1. This is an appeal by the revenue, which, is directed against the order of the Appellate Assistant Commissioner, Madras, dated 19-4-1985, wherein he held that the income from the property hitherto owned by the assessee but used as nursing home from 1-5-1979 is not to be assessed in the hands of the assessee and thereby deleted the income assessed by the Income-tax Officer. The Appellate Assistant Commissioner came to the conclusion by relying on the book entries made in the books of the firm by debiting the building account and crediting the capital account of the assessee and also the decision of the Tribunal Hyderabad Bench in the case of Vishnu Industries v. ITO [1984] 7 ITD 676.
2. The facts of the case are that the assessee is a medical doctor and owned property at No. 17, Clemens Road, Madras-7. This property is stated to have been transferred to M/s. Batoola Hospital with effect from 1-5-1979, a partnership concern carrying on medical profession in which she is a partner along with her husband sharing profits or losses in the ratio of 60 per cent and 40 per cent respectively. The assessment year involved is 1980-81 for which the previous year ended on 31-3-1980. The assessee offered income of Rs. 1,000 for part of the period, i.e., from 1-4-1979 to 30-4-1979. The Income-tax Officer was of the view that the transfer of the property was not effected by registered document and in the absence of such registration the property belonged to the assessee and not to the firm. Consequently, he computed the income from this property for the entire previous year at Rs. 31,125 and brought it to tax.
3. On appeal it was contended by the assessee that the Income-tax Officer ought to have held that the property was transferred by the assessee to the firm and registration was not necessary when an immovable property was contributed by a partner as his share capital.
The Appellate Assistant Commissioner held that the transfer of immovable property by way of book entry by a partner to the firm was valid and relying on the order of the Tribunal, Hyderabad Bench in the case of Vishnu Industries (supra), he held that no income from nursing home property was to be assessed in the hands of the assessee for the period from 1-5-1979 onwards. Therefore he did not go into the alternate plea that the income computed was excessive. However, he determined the income for the month of April 1979 at Rs. 2,000 as against Rs. 1,000 returned by the assessee. However, there is no dispute in respect of this income.
4. At the time of hearing the learned departmental representative reiterated the grounds of appeal, viz., that the Appellate Assistant Commissioner erred in holding that the transfer of nursing home building by the assessee to the firm without a registered deed would constitute a valid transfer and he should have held that registered deed was necessary for transfer of immovable property and consequently the Appellate A ssistant Commissioner should have held that the property income was to be included only in the hands of the assessee.
It was therefore prayed that the order of the Appellate Assistant Commissioner should be set aside and that of the Income-tax Officer be restored. He further submitted that the property continues to be that of the assessee and he relied upon the decision of the Madras High Court in the case of R.M. Ramanathan Cheltiar v. CED [1975] 99 ITR 410.
5. The learned representative of the assessee on the other hand, supported the order of the Appellate Assistant Commissioner and relied on the observation of the Supreme Court in the case of Kartikeya V.Sarabhai v. CIT [1985] 156 ITR 509, at page 520 wherein it has been stated that when a person brings in even his immovable property as his contribution towards the capital of the firm no written document or registration is required under Clause (b) of Sub-section (1) of Section 17 of the Registration Act. Therefore, he contended that no registration was necessary when a partner brings in immovable property as his capital contribution to the firm.
6. We have carefully considered the rival contentions. Section 14 of the Indian Partnership Act, 1932 reads as under:-- 14. The property of the firm.--Subject to contract between the partners, the property of the firm includes all property and rights and interests in property originally brought into the stook 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.
From the aforesaid section it is clear that the partnership property includes all properties 'and rights and interests therein originally brought into the stock of the firm, i.e., at the time of formation of partnership not to speak of property acquired by the firm. The latter part of the section also gives the clue that even when property is acquired with the money belonging to the firm it shall not be deemed to have been acquired for the firm if there is contrary intention in the contract. Thus both for inclusion of initial contribution of immovable property as capital by a partner or acquisition of property with the funds of the firm the intention or agreement of the partners is sine qua non to decide whether the property is that of the firm or individual partners. In the case of the assessee a copy of the deed of partnership dated. 1-5-1975 has been filed which shows that the firm M/s. Batoola Hospital carries on its profession for the present in the property at No. 17, Clemens Road, Vepery, Madras-7 and the place of business shall be shifted or changed to such other place or places as the partners may agree upon from time to time. Further it is seen from the order of the Tribunal in the assessee's own case for the assessment years 1978-79 and 1979-80 that this property was let out to the firm M/s. Batoola Hospital on a rental of Rs. 1,000 per month and therefore the Tribunal was concerned only with the computation of income from the property for those years on merits. Therefore the plea that the property was transferred to the firm with effect from 1-5-1979 is relevant only for the assessment year 1980-81 and not for earlier years. Although a new plea was taken, viz., that this property was transferred or contributed as capital to the firm with effect from 1-5-1979 there is no fresh partnership deed evidencing the intention of the partners to treat the aforesaid property as the property of the firm. From the order of the Appellate Assistant Commissioner it is seen that book entries were made in the firm debiting the property account and crediting the assessee's account. At the time of hearing a copy of the capital account of the assessee showing credit of Rs. 4,27,000 and copy of the building account showing debit of Rs. 4,27,000 as on 1-5-1979 was furnished. However, the balance sheet of the firm as on 1-5-1979 or 31-3-1980 was not furnished for perusal. There is no doubt that the book entries made show the intention to treat the property as the property of the firm but it is not sufficient to satisfy the test in Section 14 of the Indian Partnership Act, 1932, wherein, special transfer of property is involved whereby the individual partner divests his exclusive interest in the property contributed as initial capital for share interest in the net partnership asset as on the date of dissolution or retirement. Clause 4 of the deed of partnership dated 1-5-1975 clearly shows that the capital of the firm shall be represented by the total of the amounts standing to the credit of the partners from time to time which shall be construed as the capital standing as on 1-5-1975 or subsequently thereto. There is no provision in the deed of partnership requiring the partners to contribute any additional or special capital by way of transfer of immovable properties from time to time. It is in this context that it is to be seen whether the transfer of property at No. 17, Clemens Lane to the partnership is evidenced by contract between the partners to treat such property as belonging to the partnership and not that of the individual partner who brought in the property. The Madras High Court in the case of P.R.M.S. Ramanathan Chettiar v. CIT [1969] 72 ITR 534 has categorically pointed out that such property initially contributed by partner becomes the property of the firm, not by any transfer but by the very intention of the parties evidenced in the agreement between them to treat such property as that of the firm [page 533 in CIT v.Janab N. Hyath Batcha Sahib [1969] 72 ITR 528 (Mad.)]. In the absence of any fresh deed or codicil showing the agreement or contract of the parties as to the treatment of the specific property and the rights therein we hold that the book entries themselves may not be sufficient or adequate to transfer the rights in the property in favour of the firm though the intention could be gathered from the book entries. From the aforesaid observation of the Madras High Court it is clear that the question of contribution of immovable property as share capital is germane only at the formation of contract or partnership and such property becomes the property of the firm by the very intention of the parties evidenced by the agreement to treat such property as belonging to the firm. Therefore the agreement between the partners is essential or sine qua non to decide whether the property brought in as initial contribution is the individual property or property of the firm.
Unfortunately no evidence has been let in by the assessee in this regard except book entries. As has been observed earlier the book entries do not change title to properties unless the properties are given by the partners as their contribution to the capital of the firm for which there could be clear intention of the parties evidenced by agreement or contract itself. The Supreme Court in the case of Kartikeya V. Sarabhai (supra), has held that when a partner of a firm makes over capital assets which are held by him to a firm as his contribution towards capital there is transfer of a capital asset within the terms of Section 45 of the Income-tax Act, 1961 because an exclusive interest of the partner in the personal assets is reduced on their entry into the firm to a share interest. In such a case it has been judicially noticed that no registration is required under Section 17(1)(6) of the Registration Act. In view of the observation of the Supreme Court in the case of Kartikeya V. Sarabhai (supra) it is all the more essential that the agreement should be there to show that the property initially contributed by a partner as capital of the firm so as to treat the property as the property of the firm. In the absence of any contract it is not practicable to hold that the property has become the property of the partnership and ceased to be that of the assessee.
In this connection it is relevant to again refer to the observation of the Supreme Court in the case of Kariikeya V. Sarabhai (supra) that the credit entry made in the partners capital account in the books of partnership firm does not represent the true value of the consideration. It is a notional value only intended to be taken into account at the time of determining the value of the partners share in the net partnership assets on the date of dissolution or his retirement. In other words, the Supreme Court held that the credit entry does not represent the real consideration for the purpose of Section 48 of the Income-tax Act, 1961. Applying the same logic it could be said that the crediting and debiting of the assessee's account and the asset account in the books of the firm does not bring out a transfer but only represents the notional value of consideration.
7. The decisions relied upon by the revenue in the grounds of appeal as well as relied upon by the learned departmental representative are not applicable to the facts of the assessee's case and therefore they are distinguishable. The case of CIT v. Dadha & Co. [1983] 142 ITR 792 (Mad.), is a reverse case wherein immovable properties of the partnership were said to be treated as individual properties of the partners by making relevant book entries. The Madras High Court held that in the absence of actual dissolution of the firm there could be no division of properties purchased in the name of the firm as amongst the partners by making entries in the accounts of the firm and as there is a mutual release by one in favour of other as regards the interest transferred in favour of the other it will amount to transfer of interest in the immovable property and any such transfer will require registration if the value of the interest exceeds Rs. 100. In the case of Dr. Raja Sir M.A. Muthiah Chettiar v. CIT [1984] 148 ITR 532 (Mad.) the parties to the agreement of gift did not themselves treat the agreement as complete gift because the agreement itself specifically provided for the assessee executing a regular document of gift and having the same registered as soon as exemption from stamp duty was obtained from the Government of Tamil Nadu. As the parties chose to bring into existence a document in writing it was held that the provision of the Registration Act would apply and no title would pass under the document unless the same is registered. In the present case the relevant circumstances existing prior to the transfer of property to the firm also should be taken into account as they have a bearing on this issue. The property has been let out to the firm on a monthly rental of Rs. 1,000 and the Tribunal also decided the question of assessment of property income in the hands of the asseasee for the assessment years 1978-79 and 1979-80. In fact for April 1979, which is a part of the accounting year relevant for the assessment year 1980-81, the property remained let out to the firm and the assessee also admitted rental income for that period. By the accounting jugglery, namely, by passing credit and debit entries only on 1-5-1979 in the books of the firm avoidance of the liability to income-tax and also to wealth-tax on the part of the assessee has been camouflaged in a well designed tax planning. Considering the fact that the partners of the firm are none other than the assessee and her husband, who are real partners in life, the passing of entries in the books of account or reversing such book entries could be done at any time at case, which is a matter of accounting and they do not bring about transfer of title to property convenience. It is in this background coupled with absence of any agreement or contract between the partners regarding treatment of property contributed as share capital we hold that there is no clinching evidence on record to hold that the property ceased to be the individual property of the assessee and it became the property of the firm in which she is a partner. In this premise, therefore, we do not agree with the reason adduced and conclusion drrived by the Appellate Assistant Commissioner. Consequently we set aside and reverse his order and restore the order of the Income-tax Officer as it is in accordance with law and facts and circumstances of the case.
1. I have had the advantage of perusing the order of my learned brother, Shri T.V.K. Natarajachandran. With great respect to him, I regret my inability to agree with him, for the following reasons.
2. In Kartikeya V. Sarabhai's case (supra) at pages 519 and 520 of the Reports, the Supreme Court held that the position is different when a partner brings his personal assets into the partnership firm as his contribution to the capital, that an individual asset is the sole subject of consideration, and that an exclusive interest in it before it enters the partnership is reduced on such entry into a shared interest. After referring to the provisions of Section 17(1)(b) of the Registration Act and the two decisions of the Patna High Court in Firm Ram Sahay Mall Rameshwar Dayal v. Bishwanath Prasad AIR 1963 Pat. 221 and Sudhansu Kanta v. Manindra Nath AIR 1965 Pat. 144, the Supreme Court held that the view taken by the learned Judges of the Patna High Court in these two decisions, does not spring from the consideration that there is no transfer, that the view is that no document of transfer is required and that therefore registration is unnecessary.
Therefore, Their Lordships of the Supreme Court held that when the assessee brought the shares of the limited companies into the partnership firm as his contribution to his capital in the said cases, there was a transfer of a capital asset within the meaning of the terms of Section 45 of the Income-tax Act. It will be noticed that in the case of Kartikeya V. Sarabhai (supra) the facts of which are set out at page 514 of the Reports, the shares were brought into the partnership firm as partnership assets on 22-3-1973, whereas the partnership itself had commenced its business on 1st January, 1973 with an initial capital contribution of Rs. 9,000 in cash by the assessee and of Rs. 1,000 in cash by his wife. Thus, it would be seen that there is no difference in principle between an asset brought into the partnership business for the purposes of partnership business by a partner either at the commencement of the partnership business or at any later date. There is nothing in Section 14 of the Indian Partnership Act which places any such restriction on any asset being brought into the partnership business by a partner so as to make it a property of the partnership firm. It would further be noticed that Section 14 of the Partnership Act specifies the property of the firm in an inclusive manner. The definition of the 'property of the firm' in this Section 14 is inclusive merely and does not exhaust the kinds of property or modes of acquisition of property by a partnership firm, not does not it place any restriction as to the point of time when a property can be brought into the common stock of the partnership business by a partner, to make it a property of the firm.
3. In CIT v. A.V. Bhanoji Rao [1983] 142 ITR 706 (AP) relied on by the assessee, it has been held that the whole concept of partnership is to embark upon a joint venture and for that purpose to bring in as capital money or even property including immovable property, that once that is done, whatever is brought in, would cease to be the exclusive property of the person who brought it and that it would be the trading asset of the partnership in which all the partners would have interest in proportion to their share in the business of partnership and that 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. Their Lordships of the Andhra Pradesh High Court relied on the decision of the Supreme Court in Addanki Namyanappa v. Bhaskara Krishnappa AIR 1966 SC 1300 at 1304, Col. 2 and further pointed out that the said decision of the Supreme Court has been followed by the Rajasthan High Court in two decisions--CIT v. Amber Corpn. [1974] 95 ITR 178 and CIT v. Amber Corpn. [1981] 127 ITR 29.
Their Lordships have also referred to the decision of the Madras High Court in R.M. Ramanathan Chettiar's case (supra) and the decision of the Patna High Court in Firm Ram Sahay Mall Rameshwar Dayal's case (supra) wherein a similar view was expressed.
4. In R.M. Ramanathan's case (supra), Their Lordships of the Madras High Court have categorically held that no document of transfer is necessary when a partner brings into the partnership some of his assets with an intention to treat the same as partnership assets even though the assets so brought in consist of immovable property, and that the share of a partner in a firm is movable property even though the firm owned immovable properties. This decision was rendered by Their Lordships when Rule 7C of the Estate Duty Rules, 1953 was challenged as ultra vires Section 21(1) and Section 85 of the Estate Duty Act, 1953.
The contention of the asses-see was negatived by the Madras High Court.
5. When we examine the facts of the present case in the light of the aforesaid decisions of the Supreme Court, the Madras and Andhra Pradesh High Courts, it is clear that the assessee had contributed on 1-5-1979 the immovable property owned by her at No. 17, Clemens Road, Vepery, Madras-7, in which the partnership profession of Batoola Hospital was being carried on, from 1-5-1975 as partnership property only with effect from 1-5-1979. This is evidenced by the entries made in the books of the partnership firm on 1-5-1979 by debiting the building account with a value of Rs. 4,27,000 representing the value of the building and crediting the capital account of the assessee, Dr. C.Kurshid, who is a partner in the said partnership firm of M/s. Batoola Hospital. These two entries recorded in the books of the partnership firm taken together would establish the intention of the two partners of the firm of Batoola Hospital to treat this property as the property of the firm within the meaning of Section 14 of the Indian Partnership Act. As stated already, it is now well settled by decisions of the Supreme Court and of the Madras and Andhra Pradesh High Courts referred to above, that no formal document is necessary for transferring this property from the individual partner to his/her partnership firm. All that is necessary is to establish the intention of the partners regarding the property that is brought into the partnership business,, This intention is clearly established by the entries recorded in the books of the partnership firm in the present case, when this building was brought into the partnership business of Batoola Hospital on 1-5-1979.
6. If this is the true and correct position in law as established by the facts presented before us, the decision of the AAC that no income from this property should be taken for the period from 1-5-1979 for assessment in the hands of the assessee is correct and the same has to be upheld. This decision of the AAC is fully supported by the decisions of the Supreme Court and of the Madras and Andhra Pradesh High Courts referred to above. The decision of the Appellate Tribunal, Hyderabad Bench A in Vishnu Industries' case (supra) relied on by the assessee's learned counsel, also supports the assessee's case. In fact, in this decision, the Hyderabad Bench of the Tribunal has relied on a decision of the Madras High Court in CIT v. Smt. M. Rajeswari Vedachalam [1972] 86 ITR 753 wherein it was held that the properties standing in the name of one of the partners was eligible for depreciation as it was treated as partnership property and used for its purpose, notwithstanding the fact that the working partners had no right or claim against partnership assets on dissolution as per terms of the partnership deed.
In the case of the present assessee, there is no such restriction as could be seen from the terms of the partnership deed dated 1-5-1975.
7. I do not agree that there is any accounting jugglery by passing credit and debit entries on 1-5-1979 in the books of the firm for the purpose of avoidance of the liability to income-tax and also to wealth-tax on the part of the assessee, which has been camouflaged in a well designed tax planning. It is not the case of the department at any stage either in the assessment order or before us that there is any device which has been adopted by the assessee to avoid her tax liability in the present case. On the contrary, the assessee and her husband are both professional people and who are practising Doctors under the name and style of Batoola Hospital, from 1-5-1975. For the purpose of efficient carrying on of the profession if the partners think fit to bring in the immovable property of one of the partners into the professional partnership, it need not be looked at with suspicion, merely because the two partners happen to be husband and wife. The law does not frown upon such professional partnership between persons who are united in lawful wedlock. In fact, the law recognises such professional partnerships. What the assessee has done in the present case is a normal and regular transaction in respect of her professional partnership with her husband by bringing in her individual property into the partnership, as the property of the firm. This the partners of the firm have effected by recording the necessary entries to bring out their intention to treat this hospital building as forming part and parcel of the property of the firm. There is nothing illegal, unjust, unfair or unreasonable in what the assessee has done in the present case. On the contrary, what she has done is perfectly lawful, just, fair and reasonable and in conformity with normal human, conduct.
8. For the reasons discussed above, I regret an inability to agree with the reasoning and conclusion of my learned brother. I would hold that the objection of the revenue in the present case is the order of the Appellate Asstt. Commissioner is untenable and that the same has to be rejected. I would accordingly confirm the order of the AAC and dismiss this appeal.
Since there is a difference of opinion on the following points between the two Members, the appeal is placed before the Presidens, Income-tax Appellate Tribunal for being heard on the following points of difference by one or more of the other Members of the Appellate Tribunal: (1) Whether on the facts and circumstances of the case, there was a valid transfer by the assessee of the building at No. 17, Clemens Road, Madras-7, to her partnership firm of M/s. Batoola Hospital, on 1-5-1979 in terms of Section 14 of the Indian Partnership Act, 1932? (2) Whether income from the said property for the period commencing from 1-5-1979 to 31-3-1980, is includible in the hands of the assessee in her individual assessment for the assessment year 1980-81 1. This is an appeal in which, on account of difference of opinion, on the following points, the matter was referred to me as Third Member.
2. The points on which the difference of opinion arose, as stated by the learned Members, are (i) whether, on the facts and in the circumstances of the case, there was a valid transfer by the assessee of the building No. 17, Clemens Road, Madras-7, to her partnership firm of M/s. Batoola Hospital on 1-5-1979, in terms of Section 14 of the Indian Partnership Act, 1932 and (u) whether the income from the said property for the period commencing from 1-5-1979 to 31-3-1980 is includible in the hands of the assessee in her individual assessment, for the assessment year 1980-81 3. The resolution of this difference of opinion would present a difficulty, but with the help of the ratio laid down by the Supreme Court and other High Courts and the able assistance rendered to me by the learned Chartered Accountant for the assessee and the learned Departmental Representative, I could reach a conclusion, which, T think, satisfies the requirement of law, as borne out from the facts of the case.
4. Briefly stated, the relevant facts are, that the assessee is a medical doctor. She owned a property at No. 17, Clemens Road, Madras-7.
She along with her husband, a medical doctor, was carrying on medical profession in partnership, sharing profits and losses in the ratio of 60: 40 respectively in the name and style of M/s. Batoola Hospital. It is an undisputed fact that it is in this house that the firm was carrying on its medical profession. From 1-5-1979, it was claimed that she transferred this property to the firm towards her contribution of capital for a certain consideration, in recognition of which necessary book entries were passed in the books of the firm by debiting the property account and crediting the account of the assessee with the agreed consideration. Since, from that date this property was treated as the firm's property, the assessee showed in the return the income from this property for only one month of Rs. 1,000. The Income-tax Officer did not agree with this contention. According to him, since the immovable property was transferred to the firm on and from 1-5-1979, there should be a document registering the property in the name of the firm, and as no such document was executed, no transfer of the property had taken place. He, therefore, held that the property continued to belong to, the assessee and not to the firm and he estimated the net ALV of the property at Es. 31,125 and after making certain adjustments, included the sum of Rs. 31,572 in the income of the assessee. There was then an appeal against this order before the AAC contending that when individual property was treated as the firm's property, no registration was necessary. In support of this view, reliance was placed upon the decision of the Income-tax Appellate Tribunal, Hyderabad Bench in the case of Vishnu Industries (supra). Holding that the transfer of immovable property by a partner of the firm was valid, the AAC held that there was a valid transfer and that the income from 1-5-1979 should not be assessed in the hands of the assessee. He accordingly directed the deletion of the income for the subsequent period.
5. Against the order of the AAC holding that there was a valid transfer of the property from individual to the firm, absence of registration document notwithstanding, the department preferred an appeal before the Tribunal.
6. When the matter came before the Tribunal, the learned Accountant Member who wrote the leading order, did not agree with the view expressed by the AAC. Relying upon a decision of the Madras High Court in the case of R.M. Ramanathan Chettiar (supra) and observations of the Supreme Court in the case of Kartikeya V. Sarabhai (supra), the learned Accountant Member disagreed with the view expressed by the AAC. From a perusal of his order, I got the impression that he did not go so much by the lack of registered document evidencing the transfer, but as much as that the facts of the case did not justify an inference to be drawn that the assessee had treated this property as the firm's property by her Individual rights. By discussing the book entries made in the firm's books, as evidence of the transfer, the learned Accountant Member held that book entries even though show the intention to treat the property as the property of the firm, yet it was not sufficient to satisfy the test in Section 14 of the Indian. Partnership Act, 1932, according to which, an individual partner must divest his exclusive interest in the property contributed as initial capital for share interest in the net partnership asset as on the date of dissolution or retirement. In other words, he held that as there was no intention to infer that the assessee had fore-saken the rights from the property and treated this property as the firm's property this property did not become the firm's property merely by reason of the book entries. In this context, he made a reference to the absence of a provision in the Partnership Deed providing that this property would be treated as the firm's property or showing any requirement on the part of the partners needing to contribute any additional or special capital by way of transfer of immovable properties from time to time. Laying emphasis on the existence of intention of treating as an individual property as the firm's property, he placed reliance on the decision of the Madras High Court in Janab N. Hyath Batcha Sahib's case (supra) at p. 533. He then suggested that if the partners had intended to treat this property as firm's property, there ought to be, in the normal course, a fresh deed of partnership or any agreement or contract between the parties and as there was no such agreement, the inference, according to him, should be that the assessee never intended to treat this property as the firm's property. This is how he held that the mere book entries were not sufficient or adequate to transfer the rights of the property in favour of the firm, although, he did not deny that the intention could be gathered from the book entries. He also held that the intention to treat immovable property as the firm's property became germane only on the formation of the partnership, meaning perhaps thereby that such arrangement was not permissible under the law, subsequent to the formation of the partnership. Referring to the decision of the Supreme Court in the case of Kartikeya V, Sarabhai (supra), where in the Supreme Court laid down that when a partner of a firm makes over capital assets held by him as individual to the firm as his contribution towards the capital, there was a transfer of a capital asset within the meaning of Section 45 of the Income-tax Act, 1961 and that such a transfer would not require any registration under Section 17(1)(b) of the Registration Act. This enunciation of law by the Supreme Court according to him made it all the more essential for the existence of an agreement showing an unequivocal intention of treating the personal property as the firm's property. Again, relying upon the same Supreme Court decision, he held that the crediting and debiting of the assessee's account in the books of the firm did not bring about a transfer of the asset and the entries represented only the notional value of the consideration. This is how the learned Accountant Member proceeded to express himself to hold that the view taken by the AAC was erroneous in law and on fact. At one stage, he even doubted the passing of the entries in the books of account by describing them as matters of convenience not resulting in or bringing about a transfer of title of the property.
7. The learned Judicial Member, on the other hand, disagreed with these observations of the learned Accountant Member. Relying upon the very same Supreme Court decision, he held that there was a transfer and it did not require registration under Section 17(1)(5) of the Registration Act. When there was a transfer of an immovable property by the assessee to the firm, not requiring registration under Section 17(1)(b) of the Registration Act, the Department was not justified in holding that therewas no transfer. He held that the book entries were sufficient to demonstrate the intention of the assessee to treat this individual property as the firm's property w.e.f. 1-5-1979. Making a particular reference to Section 14 of the Partnership Act, the learned Judicial Member observed that the property of the firm, as explained by Section 14 of the Partnership Act, was only inclusive and did not exhaust all the kinds of property or modes of acquisition, nor did it place any restriction or limitation on the point of time when a firm could acquire property with its own internal resources, borrowed funds or by contribution by the partners. He then referred to a decision of the Hon'ble Andhra Pradesh High Court in A. V. Bhanoji Rao's case (supra) in support of the view that whenever an individual property was brought into the stock of the partnership, that would cease to be the exclusive property of the individual bringing in the property and would, henceforth become and belong to the firm as its property in which all the partners would have interest in proportion to their share in the business of the partnership and that if the property brought in by the partner happened to be an immovable property, it would not require any registration under the Indian Registration Act. He also referred to another decision of the Madras High Court in B.M. Ramanathan Chettiar's case (supra) in support of the same view. In the light of this decision and the unequivocal evidence provided by the entries made in the books of account, whose genuineness and authenticity was not disputed by the department at any stage, he held that the AAC was right in holding that there was a transfer by the assessee of her property to the firm as a firm's property and, as a consequence, the income from that property did not belong to the assessee after 1-5-1979. On account of this divergence of opinion, the matter has come before me as a Third Member.
8. After considering carefully the arguments, addressed to me both on behalf of the assessee by Shri Narayanaswamy, and on behalf of the department by Shri K.L. Tilakchand, and after going through the judgments relied upon by my learned Brothers in their orders and also referred to me in the course of arguments, I have reached the conclusion that, in so far as the matters of this nature are concerned, the law is fairly well-settled that (a) when an individual brings in his individual property into the stock of the firm's property by giving up his exclusive rights there is a transfer within the meaning of Section 45 of the Income-tax Act, 3961 because such an act results in diminishing his right over that property after such treatment, and (b) that no registration is required under Section 17(1)(b) of the Registration Act. If this is the state of law, which indeed it is, as seen from the pronouncement of the Supreme Court in Kartikeya V.Sarabhai's case (supra), it is no more open to the Revenue to contend that there was no transfer unlesa the act of treating the individual property as the firm's property was accompanied by a registered document. In this context, I would only refer to one paragraph from the judgment of Supreme Court, appearing at page 520 of the report: Our attention has also been invited to Clause (b) of Sub-section (1) of Section 17 of the Registration Act, which requires the registration of non-tesbamentary instruments which purport or operate to create, declare, assign, limit or extinguish, whether in present or in future, any right, title or interest, whether vested or contingent, of the value of one hundred rupees and upwards, to or in immovable property' and to the view taken by the courts in this country that when a person brings in even his immovable property as his contribution to the capital of the firm, no written document or registration is required under that clause. That view was expressed in Firm Ram Sahay Mall Rameshwar Dayal v. Bishwanath Prasad AIR 1963 ,Pat. 221. The learned Judges relied on the English law that the personal assets introduced by a partner into the firm as his contribution to its capital become the property of the firm by reason of the intention and agreement of the parties. The view does not spring from the consideration that there is no transfer, the view is that no document of transfer is required and that, therefore, registration is unnecessary. The Patna High Court reiterated that view in Sudhansu Kanta v. Manindra Nath AIR 1965 Pat. 144.
Thus, the view of the Supreme Court on the subject of transfer and registration is settled.
9. Another important aspect to be borne in mind in understanding the controversy that arose in this case, is the observations made by the Supreme Court in this very case as to why the Supreme Court held that there was a transfer of a capital asset within the terms of Section 45 of the Income-tax Act, 1961 when an exclusive interest of a, partner in the personal assets was reduced into a shared interest. The consideration for the transfer of the personal assets is the right which arises or accrues to the partner during the existence of a partnership to get his share of profits from time to time and after the dissolution of the firm, or with his retirement from the partnership to get the value of his share in the net partnership assets existing on the date of the dissolution or retirement after deduction of his liabilities and prior charges. It was on account of the right to share the profits and to get the value of the share in the net partnership assets on the dissolution or retirement that was held to constitute the consideration to hold that a transfer was involved when personal interest was reduced into a limited interest. It was in this context, it is again very important to note, that the Supreme Court had to explain the significance of credit entries passed in the accounts of the firm to the capital account of the partner. Quoting from the head-note, the Supreme Court observed: The credit entry made in the partner's capital account in the books of the partnership firm does not represent the true value of the consideration. It is a notional value only, intended to be taken into account at the time of determining the value of the partner's share in the net partnership assets on the date of dissolution or on his retirement a share which will depend upon deduction of the liabilities and prior charges, existing on the date of dissolution or retirement. It is not possible to predicate beforehand what will be the position in terms of monetary value of a partner's share on that date. At the time when the partner transfers his personal asset to the partnership firm, there can be no reckoning of the liabilities and losses which the firm may suffer in the years to come. All that lies within the womb of the future. It is impossible to conceive of evaluating the consideration acquired by the partner when he brings his personal asset into the partnership firm when neither can the date of dissolution or retirement be envisaged nor can there be any ascertainment of liabilities and prior charges, which may not have even arisen yet....
10. This explanation of the credit entry in the partner's capital account in the books of the firm became necessary to ascertain whether it could be said that there was consideration which a partner acquires on making over his personal assets as his contribution of the capital, so as to attract the provisions of Section 48, because that provision was fundamental to the computation machinery incorporated in the scheme relating to the determination of the charge provided in Section 45.
Since there was no consideration for the credit entry, the Supreme Court pointed out that such a case must be regarded as falling outside the scope of capital gains tax altogether. But that is not so, as opined by my learned Brother (Accountant Member), that because of the notional value to be attached to the entry there was no transfer involved. The transfer of an asset is one thing, the value to be placed upon the asset transferred, was a different thing. The Supreme Court while holding that the former did exist, the latter could not exist. It is, therefore, in my opinion, not correct to conclude from this observation that there was no transfer involved. I am, therefore, unable to subscribe to the view of the learned Accountant Member, when he observed "Applying the same logic, it could be said that the crediting and debiting of the assessee's account and the asset account in the books of the firm does not bring out a transfer but only represents the notional value of consideration".
11. Once it is held that there is a transfer and since we are not concerned with the value to be placed on it, we have got to see the next question, whether the transfer is a valid transfer or a sort of passage adopted to avoid proper payment of tax. It is the unanimous view of almost all the High Courts in India, that this transfer must be gathered from the intention and purpose, and the intention can be gathered from the conduct of the parties and the conduct of the parties can be gathered from a variety of attending circumstances, which includes agreement, oral or reduced to writing, entries passed in the books of account, statements made either orally or in writing and such like things. The books of account did constitute a prima facie evidence, although not conclusive. The prima facie evidence provided by the entries in the books of account of the intention of the assessee to transfer her property to the firm has to be doubted by the department in the first instance. I have not found anywhere even a suspicion or a doubt cast upon these entries. On the contrary, the department proceeded on the basis that the entries were genuine, they did provide evidence of transfer, but the transfer was not valid for want of registration. I do not think that, at the stage of the Tribunal it is open to doubt the entries suo motu, as it may amount to making out a new case for the parties, although I am not suggesting for a moment that it is not open to the Tribunal to go into this aspect. But going to this aspect must be again based upon either a challenge made before it by the parties or some evidence coming into its possession, led by the parties before it. In the absence of any such challenge or evidence coming before it, a mere casting of a doubt is, in my opinion, not enough, to doubt the veracity and authenticity of the entries by calling them as made for accounting convenience. The learned Accountant Member has also, in my opinion, contradicted himself when he observed that even though there was no doubt that the book entries made, show the intention to treat the property as the property of the firm, but yet it was not sufficient to satisfy the test in Section 14 of the Indian Partnership Act, 1932, whereunder individual partner must divest the exclusive interest in the property contributed as initial capital for shared interest in the net partnership assets as on the date of dissolution or retirement. I am unable to follow how, when the book entries showed the intention of the assessee to treat the property as the property of the firm, yet it was not sufficient to satisfy the requirements of Section 14 of the Indian Partnership Act, when no formalities to be complied with are laid down therein. Section 14 of the Indian Partnership Act laid down as to what is the meaning of the property of the firm. It has laid down that, subject to the contract between the partners, the property of the firm includes all property and rights and interets in the 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.
12. Analysis of this provision would at once show that the property of the firm includes (a) all property and rights and interests in the property originally brought into the stock of the firm, (6) or acquired by purchase or otherwise by or for the firm, and (c) unless a contrary intention appears, property acquired with the money belonging to the firm is property of the firm. This analysis would show that the property originally brought into stock of the firm or property acquired by purchase or otherwise by or for the firm or for the purpose of the firm in the course of its business would also be treated as the property of the firm'. This shows that the property of the firm can be acquired during the course of the business and not necessarily always at the initial stage. In fact, if a property of a firm is to be acquired at the initial stage and not subsequently, no firm can progress. Its progress will be stultified and remain static. A firm can continue to acquire property depending upon its requirements and availability of resources. There is absolutely no limitation placed upon it particularly the phrase "acquire by purchase or otherwise" would show that the property of the firm can, during the course of the business, be purchased with the money belonging to the firm, or can be gifted by partners or can be acquired by myriad ways. Therefore, there is no particular requirement of Section 14 to be satisfied, more than the presence of unequivocal intention of a partner to treat his personal property as the firm's property. Once this intention is declared, the property would then be the property of the firm within the meaning of Section 14 and that partner would cease to be exclusive owner of that property and his interest in that property would be the share interest or the limited interest, governed by the stipulation of the partnership deed. I am, therefore, unable to appreciate how, when it was conceded that the book entries showed the intention that the assessee treated this property as the property of the firm, still that was not sufficient to satisfy the requirement of Section 14, when Section 14 did not, in terms, require any particular procedure to be followed in order to complete that interest or intention. On the other hand, I find as an undisputed fact that, apart from the book entries which were not doubted by the department at any stage, the balance sheet of the firm showed this as the property of the firm. On this very property, the firm claimed depreciation and it was allowed, which could have been done only when the property belonged to the firm and not otherwise, because the requirement for the allowance of the depreciation is the ownership of the property by the firm. This was done not only in the assessment year under appeal but also in the next assessment year 1981-82 as borne out by the assessment order produced before me during the course of hearing. The assessee's share of 60 per cent was accepted. I am, therefore, of the opinion that the view expressed by the learned Accountant Member is not the proper view and that the view expressed by the learned Judicial Member is more proper and just. Except for the suspicion expressed by the learned Accountant Member in regard to the book entries, nothing more was traceable from his order to justify his conclusion.
13. In view of the fact that the law on the subject has been enunciated by the Supreme Court and in view of the further fact that entries in the books of account are sufficient evidence to prove the intention, I am not referring to all the decisions that were cited at the bar before me, except for two decisions. Before I go to those decisions, I must make an observation that there seems to be no difference of opinion between the learned Brothers on the question that the transfer of the property, if genuine, did not require registration. This is a common point. The second point is that had there been a genuine intention of investing this property with the characteristic of a firm's property then that would be a genuine affair and the property would thereafter belong to the firm. Now, the one decision that was cited by the department as a direct decision covering the issue against the assessee is that of Madras High Court in CIT v. T.M.B. Mohamed Abdul Khader [1987] 166 ITR 207. This was cited to be a binding decision in the sense that the case falls within the jurisdiction of the Madras High Court. In this case, the assessee made a declaration that the house property belonging to him will thereafter be the property of the firm in which he was a partner. As against the book value of Rs. 76,000, the value fixed for the purpose of declaration was Rs. 1,20,000 leaving an excess of Rs. 44,000. The question arose, whether this excess of Rs. 44,000 was liable to capital gains tax. The assessee pleaded up to the Tribunal level successfully that, as there was no registered document, transferring this property to the firm there was no transfer and, consequently, there was no capital gain. The High Court held, on a reference made by the CIT that "For the transfer of a property worth more than Rs. 100 a stamped and registered document of transfer was necessary under the provisions of Stamp Act as well as the Registration Act and as, in the instant case, there was no registered document, the Tribunal was right in holding that there was no liability to capital gains tax." This authority was cited for the proposition that for a valid transfer of property, there must be a registered document. There is no quarrel with this proposition and this, if I may say so, is to correct enunciation of law. But the point in issue before me is, not whether there was a transfer of a property or not requiring registration, but whether a partner can impress his individual property with the character of a property of a firm and in such an event, whether there is a transfer or not needing registration. Though this question was raised before the Madras High Court, this question was deliberately left open. In view of the decision of the Supreme Court, referred to above, it cannot any more be said that there was no transfer. It is well to remember that for the purpose of levy of capital gains tax, there must be a transfer of property within the meaning of Section 45 of the Income-tax Act and the Madras High Court held that, in the absence of a registered document in respect of immovable properties, no such transfer could take place in law for the purpose of levy of capital gains tax. But that is not the case before me. The issue before me is not regarding the issue of levy of capital gains tax. Even otherwise, after the decision of the Supreme Court in Kartikeya V. Sarabhai's case (supra), it cannot be said that there was no transfer although the Madras High Court has said that there cannot be effective sale for the purpose of capital gains tax in the absence of a registered document. The Supreme Court also laid down, in that case, that registration is not at all necessary. I am, therefore, of the opinion that this decision, so emphatically pressed into service before me by the learned Departmental Representative, does not seem to serve its purpose.
14. The other decision, which I would like to refer to is, again, the decision of the Madras High Court in R.M. Ramanathan Chettiar's case (supra), wherein it has been held that no document of transfer is necessary when a partner brings into the partnership some of his assets with an intention to treat the same as partnership assets even though the assets so brought in consist of immovable properties. In arriving at this decision, the Madras High Court placed reliance upon its earlier decision in Janab N. Hyath Batcha Sahib's case (supra) and another decision in the case of Chief Controlling Revenue Authority v.Chidambaram AIR 1970 Mad. 5. In this case, the Madras High Court categorically held that no document is necessary when a partner brings into the partnership some of his assets with an intention to treat the same as partnership assets, that by virtue of Section 14 of the Partnership Act, property can be thrown into the partnership stock without any formal document so as to make it the property of the firm.
The Madras High Court decisions are binding upon me and are in consonance with the law enunciated by the Supreme Court in Kartikeya V.Sarabhai's case (supra). What is more, I find that the judgment of the Madras High Court in Janab N. Hyath Batcha Sahib's cage (supra) was referred to by the Supreme Court in its decision with approval.
Therefore, there cannot be any controversy over this question and that was the reason why I have said in the beginning of my order that this issue is fairly settled.
15. For the foregoing reasons, I am of the opinion that there was a valid transfer by the assessee of the building No. 17, Clemens Road, Madras-7, to the partnership firm of M/s. Batoola Hospital on 1-5-1979 in terms of Section 14 of the Indian Partnership Act, 1932, as evidenced by the entries in the books of account and the subsequent conduct of the parties and no denial by any one of them. I am also of the further opinion that, as a consequence of this, the income from this property for the period from 1-5-1979 to 31-3-1980 is not includible in the hands of the assessee, as her individual income.
16. The matter will now go before the regular Bench so that the appeal can be disposed of in accordance with the opinion of the majority.