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D.R. Chawla Vs. Income-tax Officer - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Delhi
Decided On
Judge
Reported in(1984)8ITD689(Delhi)
AppellantD.R. Chawla
Respondentincome-tax Officer
Excerpt:
.....between firms and their members but that is only a matter of procedure. it is also true that the firm's property is recognised in more than one way (sections 14 and 15 of the partnership act) but only as that which is 'joint estate' of all the partners as distinguished from the 'separate estate' of any of them, and not as belonging to a body distinct in law from its members. in addanki narayanappa v. bhaskara krishnappa [1966] 3 scr 400 ; air 1966 sc 1300, this court, after quoting with approval the aforementioned passages occurring in lindley on partnership, 12th edn., made the following oberva-tions in the context of partners' rights during the subsistence as well as upon the dissolution of a firm (p. 1303) : 'no doubt since a firm has no legal existence, the partnership property.....
Judgment:
1. All the three appeals are by the assessees, who are resident-individuals and partners in the same firm, viz., Universal Book Stall and since on common facts, the speaking order of the learned first appellate authority has been made in the case of the assessee--Shri D.R. Chawla [IT Appeal No. 4659 (Delhi) of 1982]--and in other two cases the same having been followed, as of necessity and for the sake of convenience, these appeals were heard together and we were addressed in one set by both the parties, as such, are being disposed of, by this common order.

2. Shri D.R. Chawla, the assessee-appellant in IT Appeal No. 4659 (Delhi) of 1982 along with his two sons Shri A.K. Chawla, the assessee-appellant in IT Appeal No. 4642 (Delhi) of 1982 and Shri CM.Chawla, the assessee-appellant in JT Appeal No. 4643 (Delhi) of 1982, as co-owners owned immovable property known as 5-Ansari Road, Darya Ganj, New Delhi. The shares of the three owners were determinate and ascertained as 50 per cent, 25 per cent and 25 per cent, respectively.

As on 1-12-1977 the said property--5-Ansari Road, Darya Ganj, New Delhi, stood transferred as capital contribution by the three assessees in the same shares as they were owning the said property as co-owners and a partnership firm under the name and style of Universal Book Stall came into being vide deed of partnership executed by the above named three assessees on the same date, viz., 1-12-1977. The shares of the three assessees in the said firm, Universal Book Stall, was 50 per cent, 25 per cent and 25 per cent, respectively, i.e., the shares of the assessees as co-owners in the property as also in the partnership constituted, remained the same.

3. Since Shri D.R. Chawla had declared the value of his 50 per cent share in the above property for the valuation date 31-3-1975 at Rs. 1,16,000 for the purposes of assessment under the provisions of the Wealth-tax Act, 1957 ('the 1957 Act'), the ITO while framing the assessments of the assessees for the assessment year under appeal was of the opinion that the total valuation of the property as on 31-3-1975 being Rs. 2,32,000, there has been under-valuation of the same on the part of the assessees for the purposes of crediting the accounts of the assessees as partners in the firm to which the said property stood transferred by the three assessees as capital contribution and, accordingly, the ITO concluded that the provisions of Section 52(2) of the Income-tax Act, 1961 ('the Act'), was applicable. He, accordingly, sent the proposal to the learned IAC to revalue the share of Shri D.R.Chawla, the assessee, i.e., 50 per cent of the value of the property, at Rs. 1,90,000. The ITO adopted the cost of acquisition of the entire property as Rs. 1,74,860 to which it is claimed by the revenue that the assessee has not raised any objection. Capital gain in the hands of Shri D.R. Chawla was worked out at Rs. 1,02,570 while in the hands of other two assessees, the said capital gain worked out to Rs. 51,285 each. Assessments were framed accordingly and in appeals by the assessees, the learned Commissioner (Appeals) upheld in principle the levy of capital gains. He held that there was no doubt that the value of the property has not been correctly adopted on transferring the same as capital contribution to the firm and the provisions of Section 52(2) applied. On the limited issue of taking of the market value of the property at Rs. 1,90,000, he was of the opinion that there was no data, much less any basis for the same, hence, he set aside the order of the ITO to that limited extent and directed him (the ITO) to revalue the same after confronting the data to the assessee. The assessees are aggrieved, hence, these appeals and we have heard at length the learned authorized representatives of the parties. We have perused carefully the orders of the lower authorities as also a common paper book (12 pages) placed on our file for and on behalf of the assessee which, inter alia, contains photostat copy of deed of partnership executed on 1-12-1967 as between the assessees; carbon copy of balance sheet as on 30-11-1977 of the firm Universal Book Stall.

4. The case of the assessee is that within the meaning of Section 2(47) of the Act, there has been no transfer of any asset vis-a-vis the assessees as partners and as co-owners of the property contributed as capital contribution in the firm, Universal Book Stall, hence, neither provision of Section 52(2) was attracted nor Section 45 of the Act was applicable. The case of the revenue is that the issue is squarely covered in favour of the revenue by the decision of the Tribunal, Ahmedabad Bench 'A' in the case of ITO v. Ramanlal Davalbhai Patel, decided vide orders of 16-6-1980 in IT Appeal No. 72 (Ahd.) of 1979 and CO. No. 36 (Ahd.) of 1979 as stands reported in [1982] 1 SOT 14 as also by the ratio of the decision of the Hon'ble Gujarat High Court in the case of CIT v. Smt. Dhirajben R. Amin [1983] 141 ITR 875, wherein their Lordships have followed the earlier decision of the same Hon'ble High Court in the case of CIT v. Kartikey V. Sarabhai [1981] 131 ITR 42. The revenue as such, has contended that since the valuation declared by one of the assessees, who was a co-owner with 50 per cent share, and for the valuation date 31-3-1975 was Rs. 1,16,000, provision of Section 52(2) squarely applied since the same assessee has declared the value of his interest in the same property at Rs. 99,250 on 1-12-1977. In reply, the learned authorised representative of the assessee reiterated his earlier stand and further contended that in the alternate the cost of acquisition of the property be worked out as on 1-1-1964 as against the date taken by the lower authorities since the property, the subject-matter of transfer, was purchased on 15-9-1962.

5. It is a common ground that the property known as 5-Ansari Road, Darya Ganj, New Delhi, was held by S/Shri D.R. Chawla, A.K. Chawla and CM. Chawla, the assessees-appellants in the present appeals as co-owners with ascertained shares of 50 per cent, 25 per cent and 25 per cent, respectively, and it is also a common ground that the said property stood contributed by the said three persons as capital contribution as on 1-12-1977 representing their capital in the firm, Universal Book Stall, and the shares of the said three persons in the firm remained 50 per cent, 25 per cent and 25 per cent, respectively.

The shares in the immovable property and the shares in the firm as such remained the same. In the case of Malabar Fisheries Co. v. CIT [1979] 120 ITR 49, their Lordhips of the Hon'ble Supreme Court were seized of the issue of 'transfer' within the meaning of Section 2(47) and the 'firm' and the constituent partners and we usefully reproduce the following observations appearing in the same volume of the ITR: 'Partners are called collectively a firm. Merchants and lawyers have different notions respecting the nature of a firm. Commercial men and accountants are apt to look upon a firm in the light in which lawyers look upon a corporation, i.e., as a body distinct from the members composing it, and having rights and obligations distinct from those of its members. Hence in keeping partnership accounts, the firm is made debtor to each partner for what he brings into the common stock, and each partner is made debtor to the firm for all that he takes out of that stock. In the mercantile view, partners are never indebted to each other in respect of partnership transactions; but are always either debtors to or creditors of the firm.

Owing to this impersonification of the firm, there is a tendency to regard its rights and obligations as unaffected by the introduction of a new partner or by the death or retirement of an old one.

Notwithstanding such changes among its members, the firm is considered as continuing the same; and the rights and obligations of the old firm are regarded as continuing in favour of or against the new firm as if no changes had occurred. The partners are the agents and sureties of the firm; its agent for the transaction of its business; its sureties for the liquidation of its liabilities so far as the assets of the firm are insufficient to meet them. The liabilities of the firm are regarded as the liabilities of the partners only in case they cannot be met by the firm and discharged out of its assets.

But this is not the legal notion of a firm. The firm is not recognised by English lawyers as distinct from the members composing it. In taking partnership accounts and in administering partnership assets, Courts have to some extent adopted the mercantile view, and actions may now, speaking generally, be brought by or against partners in the name of their firm; but, speaking generally, the firm as such has no legal recognition. The law, ignoring the firm, looks to the partners composing it; any change amongst them destroys the identity of the firm; what is called the property of the firm is their property, and what are called the debts and liabilities of the firm are their debts and their liabilities. In point of law, a partner may be the debtor or the creditor of his co-partners, but he cannot be either debtor or creditor of the firm of which he is himself a member, nor can he be employed by his firm, for a man cannot be his own employer.' Unlike the Scottish system of law where the firm is a legal person distinct from the partners composing it, the English Partnership Act, 1890 avoids making a firm a distinct legal entity. In English jurisprudence a firm is only a compendious name for certain persons who carry on business, or have authorised one or more of their number to carry it on, in such a way that they are jointly entitled to the profits and jointly liable for the debts and losses of the business.

Further, it is true that partnership property is regarded as belonging to the firm, but that is only for the purpose of distinguishing the same from the separate property of the partners. But, in law the partnership property is jointly owned by all the partners composing the firm. In Lindley on Partnership, at page 359, the following statement of law occurs: The expressions partnership property, partnership stock, partnership assets, joint stock and joint estate, are used indiscriminately to denote everything to which the firm, or in other words all the partners composing it, can be considered to be entitled as such.

In the absence of a special agreement to that effect, all the members of an ordinary partnership are interested in the whole of the partnership property but it is not quite clear whether they are interested therein as tenants-in-common, or as joint tenants without benefit of survivorship, if indeed there is any difference between the two. It follows from this community of interest that no partner has a right to take any portion of the partnership property and to say that it is his exclusively. No partner has any such right, either during the existence of the partnership or after it has been dissolved.

As regards the nature of a share of a partner in a firm the following passage in Lindley on Partnership, at page 375, brings out the legal position very clearly : What is meant by the share of a partner is 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. 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.

The position as regards the nature of a firm and its property in Indian law under the Indian Partnership Act, 1932, is almost the same as in English law. Here also a partnership firm is not a distinct legal entity and the partnership property in law belongs to all the partners constituting the firm. In Bhagwanji Morarji Goculdas v. Alembic Chemical Works Co, Ltd. AIR 1948 PC 100 ; 18 Comp Cas 205, the Privy Council in para 10 of the judgment observed thus (see also [1948] 18 Comp Cas 209) : Before the Board it was argued that under the Indian Partnership Act, 1932, a firm is recognised as an entity apart from the persons constituting it, and that the entity continues so long as the firm exists and continues to carry on its bussiness. It is true that the Indian Partnership Act goes further than the English Partnership Act, 1890, in recognising that a firm may possess a personality distinct from the persons constituting it, the law in India in that respect being more in accordance with the law of Scotland, than with that of England. But the fact that a firm possesses a distinct personality does not involve that the personality continues unchanged so long as the business of the firm continues. The Indian Act, like the English Act, avoids making a firm a corporate body enhving the rights of perpetual succession.

It is true that under the Civil Procedure Code, Order XXX, as under the English Rules of Court, actions may be brought by or against partners in the name of the firm and even between firms and their members but that is only a matter of procedure. It is also true that the firm's property is recognised in more than one way (sections 14 and 15 of the Partnership Act) but only as that which is 'joint estate' of all the partners as distinguished from the 'separate estate' of any of them, and not as belonging to a body distinct in law from its members. In Addanki Narayanappa v. Bhaskara Krishnappa [1966] 3 SCR 400 ; AIR 1966 SC 1300, this Court, after quoting with approval the aforementioned passages occurring in Lindley on Partnership, 12th edn., made the following oberva-tions in the context of partners' rights during the subsistence as well as upon the dissolution of a firm (p. 1303) : '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.' Having regard to the above discussion, it seems to us clear that a partnership firm under the Indian Partnership Act, 1932, is not a distinct legal entity apart from the partners constituting it and equally in law the firm as such has no separate rights of its own in the partnership assets and when one talks of the firm's property or firm's assets all that is meant is property or assets in which all partners have a joint or common interest. If that be the position, it is difficult to accept the contention that upon dissolution the firm's rights in the partnership assets are extinguished. The firm as such has no separate rights of its own in the partnership assets but it is the partners who own jointly or in common the assets of the partnership and, therefore, the consequence of the 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 there is no question of any extinguishment of the firm's rights in the partnership assets amounting to a transfer of assets within the meaning of Section 2(47) of the Act. In our view, therefore, there is no transfer of assets involved even in the sense of any extinguishment of the firm's rights in the partnership assets when distribution takes place upon dissolution.

6. Now, on the facts and in the circumstances of the case with which we are seized of, the immovable property was owned and held by the three assessees in ascertained shares of 50 per cent, 25 per cent and 25 per cent, respectively, and the same property was contributed in the same shares in the partnership firm as capital contribution, i.e., the shares of the assessees in the immovable property as co-owners, and in the assets/ liabilities of the firm as partners remained the same and in this view of the matter, relying heavily on the observations of their Lordships of the Hon'ble Supreme Court reproduced above, we can safely say that within the meaning of Section 2(47) there has been no transfer in relation to a capital asset, viz., the immovable property 5-Ansari Road, Darya Ganj, New Delhi, since there has been no sale or exchange of the said asset and at the same time there has been no relinquishment of the asset or the extinguishment of any right of the assessees owning the same as co-owners vis-a-vis contribution of the same property as capital contribution in the firm constituted by the same persons specially when the shares of the co-owners in the asset and the shares of the partners in the firm remain the same.

7. Since there has been no transfer as held above on the facts and in the circumstances of the case, we cannot say that there has been a understatement of any consideration for transfer in the case of the said property and accordingly, Sub-section (2) of Section 52 does not apply. We hold, accordingly, with the result, that we do hold that on the facts and in the circumstances of the case, no capital gain was assessable in the hands of the assessee-appellants. The impugned order of the learned first appellate authority gets reversed as above. As regards the reliance of the revenue, first we come to the decision of the Special Bench of the Tribunal. The fact before the Special Bench of the Tribunal were as under: "The assessee, inter alia, inherited land from his ancestors as a result of successive partitions in the family. The same was, however, taken over by the Municipal Corporation, under the town planning scheme, by allotment of some alternative plots. During the assessment year 1975-76, the assessee, along with other five coparceners and four other outsiders, formed a firm and invested as his capital Rs. 71,750 being the market value of one of the aforesaid plots. The Income-tax Officer, taking the value of the said plot at Rs. 5,740 on 1-1-1954, taxed the difference of Rs. 66,010 as long-term capital gains, after repelling the assessee's contentions, inter alia (i) that there was a conversion of a capital asset into stock-in-trade of business to be started as per declaration to the same effect made on 1-7-1974; (ii) that there was no transfer under Section 2 (47); and (iii) that, even if there was any transfer, it was without consideration. The Appellate Assistant Commissioner, on appeal, set aside the Income-tax Officer's order holding, inter alia, that though there was a 'transfer', it was without any consideration and no capital gain arose to the assessee." From the above facts it follows that the land contributed by the assessee there as his capital contribution in the firm was owned by him exclusively and the firm where he contributed capital in the form of land, which was worked out at the market value, had 9 other partners of course 5 of them were coparceners of the assessee but 4 others were outsiders unconnected with the subject-matter of transfer, viz., the land. There a single partner brought land as his capital and on his contribution in substitute of cash capital and in the face of capital contribution of other partners, strangers and outsiders included, the said land became the property of the partnership firm, hence, it was held that there was a transfer within the meaning of Section 2(47).

There the contribution in terms of land as capital contribution being by one partner, once it became the property of the partnership firm, there was an extinguishment of the right of the said partner, hence, the decision. The facts of the cases, with which we are seized of, are distinguishable inasmuch as here the co-owners brought the property as capital contribution into a firm and the same co-owners became the partners while retaining the same ratios, i.e., shares as they were holding in the property as co-owners and prior to their constituting a firm. Here the shares being the same, there is no material effect, the property of the firm remained the property of the partners and in the same ratio, since there was no outsider, hence, no extinguishment of any right.

The property of the firm as envisaged in Section 14 of the Indian Partnership Act, 1932, becomes a part of the assets of the firm and though a partner has no individual capacity, much less any exclusive right to possess or use the partnership property in a specific asset of a firm, the interest of each partner is a share in the firm after the partnership debts are paid and after the partnership accounts are settled and within the stage given, when the rights of the partners inter se are adjusted. In these cases, the crux of the matter boils down to the shares of the partners which in the partnership firm remain the same as these were while these persons held the property as co-owners and whether there are losses or profits in the firm, the partnership accounts on determination of the partnership are to be settled and adjusted inter se partners in the same ratio, hence, no relinquishment of any right, qua the assets brought as capital contribution.

8. In the case of Kartikey V. Sarabhai (supra), the rationale behind the said decision is that where the property or asset belonging to an assessee is brought in or introduced by an assessee into a firm in which he is a partner, the property becomes the property of the firm and the assessee cannot be said to have any longer any power to dispose of the whole or any part of it or any interest therein as his property, since neither the whole nor any part of it would be includible in the net wealth of the assessee in the context of his liability under the Wealth-tax Act, 1957, since a partner has no interest in specific partnership properties. Their Lordships held that a partner having a one-half share in the partnership is not the one-half owner of the specific properties belonging to the firm since what he has is a one-half share in the residue of the partnership assets remaining after payment of the debts and liabilities of the firm. But on the facts of the cases, with which we are seized of, we can certainly say that the three assessees as three partners are having 50 per cent, 25 per cent and 25 per cent shares, respectively, in the partnership and the same shares they do have in the property, asset brought into the film as capital contribution as also in the residue of the firm, if that eventuality arises and since that 50 per cent, 25 per cent and 25 per cent ratio in the partnership was the ratio, qua the same three assessees while they held the immovable property as co-owners, the facts of the case before their Lordships of the Gujarat High Court became distinguishable with the facts of the cases with which we are seized of. The main distinguishing feature here, i.e., with the cases before us, being that the same co-owners became partners in a firm and brought one asset as capital contribution and the said asset was contributed as capital in the same ratio as they held as co-owners and the profits/loss sharing ratio in the firm remained the same. The Gujarat High Court's case in the case of Kartikey V. Sarabhai (supra) becomes distinguishable and we hold, accordingly.

9. In the case of Smt. Dhirajben R. Amin (supra), the facts are at par with the case of Kartikey V. Sarabhai (supra), hence, for the same reason, this case also becomes distinguishable.

10. The net result is that on the facts and in the circumstances of the case, the work out of capital gains in the hands of the assessees stands deleted in toto since there is no transfer within the meaning of Section 2(47), qua the capital contribution of the assessees as partners in the firm, Universal Book Stall, Delhi, and, qua the immovable property, 5-Ansari Road, Darya Ganj, New Delhi. All the three appeals succeed and stand allowed.


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