D. S. DAVE C.J. - This is a reference by the Income-tax Appellate Tribunal, Delhi Bench, under section 66(2) of the Indian Income-tax Act, 1922, which will hereinafter be referred to as 'the Act'.
The question set out for answer is as follows :
'Whether, on the facts and circumstances of this case, the income from immovable properties forming part of the assets of the assessee-firm falls properly to be assessed under section 9(3) of the Indian Income-tax Act as being in the hands of the partners of the firm, and not under section 9(1) as being in the hands of the firm ?'
The facts giving rise to the reference, as narrated in the agreed statement of the case, may be stated briefly in order to appreciate the said question.
The New Cotton and Wool Pressing Factory, Beawar, which will hereinafter be referred to as 'the assessee', is an unregistered partnership firm consisting of thirteen partners. It is running a wool and cotton pressing factory at Beawar in Ajmer District. The capital contributed and profit-sharing ratio of the said partners is as follows :
Name of partners
Share in a rupee
Deokarandas Ramkumar, Nawalgarh
Kanhaiyalal Saraogi, Telhara
Sheodathrai Sunderlal, Nawalgarh
Balmukand Dwarkadas, Calcutta.
Nathmal Jhunjhunjala, Jaipur
Smt. Jankai Bai, Jaipur
Jagdish Prasad Balkishan Beawar.
Smt. Ratan Kanwar Choukhani Nawalgarh.
Smt. Kamala Bai Choukhani, Kanpur
Mahavir, Prasad Choukhani, Nawalgarh
Madhoprasad Choukhani, Nawalgarh
Gajanand Choukhani, Kanpur.
J. K. Sarkar, Allahabad
Among other assets of the firm, there are residential buildings and godowns within the premises of the factory and they are yielding rental income. For the assessment year 1957-58, and the relevant accounting year ending July 31, 1956, the Income-tax Officer assessed Rs. 39,596 as the total income of the firm. This included rental income derived from the immovable properties amounting to Rs. 11,083, the rest being the income from the business of pressing of bales carried on by the firm during the said year. It was contended by the assessee before the Income-tax Officer that the rental income from the immovable properties should not have been assessed as the income of the firm under section 9(1) of the Act, but that it should have been assessed as income in the hands of the partners of the firm in proportion to their profit-sharing ratio under section 9(3) of the Act. The contention was repelled by the Income-tax Officer of February 10, 1958, by his order which is marked annexure 'A'. The assessee filed an appeal against this order before the Appellate Assistant Commissioner, but it was dismissed on October 9, 1958. This order so marked annexure 'B'. The assessee then approached the Income-tax Appellate Tribunal in second appeal, but that was also dismissed on April 14, 1960. Thereafter, he presented an application for reference before the Tribunal, but he was not successful. He then filed an application in this court under section 66(2) of the Act and it was at the direction of a Division Bench of this court that the present reference has been made.
Learned counsel for the assessee has raised two-fold arguments before us. It is urged, in the first instance, that it was not the firm but the partners thereof who were owners of the immovable properties which yielded the central income, that the tax could not, therefore, be payable by the assessee-firm and the firm as such could not be assessed for that income. Thus, according to learned counsel, the provisions of section 9(1) of the Act could not attracted to the present case. It is next contended that the respective shares of the thirteen partners were definite and ascertainable and, therefore, they could not be assessed as an association of persons and the share of each one of them in the income from the properties should have been included in that total income of individual partners and assessed and such. In other words, the amount received by each partner from the rental of the properties should have been included in his total income and then assessed to income-tax, if it was at all payable.
Both the contentions have been stoutly opposed by learned counsel for the department.
Now, it would be proper to take up the first contention first.
It is very candidly conceded by the assessees learned counsel that according to section 3 of the Act, firm is one of the classes of assessee mentioned therein and, therefore, it can be treated as an assessee in respect of its total income of the accounting year. What is contend by learned counsel is that no tax is payable by the firm as an assessee under the head 'Income from property' in respect of the bona find annual value of property consisting of any building or lands appurtenant thereto, because the firm as such is not the owner of the immovable property and the ownership of the property vests in the partners of the firm. In support of his argument, has he referred to section 19 of the Indian Partnership Act, 1932. It would be proper to reproduce here section 9(1) of the Act and section 19 of the Indian Partnership Act on whose interpretation the above argument is based. They run as follows.
'9. (1) The tax shall be payable by an assessee under the head Income from property in respect of the bona fide annual value of property consisting of any buildings or lands appurtenant thereto of which he is the owner, other than such portions of such property as he may occupy for the purposes of any business, profession or vocation carried on by him the profits of which are assessable to tax ......'
'19. (1) Subject to provisions of section 22, the act of a partner which is done to carry on, in the usual way, business of the final carried on by the firm, binds the firm.
The authority of a partner to bind the firm conferred by this section is called his implies authority.
(2) In the absence of any usuage or custom of trade to the contrary, the implies authority of a partner does not empower him to -
(a) submit a dispute relating to the business of the firm to arbitration,
(b) open a banking account on behalf of the firm in his own name,
(c) Compromise or relinquish any claim or portion of a claim by the firm,
(d) withdraw a suit or proceedings filed on behalf of the firm,
(e) admit any liability in a suit or proceedings against the firm,
(f) acquire immovable property on behalf of the firm,
(g) transfer immovable property belonging to the firm, or
(h) enter into partnership on behalf of the firm.'
It is pointed out by learned counsel that although according to section 19(1) the act of a partner which is done to carry on in the usual way business of the kind carried on by the firm binds the firm (subject, of course, to the provisions of section 22), according to sub-section (2), clauses (f) and (g), a partner is not empowered to acquire any immovable property on behalf of the firm nor is empowered to acquire any immovable property on behalf of the firm nor is empowered to transfer immovable property belonging to the firm.
We have given due consideration to this argument, but, in our opinion, it is not tenable. It may be observed that section 19 deals with implies authority of the partner as agent of the firm. Sub-section (1) lays down that subject to the provisions of section 22, if a partner of the firm does something and if that act is done by him to carry on in the usual way, business of the kind which is carried on by the firm, him act binds to firm, that is, in other words, his act is as much binding on other partners as on himself. This kind of authority of the partner to bind the firm which is confirmed by this section, is called his implied authority. Sub-section (2) is provided to place certain restrictions on the implied authority of a partner unless there is any usage or custom of trade to the contrary. If in a particular case, it is found that on account of any usage or customs of trade, a partner enjoys implies authority to acquire immovable property on behalf of the firm or to transfer immovable property on behalf of the firm or to transfer immovable property being to the firm, sub-section (2) would not come in his way. Moreover, the very perusal of clause (g) would show that it contemplates immovable property 'belonging to the firm'. It cannot, therefore, be urged on the basis of this clause that immovable property cannot belong to the firm in any case and the firm cannot be held liable as an assessee to pay income-tax under the head 'Income from property' in respect of the bona fide annual value of such immovable property. On the contrary, it may be pointed out that section 14 and 15 of the Indian Partnership Act make a clear distinction between the property of the firm as such, and property of its individual partners. Both the sections are reproduced there to appreciate this position of law properly. They are as follows :
'14. Subject to contract between the partners, the property of the firm includes all property and rights and interests in property originally brought into the stock of the firm or acquired, by purchase or otherwise, by or for the firm or for the purposes and in the course of the business of the firm, and includes also the goodwill of the business.
Unless the contrary intention appear, property and right and interests in property acquired with money belonging to the firm are deemed to have been acquired for the firm.
15. Subject to contract between the partners, the property of the firm shall be held and used by the partners exclusively for the purposes of the business.'
A perusal of section 14 would show that, unless there is a different contract between the partners, the property of the firm would include all property and right and interests in property originally brought into the stock of the firm, or acquired by purchase or otherwise, by or for the firm, or for the purposes and in the course of the business of the firm. It cannot be denied that the term 'property' envisaged by this section includes both movable and immovable property and even the goodwill of the business. It is further clear from its perusal that, unless a contrary intention can be spelled out, if any property and right and interest in property are acquired with money belonging to the firm, then they will be deed to have been acquired for the firm. It may be pointed out that section 15 further provides that, unless there is a different contract between the parties, the property of the firm should be held and used by the partners exclusively for the purpose of the business. The word 'exclusively' is a terms of strong connotation and its use in this section is a clear warning to the partners that, even if one or more of them are managing the property of the firm, it must be held and used by them only for the purposes of the business of the firm. This makes it crystal clear that they cannot claim to hold it in their individual capacity nor can they use it for their individual purpose as distinguished from the purpose of the business of the firm. It is not understandable how it can be urged in the face of these section that the income of such property cannot be assessed in the hands of the firm as an assessee when section 3 of the Act lays down that the firm can be an assessee. It is true that in the ultimate analysis it is the partners of the firm taken as a hole who are owners of the property, but when these partners go by a firm name in their collective capacity and when a particular immovable property or properties come within the submit of section 14 of the Partnership Act, the income from such property can, in our opinion, be assessed under section 9(1) of the Act.
We may now turn to the next argument of the learned counsel for the petitioner. It is urged by him that the immovable property whose income was assessed belonged to thirteen partners, but since their respective shares were definite and ascertainable, they could not be assessed as an association of persons or in the firm name, but the share of each such person in the income from the property as computed in accordance with this section should have been included in his total income. Sub-section (3) of section 9 of the Act on which reliance has been placed may be reproduced here. It runs as follows :
'9. (3) Where property is owned by two or more persons and their respective shares are definite and ascertainable, such persons shall not in respect of such property be assessed as an association of persons, but the share of each such person in the income from the property as computed in accordance with the section shall be included in his total income.'
To our mind, this sub-section deals with income of that immovable property which is owned by two or more persons as co-owners and when their respective shares in that property are definite and ascertainable. We do not think this sub-section can normally apply in the case of income from partnership property. The property of the firm as envisaged in section 14 of the Partnership Act is a part of the assets of the firm. In law the joint effects of a partnership firm belong to a firm and a partner has no individual property in specific assets of the firm and has no exclusive right to possess or use the partnership property. The interest of each partner is a share in the firm that the partnership debts are paid and after the partnership accounts are settled and the rights of partners inter se are adjusted. In the absence of an express agreement, no partner separately owns or has an exclusive right in any part of the partnership property. In the present case, it is common ground between the parties as mentioned in the agreed statement of the case that 'the immovable properties were admittedly acquired out of the partnership funds.' It is not the petitioners case that while acquiring the immovable properties, the various partners of the firm had contributed particular amounts and that it was settled amongst them that they would hold their shares in the properties in proportion to the contribution made by each partner for purchasing them. If the property were purchased out of partnership funds, how could it be said that the shares of individual partners in those properties were definite and ascertainable Unless the accounts of the firm were settled and it was known how much was payable to a particular partner out of the partnership fund on the date of purchase, it could not be said what was his share in the value of the specific property. Section 48 of the Partnership Act lays down the mode of settlement of accounts between the partners. It reads as under :-
'48. In settling the accounts of a firm after dissolution, the following rules shall, subject to agreement by the partners, be observed :
(a) Losses, including deficiencies of capital, shall be paid first out of profits, next out of capital, and, lastly, if necessary, by the partners individually in the proportions in which they were entitled to share profits.
(b) The assets of the firm, including any sums contributed by the partners to make up deficiencies of capital, shall be applied in the following manner and order :-
(i) in paying the debts of the firm to third parties;
(ii) in paying to each partner rateably what is due to him from the firm for advances as distinguished from capital;
(iii) in paying to each partner rateably what is due to him on account of capital; and
(iv) the residue, if any, shall be divided among the partners in the proportions in which they were entitled to share profits'
Unless the accounts are settled in the mode indicated above, it is difficult to say at any particular period of time what would be the definite share of each partner in the property of the firm. It is well settled that a partner cannot claim partition in the immovable property of the firm so long as the firm is not dissolved. If and when a firm is dissolved, losses have to be paid first as indicated in clause (a). Thereafter, the assets of the firm including the sums contributed by the partners to make up deficiencies of capital must be applied in the order indicated in clause (b). It is only after the debts of the firm payable to the third party are paid and the amount payable to each partner rateably, what is due to him from the firm for advances as distinguished from capital, is paid, that it can be known what is due to him to be paid on account of capital and how much a particular partner would be entitled to receive out of the residue. Immovable property of a firm is included in the total assets of the firm and thus there being no definite share of a partner in the immovable property of the firm, it cannot be said that he has a particular share in the income from the property and sub-section (3) would not, therefore, be attracted. The Tribunal was right in holding that 'while a co-owner can alienate or sell his share in the property, a partner of a firm has no right of alienation of a share either in the profits or assets of the firm and that a partners share in the assets of the firm is not in the same ration in which he shares the profits or losses................ and that the provisions of section 9(3) of the Act apply only to co-owners and not to partners of a firm.'
We may now examine the authorities which were cited before us by the petitioners learned counsel. The first case to which he has referred is Commissioner of Income-tax v. Smt. Indira Balkrishna. In that case the co-widows of a Hindu governed by Mitakshara law had inherited his estate consisting of immovable properties, shares, money, lying in deposit and share in a registered firm. It was held by their Lordships that 'the co-widows succeed as co-heirs to the estate of their deceased husband and take as joint tenants with rights of survivorship and equal beneficial enjoyment; they are entitled as between themselves to an equal share of the income. Though they take as joint tenants, no one of them has a right to enforce an absolute partition of the estate against the others so as a destroy their right of survivorship. But they are entitled to obtain a partition of separate portions of the property so that each may enjoy her equal share of the income accruing therefrom.' This case being one of co-heirs is of little help to the petitioner since we have already observed that a partner of the firm is not entitled to obtain a partition of immovable property of the firm and separately enjoy the income accruing therefrom.
In the next case referred by him, viz., Dulichand Laxminarayan v. Commissioner of Income-tax, it was held by their Lordships of the Supreme Court that 'the word persons in section 4 of the Indian Partnership Act, which has replaced section 239 of the Indian Contract Act, contemplates only natural or artificial, i.e., legal persons, and for the reasons stated above, a firm is not a person and as such is not entitled to enter into a partnership with another firm or Hindu undivided family or individual'. This case has also no bearing on the point raised in the present case.
Similarly, the observations made in the other three cases, which have been referred by him, namely, Commissioner of Income-tax v. M. A. Baporia, Commissioner of Income-tax v. Dewan Bahadur Dewan Krishna Kishore, and Commissioner of Income-tax v. Murlidhar Jhawar and Purna Ginning and Pressing Factory, have no direct application to the present case.
Learned counsel for the respondent also very frankly conceded before us that he could not lay his hands on any authority which has a direct bearing on the point referred in this case.
Our answer to the question referred, therefore, is that, on the facts and in the circumstances of this case, the income from immovable properties forming part of the assets of the assessee-firm falls properly to be assessed under section 9(1) of the Indian Income-tax Act, 1922, in the hands of the firm and not under section 9(3) of the said Act in the hands of the respective partners of the firm. The petitioner will pay the costs of this court to the non-petitioner.