1. This appeal by the revenue relates to the assessment year 1975-76, for which the previous year ended on 31-3-1975.
2. The assessee is a registered firm consisting of four partners, namely, S/Shri M. Haridas, M. Jayarajan, M. Suresh Babu and M.Leeladharan. The firm was constituted under a partnership deed dated 14-1-1970. The firm constructed a building in the properties belonging to the firm in M.P. Road, Calicut and was running a lodging house in the building under the name and style of Sreehari Lodge. On 8-4-1974, partner Shri Haridas sold his share in the assets of the firm to a firm in Bombay known as Y.M. Andru Haji & Co. for a consideration of Rs. 1,80,000. On 17-4-1974, the remaining three partners, namely, S/Shri Jayarajan, Suresh Babu and Leeladharan executed a release deed in favour of the Bombay firm conveying thereby their share in the assets of the assessee-firm for a consideration of Rs. 5,40,000. On 24-6-1974, the four partners executed a deed of dissolution of their partnership.
It was stated in this document that the assessee-firm had discontinued its business with effect from 12-4-1974 and that the firm shall be deemed to have been dissolved by mutual consent with effect from 12-4-1974.
3. Before the ITO, it was claimed by the assessee-firm that the transfers effected by the four partners to the Bombay firm were of their individual shares in their individual capacity, that this transfer was effected after the dissolution of the firm and that the capital gains and the profit under Section 41(2) of the Income-tax Act, 1961 ('the Act') arising from the transaction are not assessable in the hands of the firm. The claim was rejected by the ITO, who held that there could be no retrospective dissolution of a firm, that the dissolution of the firm was effective only from 24-6-1974 when the deed of dissolution was executed, that the transfer of the assets of the firm was, therefore, by the firm itself and that the capital gains and profits under Section 41(2) arising therefrom are taxable in the hands of the firm. Treating the costs of acquisition at Rs. 5,80,973, the written down value on 31-3-1974 at Rs. 4,70,436 and the sale price at Rs. 7,20,000, the capital gains and the profits under Section 41(2) were computed at Rs. 1,77,295.
4. The Commissioner (Appeals), however, accepted the contention of the assessee. He held that the transfer of a partner's interest is recognised by Section 29 of the Indian Partnership Act, 1932, that when one of the partners transfers his interest and subsequently the other partners release their interest to the purchaser, there is no transfer of the assets of the firm by the firm as such and that the transfer was only by the partners in their individual capacity. He, therefore, held that the capita! gains and the profit arising under Section 41(2) are assessable only in the individual assessments of the four partners.
Aggrieved by the same, the department has come up in appeal.
5. The only ground taken "by the department is that the Commissioner (Appeals) erred in holding that there was no sale of its assets by the assessee-firm, that the sale took place after the dissolution of the assessee-firm and, consequently, in deleting the capital gains and profit under Section 41(2) arising out of the sale.
6. The arguments advanced by the learned departmental representative were to the following effect: It is not possible to deem that the firm was dissolved on 12-4-1974. Such powers of deeming' are available only to the Legislature and not to individuals. As regards individuals, who effect things by contract, the dissolutisn can take place only when the deed of dissolution was executed. Even in the deed of dissolution, it is not stated that the firm was actually dissolved on 12-4-1974. If the firm had been actually dissolved earlier, it was not necessary for the dissolution deed to say that the firm should be deemed to have been dissolved earlier. The assessee-firm, which was running a lodge, would have had transactions with many parties and it would not have been possible to effect a dissolution from an earlier date. The partnership deed had not mentioned how the dissolution should be effected. The matter was, therefore, governed by Section 40 of the Indian Partnership Act and the dissolution could, therefore, have been effected only with the consent of all the partners or in accordance with a contract between the partners. The consent or contract should, therefore, precede the dissolution and there is no evidence of any earlier consent or contract, oral or written, in the present case. In support of the position that retrospectivity is available only to the Legislature and not to the parties, the learned departmental representative relied upon the ruling of the Supreme Court in Fazal Bhai Dhala v.Custodian-General AIR 1961 SC 1397. He also relied upon the commentaries at page 53 of Law and Practice of Income-tax by Kanga and Palkhivala, Vol. 1, 7th edition to the effect that if a partnership was in fact dissolved on. a particular date, it cannot be held to have been dissolved earlier even though the deed of dissolution might refer to an earlier date as the date of dissolution for the purposes of adjusting the rights of the partners inter se and that no deed can alter the past He also pointed out that under Section 176(3) of the Act, notice of the discontinuance of the business should have been given within 15 days from the discontinuance, that in the present case, the assessee only wrote a letter on 28-11-1975 forwarding the return and stating that the business was'discontinued on 12-4-1974. He also pointed out that, although this letter referred to an earlier letter dated 21-6-1974 by which notice of discontinuance was purported to have been given, no such letter was received by the department. He also pointed out that, in any case, even this letter did not refer to any earlier dissolution but only discontinuance of business. He further pointed out that even under the deed of dissolution, Shri Haridas, who executed the first conveyance, was entrusted with the winding up of the affairs of the firm and that Clauses 3, 4 and 8 of the dissolution deed indicated that substantial work had to be done to wind up the firm and that it is improbable that the firm would have discontinued the business from 12-4-1974. The learned departmental representative also contended that the Commissioner (Appeals) erred in holding that what was transferred was the individual right of the partners. He contended that a reading of the document will indicate that what was transferred was only the undivided interest of the partner in the firm. Finally, he also relied upon the ruling of the Madras High Court in the case of CIT v. Dadha & Co.  142 ITR 792 wherein it was held that the only way the co-owners of immovable property have of creating separate dimensions over as many separate interests as there are co-owners would be by way of a regular deed of partition or dissolution, that no partition or dissolution of immovable property costing more than Rs. 100 can be effected by making entries in the books of accounts and that till there is an effective partition or dissolution, the assets should be deemed to belong to the partnership for the purpose of computing the capital gains.
7. As against this, the arguments of the learned representative for the assessee were to the following effect : The accounts were actually closed and the business was actually discontinued from 3 2-4-1974. Form No. 7 had also been filed before the registrar of firms indicating dissolution with effect from 12-4-1974. As Shri Haridas transferred his interest to the Bombay firm with effect from 8-4-1974, the business could not have continued thereafter. The transfer by Shri Haridas was in his individual capacity and not by the firm. The implied authority conferred on the partners by Section 19 of the Indian Partnership Act by constituting him as an agent of the firm for the purpose of the business of the firm will not authorise him to transfer any immovable property. What was, therefore, transferred was only the individual rights of the partner and not of the firm. With regard to the ruling of the Madras High Court in Dadha & Co.'s case (supra), it is pointed out by the learned representative that the sale deed in that case was by all the partners and that the purchase price was credited in the accounts of the firm.
8. We have carefully considered the matter. It has been held by the Madras High Court in the case of Dadha & Co. (supra), relied upon by the learned departmental representative, that immovable properties which belonged to a firm will cease to belong to the firm only when the partnership is actually dissolved or when a partition deed or a mutual release is executed by the partners. Although, in that case, the sale deed was executed by all the partners, this was executed in their individual capacity. As there was no prior dissolution of the partnership or partition of the properties, it was held by the Madras High Court that the properties should be deemed to have belonged to the firm and that the capital gains arising from the sale of the properties should be assessed in the hands of the firm. In the light of the decision of the Supreme Court in the case of Addanki Narayanappa v.Bhaskara Krishnappa AIR 1966 SC 1300, it is clear that during the subsistence of the partnership 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. It is true that under Section 29 of the Indian Partnership Act, a partner can transfer his interest in the firm. But he cannot transfer his interest in any particular property of the firm. It is not, therefore, possible to accept the contention of the assessee-iirm that by the document executed on 8-4-1974, Shri Haridas had transferred only his interest in the immovable properties. But the position was altered when the remaining 'partners also executed a release deed in favour of the ,Bombay firm. The immovable properties belonging to the firm were scheduled to both the sale deed by Shri Haridas and also to the release deed by] the remaining partners. It is clear that when all the four partners transferred the assets belonging to the partnership, there will be an effective transfer of the assets. We are, therefore, of the view that, in the present case, there was an effective transfer of the properties to the Bombay firm only after the execution of the release deed by the remaining three partners on 17-4-1974.
8A. This takes us to the question whether the effective transfer was after the dissolution of the firm or before the same. If there had been no dissolution of the firm prior to the effective transfer, the transfer has to be treited as one by the firm. On the other hand, if there has been a dissolution of the firm and all the four partners had become co-owners of the property prior to the transfer, then alone it can be contended that the transfer was by the four partners in their individual capacity. It may be noted that the sale by Shri Haridas was on 8-4-1974 and the release deed by the three remaining partners on 17-4-1974. The case of the assessee now is that there was a dissolution of the firm in between these dates on 12-4-1974. The deed of dissolution was actually executed only much later on 24-6-1974. The following recitals in the deed are important : Whereas the business of the firm has been discontinued with effect from 12-4-1974; and Whereas it is considered necessary and expedient by the parties to dissolve the partnership and execute a dissolution deed embodying the terms and conditions of the dissolution of the partnership.
Now this deed WITNESSETH and the parties hereto mutually agree between each other as follows : 1. The said partnership shall be deemed to have been dissolved by mutual consent with effect from 12th April, 1974.
These recitals do not support the case of the assessee that there was a dissolution of the firm on 12-4-1974. What is stated is that the business has been discontinued with effect from 12-4-3974. The dissolution is effected only by the execution of the document. It is true that in the document they have stated that the dissolution shall be deemed to have been effective from 12-4-1974. In this context, the following passage in Kanga and Palkhivala's Law & Practice of Income-tax, Vol. 1, 7th edition is relevant : Partnership must be deemed to commence from the date when in fact it has commenced, even though a partnership deed may be executed later.
Where partnership has in fact commenced from the date of execution of the partnership deed, it cannot be deemed to have commenced earlier even if the deed provides for retrospective operation : no deed can alter the past Likewise, if a partnership was in fact dissolved on a particular date, it cannot be held to have been dissolved earlier even though the deed of dissolution might refer to an earlier date as the date of dissolution for the purposes of adjusting the rights of the partners inter se. A partnership may be assessed as such even after its dissolution, for instance, if it carries out after its dissolution contracts entered into before.(pp.
53-54) The decision of the Madras High Court in the case of K.P.V. Shaik Mohamed Rowther & Co. v. CIT  30 ITR 747 is also relevant in this context. In that case, one of the partners died on 28-3-1949, but the partnership was not dissolved because of the provision in the deed that it shall not be dissolved on the death of a partner. A deed of dissolution was executed on 22-7-1949, wherein it was provided that the partnership shall be deemed to have dissolved on 28-3-1949. It was held that the dissolution actually took place only when the dissolution deed was executed on 22-7-1949 and that the partnership cannot be deemed to have dissolved from any earlier date. Thus, in the present case even on the basis of the deed of dissolution, the assessee cannot succeed in its contention that there was a dissolution of the partnership on 12-4-1974.
9. There are also other evidence and circumstances in the case which would indicate that there was no dissolution on 12-4-1974. As pointed out by the ITO, there is nothing to show|that there was any mutual agreement or discussion by the partners about the dissolution of the partnership prior to the transfer of the assets. There is no mention about any dissolution of the partnership in the release deed dated 17-4-1974, which was executed after the alleged date of dissolution.
Even the sale deed by Shri Haridas dated 8-4-1974 was presented for registration only on 15-4-1974. The release deed was presented for registration still later on 18-4-1974. If the firm had been actually dissolved on 12-4-1974, the fact could have been mentioned in both the documents. On the other hand, the recitals in the document will show that what is being conveyed is the share or interest in a continuing business. The assessee has no case that the partners had fallen out at any time and that there was any difference of opinion between them. The deed of dissolution will show that the winding up of the affairs was entrusted to Shri Haridas, who first executed the sale deed. This will show that the parties, who are brothers, were on the best of relations.
Taking all these into consideration, we reject the claim of the assessee that the firm had been dissolved on 12-4-1974. The transfer has, therefore, to be treated as one by the firm. It would also appear that this is a case where the parties resorted to the execution of a sale deed by one partner and a release deed by the remaining partners to save the expenses on stamp duty and probably also on registration charges. The attempt to utilise the same to advance the contention that the sale was not by the firm but by the individual partners seems to be only an incidental one and we have no hesitation in rejecting the same.
The ITO was, therefore, perfectly justified in assessing the capital gains and the profits under Section 41(2) in the hands of the assessee-firm.