T.P. Mukerjee, J.
1. This reference under Section 66(1) of the Indian Income-tax Act, 1922 (hereinafter referred to as the Act), raises certain important questions of law on which there have been no authoritative pronouncements so far.
2. The applicant in this case is the firm styled as M/s. Ram Narain and Brothers of Lucknow, which was constituted under a deed of partnership dated June 18, 1953. It was accorded registration under Section 26A of the Act during all relevant years. There were seven partners including one Sri Ram Narain. Their shares, which are unequal, are mentioned in Clause (iv) of the deed of partnership. The business of the partnership was that of a dealer in iron and hardware goods. On October 14, 1954, the firm purchased a property consisting of certain leasehold rights in plots Nos. 90, 91 and 92 in an industrial area of Lucknow, together with the superstructure standing thereon, including a lime mill, a godown, quarters and outhouses, etc., for a sum of Rs. 27,000. In the sale deed of the said date, registered on October 16, 1954, the purchasers are shown as ' M/s. Ram Narain and Brothers through Sri Ram Narain, son of Hari Ram, a partner of the said firm, resident of Aish Bagh, Lucknow '.
3. After purchase, the income from this property was returned as the income of the firm and it was assessed as such under Section 9 of the Act up to the year 1957-58.
4. In the assessment for the year 1958-59, this income, which amounted to Rs. 9,690, was excluded from the return of the firm and shown in the individual returns of the partners on the ground that the ownership of the property had been transferred to the individual partners by adjustments made in the relevant entries in the books of account. The debit balance relating to this property in the firm's books had been transferred to the accounts of the partners in their profit-sharing proportions. It was contended before the Income-tax Officer that by such adjustments the property which belonged to the firm had been transferred to the partners and, therefore, the income from the property could not be included in the total income of the firm. It was also contended that the firm, not being a juristic personality, could not be owner of properties in the legal sense, and, therefore, the income from the property could not be assessed in its hands under Section 9 of the Act. The Income-tax Officer rejected the claim put forward on behalf of the firm and included the amount in its total income for that year. On appeal, however, the Appellate Assistant Commissioner upheld the contention of the assessee-firm and excluded the income from property from the assessment of the firm.
5. For the next assessment year 1959-60, the income from the said property was not included by the Income-tax Officer in the total income of the firm in view of the order made by the Appellate Assistant Commissioner referred to above. The Income-tax Officer assessed the income in the hands of the partners according to their profit-sharing proportions.
6. For the assessment year 1960-61 the Income-tax Officer again assessed the income from the said property in the total income of the firm holding that the property continued to belong to it despite the adjustments made in the book entries. There was a further contention before the Income-tax Officer that, as the partners had definite shares in the property, the provisions of Section 9(3) of the Act were attracted and, therefore, the income from the property should be assessed in the hands of the partners according to their shares. The Income-tax Officer rejected this contention holding that Section 9(3) applied only to co-owners forming an association of persons and that it did not apply to the case of co-partners of a firm. The assessee again appealed to the Appellate Assistant Commissioner who accepted the assessee's claim and allowed the appeal holding that the firm, not being a juristic entity, was not competent to hold property. The Appellate Assistant Commissioner held that the provisions of Section 9(3) were clearly applicable and it would be wrong to tax the income from the property in the hands of the firm. Against the order of the Appellate Assistant Commissioner the Income-tax Officer filed an appeal to the Appellate Tribunal. The Tribunal allowed the appeal holding that the property belonged to the firm itself and that the income therefrom was liable to tax in its hands. It also held that the provisions of Section 9(3) of the Act could not be invoked as the property was owned by the firm as such, and not by the partners as individuals having definite and ascertainable shares in the property. The Appellate Tribunal thus restored the order of the Income-tax Officer.
7. On the above facts the following questions of law have been referred to this court for opinion at the instance of the assessee:
' 1. Whether the property admittedly once owned by the firm as such, ceased to be so owned by it by reason of the entries made in the account books of the firm ?
2. Whether, even though the property is owned by the firm as such, can it be held to have been owned by its partners, with definite and ascertainable shares, so as to constitute themselves into an association of persons, so that the share of each partner in the income from the property is includible in his total income '
8. As already noted, the property in question was acquired by the firm through Sri Ram Narain, one of its seven partners, and the sum of Rs. 27,000 being the price of the property was paid out of the funds of the firm. It was contended on behalf of the assessee that, in view of the decision of the Supreme Court in Dulichand Laxminarayan v. Commissioner of Income-tax : [1956]29ITR535(SC) , it must be held that a firm is not a legal entity but a compendious name for the partners who constitute it and, therefore, it is the partners who are really the owners of the property. The firm, it was contended, is not capable of owning property, movable or immovable. The contention that a firm cannot own property, even for the purpose of its business, is hardly tenable. Such ownership is clearly postulated in Section 14 of the Indian Partnership Act 1932, which runs thus:
'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 appears, property and rights and interests in property acquired with money belonging to the firm are deemed to have been acquired for the firm. '
9. Section 15 of the said Act, however, circumscribes the purpose for which the property of the firm can be used. This section says that such property can be used only for the purpose of its business and no other. It states:
'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.'
10. The law in England is also the same.
11. The provisions of sections 14 and 15 of the Indian Partnership Actrelating to partnership property are almost identical in terms with those of Sections 20(1) and Section 21 of the English Partnership Act, 1890. It is clear that, although, as laid down by the Supreme Court in the case of Dulichand Laxminarayan v. Commissioner of Income-tax, a firm is not, strictly speaking, a juristic entity, both the English as well as the Indian law relating to partnership concedes to the firm a degree of personality and it is deemed to be capable of owning and holding property, both movable and immovable.
12. Now, the material question for decision in this case is whether immovable property of 'the firm can be transferred by the partners and, if so,when such transfer is made by the partners in favour of themselves,whether it can be effected by adjustment of entries in the books of thefirm relating to the investments made on the property. The IndianPartnership Act lays down that a partner is not authorised, by reason of hisimplied authority, as an agent of the firm, to transfer immovable propertyof the firm in the absence of any usage or custom of trade to the contrary, Section 19 runs as follows :
' 19. (1) Subject to the provisions of Section 22, the act of a partnerwhich is done to carry on, in the usual way, business of the kind carriedon by the firm, binds the firm.The authority of a partner to bind the firm conferred by this section is called his ' implied authority '.
(2) In the absence of any usage or custom of trade to the contrary, theimplied authority of a partner does not empower him to ...
(g) transfer immovable property belonging to the firm, or ...' '
13. Sub-section (1) lays down that a partner has the implied authority, subject to the provisions of Section 22, to do any act to carry on in the usual way, business of the kind carried on by the firm. Sub-section (2) imposes certain limitations on the implied authority of a partner. In particular, Clause (g) of Sub-section (2) provides that such implied authority of a partner does not empower him to transfer immovable property belonging to the firm, in the absence of any usage or custom of trade to the contrary. This clause clearly postulates that where j there is no usage or custom of trade to the contrary, a partner has the implied authority to transfer immovable property of the firm. It is indisputable that all the partners, conjointly, can transfer immovable property belonging to the firm even though any one of the partners, individually, may not be competent to do so. Such transfer must, as laid down in Sub-section (1), be subject to the provisions of Section 22 which runs as follows:
' 22. Mode of doing act to bind firm.--In order to bind a firm, an act or instrument done or executed by a partner or other person on behalf of the firm shall be done or executed in the firm name, or in any other manner expressing or implying an intention to bind the firm. '
14. This section contemplates that, in order to bind the firm, an act may be done or an instrument may be executed in the firm name, by a partner or partners, on behalf of the firm, expressing or implying an intention to bind the firm. Quite obviously, an instrument will have to be executed by a partner or partners where such execution is necessary in law. Under Section 54 of the Transfer of Property Act, transfer of tangible immovable property of the value of one hundred rupees and upwards can be made only by a registered instrument. It is manifest, therefore, that if tangible immovable property belonging to the firm worth more than rupees one hundred has to be transferred, the transfer can be effected only by a registered instrument.
15. In England, Section 22 of the Partnership Act, 1890, introduces a legal fiction whereby partnership realty is to be treated as movable property as between the partners inter se. That section is quoted below :
' 22. Conversion into personal estate of land held as partnership properly.--Where land or any heritable interest therein has become partnership property, it shall, unless the contrary intention appears, be treated as between the partners (including the representatives of a deceased partner), and also as between the heirs of a deceased partner and his executors or administrators, as personal or movable and not real or heritable estate.'
16. In spite of the provisions of this section, it has been held that when partnership property is converted into separate property of the partners a deed is necessary where the property consists of land. Lindley observed as follows in his book on Partnership (12th edition, at page 370):
' It is competent for partners by mutual agreement amongst themselves to convert that which was partnership property into the separate property of an individual, or vice versa. And the nature of the property may be thus altered by an agreement to that effect : for neither a deed nor (save where the property consists of land) even a writing is absolutely necessary;...'
17. At pages 394-395 of the same treatise the learned author deals with the manner in which the share of a partner in partnership can be transferred:
' Form of transfer.--In so far as the share of a partner consists of a right, on dissolution, to a proportionate part of all the assets, the nature of the assets must be considered and the transfer effected in such form as the nature of the assets requires. Where the assets consist of chattelsand legal (as opposed to equitable) chooses-in-action for which no special form is prescribed by statute, the transfer may be effected informally by word of mouth. Where, however, such assets include an equitable interest in land or, it seems, in personalty, then by Section 53(1)(c) of the Law of Property Act, 1925, dispositions of such an equitable interest must be in writing signed by the person disposing of the same. Where land forms part of the partnership assets, the beneficial interest of the partners therein will, in all cases, consist of an equitable interest under a trust for sale, but since such an interest is an 'equitable interest' for the purposes of Section 53(1)(c) of the Law of Property Act, 1925, dispositions thereof must be in writing. Notwithstanding Section 22 of the Partnership Act, 1890, it is conceived that the position is as stated above whether the transfer is to a stranger or to another partner.'
18. We have underlined* the above few lines for the sake of emphasis.
19. It would thus appear that in England transfer of the share of a partner who has right, on dissolution of the partnership, to a proportionate part of the assets thereof must be effected in such form as the nature of the assets requires. If the assets consist entirely of chattels or movable property, the transfer may be effected orally but where such assets include immovable property or land, the transfer may be effected only by a written instrument. When, therefore, a partner transfers his share in a partnership of which the assets include land, it is necessary to execute a deed of conveyance in spite of the clear provision of Section 22, quoted above, under which the partnership realty is to be treated as personalty or movable estate as between the partners themselves. It follows, therefore, that when a particular item of immovable property, being part of the partnership assets, is sought by the partners to be converted into their personal property such conversion may be effected only by means of a written instrument according to the English authorities cited by Lindley.
20. As already noted, there is no Indian authority bearing directly on the question of such conversion ; at least, none has been cited at the Bar. The provisions of the Indian Partnership Act, 1932, are based mainly on the English Partnership Act, 1890, and the wordings of the principal sections of the English enactment have been maintained in the Indian enactment without substantial change. Prior to the enactment of the Indian Partner-ship Act, 1932, the law relating to partnership was contained in Chapter XI of the Indian Contract Act, 1872, It would appear from the report of the Special Committee appointed in 1930 by the Government of India to consider the Bill to define or amend the law relating to partnership in India, that it was considered expedient to incorporate the language of the English enactment in the important provisions of the Indian Partnership Act with a view to ' attract to difficult cases in India the benefits of English judicial experience. ' It is well settled that where the basis of the Indian legislation on a particular subject is the English law, the courts would be justified in seeking guidance and help from the decision of the English courts. In State of Punjab v. Sodhi Sukhdeo Singh : [1961]2SCR371 , the Supreme Court has observed that in such cases the correct way of looking at the Indian statute is to interpret it in the manner which is in accord with the English law.
21. If the principles of the English law are to be followed it would appear that the partners of a firm can convert immovable property belonging to the firm into their personal property only by means of an instrument in writing. It may be mentioned here that there is no provision in the Indian Partnership Act corresponding to Section 22 of the English Partnership Act, 1890. That being so the legal fiction which permits partnership realty being treated as personalty as between partners infer se is not available here and the need for execution of an instrument of conveyance as contemplated in Section 22 of the Indian Partnership Act, quoted above, becomes imperative. In point of fact, conversion of firm's property into personal property of the partners involves a declaration that the interest of the firm in the property is extinguished and that thenceforward the property would belong to the partners in their individual capacity according to their shares in the firm. Such a declaration falls within the purview of Section 17(1)(b) of the Indian Registration Act and the instrument of conversion must be registered.
22. Although, as we have noted above, there seems to be no authoritative Indian decision on the question as to how an item of immovable property belonging to a firm may be transferred to the partners during the continuance of the firm, there is a decision of the Madras High Court in the case of Alasyam Ramappa v. Panyam Pheru Thirumalappa A.I.R. 1939 Mad. 884, on an analogous issue which arose on the dissolution of a partnership. In that case, there was a partnership of three persons and certain immovable properties were purchased out of the profits of the firm. On dissolution it was agreed that the immovable properties should not be divided among the partners but should be held by them as joint tenants. A statement to that effect was made in the day-book of the firm and it was signed by all the partners. It was held by a Bench of that court, presided over by Leach C.J., that the statement was an instrument which declared the rights in the properties from the date of dissolution of the partnership and, therefore, required registration under Section 17 of the Indian Registration Act.
23. In the instant case, the partners have devised a rather over-simplifiedmethod of transferring the immovable property in question, purchased for Rs. 27,000 out of the funds of the firm, to themselves. They have credited the property account by the amount of investment, viz., Rs. 27,000 and got it squared up ; at the same time, they have debited the capital accounts of each of the seven individual partners by the proportionate part of the investment corresponding to his relative share and thereby reduced the amounts of the capital which each of the partners had contributed to the firm. In other words, the partners paid the price of the property to the firm out of their own capital account by the transfer entries indicated above. These entries do not have the effect of converting the property of the firm into the personal property of the partners. The property in question, therefore, continued to remain the property of the firm, despite such entries.
24. An alternative contention of the assessee which has given rise to the second question under reference is that, even if the property be owned by the firm, the income therefrom is assessable, under Sub-section (3) of Section 9 of the Act, in the hands of the individual partners according to their shares in the firm. Sub-section (3) of Section 9 of the Act provides :
' 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 this section shall be included in his total income. '
25. In order that this sub-section might be applicable, two essential conditions must be satisfied, the first is that the property must be owned by two or more co-owners and, secondly, the respective shares of such co-owners must be definite and ascertainable. Neither of these two preconditions exist here. In the first place, the property in question is the property of the firm, within the meaning of Section 14 of the Indian Partnership Act, and it has to be held and used exclusively for the business of the firm. So long as the partnership continues, no part of the property can be regarded as belonging to any individual partner who is not competent to deal with the same as he likes. Secondly, it cannot be said that a partner has any definite and ascertainable share in any specific item of partnership assets. A partner is not entitled to get his share in specie in the movable and immovable properties of the firm. Section 48 of the Indian Partnership Act provides that, on dissolution of the firm, its assets must first be applied for payment of the debts and liabilities of the firm and if any residue is left after such payment the same shall be divided among the partners proportionately to their shares in the profits of the business of the firm. Before dissolution, however, a partner cannot claim to have any definite and ascertainable share in any particular property of the firm; The deed of partnership dated the 18th June, 1953, (annexure ' A'), does not concede to any partner any such right; on the contrary, clause 11 of the deed says that 'a partner will not be entitled to assign, pledge, hypothecate or charge his interest in the partnership and the interest of a partner will not be available for payment of his personal debts. .....' Clearly, therefore, the co-partners of a firm cannot beassessed under Section 9(3) of the Act in respect of the income from the firm's properties as co-owners having specified shares.
26. The Rajasthan High Court had to consider an identical contention regarding the assessability of partners under Section 9(3) of the Act in the case of New Cotton and Wool Pressing Factory v. Commissioner of Income-tax . Dave C.J., who delivered the judgment of the Bench; repelled the contention that the partners of a firm are assessable individually under Section 9(3) of the Act, in respect of the income from property belonging to the firm and observed as follows :
'To our mind, this sub-section deals with the 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 ascertain able. 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 after the partnership debts are paid and after the partnership accounts are settled and the rights of partners inter se are adjusted.'
27. We respectfully concur in the view expressed by the learned Chief Justice.
28. The result is that both the questions under reference are answered in the negative and against the assessee-firm. The Commissioner of Income-tax will get costs of this reference which we assess at Rs. 200.