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Additional Commissioner of Income-tax, Delhi-iii Vs. Manjeet Engineering Industries - Court Judgment

LegalCrystal Citation
Subject Direct Taxation
CourtDelhi High Court
Decided On
Case NumberIncome-tax References Nos. 10 and 121 of 1974, 275 of 1979, 1 to 4 of 1980 and 59 and 66 of 1975
Judge
Reported inILR1984Delhi787; [1985]154ITR509(Delhi)
ActsIncome Tax Act, 1961 - Sections 22, 32, 144 and 271(1)
AppellantAdditional Commissioner of Income-tax, Delhi-iii
RespondentManjeet Engineering Industries
Cases ReferredSudhansu Kanta v. Manindra Nath
Excerpt:
direct taxation - depreciation allowance - sections 22, 32, 144 and 271 (1) of income tax act, 1961 - whether tribunal right in directing allowance of depreciation in respect of building for relevant assessment year to the extent it was used for purpose of assessed's business - income tax officer rejected claim on ground that property stood in name of partner - property stood transferred by partner in favor of assessed -firm by former bringing same into stock of firm as evidenced by enteries in books of firm - position depicted by balance sheet of firm proved intention of all partners of firm to constitute property of firm even though terms of partnership deed as executed by them should somewhat contrary - held, question answered in favor of assessed. - section 13: [altamas kabir &.....goel, j. 1. these are ten reference in all, seven of these references relate to the assessed - m/s. manjeet engineering industries, new delhi - a partnership firm (hereinafter called as 'the assessed firm') in which arjun singh was one of the partners in the relevant assessment years 1965-66 to 1971-72, respectively. three of the references relate to arjun singh, the assessed, as a partner of the firm. two of them, namely, itr no. 121 of 1974 and itr no. 59 of 1975, relate to quantum cases for the assessment years 1965-66 and 1966-67, respectively. the third reference, itr no. 66 of 1975, relates to the penalty matter for the assessment year 1964-65. 2. the question for consideration in the seven references relating to the firm is as to whether the building in question had become the.....
Judgment:

Goel, J.

1. These are ten reference in all, seven of these references relate to the assessed - M/s. Manjeet Engineering Industries, New Delhi - a partnership firm (hereinafter called as 'the assessed firm') in which Arjun Singh was one of the partners in the relevant assessment years 1965-66 to 1971-72, respectively. Three of the references relate to Arjun Singh, the assessed, as a partner of the firm. Two of them, namely, ITR No. 121 of 1974 and ITR No. 59 of 1975, relate to quantum cases for the assessment years 1965-66 and 1966-67, respectively. The third reference, ITR No. 66 of 1975, relates to the penalty matter for the assessment year 1964-65.

2. The question for consideration in the seven references relating to the firm is as to whether the building in question had become the property of the partnership firm and the firm was entitled to depreciation on the building. In two of the three cases relating to Arjun Singh, partner, for the assessment years 1965-66 and 1966-67, the questions, respectively, are as to whether Arjun Singh was liable to be assessed on the rental income of the property in question under s. 22 of the I.T. Act, 1961 (hereinafter called as 'the Act'), and whether he was entitled to the deduction of depreciation in respect of the property which was used by the firm. The last reference, i.e., ITR No. 66 of 1975, relates to the question of leviability of penalty under s. 271(1)(c) of the Act on Arjun Singh, partner, for the non-inclusion of his rental income form the property receivable from the firm in the two revised returns as filed by him for the assessment year 1964-65.

3. The undisputed facts are that Arjun Singh had constructed a building bearing municipal No. 71/1, Najafgarh Road, New Delhi. He carried on business in a portion of this building under the name and style of M/s. Manjeet Engineering Industries as a sole proprietary concern up to November 7, 1960. The balance-sheet as on November 7, 1960 of the proprietary business of Arjun Singh showed the building in question at the value of Rs. 3,40,070. With effect from November 8, 1960, the business was carried on by a partnership firm consisting of Arjun Singh and his two sons, Baldev Singh and Gian Singh. Arjun Singh was entitled to 1/2 share and each of his two sons were entitled to 1/4th share in the profits of the firm. Up to the assessment year 1961-62, Arjun Singh was assessed on the income from M/s. Manjeet Engineering Industries as its sole proprietor. Subsequently, the firm was assessed in that capacity. A deed of partnership was executed between the three partners on November 8, 1960. Arjun Singh had been carrying on the business of manufacture of air compressors and other engineering works in the building and the same business was converted into that of a partnership firm. According to the terms of the partnership as contained in the partnership deed, the business of the firm was to be carried on in the same premises, 71/1 Najafgarh Road, New Delhi, or such other place or places as the partners may thereafter form time to time determine. Clauses 4 and 6 are the most material clauses for deciding the question referred and they are reproduced below :

'4. That the capital will be introduced by the First Party (Arjun Singh) from time to time in such a manner as may be mutually agreed according to the needs of the business, but the Second and Third Party also can contribute capital as they deem proper from time to time by mutual consent. The capital of the business contributed by the First Party shall, however, include the existing machinery worth about Rs. 25,000....

6. That the First Party shall place at the disposal of the partnership the existing superstructures on 71/1 Najafgarh Road, New Delhi, viz., building, sheds or other superstructures on the said factory premises for the use of the partnership for which he will be entitled to a rent of Rs. 500 p.m. from the partnership. This user of partnership will not, however, entitle the Second and Third parties to any right of tenancy in respect of the said premises within the meaning of the Rent Control Act as applicable to the State of Delhi. The amounts so received by the First Party shall be debited to the partnership as expenses of the business.

4. At this stage, it is worth while to reproduce the balance-sheets of the proprietary business of Arjun Singh for the period from April 1, 1960, to November 7, 1960, and of the partnership firm as on November 8, 1960 :

Property period April 1, 1960, to November 7, 1960.

Balance-sheet as on 7th November, 1960, of M/s. Manjeet Engineering Industries, 71/1, Najafgarh Road, New-Delhi-15.

Rs. Rs.Capital a/c BuildingS. Arjun a/c As perSingh a/c 3,43,778.66 old ledger 3,32,960.87Addition 5,005.20 Addition 7,108.70------------ -----------3,48,783.86 3,40,069.57Less loss 6,938.34 Machinery a/c------------- As per old3,41,845.52 ledger 23,933.54Addition 1,535.51------------ -----------25,469.05Sundry Creditors :As per list attached 1,10,150.85 Furniture a/cAs per oldledger 747.47Addition 688.50-----------1,435.97-----------Motor Vehicle a/cAs per old ledger 2,321.94Patterns a/cAs per profit &loss; a/c 3,500.00Closing stockAs per trading a/c 60,186.00Sundry DebtorsAs per list attached 8,644.00Cash in hand 10,368.00----------- -----------4,51,996.37 4,51,996.00----------- ----------- Messrs Manjeet Engineering Industries, 71/1, Najafgarh Road, New Delhi-15. Balance sheet as on 8-11-1960. Rs. Rs.Capital a/c Building a/cS. Arjun Singh 3,41,845.52 To written down value 3,40,069.57S. Gian Singh 44,523.00Machinery a/cS. Baldev Singh 58,000.00 To written down value 25,469.05Sundry Creditors : Furniture a/cDr. Daulat Ram 3,000.00 To written down value 1,435.97M/s. Pinki Coal Co. 2,102.60 Patterns a/cM/s. Behari Lal& Co., Delhi 2,216.78 To written down value 3,500.00Employees' StateIns. payable 2960.07 Closing stockTo value of stock 60,186.80Sundry Debtors :Sales Tax A/cpayable 12.40 M/s. Indian Oxygen 150.00M/s. Milstock & Co. 1,000.00M/s. Frontier MachineryWorks 1,600.00Sales Tax Officer 2,000.00The Bank of Baroda 332.31The Punjab NationalBank 2,212.64D.E.S. Undertaking 1,350.00Cash-in-hand 10,368.09Motor Vehicle a/cTo written decideddown value 2,231.94------------- -------------4,51,996.37 4,51,996.37------------- -------------

5. The first balance-sheet of the partnership firm was drawn up on March 31, 1961. In this, the building account started with the figure of Rs. 3,40,069, i.e., the figure at which the firm took over. In the assessment of the firm for the assessment year 1962-63, the assessed claimed a payment of Rs. 6,000 as rent to Arjun Singh in respect of the above said premises. It also claimed depreciation and deduction by way of property tax paid in respect of the same building. The assessed's claim regarding depreciation, amongst other claims relating to the property, was disallowed by the ITO. The matter was taken up by the firm to the AAC in appeal. The AAC directed to ITO to allow the depreciation claimed by the firm subject to depreciation rules. In the absence of any appeal there from, the decision of the AAC became final and conclusive for the assessment year. For the assessment year 1963-64, the matter came up before the Appellate Tribunal which disallowed the depreciation in the case of the firm and the firm was allowed deduction on account of the rent payable to Arjun Singh. For the subsequent assessment year 1964-65, the Tribunal followed its decision given in the earlier year 1963-64. The assessment for this year was completed ex parte under s. 144 of the I.T. Act, 1961.

6. The assessed some time in the beginning of the year 1968 produced an agreement dated November 9, 1962, entered into between the partners of the firm before the assessing authority taking assessment proceedings for the year 1963-64. The assessment for that year was completed by the ITO on February 20, 1968. This deed states that it shall form a part of the partnership deed of the firm executed on November 8, 1960, and it was agreed between the three partners that the parties thereto agreed that the property in question which was owned by Arjun Singh, a partner, has been pooled with the partnership property and it shall be the property of the partnership thereafter. Further, Arjun Singh shall not be entitled to any rent of the property whatsoever and the rent of Rs. 500 per month received by him shall be treated as his drawings and it was also stated therein that the deed shall be deemed to have commenced from November 8, 1960. This agreement was signed on a stamp paper of Rs. 1.50 and was singed by the three partners of the firm and three witnesses. The firm relied on this document in the course of assessments for the assessment year 1963-64 and 1964-65. The Tribunal, however, declined to place reliance on this document in those years and it was held to be a document fabricated later in order to reduce or nullify clause 6 of the original partnership deed whereunder the firm was allowed use of the premises on payment of rent of Rs. 500 per month only. One of the main reasons that weighed with the Tribunal in holding the document to be a got-up one was that the same was produced before the taxing authority for the first time in the year 1968, and the Explanationn of the firm that the same could not be produced earlier because Arjun Singh remained out of the country up to June, 1964, was not found to be satisfactory. Arjun Singh in his wealth-tax return for the assessment year 1963-64 as submitted in February, 1966, did not show the property as belonging to him, but only disclosed the capital balance in the firm as his asset. The firm also endeavored to make a reversal of entries in its books on March 31, 1966, whereby the amounts of rent credited to Arjun Singh were sought to be debited to his account and credited back to the firm. All this material was relied on by the firm in support of its contention that Arjun Singh, a partner of the firm, had brought the property in question and had pooled the same with the assets of the firm right on November 8, 1960, and the intention of all the three partners was that the property shall become and it became the asset of the partnership firm from the date of its inception, i.e., from November 8, 1960. Relying on the provisions of s. 14 of the Indian Partnership Act, 1932, it was contended that subject to contract between the partners, the property brought into the stock of the firm by a partnership became the property of the partnership firm and no registered deed or any writing whatsoever is required for bringing in separate property of a partner into the stock of the firm. These contentions of the firm did to prevail with the Tribunal in the assessment years 1963-64 and 1964-65, and no depreciation was allowed to the firm on the property in those years. It appears that no reference was made to this court against the orders of the Appellate Tribunal in the quantum cases in either of those two years.

7. In the assessment year 1964-65, a penalty of Rs. 7,500 was levied by the IAC on Arjun Singh, a partner, under s. 271(1)(c) of the Act for concealment of his rental income of Rs. 6,000 from the property in question in the two revised returns as furnished by him. I.T.R. No. 66 of 1975, made at the instance of the Department, relates to a question of law arising out of that order of the Tribunal.

8. For the assessment year 1965-66, the Appellate Tribunal in the second appeal taken to it by the firm noted with approval the view taken by it in earlier years that no registration was necessary for conveying separate property by a partner into the stock of his firm. It was further noted that the Tribunal did not allow depreciation to the firm in the assessment years 1963-64 and 1964-65, for the main reason that the deed dated November 9, 1962, was found by it as not being a genuine document. The Tribunal examined the question as to whether a different view of the matter could be taken on the facts and circumstances of the case in the assessment year 1955-66. The Tribunal took note of certain facts and circumstances as brought out on the record. It was observed that the firm in the earlier years did commit certain obvious mistakes, but these mistakes need not haunt the firm even in the year 1965-66, wherein they had been rectified and that whatever be the position in hte past, the firm had treated the property as its own in the assessment year 1965-66. It was pointed out that the value of the property had bean incorporated in the books of the firm and also exhibited in its balance-sheet in that year. Arjun Singh was given credit for the value of the property. For these and other reasons as stated in its order, the Tribunal allowed the appeal of the firm. It was held that the firm was entitle to depreciation on the building. However, as a portion of the building was in the occupation of Arjun Singh as residence for himself and for his family, the ITO was directed to ascertain the extent of the portion and to disallow depreciation to the firm only to that extent. The Revenue has sought reference against this finding of the Tribunal in I.T.R. No. 10 of 1974.

9. For the assessment year 1966-67, the matter came up for consideration before the Tribunal in the appeals filed by the firm as well as by Arjun Singh, partner. In view of the fact that there were conflicting decisions of the Tribunal in prior years, the matter was placed before a Full bench of the Tribunal so constituted to consider the issue involved. The Tribunal took the view that the agreement dated November 9, 1962, was not a genuine document and further that clause 6 of the partnership deed could not be deemed as having been amended by the acts and conduct of the partners of the firm. It was also held that even though no registered deed was required transferring the property by a partner to the firm in which the owner of the property was a partner, it could not be said that clause 6 of the partnership deed had become inoperative and, thereforee, the property in question could not be held as having been transferred from Arjun Singh to the firm. It was held that the firm was not entitled to depreciation of the property in question. Consistent with this decision in the case of the assessed-firm, the Tribunal held that Arjun Singh, partner, was entitled to depreciation in respect of the property used for purposes of carrying on the business of the firm.

10. For the assessment years 1967-68 and 1968-69, apart form the submissions made on behalf of the assessed in the prior years, it was pointed out that the agreement dated November 9, 1962, was in any case in existence in those two years and that, thereforee, the property in question should be held to be belonging to the firm at least from the year 1967-68 onwards. The Tribunal observed that the said document had already been held to be a non-genuine document and following the decision of the Full Bench of the Tribunal in the assessment year 1966-67, held against the firm. For the subsequent years 1966-67 to 1971-72, reliance was placed by the assessed on the further material also consisting of the new partnership deed executed by the partners of the firm on December 18, 1968, effective from April 1, 1968. It was submitted that clause 6 of the old partnership deed did not find a place in the new partnership deed and, thereforee, the assessed-firm no longer remained a lessee of Arjun Singh as was stated in that clause and that, thereforee, in those years, in any case, the position had altogether changed and the firm should be held to have become the owner of the property in question at least with effect from April 1, 1968. This contention also did not prevail with the Tribunal. The Tribunal observed that the new partnership feed was based on the earlier agreement dated November 9, 1962, and since that agreement had already been held to be a non-genuine document, the new partnership deed did not enhance the case of the assessed-firm. The appeals of the firm for these years were also accordingly dismissed.

11. The following questions of law have been referred for opinion of this court :

I.T.R. No. 10 of 1974 (Assessment year 1965-66) :

'Whether on the fats and in the circumstances of this case, the Tribunal was right in directing the allowance of depreciation of in respect of the building at 71/1, Najafgarh Road, New Delhi-15, for the assessment year 1965-66, to the extent it was used for the purpose of the assessed's factory (business) ?' I.T.R. No. 121 of 1974 (Assessment year 1965-66) :

'(3) Whether, on the facts and in the circumstances of the case, the Tribunal was legally correct in holding that the assessed was not assessable for the rental income under section 22 in respect of house property situated at 71/1, Najafgarh Road, New Delhi ?' I.T.R. No. 4 of 1980 (Assessment year 1966-67) :

'1. Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the building at 71/1, Najafgarh Road, New Delhi, belonged to S. Arjun Singh and not to M/s. Manjeet Engineering Industries (firm)

2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that M/s. Manjeet Engineering industries (firm) was not entitled to depreciation on the above building used for the business of the firm

3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the agreement dated November 9, 1962, was not a genuine document ?'

I.T.R. No. 275 of 1979 (Assessment year 1967-68 and 1968-69) :

'1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that building at 71/1, Najafgarh Road, New Delhi, belonged to S. Arjun Singh and not to M/s. Manjeet Engineering Industries (firm)

2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that M/s. Manjeet Engineering Industries (firm) was not entitled to depreciation on the said building which is being used for the business of the firm

3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the agreement dated November 9, 1962, was not a genuine agreement ?'

I.T. Rs. Nos. 1 to 3 of 1980 (Assessment year 1969-70, 1970-71 and 1971-72) :

'1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the partnership deed of December 18, 1968, did not bring about any material change in the ownership of property No. 71/1, Najafgarh Road, New Delhi, for the assessment year 1969-70 and onwards

2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the partnership deed drawn up on December 18, 1968, was not an independent and self-contained document, but was dependent on the earlier two documents dated November 8, 1960, and November 9, 1962

3. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that property No. 71/1, Najafgarh Road, New Delhi, does not belong to the partnership firm, but to S. Arjun Singh

4. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in upholding the disallowance of depreciation in respect of property No. 71/1, Najafgarh Road, New Delhi, in the assessment of this firm

5. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in applying the judgment of the Full bench of the Tribunal which was delivered by the latter in the context of the facts found by it for the assessment year 1966-67 ?'

I.T.R. No. 59 of 1975 (Assessment year 1966-67) :

'Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the partner was entitled to deduction of depreciation in respect of the property used by the firm ?' I.T.R. No. 66 of 1975 (Assessment year 1964-65) :

'Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in vacating the penalty of Rs. 7,500 levied under s. 271(1)(c) of the Income-tax Act, 1961 ?' I.T.R. No. 121 of 1974 (Assessment year 1965-66) : The finding of the Tribunal that has been challenged in this reference on behalf of the Department is that the property in question, namely, the building bearing No. 71/1, Najafgarh Road, New Delhi, stood transferred from Arjun Singh to the firm and the firm was its owner in the previous year relevant to the assessment year 1965-66. The case of the assessed-firm has been that the intention of the parties from the very beginning, i.e., when the partnership came into being between them, vide partnership deed dated November 8, 1960, has been that the property was brought in by Arjun Singh and was pooled into the stock of the firm by passing necessary entries in the cash book of the firm and which position was duly depicted in the balance-sheet of the firm. The further case of the assessed is that certain circumstances including clauses 4 and 6 of the partnership deed dated created certain difficulty in the way of the assessed for giving the said treatment to the property in the assessment year 1962-63 to 1964-65; however, the intention of the partners that the property stood transferred to the stock of the firm and was being treated by them as property of the firm became clear and unambiguous having regard to their conduct and treatment of the property in the relevant previous year. The firm is support of this claim also relied on the deed of agreement dated November 9, 1962, which was filed before the ITO in the course of the assessed proceedings for the assessment year 1965-66.

12. The contention of the Revenue is that even though the property is question was apparently brought by Arjun Singh into the stock of the firm as evidenced by the passing of the necessary entries in the books of the firm, that was against the terms of the partnership as evidenced by the deed of partnership and further that under s. 14 of the Indian Partnership Act as relied upon by the assessed, an immovable property could not be transferred by a partner in favor of the partnership firm of which he is a partner except by executing conveyance deed drawn on the due stamp paper and getting the same duly registered under the Indian Registration Act.

13. Before we deal with the relevant contentions, it may be stated here that for the allowance of claim of depreciation on the property in question, it was necessary that the property was owned by the firm. We, thereforee, have to see as to whether the ownership of the property in question stood transferred to the firm. Now, the Tribunal on a perusal of the relevant entries in the cash book of the firm as also the relevant balance-sheet of Arjun Singh, individual, as on November 7, 1960, and of the firm as on November 8, 1960, as reproduced above, has found that in the capital account of Arjun Singh, credit was given as capital for the sum of Rs. 3,48,784 being the full value of the building and the building was disclosed as part of the assets of the partnership firm as on November 8, 1960, i.e., the date on which the partnership came into being between Arjun Singh and his two sons. There was no change in that position and the very same position continued for all the assessment year in question. The fact and circumstances as relied on by the Revenue, namely, the payment of rent @ Rs. 500 per month by the firm to Arjun Singh for the building in question in the previous years relevant to the assessment years 1962-63 to 1964-65 as also the claim of deduction on account of rent payment to Arjun Singh in its income-tax assessments for those year could not be destructive of the above said position as emanating from the facts and circumstances proved on the record as mentioned above. The facts relied on by the Revenue on no doubt create a difficulty in answering the question as to whether the property was intended to be transferred and was in fact transferred by Arjun Singh in favor of the firm. The passing of these entries, in our view, had the effect of constituting the firm as the owner of the property in question with effect from November 8, 1960 onwards. It was not the case of the Revenue that these entries were fictitious or were not genuine. The case of the Revenue on the other hand is that the state of affairs, as given rise to by the passing of these entries, should not be given effect to in view of the terms of the partnership and the conduct of the firm and Arjun Singh as relied on by the Revenue. It was submitted by Shri Wadhera, learned counsel for the Revenue, that as per s. 14 of the Indian Partnership Act, bringing of property by a partner into the stock of the firm is subject to contract between the partners i.e., the property can be brought by a partners into the stock of the firm only if the partners of the firm so agree. There can be no quarrel with regard to this principle of law as the language of s. 14 of the Partnership Act in terms so states. The question that, however, remains to be seen is as to whether the intention of the partners of the firm was that the property in question should be brought by Arjun Singh in top the stock of the firm so as to constitute the same as the property of the firm or the property was placed by Arjun Singh at the disposal of the firm merely for its use by the firm and retaining the ownership there of with him all the time. We are of the view that by the passing of the aforesaid entries in the cash books of the firm and the position as depicted by the balance-sheet of the firm, the intention of all the three partners of the firm was to constitute the property as the property of the firm even though the terms of the partnership deed as executed by them stood somewhat to the contrary. Shri Wadhera submitted that the balance-sheet entries of the firm as reproduced above only showed that Arjun Singh placed the property in question at the disposal of the firm, but the ownership there in was not transferred by him and further that credit of the amount being the value of the property was made in his favor only as a security. Shri Wadhera was unable to show as to how this conclusion could be reached on the construction to be placed on the entries in the two balance-sheets and we find no merit in this submission. These entries clearly show that Arjun Singh was given credit in the sum of Rs. 3,48,784, being the full value of the property in his capital account. Shri Wadhera in support of his above contention referred to the decision of the Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT : [1971]82ITR363(SC) . The decision of the Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. is of no help to the case of the Revenue in the said regard as it has no bearing on the point at issue.

14. The question for consideration is as to whether the property was brought into the stock of the firm only for a limited purpose, namely, for used by the firm as was purported to be so done by the terms of the partnership deed and in particular by clause 6 thereof, or the property was transferred from the hands of the Arjun Singh into the stock of the firm and it was so done in accordance with the consent of the three partners of the firm. In view of the facts that the property was irretrievably transferred by Arjun Singh in favor of the firm soon after the execution of the partnership deed, coupled with the subsequent conduct of the firm and Arjun Singh, we are of the view that the property stood originally transferred by Arjun Singh in favor of the firm by the former bringing the same into the stock of the firm as evidenced by the aforesaid entries in the books of the firm in accordance with the agreed intention of all three partners of the firm. It is obvious that the three partners of the firm were ad idem when the ownership of the property in question was transferred by Arjun Singh in favor of the firm by the passing of the aforesaid entries in the books of the firm. This is not a case in which any of the three partners of the firm made even any whisper against this factual position. All the three partners of the firm have, in fact, been at pains to see that the property is considered to have become the property of the firm when the same was brought by Arjun Singh into the stock of the firm, i.e., with effect from November 8, 1960.

15. The passing of the entries in the books of the firm is in fact determinative of the intention of the partners of the firm. These entries are clear and unambiguous and admit of no two interpretations. The intentions of the partners of the firm is explicit from this treatment given to the property in question by the passing of the entries in the books of the firm and their adoption in the balance-sheets of Arjun Singh, partner, and that of the firm. The question of finding out the intention of the partners would normally come in for consideration, if the entries which purport to give effect to the intention of the parties admit of two different construction. That, however, its not so in the present case. There could also be some scope for argument if any of the three partners had alleged that these entries were passed under some misapprehension or if the Department were able to establish that the legal effect of the passing of the said entries could not be transfer the personal property of Arjun Singh to the firm i.e., that the apparent position did not reflect the true intention of the partners of the firm. The onus to prove that was thus on the Department.

16. Now, clause 6 of the partnership deed no doubt states that the first party, i.e., Arjun Singh, shall place at the disposal of the firm the building in question for the use of the partnership for which will be entitled to a rent of Rs. 500 per month from the partnership. It further states path this used by the partnership will not entitle the partnership tenancy rights in the property. Clause 4 also relied on by the Revenue, however, is of no real consequence on the point at issue. Support is sought to be derived from that clause only indirectly on the submission that if the building was also to be brought by Arjun Singh into the pool of partnership assets as his capital, it would have been so mentioned in clause 4 as was done with regard to the machinery installed by Arjun Singh in the building, the value of which was estimated in that clause at about Rs. 25,000. It may also be pointed out here that where as per clause 4 of the partnership deed dated November 8, 1960, Arjun Singh was to be given credit in his capital account for a sum of Rs. 25,000 for bringing the machinery into the stock of the firm, the balance-sheets show that he was given a credit for only Rs. 1,786 on that account. This shows that the terms in the partnership deed were not at all rigidly adhered to by the partners of the firm when the question of acting on them came up and the true state of affairs and the intention of the parties were depicted by the entries in the said two balance-sheet.

17. Clauses 4 and 6 of the contract of partnership entered into between the partners were not given effect to and were not acted upon by the partners when soon thereafter the question came up before the firm as to what extent and for what purpose the interest of Arjun Singh in the property was to be transferred in favor of the firm by passing necessary entries in the books in that regard. The entries can only be read as meaning that Arjun Singh agreed to transfer his separate property in question into the stock of the firm and the firm in return credited the full value of the property in favor of Arjun Singh. Thus by the act and conduct of the partners is passing the said entries, clauses 4 and 6 of the deed of partnership became inoperative in the said regard. This, in our view, is the only proper way in which this material has to be construed.

18. The subsequent conduct of the firm and Arjun Singh including the treatment by them of the property in question also did not bring about any change in the said legal character of the property. That in fact clearly show that the firm has been at pains to declare from time to time that the property had come to belong to it and it was entitled to depreciation thereon. The Tribunal had found that the property tax for the property in question was paid by the firm right from assessment year 1962-63 onwards. The firm claimed depreciation allowance on the property from the beginning till the last assessment year 1971-72 in question. It was also not disputed that Arjun Singh did not include the value of the building in his wealth-tax returns as filed by him for the assessment years 1961-62 to 1965-66. No attempt of any kind was made by Arjun Singh or by the firm to get the said effect of the passing of the entries reversed. To the contrary, in the previous year relating to the assessment year 1965-66, the firm reversed entries in its books by which it had credited rent of the property in favor of Arjun Singh in the previous years relevant to the assessment years 1962-63 to 1964-65. Then the document dated November 9, 1962, was executed by the partners of the firm (held by the Tribunal as forged, being ante-dated) wherein the partners confirmed that the property was originally transferred by Arjun Singh to the stock of the firm and that Arjun Singh will not be entitled to any rent whatsoever and the rent of Rs. 500 per month received by him shall be treated as his drawings.

19.. We may at this stage deal with the question relating to the genuineness or otherwise of the document dated November 9, 1962, produced on behalf of the assessed before the ITO in the course of the assessment proceedings for the assessment years 1963-64 to 1965-66. The Tribunal in the case of the assessed for the assessment year 1963-64 held that this document was not a genuine document. According to the Tribunal, the same was ante-dated. It was observed that this document was not produced before the ITO in the course of the assessment proceedings for the assessment year 1963-64 which was completed as on February 20, 1968. The assessed gave the reason for its non-production before the ITO in time as that Arjun Singh had remained out of India from November 14, 1962, to June, 1964. This Explanationn did not find favor with the Tribunal. It was observed that the assessment for the year 1963-64 was taken up long after June, 1964, and there was evidence to suggest that this document was a got-up document and it was an after-thought. The question as to whether this document was a forged one inasmuch as the same was ante-dated is a question of fact and as there was material before the Tribunal on which a finding regarding its genuineness in that sense could be returned by the Tribunal, we would not enter into a reappraisal of the same at this stage and hold that this is a finding of fact and we decline to answer the questions referred to us wherein the finding of the Tribunal regarding the non-genuineness of this document was challenged. The fact remains that this document embodies the intention of the three partners of the firm wherein they affirmed and repeated that the property in question was originally brought by Arjun Singh into the stock of the firm and to that extent this is also a piece of evidence of the said subsequent conduct of the three partners of the firm, This document was thus available to the assessed only for that limited purpose and we have not taken this document into consideration while recording our finding on the question as to whether the property in question stood transferred from Arjun Singh to the firm.

20. Shri Agnihotri, learned counsel for the assessed, submitted that even if it be held that the property was not originally brought by Arjun Singh into the stock of the firm, the position so far as the previous year relevant to the assessment year 1965-66 and the subsequent years is concerned, none of the facts as relied on by the Revenue against the assessed was available. The crediting of the rent by the firm to the account of Arjun Singh, etc., had been stopped by that time, the firm had also reversed the entries passed in its books in the prior year crediting the rent to the account of Arjun Singh and as such no anomaly was left in the case of the assessed-firm in that year and the terms of the partnership deed to the contrary were to be deemed to have been modified by the act and conduct of the three partners of the firm in the previous year relevant to the assessment year 1965-66 in question and that from that year onwards, the firm became the owner of the property. In this connection, reliance was place d by shri Agnihotri on s. 11 of the Partnership Act. It was submitted by Shri Agnihotri that so far as the assessment years 1969-70 to 1971-72 are concerned, the firm had executed a new partnership deed on December 18, 1968, and as per that deed the property clearly stood in favor of the firm and that, thereforee, in any case, the firm had become the owner of the property in the previous year relevant to the assessment year 1969-70, and such the Tribunal was in error in not allowing depreciation on the property to the firm for the assessment years 1969-70 and 1971-72. In view of our clear finding above that the property stood transferred from Arjun Singh to the partnership firm originally, i.e., when Arjun Singh took his two sons in the business carried on by him and when the firm was constituted, we need not go into these alternative contentions of Shri Agnihotri. It may, however, be pointed out here that the subsequent act and conduct of the partners of the firm was relevant only for the finding out the true agreement between the partners of the firm relating to the transfer of the property in question at the very inception of the firm i.e., when Arjun Singh became a partner in the firm along with the other two partners thereof.

21. Now, we take up the main contention of Shri Wadhera, learned counsel for the Revenue, namely, that s. 14 of the Partnership Act cannot be interpreted to mean that a partner of a firm can validly transfer immovable property belonging to him in favor of the partnership firm of which he is a partner by originally bringing the same into the stock of the firm. It was contended by him that as per the provisions of Stamp Act and of s. 54 of the Transfer of Property Act, sale immovable property worth more than Rs. 99 can be effected by its owner in favor of another person only by means of a registered deed executed on a duly stamped paper and as per s. 17 of the Indian Registration Act also such a deed requires compulsory registration. It was submitted that to interpret s. 14 in the manner as suggested on behalf of the assessed would mean to nullify the said to acts and that such a position is not allowable in law. We are not inclined to agree with this contention. Before we examine the force of this contention, it may be pointed out here that the Tribunal in repelling the claim of the assessed-firm did not take this view of the matter and instead it took a view in favor of the assessed in all the assessment years in question so far as this legal position is concerned. However, by that we do not mean to say that the Revenue is not entitled to urge this contention in these references. Whereas the Transfer of Property Act provides for different modes of transfer of property, it is not exhaustive of the modes of transfer of property. There may be a mode other than those as mentioned in the Transfer of Property Act by which property may be lawfully transferred by its owner in favor of another. Throwing of coparcenary property by a coparcener into the hotchpotch of the HUF is one such recognised mode of transfer. Section 14 of the Partnership Act, in our opinion, embodies another such provision. Section 14 of the Partnership Act is, in that sense, in that sense, a special provision and it cannot be said to be in derogation of or in conflict with any provision of the Transfer of Property Act, viz., ss. 5 or 54 thereof. As per s. 14 of the said Act, the contribution by a partner of his separate immovable property by throwing the same into the stock of the partnership firm has the effect of transferring the partner's share therein to that of the firm. No particular mode or form is provided for so bringing in a separate property of the partner into the stock of the firm and no deed whatsoever registered or otherwise is required to be executed by the partner for doing so. There is ample authority in support of this view of ours.

22. There is a very early decision of the English Court, namely, Robinson v. Ashton [1875] LR 20 Eq 25, which embodies this principle. In that case, a man become a member of a partnership and the agreement was that the business should be conducted at the mill belonging to him and he was credited in the books of the partnership with the value of the mill. It was observed that it makes no difference that his contribution was in the form of a mill and machinery and not in the form of money. It was held in that case that property became the property of the partnership firm.

23. The Calcutta High Court in the case of Prem Raj Brahmin v. Bhani Ram Brahmin [1946] 1 Cal 191 , on an examination of the relevant provisions of Indian Contract Act, 1872, and the Indian Partnership Act, 1932, including s. 14 of that Act, came to the conclusion that under the provisions of those two Acts, a written document and, consequently, registration is not necessary to bring in separate properties of the partners into the partnership stock. It was further held that by virtue of ss. 239, 253 and 265 of the Indian Contract Act and ss. 14 and 46 of the Indian partnership Act, they become the properties of the firm as soon as the partners intend to so bring them in and treat them as such and this is not prohibited by the Transfer of Property Act, 1882, or the Indian Registration Act, 1908. In a Full Bench decision of the Madras High Court in the case of Chief Controlling Revenue Authority v. Chidambaram, Partner, Thachanallur Sugar Mills and Distilleries, : AIR1970Mad5 , the said view was quoted with approval. Ramanathan Chettiar v. CED : [1975]99ITR410(Mad) , is another judgment of the Madras High Court in which it was held that no document of transfer is necessary when the partner brings into the partnership some of his assets with intention to treat the same as partnership assets, even though the assets so brought in consist of immovable properties. The share of a partner in a firm is movable property even though the firm owned immovable properties.

24. Thw Patna Court in the case of Firm Ram Sahay Mail Rameshwar Dayal v. Bishwanath Prasad, : AIR1963Pat221 , also had occasion to interpret s. 14 of the Partnership Act. It took note of similar provisions in the English Partnership Act, namely, s. 20(1) of the Law of Partnership of England. It was held as below (p. 223) :

'It will be noticed that all property and rights and interests which the partners may have brought in the common stock as their contribution to the common business are parts of the partnership property. Even if a property contributed by one partner be an immovable property, no document, registered or otherwise, is required for transferring the property to the partnership.'

25. A similar view was taken in the case of Sudhansu Kanta v. Manindra Nath, : AIR1965Pat144 . It was observed in this case that the Transfer of Property Act is not exhaustive about the modes of transfer. The contribution by a partner of an immovable property or interest therein by throwing the same into the stock of the partnership firm has the effect of transferring the partner's interest in that property to that of the firm.

26. Next is the decision of the Allahabad High Court in the case of Pandey v. CWT : [1977]108ITR214(All) . In that case, the assessed who was running a hotel as its sole proprietor, into a partnership with his son in 1966. He transferred his entire business assets including the hotel building which belonged to him individually to the new partnership firm, without executing a deed of conveyance for the same. The assessed in his wealth-tax assessment for the year 1967-68 claimed that he had transferred the said business including the hotel building in favor of the partnership firm and as such, only 75% share in the building as per his share in the firm was includible in his net wealth. The Allahabad High Court held that the business assets of the assessed consisting of the building stood transferred to the partnership without executing any deed of conveyance in this behalf as such a position was permissible was permissible as per s. 14 of the Partnership Act. The provisions of s. 5 the Transfer of Property Act and that of s. 17(1)(b) of the Registration Act, 1908, were duly taken note of by the Allahabad High Court in coming to its aforesaid conclusion.

27. The Rajasthan High Court in the case of CIT v. Amber Corporation , was directly concerned with the same question, namely, as to whether any immovable property could be brought by a partner into the common stock of the partnership firm without executing a deed of conveyance and getting the same registered. It was held that a reading of s. 14 of the Indian Partnership Act, 1932, made it quite clear that immovable property could be brought into the stock of a firm and no document registered or otherwise is required for transferring the property to the partnership as there was no provision in the Partnership Act or in the Indian Registration Act requiring such transfer to be registered. Such a case is not one of transfer at all under the provisions of the Transfer of Property Act.

28. As against the aforesaid authorities of various High Courts, Shri Wadhera, learned counsel for the Revenue, was unable to cite a single authority in which a contrary view may have been taken. He referred us to the decision of the Supreme Court in the case of CIT v. Hind Construction Ltd. : [1972]83ITR211(SC) . This authority does not at all deal with the point in issue. In that case, the assessed had transferred its stock of machinery of its earliar business on the book value of the earlier firm at a particular amount as its share of the capital of the newly constituted firm. The question for consideration was as to whether that constituted a sale and the difference of Rs. 4 lakhs in the value which was put to the stock and machinery brought by the assessed into the new firm and the value as put to the stock and machinery at the time of the division of the assets of the earlier firm was liable to income-tax, being the income of the assessed. It was held that a person by handing over his goods to a partnership of which he is partner as his share of the capital, cannot be considered as having sold the goods to the partnership. This authority, in fact, indirectly somewhat goes to show that a partner can bring his separate property into the stock of the partnership firm and such a transaction does not amount to sale of that property by the firm. In conclusion, in view of what has been said above, we hold that the Tribunal was right in coming to the conclusion in the case of the assessed for the assessment year 1965-66 that the assessed-firm has become the owner of the property in question and as such was entitled to the allowance of depreciation in respect of the same for the assessment year 1965-66 to the extent the property was used for purposes of the firm's factory. We accordingly answer the question referred to us in ITR No. 10 of 1974 in the affirmative, i.e., in favor of the assessed-firm and against the Revenue.

29. ITR No. 121 of 1974 (Assessment year 1965-66) :

Arjun Singh, the assessed, did not include any income from the property in question in the return filed by him in his individual assessment for the assessment year 1965-66. It was contended before the ITO that the building stood transferred to the partnership firm. The ITO rejected this contention of the assessed on the partnership firm. The ITO rejected this contention of the assessed on the ground that the property stood in the name of Arjun Singh (in the Municipal records). He included the net income from the property at Rs. 32,779 on an estimated basis. The AAC deleted this inclusion of income and observed that it was common ground that the assessed, Arjun Singh, was not in receipt of any rent or compensation from the firm in respect of the property. The Tribunal dismissed the Department's appeal against the order of the AAC following its decision in the case of the firm. Consequent to our finding in the case of the firm in ITR No. 10 of 1974, we answer the question referred to us in the affirmative, i.e., in favor of the assessed and against the Revenue.

30. ITR No. 4 of 1980 (Assessment year 1966-67) :

As per our discussion and findings in ITR No. 10 of 1974 (supra), we answer questions Nos. 1 and 2 in the nagative, i.e., in favor of the assessed and against the Revenue. We decline to answer question No. 3, it bring a question of fact.

31. ITR No. 275 of 1979 (Assessment year 1967-68 and 1968-69) :

As per our discussion and findings in ITR No. 10 of 1974 (supra), we answer questions Nos. 1 and 2 in the negative, i.e., in favor of the assessed and against the Revenue. We decline to answer question No. 3, it being a question fact.

32. ITRs. Nos. 1 to 3 of 1980 (Assessment years 1969-70, 1970-71 and 1971-72) :

As per our discussion and findings in ITR No. 10 of 1974, questions Nos. 3 and 5 are answered in the negative, i.e., in favor of the assessed and against the Revenue.

we decline to answer questions Nos. 1 and 2.

33. ITR Nos. 59 of 1975 (Assessment year 1966-67) :

The Tribunal held that Arjun Singh, partner, was entitled to deduction of depreciation allowance in respect of the property used for purposes of the firm's business in consequence of its finding in the case of the firm that the firm did not become the owner of the property and that Arjun Singh continued to be its owner. In the case of the firm for the assessment year 1966-67, being ITR No. 4 of 1980, we have answered the question in favor of the firm that it had become the owner of the property and as such was entitled to depreciation allowance thereon. Consequent to our findings in the case of the firm, we hold that Arjun Singh, partner, was not entitled to depreciation allowance for the assessment year 1966-67 and answer the question in the negative.

34. Shri Wadhera, learned counsel for the Revenue, submitted that even if it was held that the property continued to belong to Arjun Singh, partner, he was still not entitled to the depreciation allowance on the property in question to the extent it was used for purposes of the firm's business. No such plea of the Revenue was considered by the Tribunal and no finding has been recorded by the Tribunal in that regard. For that reason also we need not go into the said contention of Shri Wadhera.

35. ITR No. 66 of 1975 (Assessment year 1964-65) :

Arjun Singh, the assessed, in the return of income originally filed by him for the assessment year 1964-65, had included a sum of Rs. 6,000 as his income form the property in question. He filed revised returns for that year. He, however, excluded them from income from the property. In the penalty proceedings taken by the IAC under s. 271(1)(c) of the Act as referred to him by the ITO, he rejected the plea of Arjun Singh that he was under a bona fide belief that he was not entitled to any rental income from the firm. It was pointed out that different Benches of the Tribunal had taken different views on that issue in different years, even thought it was held for the assessment year 1964-65 that Arjun Singh was entitled to rental income from the firm and the firm had credited Rs. 6,000 as rental income in the account of Arjun Singh. This plea of the assessed did not find favor with the IAC and he levied a penalty of Rs. 7,500 on the assessed.

36. The Tribunal in appeal by the assessed accepted the said version of the assessed and deleted the penalty levied on the assessed. As per our discussion in ITR No. 10 of 1974, the firm has been found to have become the owner of the property in question right from November 8, 1960. Consequent to that finding of ours, no penalty was exigible in the case of Arjun Singh for non-inclusion of the income from that property. The question referred to us has accordingly to be answered in the affrmative. We may also state here that even if it be held that the property in question did not stand transferred to the firm, in that case also having regard to the facts and circumstances of the case, as discussed above, the Tribunal was justified in coming to the conclusion that Arjun Singh could be under a bona fide belief that he was no longer the owner of the property and as such was not liable to include the income from the property in his return for the assessment year 1964-65. In conclusion, we answer the question referred in the affirmative, i.e., in favor of the assessed, Arjun Singh, and against the Department. In view of the facts and circumstances of the cases, we leave the parties to bear their own costs.


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