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Vishnu Industries Vs. Income-tax Officer - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Hyderabad
Decided On
Judge
Reported in(1984)7ITD676(Hyd.)
AppellantVishnu Industries
Respondentincome-tax Officer
Excerpt:
.....the former inference (continued ownership by former firm) is untenable in view of dissolution deed, transfer of possession and adjustment of consideration in dissolution accounts while the latter inference (reversion to partner shri chandra prakash agarwal) is consistent with the property belonging to the firm because it is open to a partner to convert his immovable property into partnership one on formation of partnership without registration. there is also no other person (other than the assessee) asserting right to this property. under the circumstances, we do not find any justification for holding that the assessee is not the owner of the property for the purposes of depreciation. however, the alternative contention of the learned departmental representative that the period of.....
Judgment:
1. This is an appeal filed by Vishnu Industries of Karimnagar, objecting to the order of the Commissioner (Appeals) for the assessment year 1981-82.

2. The assessee is a registered firm. It had claimed depreciation on a godown allegedly taken over by the assessee-firm for its business purposes at Rs. 80,000. The ITO found that this godown devolved on the assessee on dissolu Jon of Laxmi Trading Co., as is evident from its dissolution deed. Though the assessee claimed that the premises was used for the assessee's business as is evident from sales tax and foods grains licences, the ITO was of the view that the assessee was not entitled to depreciation as it was not the owner of the godown inasmuch as the transfer from Laxmi Trading Co. to the assessee-firm was not evidenced by a registered instrument of transfer. The assessee explained that the property belonged to and was in the name of Shri Chandra Prakash Agarwal who had pooled it as his capital in Laxmi Trading Co. which used it as partnership property. When Laxmi Trading Co. was dissolved and the assessee-firm was being formed, Shri Chandra Prakash Agarwal, who was also partner in the new firm, agreed to have the property used by the new firm for its business. The dissolution agreement, it was claimed only described distribution of the partnership assets in kind and that it became the assessee's property by agreement between the parties and that there was no transfer which required registration. It was contended that the assessee-firm was the owner of the property. The ITO did not agree with the contention. He also found that the property being a godown would have been entitled only to 5 per cent and not 10 per cent depreciation as claimed by the assessee, even if it were eligible for depreciation. The assessee took up the matter in appeal. It was argued before the first appellate authority that on dissolution of Laxmi Trading Co., the property reverted to its titular owner Shri Chandra Prakash Agarwal who had brought it as his share of capital to the assessee-firm as is evident from the narration of the release deed dated 30-12-1979 in pursuance of which the dissolution deed dated 1-7-1980 was written up. The first appellate authority did not accept that there was any 'transfer' in two stages, viz., firstly, Laxmi Trading Co., to Shri Chandra Prakash Agarwal and secondly, from Shri Chandra Prakash Agarwal to the assessee-firm. He was of the view that inasmuch as the dissolution deed categorically mentions sale of the property from Laxmi Trading Co. to the assessee-firm, it was a case where the transfer required a registered document as the property involved was immovable. It is for this reason that he confirmed the order of the ITO.3. The learned representative for the assessee repeated the stand before the authorities below. He claimed that the property stood in the name of partner who made it over to the firm by means of a release deed dated 30-12-1979. He cited the decisions in CIT v. Dewas Cine Corporation [1968] 68 ITR 240 (SC), CIT v. V.M. Thangavel Chettiar [1977] 107 ITR 556 (Mad.) and CIT v. Hind Construction Ltd. [1972] 83 ITR 211 (SC) for the proposition that no registration was required in respect of transfer of immovable property by firm to partners on dissolution or partners to firm on inception. As for the terms of dissolution deed of Laxmi Trading Co., he claimed that it was a matter between the partners of that firm and the effect of that deed was that it reverted to the partner, Shri Chandra Prakash Agarwal, who had already agreed to contribute it as his capital to the assessee-firm. He claimed that the firm was the 'owner' of the godown and that depreciation was admissible to it. The learned departmental representative, however, relied upon the orders of the authorities below. He laid great stress on the dissolution deed which clearly indicated that the transfer was from Laxmi Trading Co. to the assessee, a transaction between two firms. He claimed that the requirements of a registered document does not stand dispensed with under such circumstances merely because there was a common partner. He also alternatively claimed that the property, at best, was used for part of the year and that the rate of depreciation cannot be 10 per cent as claimed by the assessee.

4. We have carefully considered the records as well as the arguments.

The property stands in the name of partner, Shri Chandra Prakash Agarwal and it is firm's property as the consideration of Rs. 80,000 was paid by the assessee-firm and it appears as firm's property in its books. These facts are sufficient to establish the claim of the assessee that it is the owner of this asset for depreciation purposes.

The Allahabad High Court in Addl. CIT v. U.P. State Agro Industrial Corporation Ltd. [1981] 127 ITR 97 held that ownership to property should not be equated with title to property. Even possession coupled with payment of consideration, it was held, was sufficient to entitle the taxpayer to depreciation even without a formal registered deed though the property involved was an immovable one. This view has been characterised as a 'liberal' one not probably strictly warranted by law by the authors of Sampath Iyengar's Law of Income-tax Seventh edition, Vol. 2, page 1260. But this view has been followed by this Tribunal in a number of cases. But as regards claim of depreciation allowance by a firm on assets which became firm's property by partner bringing it to the firm, there can be no controversy. The Madras High Court in the case of CIT v. Smt. M. Rajeswari Vedachalam [1972] 86 ITR 753 found that the property standing in the name of one of the partners was eligible for depreciation as it was treated as partnership property and used for its purpose, notwithstanding the fact that the working partners had no right or claim against partnership assets on dissolution as per terms of the partnership deed. In the case of the assessee before us, there is not even any such restriction. In the case of CIT v. Amber Corporation [1974] 95 ITR 178 (Raj.), though the property (immovable) was to revert back to the partners who brought them only in the event of dissolution, the firm was held entitled to depreciation during the duration of partnership. The argument that there could not be a valid transfer to the firm in absence of registration was rejected by the High Court in the following words : ...Moreover, there is ample authority for the proposition that this sort of contribution or transfer is not required to be registered under the Indian Registration Act. Reference in this connection may be made to Firm Ram Sahay Mall Rameshwar Dayal v. Bishwanath Prasad AIR 1963 Pat. 221 and the other authorities cited therein. This authority has been referred to in Mulla's Commentary on the Indian Registration Act. This authority has also been approved again by another Division Bench of the Patna High Court in Sudhansu Kanta v. Manindra Nath AIR 1965 Pat. 144....(P. 182) This decision as regards requirement of registration was followed by the High Court again in CIT v. Amber Corporation [1981] 127 ITR 29 (Raj.) after referring to Section 14 of the Indian Partnership Act, 1932, which defines 'partnership property'. It was repeated that 'there was no provision under the Partnership Act or under the Indian Registration Act requiring such transfer to be registered'. The Bombay High Court (sic) while holding, in another context, that an individual who converted his individual asset to partnership one ceased to be the owner in his individual capacity so as to disentitle him from set off of unabsorbed depreciation against his share of profits adverted to the decision of the Supreme Court in Addanki Narayanappa v. Bhaskara Krishnappa AIR Answer to this question is concluded by a dicision of the Supreme Court in Narayanappa v. Bhaskara Krishnappa AIR 1966 SC 1300. In this case, the Supreme Court has, inter alia, taken the view that the provisions of Sections 14, 15, 29, 32, 37, 38 and 48 of the Partnership Act, 1932, make it clear that whatever may be the character of the property which is brought in by the partners when the partnership is formed or which may be acquired in the course of the business of the partnership it becomes the property of the firm and what a partner is entitled to is his share of profits, if any, accruing to the partnership from the realisation of this property and upon dissolution of the partnership to a share in the money representating the value of the property. 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 any one. His right is to obtain such profits, if any, as fall 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) and sub-clauses (i), (ii) and (iii) of Clause (b) of Section 48.

The whole concept of partnership is to embark upon a joint venture and for that purpose to bring in as capital money or even property including immovable property. Once that is done whatever is brought in would cease to be the exclusive property of the person who brought it in. It would be the trading asset of the partnership in which all the partners would have interest in proportion to their share in the joint venture of the business of partnership. The person who brought it in would, therefore, not be able to claim or exercise any exclusive right over any property which he has brought in, much less over any other partnership property. He would not be able to exercise his right even to the extent of his share in the business of the partnership....

No doubt, the Andhra Pradesh High Court in the case of CIT v. Smt. P.Janaki Bai [1973] 87 ITR 645 held that a partner was entitled to depreciation on building owned by the partner to be used by the firm against share income from the firm, but it was on the basis of the fact that the premises continued to belong to that partner who paid municipal taxes. Such municipal taxes and depreciation, it was found, was admissible as deduction. In the case of the assessee before us, the property is treated as firm's property at a value of Rs. 80,000. Under these circumstances, there appears to be no bar to the allowance of the claim for depreciation in the assessee's hands.

5. We have, however, to deal with some more specific objection on behalf of the revenue. It is pointed out that the release deed dated 30-12-1979 by which the conversion is sought to be achieved is not valid as the release could only be in favour of a co-owner. It is also claimed that this document insofar as it purports to transfer, title to the firm requires registration. We find that though the document is styled as release deed, it narrates that the properties in question were partnership property of Laxmi Trading Co. and that 'on dissolution and on taking accounts, the said properties described in the schedule hereto were allotted towards the share of releasor, who was one of the partners of the said dissolved partnership'. It proceeds further to say that the scheduled properties are 'released' in favour of the assessee-firm, Vishnu Industries. Hence, the 'release' meant is only conversion of individual property as partnership property on acquisition of the same on dissolution. It is, however, pointed out that the dissolution deed of Laxmi Industries dated 1-7-1980 described the devaluation of the property as under : 3. That the property of the firm including acres 2.15 guntas of land and all buildings in the said land situated at Alagnur Village, Karimnagar District, was sold and delivered possession to the firm if Vishnu Industries, Alagnur, Karimnagar District and the sale consideration was received in full.

It is stated on behalf of the revenue that this clause contemplates transfer of immovable property from Laxmi Trading Co. directly to the assessee-firm and that such transfer is certainly invalid without a registered instrument. But we find it difficult to read a dissolution deed as an instrument of transfer. The dissolution deed must be read as merely settling the terms of agreement between the partners. The property stood in the name of Shri Chandra Prakash Agarwal and was partnership property of erstwhile firm of Laxmi Trading Co. 'Release deed' dated 30-12-1979 which is anterior to dissolution deed says that the property was allotted to him and he brought it to the assessee-firm, Vishnu Industries. It is also common ground that Rs. 80,000 was placed as its value for purposes of dissolution. This was also taken over by Vishnu Industries at the same value. Hence, there is no conflict between the state of affairs as mentioned in the release deed and what has been mentioned in the dissolution deed. Since the two firms had Shri Chandra Prakash Agarwal as common partner with a common value of Rs. 80,000, both for purposes of dissolution and as well as for inception of the new firm, the arithmetical and accountancy effect of this apparently tripartite arrangement was the same whether on passing of two sets of entries in two stages (of allotment of property to Shri Chandra Prakash Agarwal by old firm and introduction of same to new firm) or a single one as transfer from old firm to new firm. Shri Chandra Prakash Agarwal's capital account will remain the same in either case. Even otherwise, a dissolution deed cannot be read as an instrument of transfer. The dissolution deed clearly shows that it was no longer owner of the property. If the revenue is right that the property coul d not belong to the assessee for absence of registration, then it either continues to belong to the erstwhile firm which has since been dissolved or it reverts to Shri Chandra Prakash Agarwal in whose name the property stands. The former inference (continued ownership by former firm) is untenable in view of dissolution deed, transfer of possession and adjustment of consideration in dissolution accounts while the latter inference (reversion to partner Shri Chandra Prakash Agarwal) is consistent with the property belonging to the firm because it is open to a partner to convert his immovable property into partnership one on formation of partnership without registration. There is also no other person (other than the assessee) asserting right to this property. Under the circumstances, we do not find any justification for holding that the assessee is not the owner of the property for the purposes of depreciation. However, the alternative contention of the learned departmental representative that the period of user and the rate of depreciation applicable to the property needs further vetting has to be conceded. Hence, the ITO is directed to allow depreciation in accordance with law after giving the assessee an opportunity.

6. The only other ground in this appeal relates to the claim of additional depreciation (Rs. 972) under Section 32(1)(iia) of the Income-tax Act, 1961, on new machinery cost of Rs. 19,435. Though the statement filed by the assessee included the claim, the ITO overlooked it. The first appellate authority, however, justified the assessment order on this point by saying that prescribed particulars were not furnished. It is not clear from his order as to what further particulars he required. We, therefore, remit this claim also back to the ITO for fresh consideration in accordance with law.

7. The appeal is treated as allowed in the manner indicated in the preceding paragraph.


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