Jagannatha Shetty, J.
1. The Income-tax Appellate Tribunal, Bangalore Bench, has referred the following two questions under s. 256(1) of the I.T. Act, 1961 :
'(i) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the land at Nos. 102, 103, Commercial Street, Bangalore and Nos. 21-22, Dispensary, Road, Bangalore, together with the newly constructed property were the assets of the firm with the result that its income or loss has to be considered in the hands of the firm
(ii) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the properties mentioned above could not be converted into partners' personal property except by means of an instrument in writing in accordance with the requirements of the Transfer of Property Act and the Registration Act ?'
2. The facts behind these legal formulation are :
The assessee is a firm of four partners. The property bearing Municipal Nos. 102 and 103 (74 and 75) at Commercial Street, Bangalore, was the asset of the firm. Later on, the property bearing Nos. 21-22, Dispensary Road, was purchased from out of the funds of the firm and both the said properties were used by the firm till June 30, 1970. Thereafter, upon demolition of the old structure, a new building was contracted. The cost of construction was met partly from the funds of the firm and partly from a loan obtained form the Central Bank of India. That loan was repaid by the firm after the construction was completed.
On June 30, 1970, the partners entered into an agreement, inter alia, providing thus :
'Wherein the parties herein also bought the property at Nos. 21 & 22, Dispensary Road, Bangalore-1, for the purpose of the said firm out of the funds of the said firm and were treating the same as the said firm's property :
'Whereas the said firm demolished both the said two properties for the purpose of constructing a modern show room;
Whereas after the demolition, the parties herein decided to take the aforesaid two properties as individual properties, each party holding 1/4th share therein along with other parties as co-owners;
Whereas the said properties have been allotted to parties herein as above earlier today and thereupon the said property ceased to be the firm's properties.'
3. For the assessment years concerned in these cases, it was contended on behalf of the firm that the above-said properties should be considered as separate properties of the individual partners and not as the assets of the firm. That plea was rested on the relevant entries made in the account books of the firm. But, the ITO did not accept that plea in the absence of a registered deed of conveyance. The assessee appealed to the AAC who allowed the claim of the assessee. He held that no deed conveying the properties to the individual partners was required to be executed and the book entries evidencing that the properties should be treated as separate properties of the individual partners would be sufficient. He, however, held that the firm was liable to capital gains tax. He, accordingly, set aside the assessment with a direction to the ITO to make a fresh assessment.
4. The Department appealed to the Tribunal challenging the validity of the order of the AAC. The Tribunal allowed the appeal by following the judgment of the Allahabad high Court in Ram Neuron and Brothers v. CIT : 73ITR423(All) . The Tribunal held that a transfer of the firm's property during the continuance of the partnership cannot be the subject matter of a mutual agreement between the partners followed by making mere book entries, and it must be evidenced by a deed of conveyance executed and registered in accordance with law. The Tribunal, however, has referred the above-stated questions for the opinion of this court.
5. We will take up the second question first for consideration and, if that is answered against the assessee, the first question presents no problem and automatically finds its own answer.
6. It will be seen form the above narration that the partners admitted that the properties were initially held as the assets of the firm for all practical purposes. The depreciation in respect of the properties was claimed by the firm and allowed by the ITO. It was only after the demolition and reconstruction of the buildings, the partners claimed that the properties were held as separate properties of the partners. The support for this contention was drawn from the written agreement dated June 30, 1970, and the entries in the books of the firm. The question is whether this material is sufficient to vest the properties in the individual partners as their separate properties. Section 14 of the Indian Partnership Act provides as to how a firm could become the owner of a property. 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 in the course of the business of the firm. It includes also the goodwill of the business.
7. The question herein is whether the partners, by making mere book entry or by agreement as between them, could claim the assets of the firm as their separate properties during the continuance of the firm. We do not think so. Book entries do not change title to properties unless the properties are given by the partners as their contribution to the capital of the firm. Any other conveyance known to law must be by instrument properly executed and registered, if the value thereof is over Rs. 100.
8. The earliest decision on this question is of the Allahabad high Court in Ram Narain's case : 73ITR423(All) . By following the principles under the English partnership Act, it was observed therein that mere book entries do not have the effect of converting the property of the firm into the personal property of the partners. This judgment was followed by the Madras High Court in CIT v. Dadha and Company : 142ITR792(Mad) . It was held therein that book entries are sufficient to constitute a transfer of common interest in the properties into the separate interest of the partners. In Abdul Kareemia and Bros. v. CIT : 145ITR442(AP) , the Andhra Pradesh High Court has also taken a similar view.
9. Having regard to the clear provisions of law governing the transfer of immovable properties, we do not think that any other view is possible. Mere entries in the account books of the partnership firm proprio vigore will not convert partnership property into individual property of the partners or of third parties. Nor the agreement dated June 30, 1970, entered in to by the partners treating the firm's property as individual property will have any such effect. Unless that agreement is followed by a deed of conveyance known to law, the partners cannot claim the firm's property as their separate and individual property so long as the firm continues.
10. In the result, we answer the second question in the affirmative and against the assessee. Consequently, the first question is also answered accordingly.