partner or his representative is not settled, in the absence of a contract to the contrary, the outgoing partner or his estate is entitled, at the option of himself or his representative, to such share of the profits made, since he ceased to be a partner, as may be attributable to the use of his share of the property of the firm or to interest @ 6% per annum on the amount of his share in the property of the firm.

The proviso thereof limits the rights of the outgoing partner, where under the contract between the parties an option is given to the surviving or continuing partners to purchase the interest of the deceased or the outgoing partner, and that option is duly exercised; but if any partner, assuming to act in exercise of the option does not in all material respects comply with the terms thereof, he is liable to account under the provisions of Chapter-V.

In Chillakuru Chandrasekhara Reddy Vs.

Pamuru Vishnu Vinodh Reddy6, the question arose as to what is the relevant date for ascertainment of value of the share of the outgoing partner consequent on his retirement.

This Court has referred to and quoted the celebrated work of Lord Lindley.

The following is the passage quoted therefrom in the said Judgment: "If, as will usually be the case, the agreement establishes the manner in which the deceased or outgoing partner's financial entitlement in respect of his share is to be ascertained and paid and provides for the devolution of the legal title to any partnership assets which may be vested in him, his share may properly to be regarded as a pure debt with effect from the date on which he ceased to be a partner...." "In any case in which a share falls to be valued in the above way, it will be important to determine the date on which such value is to be taken.

Where there is an implied agreement for the acquisition of the deceased or outgoing partner's share, the relevant date will be the date on which he ceased to be a partner; where, however, a valuation is directed by the court in the exercise of its discretion, the relevant date will be the date on which the share is actually valued.

In the former case, the outgoing partner will be "compensated" for any delay in the payment of his financial entitlement by a right to interest or, at his (or his estate's) option, a share of profits attributable to the use of his share, but he cannot also claim a share of any capital profits attributable to increases in the value of the partnership assets since the date on which he ceased to be a partner." (Emphasis added) After referring to the decision of the Chancery Division of England in Sobell Vs.

Boston7, this Court, at para-20, has summed up as under: "It follows from the above, that the in cases where there is an agreement to purchase the share of a partner, the value of the share of the outgoing partner or retiring partner shall be ascertained on the basis of the value on the date of the retirement, unless it is a case where the valuation is directed by the Court in the exercise of its discretion, in which event, relevant date will be the date on which the share is actually valued.

Admittedly, it is a case where the plaintiff had retired from the concern on 5-4-1971 and agreed to sell his share to Sri M.

Subbareddy.

Therefore, there was an express agreement to sell the share, pursuant to which, he sold his share to defendant No.12 and thereafter he retired and ceased to be a partner on 5-4-1971.

If there was delay in payment of his financial entitlement, he is entitled to interest at the rate of six per cent per annum in the property of the firm.

Section 37 of the Indian Partnership Act, also says that in the case of an outgoing partner, he is entitled to such share of the profits made since he ceased to be a partner as may be attributable to the use of his share of the property of the firm or to interest at the rate of six per cent per annum on the amount of his share in the property of the firm.

The language used in Section 37 is that "since he cased to be a partner".

In other words, since he ceased to be a partner, he is entitled to interest at the rate of six per cent per annum on the amount of his share in the property of the firm.

Section 37 itself makes it clear that the relevant date is the date on which he ceases to be a partner.

The proviso to Section 37 also says that if option is given to surviving partners to purchase the share of an outgoing partner and if any partners assuming to act in exercise of the option does not in all material respects comply with the terms thereof he is liable to account under Section 37." The law is thus settled in the case of a retiring or an outgoing partner that where there is an agreement between the outgoing partner or a retiring partner or his legal representatives, as the case may be, and the surviving partners, the value of his share shall be ascertained on the date of retirement unless the Court directs that the relevant date for ascertainment of the value shall be the date on which the share is actually valued.

This Court has taken note of the agreement between the plaintiff and the surviving partners under which the former agreed to sell his share on 5-4-1971 and accordingly held that the plaintiff is entitled to his share in the assets of the firm valued as on the date of his retirement and if there is any delay in making the payment, he is entitled to interest @ 6% per annum on the value of his share in the property of the firm.

Position in cases of dissolution of the partnership: But, the case on hand is one of dissolution, which as noted above, is governed by the provisions of Chapter-VI of the Partnership Act.

Sections 46 and 48 deal with the rights of the partners on dissolution and mode of settlement of accounts between them.

Section 46 envisages that on the dissolution of a firm, every partner has a right against all other partners or their representatives to insist that the property of the firm is utilized in payment of the debts and liabilities of the firm and to receive his share in the surplus according to his right.

Section 48 prescribes the mode of settlement of accounts between the partners as envisaged in clauses (a) and (b) thereof.

Under this provision, the residue of assets of the firm, after paying the debts to third parties, to each partner rateably what is due to him from the firm for advances and to each partner rateably what is due to him on account of capital, shall be divided among the partners in the proportions in which they were entitled to share the profits.

Thus, Sections 46 and 48 constitute a complete code in itself for settlement of accounts, sharing of profits/losses and distribution of value of the assets of the partnership firm among the partners in the residue after settling the accounts.

Is it necessary to liquidate the partnership assets upon dissolution A Full Bench of Lahore High Court in Ajudhia Pershad Ram Pershad Vs.

Sham Sunder8, held that the Partnership Act contemplates complete liquidation of the assets of the partnership as a preliminary to the settlement of accounts between the partners upon dissolution of the firm.

The Full Bench, it is Judgment, also quoted Lord Lindley.

It is not only instructive, but also profitable to reproduce the relevant portion of the said Judgment hereunder: "These Sections require that the debts and liabilities should first be met out of the firm property and thereafter the assets should be applied in rateable payment to each partner of what is due to him firstly on account of advances as distinguished from capital and secondly on account of capital, the residue, if any, being divided rateably among all the partners.

It is obvious that the Act contemplates complete liquidation of the assets of the partnership as a preliminary to the settlement of accounts between the partners upon dissolution of the firm and it will, therefore, be correct to say that, for the purposes of the Indian Partnership Act, and irrespective of any mutual agreement between the partners, the share of each partner is, in the words of Lindley: "his proportion of the partnership assets after they have been all realized and converted into money, and all the partnership debts and liabilities have been paid and discharged." (Emphasis added) The above mentioned passage was quoted with approval by the Supreme Court in Addanki Narayanappa (1-supra).

Their Lordships also quoted a passage from "Lindley on Partnership", 12th Edition, page-375, which reads as under : "What is meant by the share of a partner in his proportion of the partnership assets after they have been all realized and converted into money, and all the partnership debts and liabilities have been paid and discharged.

This it is, and this only which on the death of a partner passes to his representatives, or to a legatee of his share .....

and which on his bankruptcy passes to his trustee." (Emphasis added) Sections 46 and 48 of the Partnership Act are analogous to the English Partnership Act, 1890.

Indeed, Section 48 of the Partnership Act is ipsissima verba with Section 44 of the English Partnership Act, 1890.

With reference to the said provision, "Lindley and Banks on Partnership", 19th Edition by Roderick I'anson Banks, deduced the principles which apply as between the partners on winding up of the partnership firm.

The following are some of the principles which are relevant for the present purpose : (1) Each partner is, in general, entitled to have dissolution accounts taken as between him and his co-partners.

(2) Each partner is entitled to have the partnership property applied in liquidation of the partnership debts, and to have any surplus assets divided.

(3) Each partner is, in general, entitled to force a sale of all partnership assets which are capable of being sold and to have the value of any unsaleable asset brought into account by the partner who retains it.

(4) As a corollary of (3), save in special circumstances, no partner can insist on taking the share of any other partner at a valuation or to insist on a division of the partnership assets in specie.

(5) No partner can retain the exclusive right to any increase in the value of the partnership assets between dissolution and sale, but more difficult questions may arise in relation to trading profits realized during that period.

If the above deduced principles are closely examined with reference to the provisions of Sections 46 and 48 of the Partnership Act, the indisputable legal position that emerges is that each partner's right to take his share in the assets of the partnership firm, is unfettered and unqualified.

Principles (3) and (4) reproduced above, in unequivocal terms, recognize the right of each partner to force the sale of all partnership assets which are capable of being sold and to have the value of any unsaleable asset brought into account by the partner who retains it.

As a corollary of these principles, except in special circumstances, no partner can insist on taking the share of any other partner at a valuation or to insist on a division of the partnership assets in specie.

The above discussed principle that on dissolution of the partnership every partner has a right to insist on liquidation of the assets of the dissolved firm is well recognized by the Indian Courts, is very much reflected in the subsequent Judgments of the Apex Court.

In Malabar Fisheries Company (2-supra), the question was whether the distribution of assets of a firm consequent on its dissolution amounts to transfer of assets within the meaning of the expression "otherwise transferred" occurring in Section 34(3)(b) of the Indian Income-Tax Act 1961.

The Supreme Court relied upon the Judgment in Addanki Narayanappa (1- supra) in holding that upon dissolution, the firm's rights in the partnership assets are extinguished; that the firm as such has no separate rights of its own in the partnership assets; that it is the partners who own jointly and in common the assets of the partnership; that therefore the consequence of distribution, division or allotment of assets to the partners which flows upon dissolution after discharge of liabilities is nothing but a mutual adjustment of rights between the partners and that there is no question of extinguishment of firm's rights in the partnership assets amounting to a transfer of assets within the meaning of Section 2(47) of the Indian Income-Tax Act, 1961.

In S.V.

Chandra Pandian (3-supra) the same question as in Addanki Narayanappa (1-supra) arose and the Supreme Court while reiterating its earlier view observed as under : "From the foregoing discussion it seems clear to us that regardless of its character the property brought into stock of the firm or acquired by the firm during its subsistence for the purposes and in the course of the business of the firm shall constitute the property of the firm unless the contract between the partners provides otherwise.

On the dissolution of the firm each partner becomes entitled to his share in the profits, if any, after the accounts are settled in accordance with Section 48 of the Partnership Act.

Thus in the entire asset of the firm all the partners have an interest albeit in proportion to their share and the residue, if any, after the settlement of accounts on dissolution would have to be divided among the partners in the same proportion in which they were entitled to a share in the profit.

Thus during the subsistence of the partnership a partner would be entitled to a share in the profits and after its dissolution to a share in the residue, if any, on settlement of accounts.

The mode of settlement of accounts set out in Section 48 clearly indicates that the partnership asset in its entirety must be converted into money and from the pool the disbursement has to be made as set out in clause (a) and sub-clauses (i), (ii) and (iii) of clause (b) and thereafter if there is any residue that has to be divided among the partners in the proportions in which they were entitled to a share in the profits of the firm.

So viewed, it becomes obvious that the residue would in the eye of law be moveable property i.e., cash, and hence distribution of the residue among the partners in proportion to their shares in the profits would not attract Section 17 of the Registration Act.

" (Emphasis added) From a close analysis of the above noted legal position, it follows that the right of each partner on dissolution of the firm is two fold viz., (i) right to settle the account as on the date of dissolution and (ii) right to share the residue in the assets following their liquidation and after satisfying the liabilities set out in clause (a) and sub clauses (i), (ii) and (iii) of clause (b) of Section 48.

Liquidation of assets is therefore a necessary step towards payment of share of each partner in the partnership assets.

The preliminary decree and its effect: The sheet-anchor of the case of the defendants is that since this Court in C.C.C.A.No.52/1999 fixed 18-10-1983 as the date on which the partnership firm was dissolved, the plaintiff is entitled to receive the value of the assets only as on that date.

While interpreting Sections 46 and 48 of the Partnership Act, of course in a different context, the Supreme Court, in Addanki Narayanappa (1- supra) observed as under: ".....No doubt, since a firm has no legal existence, the partnership property will vest in all the partners and in that sense every partner has an interest in the property of the partnership.

During the subsistence of the partnership, however, no partner can deal with any portion of the property as his own.

Nor can he assign his interest in a specific item of the partnership property to anyone.

His right is to obtain such profits, if any, as fall (sic: falling) to his share from time to time and upon the dissolution of the firm to a share in the assets of the firm which remain after satisfying the liabilities set out in Clause (a) sub-clauses (i), (ii) and (iii) of Clause (b) of Section 48." (Emphasis supplied) As noted hereinbefore, the right of the partners on dissolution of the firm is to receive profits till dissolution and to receive the value of the assets in proportion to their share after settlement of accounts.

The preliminary decree as modified by this Court needs to be accordingly understood.

Clause (1) of the preliminary decree declared the share of the plaintiff in the capital amount of the firm and Clause (2) fixed the date as on which the accounts should be rendered.

This means, the profits or losses in the business of the firm should be ascertained as on 18-10-1983.

The significance of referring of this date is thus limited to ascertainment of profits or losses alone and it has no relevance to the right of the partners to receive the value in the residue of the assets.

Whether it is permissible for the defendants to claim the benefit of escalation in land value after dissolution Under principle No.(5) quoted by Lindley and Banks (supra), no partner can retain the exclusive right to any increase in the value of the partnership assets between dissolution and the sale of its assets.

On the dissolution of the partnership firm, each partner stands on a par with the other.

The advantages or disadvantages and the profits or losses, have to be shared by all the partners in proportion to their respective shares in the partnership.

No partner can, as of right, claim advantage of the increase in the value of the partnership asset after the dissolution of the firm.

Similarly, no partner can insist that he is not liable to bear the loss, if any, occurred on account of reduction in the value of the asset, post dissolution At the hearing, this Court has called upon the learned counsel for the defendants to specify as to who will enjoy the profit or bear the loss if there is escalation or reduction in the value of the partnership asset, as the case may be, during the huge time lag between the date of dissolution and distribution of the shares among the partners.

It was submitted by the learned counsel that the remaining partners constituted a new partnership firm and that the escalation of the value of the partnership asset or the loss due to reduction of its value, as the case may be, would be to the firm's account.

This submission of the defendants flies in the face of the above mentioned principle.

With the dissolution of the partnership firm, all its assets have to be necessarily liquidated unless any one or more partners of the dissolved firm come forward to pay the market value of the share of the remaining partner/partners in lieu of liquidation with the consent of such remaining partner/partners.

The reconstituted firm has no right whatsoever to utilize the assets of the dissolved firm unless all the partners of the dissolved firm reach an agreement to settle the accounts and pay the outgoing partner/partners his/their share(s) in the value of the assets.

If such an agreement is not reached, there is no option other than liquidation of the assets and distribution of the value realized therefrom such liquidation in proportion to their shares among all partners.

Case law cited by the learned counsel for the defendants : None of the Judgments cited by the learned counsel directly dealt with the nature of the case on hand.

In Addanki Narayanappa (1-supra), the question considered by the Supreme Court was whether the document evincing relinquishment of the interests of a partner in the partnership assets comprising movable or immovable properties, on dissolution of the partnership, is registerable for the purposes of Section 17(1) of the Registration Act, 1908.

In this context, while dealing with the provisions of Section 48 of the Partnership Act, as noted above, the Supreme Court held that what a partner, on dissolution of the partnership, is entitled to, is, his share of profits, if any, accruing to the partnership firm and upon dissolution of the partnership his share in the money representing the value of the property.

The learned counsel for the defendants placed heavy reliance on the following observations of the Supreme Court in the said Judgment: ".....As already stated his right during the subsistence of the partnership is to get his share of profits from time to time as may be agreed upon among the partners and after the dissolution of the partnership or with his retirement from partnership of the value of his share in the net partnership assets as on the date of dissolution or retirement after a deduction of liabilities and prior charges..." (Emphasis added) The learned counsel emphasized on the words "as on the date of dissolution" in the above reproduced portion of the Judgment.

As noticed earlier, the question before the Supreme Court was not as to what is the date on which the assets of the dissolved firm should be valued.

The question was whether the interest of a partner in the partnership assets should be treated as immovable property for the purposes of Section 17(1) of the Registration Act, 1908.

The Judgment of the Supreme Court, has to be understood in harmony with the provisions of Section 48 of the Partnership Act and the law declared in the various English authorities qua Section 44 of the English Partnership Act, upon which the principles referred to supra were deduced by Lindley and Banks.

So understood, the above mentioned words "as on the date of dissolution" do not constitute a ratio for the proposition that the right of an outgoing partner is frozen as on the date of dissolution for the purpose of valuation of the assets of the partnership firm.

The learned counsel for the defendants also placed heavy reliance on the Judgment of a learned single Judge of Madras High Court in N.

Muhammad Ussain Sahib (4-supra).

The question which arose therein was while assessing the market value of the assets of the partnership on dissolution, whether the book value should be adopted or the market value as on the date of dissolution should be adopted.

While rejecting the plea that the book value should be adopted, the learned single Judge has brought out a distinction between "book value" and "market value".

The learned Judge held that during the subsistence of partnership, the annual settlement of accounts is only for the definite purpose of assessing the profits at the end of the year; that it does not make any difference to the partners even if the notional value is taken as the value of the assets; that but the situation is totally different when the firm is dissolved or when a partner retires and that the settlement of accounts must be not on a notional basis but on a real basis.

It was further observed that every asset of the partnership should be converted into money and the account of each partner settled on that basis and that no partner is entitled to take advantage of the appreciation of the value of the assets to the detriment of the other partners.

These observations strongly fortify the plea of the plaintiff that freezing the value of the partnership asset as on the date of dissolution of to the partnership, will confer undue advantage of appreciation in the value of the asset, on the defendants.

This Judgment far from supporting the case of the defendants, helps the cause of the plaintiff.

In Tilokram Ghosh and others Vs.

Smt.

Gita Rani Sadhukhan and others9, one of the questions was what were the rights of the representatives of one of the deceased partners in the partnership firm under Section 37 of the Partnership Act.

The Division Bench of Calcutta High Court held that the representatives of the deceased partner are entitled to the share of profit which was earned by the firm subsequent to the death of the partner in respect of his share which continued to remain in the firm.

It also held that as a suit for dissolution of the partnership and accounts cannot be treated as a suit for land even if its assets consist of immovable properties and that therefore a suit for dissolution and accounts is maintainable in a Court though that Court has no territorial jurisdiction over the assets of the firm which are immovable properties.

In my opinion, this Judgment does not in any manner support the case of the defendants.

What is the effect of the orders in I.A.No.892/2005, C.R.P.No.4063/2006 and the common Judgment in C.M.A.No.1485/2004 & C.R.P.No.3825/2006: While narrating the background facts, it was noted that the lower Court has allowed I.A.No.1404/2002 filed by the defendants for reviewing the order dated 25-11-2002 in I.A.No.1247/2001 whereby the Commissioner was directed to take possession of the assets of the dissolved firm.

In the said order, the lower Court has accepted the plea of the defendants that as per the preliminary decree as modified in C.C.C.A.No.52/1999, the plaintiff is entitled to his share in the profits of the business till 18-10-1983 and that the question of selling the property arises only when the other partners fail to pay the amount ascertained as payable to the plaintiff on rendition of accounts.

This order was reversed by this Court in C.M.A.1485/2004.

In paragraph-30 of the Judgment, which was reproduced hereinbefore, the Commissioner was directed to get the value of the property assessed and on such assessment, if the other partners come forward to pay 25% of the value of the property after deducting the liabilities, if any, the property can be left to the partners after satisfying the share of the plaintiff.

Conversely, the property has to be sold to realize the amount for the purpose of distribution of the respective shares of the partners.

An option was also left with the partners to allow the plaintiff to take 25% of the land towards his share instead of selling the same for the purpose of distribution of the sale proceeds among the partners.

By setting aside the review order of the lower Court dated 26- 4-2004, this Court has, unequivocally rejected the stand of the defendants that there was no need for the Advocate-Commissioner to take possession of the property for its sale.

Even though this Court has not rendered a finding in express terms on the date on which the value of the property should be determined, a reading of paragraph-30 of the order in its entirety would leave no room for any doubt that what this Court has meant is that the property should be valued by the Commissioner as on the date when he assesses its value; that if the other partners come forward to pay the value of the plaintiff's share, the same shall be paid to him by taking over the asset by the remaining partners.

A further option was also given to the partners subject to their understanding that 25% of the land may be given to the plaintiff instead of liquidating the property.

The order of this Court in C.M.A.No.1485/2004 is in consonance with the settled legal position as discussed above.

Indeed, in I.A.No.892/2005 filed by defendant Nos.4 and 5, the lower Court in its order dated 25-7-2006 held in no uncertain terms that the preliminary decree has not limited the right of the plaintiff to receive the value of his share as on 18-10-1983 in the asset of the dissolved firm and that his right will exist till passing of the final decree.

This order was questioned in C.R.P.No.4063/2006.

This Court has dismissed the said C.R.P.

by order dated 13-10-2006.

The S.L.P.

filed against the said order was also dismissed by the Supreme Court by its order dated 5-1-2007.

The order under the present revision petition is thus in the teeth of the above mentioned orders.

Conclusion: In the result, the order under revision is set-aside.

I.A.No.541/2001 is allowed.

Unless the parties mutually agree to settle their shares and file a joint Memo before the lower Court within two months from today, the Advocate-Commissioner shall sell the asset of the dissolved firm viz., the extent of Ac.3-27 guntas, through public auction and deposit the sale proceeds before the lower Court, within a period of four months from today.

The final decree shall be passed by the lower Court within a period of six months from today for payment of 25% of the sale proceeds to the petitioner after discharging the liabilities of the dissolved firm, if any.

Subject to the above directions, the Civil Revision Petition is allowed.

As a sequel, C.R.P.M.P.No.7964/2011 is disposed of as infructuous.

________________________ Justice C.V.

Nagarjuna Reddy Date :

9. 4-2012


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