1. The assessee is assessed in the status of an unregistered firm, for the year ending on 31-3-1980 relevant to the assessment year 1980-81.
It is a partnership firm consisting of two partners S/Shri K.P.Kaladharan and K.P. Surendran. Shri K.P. Kaladharan sold his interest in the firm to and in favour of M/s Mohammedali Haji and Ahamedkutty Haji for a consideration of Rs. 4 lakhs on 10-10-1979 as per sale deed No. 3890 of 1979 of S.R.O., Palghat. Subsequently Shri K.P. Surendran surrendered his share of interest in the firm in favour of the same party for a consideration of Rs. 4 lakhs on 5-11 -1979 as per deed No.3967 of 1979 of S.R.O., Palghat. In the process, the assets of the firm got transferred to M/s Mohammedali Haji and Ahamedkutty Haji. The firm made up its accounts from 1-4-1979 to 6-11-1979. Profit and Loss account was drawn up and distributed amongst the partners. A trial balance as on 6-11-1979 was also filed containing the list of outstanding owed by the firm and owed to the firm besides certain sundry items. The assessee had shown a sum of Rs. 71,390 (gross) under the head capital gains and after deduction available under section SOT, a net capital gains of Rs. 49,792 was admitted. This was sought to be set off against the brought forward business loss which, according to the assessee's accounts amounted to Rs. 56,264. The capital gains reported by the assessee was ascertained as under :Sale value of the lodge building with premises.
Rs. 8,00,000Less:4.
Furniture.
Rs. 7,409 Rs. 7,28,610 The Income-tax Officer determined the cost of the assets sold at Rs. 8,75,360 consisting of the written down value of Rs. 7,21,201 and the amount allowed for depreciation in a sum of Rs. 1,54,159. Thus, the ITO concluded that there was only a capital loss of Rs. 75,360. As it was a long-term capital loss, it can be set off only against long-term capital gains. Proceeding further, the ITO compared the sale proceeds of Rs. 8 lakhs with the written down value of the assets, i.e., Rs. 7,21,201 and thus arrived at a profit of Rs. 78,799 and the same was brought to tax under Section 41(2) of the IT Act. The assessee was aggrieved.
2. Before the Appellate Assistant Commissioner of Income-tax, it was contended by the assessee as follows: (i) The individual partners sold their shares separately and not jointly in partnership; (ii) The sale was of their share in the firm which is movable property and not assignable to any asset of the firm specifically as held in A. Narayanappa v. B. Krishnappa AIR 1966 (SC) 1300; (iii) Alternatively, when the undertaking itself is sold, no profit arises under Section 41(2); and (iv) That capital gains is also not chargeable as the original cost of the undertaking cannot be determined.
Reliance was also placed on the decision of the Karnataka High Court in the case of Syndic ate Bank Ltd. v. Addl. CIT. The AAC did not agree with the assessee that there was dissolution of the partnership when Shri Kaladharan sold his interest in the firm to M/s Mohammedali Haji and Ahamedkutty Haji. He found that there was only a small interval between Shri Kaladharan assigning his interest in favour of the above party and Shri Surendran surrendering his rights in the firm in favour of the very same party. The receipt of sale consideration was accounted for in the books of the firm and adjusted as found in para one above.
Even the advance moneys received towards the sale consideration were treated only in the books of the firm. Therefore, he held that it was sale of assets by the firm in favour of M/s Mohammedali Haji and Ahamedkutty Haji.
3. It was next contented by the assessee before the AAC that as it was a sale of whole undertaking or business as a whole, no gains arose out of the transaction and reliance was placed on the decision of the Karnataka High Court in the case of Syndicate Bank Ltd. (supra). The AAC distinguished the facts of the assessee's case from those in the decision of the Karnataka High Court and preferred to follow the decision of the Cochin Bench of the Tribunal in the case of Sreehari Lodge [IT Appeal No. 126 (Coch.) of 1982] for the assessment year 1975-76. There were certain disallowances in a small sum of Rs. 2,000 and Rs. 1,000 and for want of proof, the disallowances were confirmed.
4. The ITO had added a sum of Rs. 7,000 towards omission of rent and the assessee agreed to reconcile the rent account before the AAC but did not furnish the details as a result of which the addition was also confirmed by the AAC. In the result, the assessee did not succeed before the first appellate authority. It is, therefore, on second appeal before us.
5. Shri George K. George, the learned counsel for the assessee submitted that it was a slump sale; besides it was the sale of business as a whole. Therefore, the surplus is not taxable. The assessee has not sold the assets but the partners individually sold the same. No price was fixed individually for the assets sold. Firstly, one of the partners had sold his interest and the value of that interest cannot be ascertained. Secondly, the other partner had released his right in favour of the very same party to whom the first partner had conveyed his interest. This was in respect of his share of interest. Therefore, there was no sale by the firm. Even if it is held that there was sale by the firm in a case of composite consideration it cannot be held that the sale price was fixed for any of the assets individually. Section 41(2) cannot be invoked nor capital gains would arise. In this view of the matter, he relied on the decision of the Kerala High Court in CIT v. F.X. Periera and Sons (Travancore) (P.) Ltd. [1991] 184 ITR 461, as also the decision reported in Artex Manufacturing Co, v. CIT [1981] 131 ITR 559 (Guj.) 6. Shri Abraham, the learned senior departmental representative, submitted that this was a case of sale of assets by the firm. The interest of the partner in any specific asset during the subsistence of the partnership cannot be predicated. Therefore, the sale of such interest in the assets of the firm by Shri Kaladharan in October 1979 cannot bind the firm. The firm was not made a party to it. Nor any consent was shown to have been given by the other partner. The other partner was not made a party or even a witness in the sale deed dated 10-10-1979. After a few days in the month of November 1979, Shri Surendran, the other partner, had surrendered his rights in favour of the very same vendees. Perhaps, this was to economise on stamp duty and registration charges. Therefore, when the surrender deed was executed by Shri Surendran on 5-11-1979, the firm is deemed to have been dissolved. As a matter of fact, the assessee has made up its account as on 6-11-1979. Therefore, even though the partners have individually acted, they have acted with cohesion and for a unified purpose, the purpose being to transfer the properties of the firm to M/s Moharnmedali Haji and Ahamedkutty Haji. That act of transfer became complete as against the firm only when the other partner Shri Surendran had executed the surrender deed. Therefore, it was a case of sale of assets by the firm even though the parties have taken care not to bring in the name of the firm or refer to the partnership to which the assets had belonged. However, the sale consideration has been accounted for only in the books of the firm and a surplus was arrived at. In the circumstances, the AAC was justified in holding that it was sale of assets by the firm. The assessee's contention that it was a slump sale and the consideration that was received was a composite consideration should not be accepted. The written down value of the assets sold was far less than the sale consideration and, therefore, it cannot be described as a slump sale. The assessee has been allowed depreciation on the book cost of Rs. 7,28,610. The assessee has realised Rs. 8 lakhs. So, it is only a question of mere arithmatics to find out the profit on the sale of such assets. Even if it is held that the consideration cannot be vivisected, there can be a general profit on the sale of all assets and such profits can be held to be taxable.
Therefore, it is taxable at last under the head capital gains invoking the provisions of Section 51 of the IT Act. .He also relied on the decision of the Tribunal in the case of Sreehari Lodge (supra) for the proposition that the transfer of assets in similar circumstances would amount to transfer of assets by the firm and not by the partners in their individual capacity. Referring to the entries in the books and also the fact that after the sale of such assets a number of items remained with the firm, he submitted that it cannot be held that it was a case of sale of business as a whole. Thus, he defended the orders of the revenue authorities.
7. Having heard rival submissions, we uphold the order of the AAC though for different reasons. This is a case of a partnership firm consisting of two partners only Shri K.P. Kaladharan and Shri K.P.Surendran. Shri Kaladharan has sold his interest in the partnership firm to Mohammedali Haji and Ahamedkutty Haji by a sale deed dated 10-10-1979. The sale deed describes that what was sold was his right, title and interest to the extent of half share in the properties described in the schedule. The schedule describes a tiled house in Robinson Road, property situated in Block No. 5/49,37 cents in S.No.2469/11, half cent out of 41 cents in S.No. 2469/2, property situated in Block No. 5/55, 2 cents in S. No. 2724, one cent in S.No. 2725, one cent in S. No. 2726 together with four storeyed concrete building known as Tourist Lodge, Nalanda Hotel, 2 shop rooms, clinical laboratories, tailor shop, with electric, sanitary and all other fittings attached.
Thus, though the document is purported to sell his interest in the properties described in the schedule individually the properties described as Tourist Lodge, Nalanda Hotel, Shop rooms, Clinical laboratories, tailor shop and electrical and sanitary fittings and other fittings remain in the books of the firm. Such properties have been looked upon by the partners of the firm as belonging to the fine.
The deed is silent, about the ownership of the property by the partnership firm. Under the provisions of the Partnership Act, a partner can certainly assign his interest in the partnership property, though such interest cannot be predicated during the subsistence of the partnership. The sale deed executed by Shri Kaladharan having specified she share individually in the properties of the partnership firm, it cannot be said that Shri Kaladharan has in law conveyed his interest in the partnership property. The vendees cannot bind the firm proving their title under the sale deed executed in their favour. This is because the vendees take their title subject to the prior title of the firm on the assets belonging to it as the partner had not by the sale deed executed in their favour transferred his interest in the assets of the finn. The interest of a partner can be ascertained only when an account is taken out of all the assets and liabilities, say for instance, in the event of dissolution of the firm. Till then all that a partner can say is that he has an interest in the whole of the partnership property to the extent of his share. In other words, he does not have any specific portion of interest in any particular asset of the firm though he has an interest to the extent of his share in all the assets of the firm. Such being the case, we hold that the sale deed dated 10-10-1979 effected by Shri Kaladharan cannot have the effect of alienating the properties belonging to the firm as mentioned in the schedule.
8. It is settled law that even if the strangers acquire title under a valid deed of transfer or assignment of the interest of a partner in the partnership firm, they cannot become partners themselves in the firm unless they are specifically admitted into the firm as partners by the consent of the other partners. The effect of an assignment or transfer of his interest in the firm' s property by a partner has been laid down under the English Law of Partnership by Under bill, 10th Edition, pages 100 and 101 as follows: ...The answer is, that without the consent of all the partners (unless there be some express stipulation in the partnership deed), a partner cannot transfer his share in the partnership so as to place another person in his shoes with all the rights of a partner.
Partnership is founded on personal confidence, and the confidence which one may feel in the partner of one's own choice may not be extended to his assignee. One might be very willing to be the partner of the reasonable and industrious Jones, but might recoil from entering into a like relation with his assignee, the Contankerous and idle Brown. Therefore, the law is not so unreasonable as to allow Jones to foist Brown on his partner as his substitute, and still less to allow Jones's secured creditors to force themselves on Jones's partner in place of Jones, for the purpose of liquidating the debts due from him.
The other effect of transferor assignment of the interest in the partnership by a partner is that the transferring partner or the assigner is relieved of all his antecedent liability upon such assignment if he gives notice to the other partners of his withdrawal from the firm, and the assignment, though made to an insolvent person is not, for that reason, the less effectual in putting an end to his liability--Jefferys v. Smith [1827] 27 RR 49.
No doubt, the Indian Courts have held that upon assignment or transfer of interest by a partner, the partnership does not come to an end. But such a proposition can be advanced only when there are more than two partners and one of the partners assigns or otherwise transfers his interest in the firm.
9. The above discussions lead us to either of the two conclusions: (1) As Shri Kaladharan has specified the assets that are purported to be sold by him in favour of the strangers, the sale deed cannot be interpreted as having the effect of transferring his interest in the partnership firm and, therefore, the assets continued to be with the firm notwithstanding the sale deed. The conduct of the other partner in surrendering his interest to the very same strangers should not be lost sight of. The strangers who did not get a perfect title to the properties under the sale deed dated 10-10-1979 have perfected their title to the properties when the other partner Shri Surendran surrendered his share of interest in the firm by a surrender deed dated 5-11-1979 Atleast at that point of time the partnership had come to an end and the firm stood dissolved by the act of the partners. It is only at that point of time the properties of the firm stood legally transferred to and in favour of the strangers. Thus, it is a sale of assets by the firm. (2) On the other hand, if it is considered that by the impugned sale deed Shri Kaladharan had in effect transferred his interest in the partnership firm in favour of the strangers, inasmuch as the partnership consisted of only two partners, the partnership should be deemed to have been dissolved, the strangers having not been specifically admitted as partners.
10. In either case, dissolution had taken place within the previous year ending on 31-3-1980 which is the previous year relevant to the assessment year 1980-81. It is the contention of the assessee that the business as a whole was transferred and, therefore, neither capital gains nor the profit under Section 41(2) would arise for consideration.
We do not accept such a proposition. On a careful scrutiny of the sale deed dated 10-10-1979 and the surrender deed dated 5-11-1979 what was transferred was only the assets such as buildings, electrical fittings, sanitary fittings etc. belonging to the firm, in addition to lands the ownership of which is not clear. If a business as a whole is transferred, nothing prevented the assessee from transferring all the assets and liabilities with the right to the transferee to carry on the business either in the same name or in any other name. There is no evidence on record to show that the transferees continued to carry on the same business. Therefore, we reject the contention of the assessee that the business as a whole was transferred.
11. The next contention of the assessee was that the sale was for a slump price and, therefore, profit under Section 41(2) cannot be computed and in this connection he relied on the decision of the Kerala High Court in CIT v. FX. Periera & Sons (Travancore) (P.) Ltd.'s case (supra). We have carefully considered the decision of the Hon'ble High Court of Kerala. It was a case where the entire business was sold, lock, stock and barrel, for a composite consideration and it was in that context the Kerala High Court held that the consideration cannot be apportioned among different assets. We have already held that this is not a case of sale of whole business.
We are reinforced in this view by the treatment accorded to the sale proceeds in the books of account of the assessee as stated above. None of the liabilities was transferred to and in favour of the vendees. The mere fact that Shri Kaladharan had directed the vendees to deposit a certain amount with Nedungadi Bank cannot lead to the inference that the sale effected by him was subject to the liability to the bank. On the other hand, a plain reading of the document only showed that the direction amounted to an appropriation of the sale proceeds in quit of the liability to the bank. Therefore, this is a case of sale of assets by the firm on its dissolution.
12. The next question is whether the profit arising on the sale can be brought to tax in the hands of the firm. There is a certain distinction between dissolution of a firm and the winding up of a firm. Dissolution precedes winding up. The firm after its dissolution may continue for some time for purposes of winding up the affairs of the partnership.
Such a situation is envisaged under Section 47 of the Partnership Act read with Section 189 of the IT Act. In fact, the Hon'ble High Court of Kerala in Paulson Constructions v. CIT [ 1990] 181 ITR476, held as per head notes as follows: Section 47 of the Indian Partnership Act, 1932, says that on the dissolution of a firm, the authority of each partner to bind the firm, and the other mutual rights and obligation of the partners, continue notwithstanding the dissolution, so far as may be necessary to wind up the affairs of the firm and to complete transactions begun but unfinished at the time of dissolution. Under Section 189 of the Income-tax Act, 1961, where any business or profession carried on by a firm has been discontinued or where a firm is dissolved the Income-tax Officer shall make an assessment of the total income of the firm as if no such discontinuance or dissolution had taken place and by Section 2(24)(v) of the Act, income will include any sum chargeable to income-tax under Section 41 also.
Therefore, we hold that the dissolution had taken place during the previous year but still the firm can be assessed in respect of the profits arising in the course of its winding up. That is what has been done in this case. The revenue's contention is also supported by 'he decision of the Tribunal in the case of Sreehari Lodge (supra).
13. Though the assessee would appear to be aggrieved with the addition of Rs. 7,000 towards rent and the disallowances of Rs. 4,000 we do not find any specific ground of appeal on the above and, therefore, we decline to entertain the plea of the advocate to consider the issues.