D.K. Kapur J.
1. For the assessment year 1969-70, the following question has been referred to us under section 256(1) of the Income-tax Act, 1961, by the Income-tax Appellate Tribunal :
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the tenancy rights did not belong to the assessed-firm and any surplus realised by the transfer thereof, could not be included in its assessment ?'
2. The history of the case as set out in the statement of the case can now be shortly referred to. The assessed is a registered firm carrying on business in paints and varnishes. It has three partners - Shri Mohan Singh, Shri Dalip Singh and Shri Gian Singh, sons of the late Shri Harnam Singh. For the assessment year 1969-70, the firm was assessed on a total income of Rs. 1,77,043 which included a sum of Rs. 1,60,000 received on the transfer of the tenancy relation to 303 and 304, Fatehpuri, Chandni Chowk, Delhi, in which the firm's business was being carried on, to M/s. Bata Shoe Company. The contentions of the assessed before the Income-tax Officer were that the sum was a capital receipt or a casual receipt not liable to tax. The Income-tax Officer rejected these pleas holding that possession had been handed over on receipt of Rs. 1,60,000 and so the amount could not be treated as a windfall or a casual receipt.
3. Before the Appellate Assistant Commissioner, it was contended that this sum was not income received from trade. It was also pointed out at out of the sum of Rs. 1,60,000, Rs. 1,20,000 had been credited to the accounts of the three partners of the firm and the remaining amount of Rs. 40,000 had been credited to the account of Shri Rajinder Singh, a brother of the three partners, who was not connected with the firm. It was urged that the tenancy rights were a part of the goodwill which, according to a will dated May 8, 1956, made by Shri Harnam Singh, the father of the partners, had to be inherited in equal shares by the four sons i.e., Shri Mohan Singh, Shri Dalip Singh, Shri Gian Singh and Shri Rajinder Singh, who was not a partner. According to the assessed, the tenancy was that of Shri Harnam Singh, who died in October, 1956, and according to his will, the tenancy rights belonged not to the firm, but to the sons of Shri Harnam Singh. Further, it was urged that the sum of Rs. 1,60,000 was a windfall as it was not gained from an adventure in the nature of trade of the firm. According to the Appellate Assistant Commissioner, the tenancy rights were not mentioned in Shri Harnam Singh's will and after the firm was formed, the rent was being paid by the firm. It was accordingly held that the firm was the tenant and, thereforee, the sum of Rs. 1,60,000 paid by M/s. Bata Shoe Company on relinquishment of the tenancy rights was a sum earned by the firm under sections 45 and 47 of the Income-tax Act, 1961. In other words, the conclusion was that it was long-term capital gain of the firm. The net taxable gain was Rs. 1,16,667 which meant that a sum of Rs. 61,417 had to be included in the assess's income under section 80T of the Act.
4. The assessed went in further appeal to the Tribunal. There was a difference between the members which led to a reference to a third member. The Vice-President of the Tribunal was the Accountant Member and the Bench held that the tenancy rights originally belonged to Shri Harnam Singh In his individual capacity, which passed on his death to his legal hairs and not to the assessed-firm. Other points were left open by the Vice-President. The Judicial Member held that on the death of Shri Harnam Singh in October, 1956, tenancy was created in favor of the assessed reason of the landlord Realizing rent and, thereforee, the surplus realised on transfer was assessable in the assessed's hands.
5. The case was then referred to the President as a third Member, who held that originally the business belonged to Shri Harnam Singh in his individual capacity, but he converted the same by executing a partnership deed on May 1, 1952. In this firm, there were four partners, namely, Shri Harnam Singh, his two sons, Shri Mohan Singh and Shri Gian Singh, and a son-in-law, Shri Gurbachan Singh. Shri Gurbachan Singh was occupying premises No. 303, Fatehpuri, Chandni Chowk, which were transferred to the firm by this agreement. The tenancy rights of both the shops vested in Shri Harnam Singh in his individual capacity and on dissolution, he would be entitled to get the tenancy rights of both shops. Shri Gurbachan Singh retired from the partnership and then a new partnership was created between Shri Harnam Singh and his two sons, Shri Mohan Singh and Shri Gian Singh. This partnership deed provided that the business premise would belong on dissolution exclusively to Shri Harnam Singh. There was yet another change in the partnership when Shri Dalip Singh, another son of Shri Harnam Singh, was taken as a partner. In this deed also, it was provided that the tenancy rights in the business premises would vest exclusively in Shri Harnam Singh and none of the other partners would be entitled to a claim therein.
6. Shri Harnam Singh executed will on May 8, 1956, which was registered and this will provided that as long as he was alive, he would be the sole owner of the goodwill and on his death, the goodwill will pass to his four sons in equal shares and the daughters were not entitled. Shri Harnam Singh died in October, 1956. The three surviving partners continued the business under the old name and style of B. Harnam Singh & Sons as per the partnership deed dated November 3, 1956. The premises were eventually surrendered on March 31, 1961, and let out to M/s. Bata Shoe Company, who paid Rs. 1,60,000 to the assessed which was credited in four equal shares to Shri Mohan Singh, Shri Gian Singh, Shri Dalip Singh and Shri Rajinder Singh. It was also found that Shri Rajinder Singh had been making withdrawals from the amount credited to his account.
7. In accordance with the majority decision, the Tribunal held on December 7, 1974, that the tenancy rights did not belong to the assessed-firm and any surplus realised by the transfer could not be included in the assessment of the assessed-firm. This has led to the reference before us.
8. It has been urged by learned counsel for the Department that the Tribunal was wrong in holding that the tenancy rights belonged to the four sons of Shri Harnam Singh after Shri Harnam Singh's death. It is urged that the tenancy rights belonged to the partnership firm as the rent was being paid by the partnership firm. Nevertheless, we find it difficult to agree with the submission of the learned counsel for the Department. The history of the case as narrated in the President's order is borne out by the various Partnership deeds executed from time to time. The original partnership deed dated May 1, 1952, clearly specifies that Shri Harnam Singh was carrying on business in the name of B. Harnam Singh and Sons in Shop No. VI/304, Fatehpuri, Chandni Chowk, Delhi, and his two sons were working with him on a fixed remuneration. The fourth partner, i.e., the son-in-law, was carrying on business as a general merchant in Shop No. VI/303, but the said business had closed down. Para No. 10 of this deed shows that the landlord had agreed to transfer the tenancy to B Harnam Singh & Sons. Accordingly, it was stated that the tenancy rights of both shops would vest on dissolution in the first party, i.e., Shri Harnam Singh, and none of the other partners would be entitled to claim interest in the tenancy rights of these shops. This meant that Shri Harnam Singh alone would be entitled to the tenancy rights of both shops and this would not become partnership property. The next partnership deed dated September 16, 1954, continues this position because it is stated that thiya (business premises) and goodwill rights would belong to party No. 1. In this partnership, there were only three partners, the father and his two sons. The next partnership deed dated April 11, 1956, admitted one other son to the partnership. This also specified in para No. 6 that the tenancy rights and goodwill would belong exclusively to party No. 1 alone and none of the other partners Nos. 2, 3 or 4 were entitled to any claim therein. It follows that on the death of Shri Harnam Singh on October 17, 1956, the tenancy would be inherited by his legal heirs. Subsequently, on November 3, 1956, three of the sons entered into another partnership also to carry on business under the name of B. Harnam Singh & Sons. This deed is entirely silent as to the rights in the premises. It merely says that the business would be continued in the same premises, or at such other place as might be mutually agreed upon. It, thereforee, follows that there was no alteration in the legal position regarding the ownership of the tenancy rights.
9. Under the law of partnership, some property remains the individual property of a partner and some property becomes partnership property. On dissolution, the partnership property has to be divided amongst the partners in accordance with the partnership deed, but the individual property reverts back to the individual owner. On the death of Shri Harnam Singh, the firm stood dissolved and, thereforee, the tenancy would revert to the heirs of Shri Harnam Singh.
10. Learned counsel for the Department urges that whatever the position might be in law, once the rent was paid by the new firm formed on November 3, 1956, that firm alone would be the tenant and not the legal heirs of Shri Harnam Singh. We find it difficult to accept this contention because this is a question of inheritance and not a question of contract. All along from 1952 onwards, the rent was admittedly being paid by different firms, but at no point of time did the firm become the tenant. It was as if Shri Harnam Singh had allowed the partnership to use his individual property as business premises along with himself. In other words, Shri Harnam Singh as the tenant of the premises had taken in partners who were entitled to use the shop along with himself, but he himself retained the tenancy. The payment of rent by the firm would be payment on behalf of Shri Harnam Singh and the tenancy all along remained with Shri Harnam Singh individually. On Shri Harnam Singh's death, his legal heirs would succeed to the tenancy rights. Like every other property belonging to Shri Harnam Singh, his tenancy rights would also come to his legal heirs. Learned counsel for the Department urged that the tenancy rights were not inheritable as they were personal. But, this is not so. The tenancy rights are in rem which passed to the heirs on succession. On the death of Shri Harnam Singh, his legal heirs would become entitled to the premises. The fact that the heirs allowed the new firm set up by the three sons to continue to operate would be explained by the fact that all the three sons were also heirs who could use the premises being co-tenants along with the other heirs.
11. The next question is, who are the legal heirs Clearly, the four sons are the legal heirs. According to the will dated May 8, 1956, registered on June 22, 1956, the goodwill of the firm was left to the four brothers and not to the four daughters or the widow, Shrimati Harbans Kaur. It is urged by learned counsel that the will does not cover the tenancy rights because the goodwill does not include tenancy rights. This is a moot point which need not be resolved in this particular case. We are only concerned with whether the tenancy rights belong to the assessed-firm and not with the question as to who are the other heirs of Shri Harnam Singh. There are five other persons who could have claimed that they were entitled to the tenancy rights, but are not before us. So, we will say nothing about the four daughters and the widow having any rights in the firm. The legal position is that the heirs of Shri Harnam Singh are entitled to the sum of Rs. 1,60,000. From the manner in which the sons have dealt with the amount, it appears that they have divided it into four parts and thus each received Rs. 40,000. In other words, they at least have accepted the fact that none of the other legal heirs succeeds to this sum.
12. Some other cases have been cited before us relating to goodwill and partnership property. As a matter of fact, the present case does not involve any of the questions decided in those cases. In CIT v. B. C. Srinivasa Setty : 128ITR294(SC) , a goodwill of a firm was transferred to a newly constituted firm and the question arose whether capital gains arose. It was there held that the preponderance of judicial opinion was of the view that the transfer of goodwill initial] y generated in a business does not give rise to capital gains. As observed above, we have held that this is not a case of goodwill because it was the individual property of Shri Harnam Singh in accordance with the partnership deed. This question does not really arise in the present case.
13. In Lachhman Das v. Mt. Gulab Devi : AIR1936All270 , a question arose as to whether the assets held by the joint Hindu family which was disrupted and the assets were then used in a partnership set up by the erstwhile members, were assets of the business or assets of the partners. It was held that the assets were not those of the partnership but of the members. In another judgment cited before us, Boda Narayana Murthy a Sons v. Valluri Venkata Suguna, : AIR1978AP257 , a question arose whether property being used by the partnership became the property of the partnership. In that case, there was a cinema house called the 'Minerva Talkies' which was bought by five persons. It was found that as there was no evidence to show that these persons had bought the property as partners, the fact that they eventually ran a partnership to exhibit films in the cinema would not change the property into partnership property. There is a reference in that case to an unreported judgment of the Supreme Court, Arjun Kanoji v. Santa Ram Kanoj Tankar  UJSC 405, wherein it was observed that unless there was an agreement to the contrary, property belonging to an individual which was used by the partnership, did not become partnership property.
14. Thus, these judgments would support the decision of the Tribunal concerning the nature of the property. The legal position is even otherwise quite clear and is not capable of any opposite construction. A property can be acquired by a partnership using partnership funds. In such a case, the property becomes partnership property. A property can brought into use by a partnership by a member of a partnership. In such a case, the property remains that of the partner though it is used by the partnership. At the time of dissolution, the partnership property has to be dealt with on the principles of general accounting between partners. The winding up of the partnership involves a determination of the share of each partner in that partnership property. The individual property of a partner is outside the winding up procedure, it merely reverts to the owner. A third case is possible which is when an individual bring his own property into the partnership, but treats it as a partnership assets. In such a case, the property will cease to be his individual property. There can be no doubt on the reading of the various partnership deeds in the present case that Shri Harnam Singh always had a clause in the partnership to the effect that he would enjoy the tenancy rights and the goodwill of the firm on its dissolution. thereforee, there was no intention to treat this property as a partnership asset.
15. The next stage is after Shri Harnam Singh's death. It was possible for the other legal heirs to give up their rights in the tenancy, but no such intention can be made out from the mere fact that the partnership firm paid the rent. This position was true right from the inception. The finding is that from 1952 onwards, the rent was paid by B. Harnam Singh & Sons, i.e., even in the lifetime of Shri Harnam Singh, the rent was paid by the firm. Clearly, such payment was on behalf of the tenant, Shri Harnam Singh. After the death of Shri Harnam Singh, the payment would be on behalf of the legal heirs. Thus, at no stage did the property become a partnership asset and, consequently, the answer to the question referred to us has to be in the affirmative to the effect that the Tribunal was right in holding that the tenancy did not belong to the assessed.
16. As the question is, in a sense, a novel one, we leave the parties to bear their own costs.