V. K. SINGHAL J. - The Income-tax Appellate Tribunal has referred the following question of law arising out of its order dated July 28, 1984, in respect of the assessment years 1979-80 and 1980-81 under section 256(1) of the Income-tax Act, 1961 :
'Whether, on the facts and in the circumstances of the case, the partners of the firm by virtue of a partial dissolution deed hold certain properties which property originally belonged to the firm in the capacity of co-owners in the same ratio in which they shared the profits and gains from the business of the firm without going through the requirement of section 17(1)(b) of the Registration Act ?'
The brief facts of the case are that the assessee is a partnership firm and had 17 partners. The firm had nine godowns and it was decided by the partners that the godowns should no longer be part of the sets of the firm but should be owned by the respective partners in the same ratio in which they shared the profits and gains from the business transacted by the firm. The partners decided to close down the letting out of godowns which was done by means of a partial dissolution deed dated January 31, 1979. The godowns were let out by the partners (co-owners) and due information was also given to the bankers in this regard. The Inspecting Assistant commissioner of Income-tax was of the view that without there being registration in terms of section 17(1)(b) of the Indian Registration Act, there was no transfer of godowns and they belonged to the firm. He was also of the view that there cannot be a partial dissolution of the firms assets. Against the said order, the matter was taken up before the Commissioner of Income-tax (Appeals) who referred to the various agreements entered into between the partners. The firm was constituted by a partnership deed dated May 20, 1978, having 15 partners and two minors were admitted to the benefits of the partnership. Since one of the minors admitted to the benefits of the partnership attained majority on January 31, 1979, a dissolution deed was executed. On February 1, 1979, another agreement was entered into between the firm and its partners whereby the firm became the authorised gent of the partners-co-owners for the purposes of collection of rent from the Food Corporation of India. A fresh partnership deed was executed on February 1, 1979. By the dissolution deed dated January 31, 1979, nine godowns of the firm were intended to be taken out of the partnership firm and to treat the same as their property in their individual capacity as co-owners. The provisions of section 17 of the Registration act were also taken into consideration and after going through the various provisions, the appeal was dismissed. In the second appeal before the Income-tax Appellate Tribunal, the provisions of sections 14 and 15 of the Indian Partnership Act were taken into consideration where the property of the firm has been defined. The decision of this court in the case of CIT v. Amber Corporation was relied upon. That was a case where property contributed by the partners was immovable property of which all the right, title and interest was brought into the common stock as their contribution to the common business as partnership property. It was held that no registration is necessary for transferring the property to the partnership. In the present case, the property of the firm has been given to the partners through a dissolution deed. The said dissolution deed dated January 31, 1979, was only with a view to take out the godowns and distribute them to the partners in their profit-sharing ratio. The effect of the dissolution deed by which the property of the firm was transferred to the partners has to be examined. The decision which has been relied upon by the Tribunal is in respect of the capital which has been contributed by the partners of immovable property and it is not in respect of the property of the firm which has come to the shares of the partners by a deed of dissolution. This matter was considered by the apex court in the case of S. V. Chandra pandian v. S. V. Sivalinga Nadar : [1995]212ITR592(SC) wherein it was observed that (at page 600) :
'.......... regardless of the character of the property brought in by the partners on the constitution of the partnership firm or that which is acquired in the course of business of the partnership, such property shall become the property of the firm and an individual partners shall only be entitled to his share of profits, if any, accruing to the partnership from the realisation of this property and upon dissolution of the partnership to a share in the money representing the value of the property. It is well-settled that the firm is not a legal entity, it has no legal existence, it is merely compendious name and, hence, the partnership property would vest in all the partners of the firm. Accordingly, each and every partner of the firm would have an interest in the property or asset of the firm, but during its subsistence no partner can deal with any portion of the property as belonging to him, nor can he assign his interest in any specific item thereof to any one. By virtue of the implied authority conferred as agent of the firm his action would bind the firm if it is done to carry on, in the usual way, the business of the kind carried on by the firm, but the act or instrument by which the firm is sought to be bound must be done or executed in the firm name or in any other manner expressing or implying an intention to bind the firm. His right is merely to obtain such profits, if any, as may fall to his share upon the dissolution of the firm which remain after satisfying the liabilities set out in the various sub-clauses (i) to (iv) of clause (b) of section 48 of the Act.'
It was further observed (at page 606) :
'From the foregoing discussion, it seems clear to us that regardless of its character the property brought into stock of the firm or acquired by the firm during its subsistence for the purposes and in the course of the business of the firm shall constitute the property of the firm unless the contract between the partners provides otherwise. On the dissolution of the firm each partner becomes entitled to his share in the profits, if any, after the accounts are settled in accordance with section 48 of the Partnership Act. Thus, in the entire assets of the firm all the partners have an interest albeit in proportion to their share and the residue, if any, after the settlement of accounts on dissolution would have to be divided among the partners in the same proportion in which they were entitled to a share in the profit. Thus, during the subsistence of the partnership, a partners would be entitled to a share in the profits and after its dissolution to a share in the residue, if any, on settlement of accounts. The mode of settlement of accounts set out in section 48 clearly indicates that the partnership asset in its entirety must be converted into money and from the pool the disbursement has to be made as set out in clause (a) and sub-clause (i), (ii) and (iii) of clause (b) and, thereafter, if there is any residue that has to be divided among the partners in the proportion in which they were entitled to a share in the profits of the firm. So viewed, it becomes obvious that the residue would, in the eye of law, be movable property, i.e., cash, and hence, distribution of the residue among the partners in proportion to their shares in the profits would not attract section 17 of the Registration Act. Viewed from another angle, it must be realised that since a partnership is not legal entity but is only a compendious name and each and every partner has a beneficial interest in the property of the firm even though he cannot lay a claim on any earmarked portion thereof as the same cannot be predicated. Therefore, when any property is allocated to him from the residue, it cannot be said that he had only a definite limited interest in that property and that there is a transfer of the remaining interest in his favour within the meaning of section 17 of the Registration Act. Each and every partners of a firm has an undefined interest in each and every property of the firm and it is not possible to say unless the accounts are settled and the residue or surplus determined what would be the extent of the interest of each partner in the property. It is, however, clear that since no partner can claim a definite or earmarked interest in one or all of the properties of the firm because the interest is a fluctuating one depending on various factors such as the losses incurred by the firm, the advances made by the partners as distinguished from the capital brought into the firm, etc., it cannot be said, unless the accounts are settled in the manner indicted by section 48 of the Partnership Act, what would be the residue which would ultimately be allocable to the partners. In that residue, which becomes divisible among the partners, every partner has an interest and when a particular property is allocated to a partner in proportion to his share in the profits of the firm, there is no partition or transfer taking place nor is there any extinguishment of interest of other partners in the allocated property in the sense of a transfer or extinguishment of interest under section 17 of the Registration Act. Therefore, viewed from this angle also it seems clear to us that when a dissolution of a partnership takes place and the residue is distributed among the partners after settlement of accounts there is no partition, transfer or extinguishment of interest attracting section 17 of the Registration Act.'
From the above elucidation of law propounded by the apex court it is clear that the property which has come to the share of the partners on the dissolution of the firm does not require registration under section 17 of the Registration Act. The dissolution deed dated January 31, 1979, has the effect of divesting the firm of the property to the partners as co-owners. The question is whether there can be a partial dissolution of the firm. It has been provided under Chapter VI of the partnership Act as to how a firm can be dissolved. Section 40 of the Partnership Act provides that a firm may be dissolved with the consent of all the partners or in accordance with a contract between the partners. The Tribunal has proceeded on the interpretation of sections 14 and 15 of the Partnership Act. It was considered that this dissolution deed modifies the original deed of the firm to the extent that the godowns will be no longer used for the purpose of business. The Tribunal has not examined that the partial dissolution deed amounts to a dissolution deed, but has proceeded that it has only modified the partnership agreement already entered into by excluding certain properties from the assets of the firm. It has to be considered as to whether by an agreement of this nature the property of the firm could be transferred to the partners and whether such transfer will not require registration under section 17 of the Registration Act. The provisions of section 14 of the Partnership Act provide that subject to contract between the partners, the property of the firm includes all property and rights and interests 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. This provision is applicable not only to the property which has been originally brought into the stock of the firm, but also such property which has been acquired by the firm by purchase or otherwise. All such properties have to be treated to be the properties of the firm, but this is subject to the contract between the partners. This section contemplates that there could be a contract contrary to the general proposition with regard to the property of the firm. A contract could be entered into between the partners with regard to the property of the firm. The observations of the apex court in the case of S. V. Chandra Pandian : [1995]212ITR592(SC) also contemplate that regardless of its character the property brought into the stock of the firm or acquired by the firm during its subsistence for the purposes and in the course of the business of the firm shall be considered to be the property of the firm unless the contract between the parties provides otherwise. Thus, the agreement between the partners could be at the time of dissolution of the firm or during the subsistence thereof. The godowns which have been let have been given in the profit sharing ratio and as such the partners who were having interest in the said property of the firm, cannot be said they have acted contrary to law. The only point which has to be seen is as to whether registration is necessary in a case where the property of the firm is transferred to a partners. So far as the partial dissolution deed ins concerned, it is nowhere provided under law and, therefore, it cannot be recognised under law, either the firm is dissolved or is continued. In case it is dissolved, then in view of the decision in the case of S. V. Chandra Pandian : [1995]212ITR592(SC) registration is not necessary when the assets of the firm are distributed among the partners at the time of dissolution of the firm, but if the firm is not dissolved, then the immovable property given to partners of the firm having a value of more than Rs. 100 will require registration. The apex court has held that the property which is allotted to the partners on the dissolution of the firm is only distribution of the residue and it is not a case of partition, transfer or extinguishment of interest. The decision in the case of S. V. Chandra Pandian : [1995]212ITR592(SC) is of no assistance to the assessee. In these circumstances, we are of the view that the Tribunal was not justified in holding that the partners of the firm by virtue of the partial dissolution deed could hold certain properties which property originally belonged to the firm in the capacity of the co-owners in the same ratio in which they shared the profits and gains from the business of the firm without going through the requirement of section 17(1)(b) of the Registration Act.
Consequently, the reference is answered in favour of the Revenue and against the assessee. No order as to costs.