Income‑tax‑‑‑

‑‑‑‑Business‑‑‑Balancing charge ‑‑Capital gains‑‑‑Firm‑‑‑Transfer of immovable property by firm to its partners‑‑‑No document in writing and no registration of transfer‑‑‑Transfer was not valid‑‑‑No balancing charge or capital gains arose‑‑‑Indian Income Tax Act, 1961, Ss. 41(2) & 54.

In order to effect valid and effective transfer of properties of the firm in favour of the partners, there must be a deed in writing and it must be registered especially where the properties are immovable properties. If there is no such valid transfer, the provisions of section 41(2) of the Income Tax Act, 1961, and the provisions relating to capital gains do not apply.

CIT v. Dadha & Co. (1983) 142 ITR 792 (Mad.) fol.

C.V. Rajan for the Commissioner.

JUDGMENT

N.V. BALASUBRAMANIAN, J.‑‑‑The assessee is a partnership firm styled S.Rajamani and Thangarajan Industries carrying on business in the manufacture and sale of soapnut powder. The assessment year with which we are concerned is 1974‑75, for which the relevant previous year ended on March 31, 1974.

The assessee‑firm was originally constituted by a deed of partnership between two partners, namely, Rajamani and Thangarajan, dated March 22, 1955, with effect from April 1, 1954. Certain properties situate at Thiruvathiyur High Road, Chennai, were purchased by the said two partners in their names and it was a common ground that the cost of the purchase was debited to the asset account of the book of the partnership firm and it was also shown as an asset in the balance‑sheet. The assessee‑firm also claimed depreciation on the properties for several assessment years. Similarly, other properties and assets were purchased subsequently in the names of the said two partners. During the accounting year relevant to the assessment year 1973‑74, the original partners, namely, S.Rajamani and Thangarajan, took five more partners and executed a fresh partnership deed. The original two partners, namely, Rajamani and Thangarajan, during the previous year relevant to the assessment year 1974‑75 took overall the assets of the firm at book value. According to the assessee, taking over of the properties of the firm originally purchased by the said two partners in their names did not result in any transfer attracting either the provisions of section 41(2) of the Act or the capital gains. The Income‑tax Officer, however, held that there was a sale or transfer which attracted the provisions of section 41(2) of the Act. He further held that by applying the provisions of section 52(2) of the Act, the fair market value of the assets should be taken into account to determine the capital gains arising on the transaction. He, accordingly, made the assessment bringing to charge not only the profit under section 41(2) of the Act, but also the capital gains. The Commissioner of Income‑tax (Appeals) deleted the profits under section 41(2) of the Act and the capital gains under section 52(2) of the Act, on the ground that the properties being immovable properties continued to be the properties of the firm and there was no valid transfer of the properties consisting of land and building by the firm to the said two partners. The Appellate Tribunal, on appeal, decided the case on two‑ issues. One issue that was raised before the Appellate Tribunal was that no registered document was necessary for the transfer of immovable property of the firm to the partners when the properties were purchased in the names of the said two partners. The second issue that was posed before the Appellate Tribunal was that the taking over of the properties of the firm by the two partners resulted in a transfer by the firm to the said two partners.

On the first question, the Appellate Tribunal held that the properties and assets belonged to only the said two partners and by the taking over of the said properties, there was no transfer of the properties which originally belonged to the partners even prior to the alleged taking over. The Appellate Tribunal also held that even assuming that the firm was the owner of the properties, there was no valid or effective transfer in the absence of a registered deed for the transfer of the immovable properties. The Tribunal held that as the properties involved were immovable properties and in the absence of any valid transfer, no question of any addition of profit under section 41(2) of the Act or charge to capital gains would arise. Aggrieved by the order of the Appellate Tribunal, the Revenue has sought for and obtained a reference and on the basis of the directions of this Court in T. C. P.No.54.of 1983, dated July 4, 1983, the Appellate Tribunal has stated a case and referred the following questions of law for our opinion:

"(1) Whether; the Appellate Tribunal's view that a partnership firm cannot, be the owner of any property or asset and, therefore, there cannot be a transfer from the firm to the two partners who took over all the properties and assets at book value, is sustainable in law?

(2) Whether, the Appellate Tribunal's conclusion that the two partners have taken over the properties and assets belonging to them is reasonable and valid having regard to the fact that the assessee‑firm had treated the properties and assets as its own and obtained the benefits of depreciation allowance in respect of the assets used for its business?

(3) Whether the Appellate Tribunal is justified in law in holding that the charge under section 41(2) and the liability to capital gains tax are not attr9cted in this case?

(4)? Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is justified in holding that the transfer, in order to be valid and effective so as to attract the provisions of section 41(2) and liability to capital gains tax must be by means of an instrument in writing?"

Mr.C.V. Rajan, learned counsel for the Revenue, submitted that the views of the Appellate Tribunal on both the issues are not correct as the properties were purchased out of the funds of the firm and depreciation was claimed by the firm and further the properties were shown as assets of the firm in its balance‑sheet. He, therefore, submitted that the view of the Appellate Tribunal that the original partners were the owners of the properties is not correct. He also submitted that the view of the Tribunal that there was no transfer is not justified in law.

Though notice was served on the respondent, there was no representation on behalf of the assessee.

We have carefully considered the arguments of learned counsel for the Revenue and perused the records also.

The Appellate Tribunal considered the two points and the Revenue canvasses the correctness of the views of the Tribunal and unless it is established that both the views of the Tribunal are incorrect, the Revenue is not entitled to succeed in the reference. The reasoning given by the Tribunal for the second issue that there should be a registered deed when the firm transferred the immovable properties to its partners is more appealing than the view of the Tribunal on the first issue. The view of the Appellate Tribunal that there should be a registered deed when the firm transfers its immovable properties to its partners is in conformity with the decision of this Court in the case of CIT v. Dadha & Co.(1983) 142 ITR 792, wherein this Court held that even assuming that the firm's properties were owned and enjoyed in common by the partners, such common properties cannot, be possessed or enjoyed in severalty unless there is a document in writing and the document is registered. This Court further held that where there is release of the partner's share in specified properties of the firm, there will be a valid transfer of the interest in immovable properties of the firm only where a document is written and., registered according to `the provisions of the Registration Act. This Court further held that mere book entry would not be sufficient for valid transfer of the interest of the partners in the immovable properties of the firm. The view of the Appellate Tribunal holding that in order to effect valid and effective transfer of immovable properties of the firm in favour of the partners, there must be a deed in writing and it must be registered especially where the properties involved are immovable properties is legally sustainable. In this view of the matter, we are not inclined to go into the further question whether the properties really belonged to the partners or not and if the second issue is decided by the Tribunal against the Revenue on this point, it‑will not be necessary to decide the first issue. The fourth question of law raised before us relates to the question whether there was a valid and effective transfer and we hold that the Tribunal was justified in holding that there was no valid and effective transfer so as to attract the provisions of section 41(2) of the Act, and the provisions relating to the liability under capital gains. Accordingly, we answer the fourth question of law referred to us in the affirmative and against the Revenue. In view of our answer to the fourth question, it is not necessary for us to provide an answer to questions of law 1 to 3 referred to us, and accordingly, we are not answering the said questions.

There will be no order as to costs, in the circumstances of the case.

M.B.A./642/FC?????????????????????????????????????????????????????????????????????????????????? Order accordingly.