Satish Chandra, J.
1. The Board of Revenue has referred the following two questions for decision bythis Court;
'1. Whether the document is a dissolution of partnership-cum-three mortgages-cum-three releases as contended bythe executants.
2. Whether the document amounts to a dissolution of partnership-cum-three mortgages-cum-three conveyances for Rs. 48,000.00, Rs. 45,000.00 and Rupees 13,000,00 respectively chargeable with the aggregate duties of three conveyances under Article 23 of Schedule 1-B the U.P. Stamp Amendment Act 1958 read with Section 6 thereof.'
2. The document in question is dated 15th September 1960. It states that the four executants carried on business in partnership. The partnership has been dissolved with effect from 15th September 1960. The third party (Narendra Bahadur Singh) was given all the stocks, assets, and liabilities, including, all debts as per books of accounts of the firm. He was entitled to carry on the business under the old name and style. The other three partners were not entitled to or liable for the profits or loss of the business or for the liabilities that may be incurred by the third party (Narendra Bahadur Singh) hereinafter. In lieu of their capital, advances, profits and loss and interest, if any, accrued upto the 15th of September. 1960, the 1st party, the 2nd party and the 4th party had agreed to receive and 3rd party had agreed to pay, the amount mentioned hereunder respectively against their names, in full satisfaction of their respective shares, interest, profits and claim whatsoever in the said firm. The 1st party (Purshottam Das Lallu Bhai) was to receive Rs. 48,000,00, the 2nd party (Smt. Deliben) Rs. 45,000.00 and the 4th party (Smt. Kikiben) Rupees 13,000.00 from the third party. In order to secure payment of these sums, the third party had hypothecated and charged certain properties.
3. It has not been disputed before us that the clause hypothecating and charging the properties to secure payment of the amounts to the other three parties, constitutes the document a deed of three mortgages chargeable to duty as such.
4. The Board of Revenue was of the opinion that the document is not only an instrument of dissolution of partnership but also of conveyance. The Board felt that the 1st, 2nd and the 4th party transferred their shares in the firm to the 3rd party, against cash payment, equivalent to the value of their share. The transaction was, therefore, conveyance within meaning of Section 2(1) of the U.P. Stamp Act. The Board holds that the document in question is an instrument of dissolution of partnership. In this context, its view that the three partners had transferred their shares in the firm to the fourth, could not mean that this transfer had taken place in a subsisting partnership.
5. It is noticeable that the Board does not hold that the three partners transferred their share or interest in the properties of the firm to Narendra Bahadur Singh. It is hence unnecessary to discuss in detail if partners are co-owners. Suffice it to say that the Supreme Court has settled the law that, during the subsistence of a partnership, the firm properties vest in all the partners collectively, but no partner can deal with specific properties as if they were his own, nor does he possess any assignable interest in any such property (See Narayanappa v. Bhaskara Krishnappa : 3SCR400 So, it is obvious that there can be no transfer or sale of the three partners* interest in the properties of the firm to the 4th partner.
6. The position of partners on dissolution of a firm may be examined. Under Section 46, Indian Partnership Act, 1932, on the dissolution of the firm, every partner is entitled, as against all the other partners, to have the property of the firm applied in payment of the debts and liabilities of the firm, and to have the surplus distributed amongst the partners according to their rights.
7. Section 48, Indian Partnership Act, provides the mode of settlement of accounts between the partners. It prescribes the sequence, in which the various outgoings are to be applied, and then the residue alone is to be divided between the partners. Under it, first the liabilities due to outsiders are to be paid out, then the advances made by the partners have to be paid, next the capital advanced by each partner is paid back to him. Thereafter, under Clause (iv) of Sub-section (b) of Section 48, the residue is divided between the partners in accordance with their shares.
8. In : 3SCR400 , the Supreme Court held that, on dissolution of the partnership, the right of a partner is to get the value of his share in the net assets of the partnership as on the date of dissolution, but after a deduction of liabilities and prior charges.
9. Dealing with the settlement of accounts of a partnership firm on its dissolution, the Supreme Court in Commr. of Income-tax, Madhya Pradesh, Nagpur and Bhandara v. Dewas Cine Corporation, : 68ITR240(SC) held:--
'The distribution of surplus is for the purpose of adjustment of the rights of the partners in the assets of the partnership it does not amount to transfer of assets.'
In that case, the two partners had brought a theatre each into the partnership. On dissolution of the partnership, it was agreed that each theatre be returned to its original owner in satisfaction partially or wholly of his claim to a share in the residue of the assets after discharging the debts and other obligations. The Supreme Court held, 'But thereby the theatres were not in law sold by the partnership to the individual partners in consideration of their respective share in the residue ............ 'Sale' according to its ordinary meaning is a transfer of property for a price. 'The Solicitor General appearing for the Revenue submitted that each partner is entitled to have the assets of the partnership sold for discharging the debts and obligations of the partnership, and for the purpose of dividing the residue among the partners if property is allotted to the partners in satisfaction of their claims, the transaction must be deemed in law to take the form of a notional sale of the property to the partner in consideration of the money value of his share.' The Supreme Court, repelled the submission. It held that.
'............A partner may, it is true, in an action for dissolution insist that the assets of the partnership be realised by sale, but where in satisfaction of the claim of the partner to his share in the value of the residue, determined on the footing of an actual or notional sale, property is allotted, the property as allotted to him cannot be deemed in law to be sold to him.'
This view was reaffirmed in the Commissioner of Income-tax, U.P. v. Bankey Lal AIR 1971 SC 149.
10. In the instant case, instead of properties, cash amounts were paid to three partners by the 4th partner. By this, their claim to capital investment, profit, as well as to a share in the residue was satisfied. This was adjustment of rights and liabilities. It was not transfer of share in the firm for a price. The deed cannot be deemed an instrument of conveyance.
11. The first question was framed on the basis that the document was an instrument of release, in addition to being a deed of dissolution. It is true that one partner can release or relinquish his share in the firm. A partner can, however, release or relinquish his share in a firm, only so long as the firm is alive. On dissolution, the partnership becomes a deadened entity. Whatever a partner obtains in liquidation proceedings, is paid to him in satisfaction of the firm's liability to repay the advances made by him, the capital advanced by him and his share in the residue of the firm's assets. A partner does not give up any right for these repayments. His pre-existing rights are satisfied. On liquidation being completed, the firm is extinguished. The shares of the partners vanish. There are no co-owners. Nothing can be released or relinquished by one in favour of other co-owners.
12. My answer to the Questions referred to this court are:--
1. The document is not a deed of release. It is a deed of dissolution cum-three mortgages.
2. The document is not an instrument of conveyance and is not chargeable to additional duty as such.
13. This is a reference under Section 57 of the Indian Stamp Act. The Chief Controlling Revenue Authority has stated a case and has referred the following two questions for decision to this Court:--
(1) Whether the document is a Dissolution of partnership-cum-three Mortgages-cum-three Releases as contended by the executants ?
(2) Whether the document amounts to a Dissolution of partnership-cum-three Mortgages-cum-three conveyances for Rs. 48,000/-, Rs. 45,000/- and Rs. 13,000/-respectively chargeable with the aggregate duties of three conveyances under Article 23 of Schedule I-B of the U.P. Stamp Amendment Act, 1958 read with Section 6 Ibid?
14. The material facts are given below.
Four persons namely Parshottam Das Lallu Bhai, Smt. Daliben, Narendra Bahadur Singh and Smt. Kikiben used to carry on a partnership business at Varanasi under the name and style of 'Sri Ambika Saree House.' The partnership business was parried on for a period of a little over three years, The partnership was terminated and a document was executed on 15th September, 1960 which, according to the executants, is a composite deed of dissolution of partnership and three mortgages. The document, according to the Revenue Authorities, is deficiently stamped by Rs. 1575/-. The executants have paid a stamp duty of Rs. 1605/-, In the statement of the case, it has been observed that the intention of the parties is clear, that the first, second and fourth parties assigned their shares in the firm to the third party against cash payment equivalent to the value of their snares. The document, therefore, answers the definition of 'Conveyance' in Section 2(10) of the Stamp Act, and would require the duty on three conveyances under Article 23 read with Section 6 of the Stamp Act for the amounts of Rupees 48,000/-, 45,000/- and 13,000/-. In order to decide the questions referred, it will be necessary to examine the document in question in some detail.
15. The document states that the four executants under a deed of partnership dated 6th March 1957 carried on business in Banarsi goods under the name and style of 'Sri Ambika Saree House' and that they have agreed to dissolve the firm with effect from 15th September 1960. The terms and conditions upon which the parties agreed to dissolve the firm are set out in Clauses (1, 2, 3). The first clause states, that the partnership firm working under the name and style of Sri Ambika Saree House stands dissolved. In the second clause, it is stated that the third party Narendra Bahadur Singh has taken over all the stocks, assets and liabilities including all debts as per books of accounts maintained in the firm and he will be entitled to carry on the business under the old name and style, but the other parties shall not be in any way entitled to or liable for the profit or loss of the business or for the liabilities incurred by the said third party in the business hereinafter carried on. The third clause provided that in lieu of their capital, advances, profits and loss and interest, if any, accrued upto 15th September 1960, the first, second and fourth parties had agreed to receive and the third party had agreed to pay the amounts noted respectively against the names of the said parties in full satisfaction of their respective shares, interest, profits and claim whatsoever in the said firm. The first party was to receive Rs. 48,000/-, the second party Rs. 4,5000/-and the fourth party Rs. 13,000/- from the third party. The amount payable to each of such party was to be paid by instalments as mentioned in the document. In Clause 10 it was provided that in order to secure the payment of the total sum of Rs. 1,06,000/-, the third party had agreed to hypothecate and charge the properties mentioned therein. It is not necessary to refer to the other clauses of the document. The controversy really relates to the contents of Clauses 2 and 3 of the document referred to above.
16. In order to appreciate the correct legal position, it would be necessary to refer to certain provisions of the Indian Partnership Act. Section 40 of that Act provides that:--
'A firm may be dissolved with the consent of all the partners or in accordance with a contract between the partners.'
17. Sections 41, 42, 43 and 44 also provide for dissolution of firms in other different ways. Section 45 provides that :--
'Notwithstanding the dissolution of a firm, the partners continue to be liable as such to third parties for any act done by any of them which would have been an act of the firm if done before the dissolution, until public notice is given of the dissolution.'
Section 46 reads:--
'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 47 provides that:--
'After the dissolution of a firm the authority of each partner to bind the firm, and the other mutual rights and obligations of the partners, continue notwithstanding the dissolution, so far as may be necessary to wind up the affairs of the firm and to complete transactions begun but unfinished at the time of the dissolution, but not otherwise:'
Section 48 provides for the mode of settlement of accounts between the partners. Clauses (a) and (b) of that section provide subject to agreement by the partners, that:--
(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 paving to each partner ra-teably what is due to him from the firm for advances as distinguished from capital;
(iii) in paying to each partner, ra-teably 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.'
18. From the provisions of the Partnership Act noted above, it will be clear that a mere dissolution of a firm does not bring about a complete extinction of the firm itself. The firm, even though for the limited purposes mentioned in the relevant sections, continues to exist until its affairs are finally and completely wound up. It is only after the dissolution of the firm that its affairs can be wound up at the instance of any of the partners. Till the debts and liabilities of the firm have been fully paid off no partner can claim any particular property as his own nor can he claim that he has any specific share or interest in any property of the firm. It is only when after payment of all the debts and liabilities of the firm there is a surplus left that a partner can have the surplus distributed according to his rights. The accounts of the firm as between the partners have to be settled, subject to agreement by them, in accordance with the rules stated in Section 48. The partners of a firm presumably are not co-owners of 'the property of the firm' or its assets. This to my mind is adumbrated by the decision in : 3SCR400 . In that case the following observation of Cornelious, J. in Ajudhia Pershad Ram Pershad v. Sham Sunder, AIR 1947 Lah 13 (FB) was expressly approved in paragraph 6 of the judgment:--
'............It is obvious that the Act (Partnership Act) contemplates complete liquidation of the assets of the partnership as a preliminary to the settlement of accounts between 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 realised and converted into money and all the partnership debts and liabilities have been paid and discharged.'
19. This point, however, does not arise in this case and need not be pursued further. It will be sufficient to mention here that the decision of the Supreme Court in Addanki's case : 3SCR400 (Supra) and in : 68ITR240(SC) negates the contention that the instrument in the instant case is one of conveyances.
20. An instrument of dissolution of partnership is liable to be stamped under Article 46 of Schedule I of the Stamp Act, the maximum duty in Uttar Pradesh being Rs. 100/-, This amount admittedly has been paid on the document. The word 'instrument' is defined in Section 2(14) of the Act thus:--'Instrument' includes every document by which any right or liability is or purports to be created, transferred, limited, extended, extinguished or recorded.'
21. As so defined, the word 'instrument' is a word of wide import.
'Instrument of Partition' as defined in Section 2(15) means 'any instrument whereby co-owners of any property divide or agree to divide such property in severally.'
The Act, however, does not define the expression 'instrument of Dissolution of Partnership.' Therefore, in considering the true nature and legal incidents of 'instrument of Dissolution of Partnership' the provisions of the Stamp Act can be of no assistance. In the absence of any special definition the expression 'instrument of Dissolution of Partnership' in Article 46 of Schedule I of the Stamp Act has to be understood in the light of the material provisions of the Partnership Act which relate to dissolution and the legal incidents or consequences which inevitably attach to the dissolution of a firm. The provisions of the Partnership Act already referred to above clearly indicate that dissolution of a firm is in reality the inception or the starting point of the process by which the legal existence of the 'firm' as defined in the Act has to come to an end.
Under Section 39 of the said Act, the dissolution of partnership between all the partners of a firm is called the dissolution of the firm. From Sections 40, 41, 42 and 43 of that Act, it will be clear that dissolution does not require any particular procedure and a dissolution of a firm may be brought about even involuntarily as a result of the expiry of the term of partnership or by the death of a partner or on the adjudication of a partner as an insolvent. In a case 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. Thus, it will be clear that under the Partnership Act, no formal document of dissolution of partnership is necessary nor are the rights or liabilities of the partners determined by the mere dissolution of the firm.
22. Section 3 of the Stamp Act provides that every instrument mentioned in Schedule I shall be chargeable with duty of the amount indicated in that Schedule as the proper duty therefor. In Article 46 of Schedule I, the instrument mentioned is 'Instrument of dissolution of partnership.' It has already been mentioned that the Act does not define the expression 'Instrument of dissolution of partnership' although the word 'Instrument' is defined. Therefore, in Article 46, 'Instrument of dissolution of partnership' has to be read in conjunction with the definition of the word 'Instrument'. Unless an 'Instrument of Dissolution of Partnership' so understood comes within the mischief of any specific provision of the Act or of any particular Article the 'Instrument of Dissolution of Partnership' can be charged only with stamp duty as provided in Article 46.
23. According to the Revenue Authorities, clauses 2 and 3 of the Instrument of Dissolution of Partnership in the instant case bring the case within the definition of the word 'Conveyance' as defined in Section 2(10) of the Act. The definition is as follows:--
'Conveyance' includes a conveyance on sale and every instrument by which property, whether movable or immovable, is transferred inter vivos and which is not otherwise specifically provided for by Schedule 1,'
24. If an 'Instrument of Dissolution of Partnership' is a document by which any right or liability can be created, transferred, limited, extended, extinguished or recorded by virtue of the definition of the word 'Instrument' in Section 2(14) of the Act., it is clear that such an Instrument will be an Instrument specifically provided for in Article 46 of Schedule I, and, therefore, such an Instrument will not fall within the definition of the word 'Conveyance' in Section 2(10) of the Act. The instrument dated 15th September 1960 states that the firm which the parties had constituted by the deed of partnership dated 6th March 1957 stands dissolved. Then the Instrument purports to record the arrangements arrived at by them inter se in regard to the mode of settling accounts between them and the manner of the actual winding up of the firm of which the executants were partners. Instead of adopting the mode of settlement of accounts between, them as provided in Section 48, they did so in a different manner as recorded in the document of 15th September 1960. The rules in regard to settlement of the accounts of a firm after dissolution stated in Section 48 of the Partnership Act are, as provided therein, subject to the agreement by the parties. Thus, it is clear that by mutual agreement between them, the partners can and are legally entitled to settle accounts between them of a dissolved firm in any other manner subject, however, to the statutory liabilities under the Act. The document read as a whole indicates that irrespective of their capital contributions or advances made by them and irrespective also of the profits and losses, the first, second and fourth parties agreed to receive from the third party the specified amounts from the third party who alone appeared to have been eager to carry on the business as his individual business. The document does not show whether and, if so, to what extent the amounts which the first, second and the fourth party respectively agreed to accept would be covered by or payable out of the assets of the firm. The document also does not show whether in fact after the payment of all debts and liabilities of the firm any divisible surplus would have been left and, if so, how much. In the circumstances, the document in question can reasonably be construed only as recording a special mode of adjustment and settlement of accounts between the partners in accordance with their mutual agreement' instead of following the rules mentioned in Section 48 of the Partnership Act. The mutual rights and liabilities which came into existence as a result of the agreement at which the parties arrived, could be recorded in the deed of dissolution of partnership, and the deed actually executed by them, which is the subject-matter of controversy, is covered by Article 46 of Schedule I of the Act.
25. In view of what has been stated above, it is not really necessary to refer to the cases which were cited by the learned counsel for the parties at the hearing. Necessarily almost in every case whenever a question arises as to whether a document is an instrument of dissolution of partnership chargeable with stamp duty under Article 46 of Schedule I or is an instrument chargeable as a deed of conveyance or is an instrument of some other kind or is a composite document, the deciding factor will be the transaction or transactions recorded in or evidenced by the document and the real intention of the parties to be gathered therefrom. This will depend in each case on the construction of the particular document. Even so a few of the cases cited at the Bar may be noted.
26. In re the Incorporation of Swadeshi Cotton Mills Company, Ltd. : AIR1932All291 a Special Bench held that if after entering into a contract to sell, the parties refrain from getting an actual deed of conveyance prepared, they can be made liable to pay stamp duty on the document embodying the agreement as a deed of agreement only and not as a deed of conveyance. By the instrument of agreement in question, the vendors had agreed to sell all their business undertakings and assets including good will, free hold hereditaments, plants, etc. for an agreed amount. Subsequently the vendors executed a document in respect of immovable property but no subsequent deed of transfer was executed as regards goodwill or the move-able property. The question was whether the agreement to sell was liable to be charged only as an instrument of agreement or as a conveyance. It was decided that it was not liable to be stamped as a conveyance. Sheo Kedar Singh v. Mukund Lal Durga Prasad, (1964 All LJ 783) which was cited by the learned counsel for the applicants does not appear to be relevant. The learned counsel during his arguments at one stage submitted that the document might be liable to be charged with stamp duty payable on a deed of Release but not on an Instrument of Conveyance. In support of this argument reliance was placed on Chief Controlling Revenue Authority, Board of Revenue, Madras v. Lakshmanan Chettiar, : AIR1970Mad348 . The document with which we are concerned however, cannot be treated as a deed of Release; therefore, it is not necessary to consider the aforesaid authority. For the same reason it is also not necessary to consider the case reported in Board of Revenue v. V.M. Murugesa Mudaliar : AIR1955Mad641 .
27. The learned counsel for the State relied on the decision of the Bombay High Court in the matter of Hira Lal Navalram, (1908) ILR 32 Bom 505. In that case the heirs of a deceased partner having a four-anna share in firm relinquished all his claims over the four annas share for Rs. 17,341/-in favour of one of the partners. The document in question was treated as a conveyance on sale of property, namely, the four annas share in the Pressing Factory which belonged to the Partnership. The facts and circumstances of that case were entirely different from the instant case. This case was distinguished in Marudakkal v. Arumugha Goundar (AIR 1958 Mad 255). It was pointed out that the Bombay case was one where there was a specific conveyance of the share of a partner to the other partners who continued the business. On facts, specially in view of the fact that the document dated 15-9-1960 in reality embodies an adjustment or settlement of accounts between the partners of the dissolved firm the Bombay case has no application.
28. In the result, my answer to question No. 2 is in the negative. In so far as question No. 1 is concerned my answer is that the document in question is an Instrument of Dissolution! of Partnership-cum-three Mortgages which are separately chargeable with stamp duty under Articles 46 and 40 respectively.
29. The applicant would be entitled to his cost which is assessed at Rs. 100/-. A copy of this judgment shall be sent to the Revenue authority as required under Section 59(2) of the Stamp Act.
C.S.P. Singh, J.
30. I agree.
BY THE COURT
31. Our answer to question No. 2 is in the negative. In so far as question No. 1 is concerned our answer is that the document in question is an instrument of dissolution of Partnership-cum-three mortgages which are separately chargeable, with stamp duty under Articles 46 and 40 respectively.
32. The applicant will be entitled to his cost, which is assessed at Rs. 100/-. A copy of the judgment shall be sent to the Board of Revenue under the seal of the Court and the signature of the Registrar.