TMI Blog1979 (9) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... firm represented by one of its erstwhile partners. The firm as originally constituted on April 1, 1959, consisted of four partners and carried on six different businesses in six different names and styles, namely, (a) Malabar Fisheries Co., (b) Coastal Engineering Co., (c) Cochin Tin Factory, (d) Goodwill Industries, all at Palluruthy, (e) Combine Steel Industries at the Industrial Estate at Olavakkot and (f) Lite Metal Industries at Visakhapatnam in Andhra Pradesh. The firm was dissolved on March 31, 1963, and under the deed of dissolution executed by and between the partners, the first business concern was taken over by one of the partners, the remaining five concerns by two of the other partners and the fourth partner received a sum of ₹ 3,81,082 in lieu of his respective shares in the assets of all the busineses of the firm. It appears that during the four assessment years 1960-61 to 1963-64, the firm had installed various items of machinery in respect of which it received development rebate in its respective tax assessments under s. 33 of the Act. On dissolution of the firm on March 31, 1963, the ITO took the view that s. 34(3)(b) of the Act applied on the ground that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on or allotment of assets between partners of a firm consequent on its dissolution amounts to a mutual adjustment of rights of the partners and does not amount to a sale or transfer had been rendered under the Indian I.T. Act, 1922, wherein the expression sale or transfer had not been defined whereas in the 1961 Act by which the case was governed, the expression transfer had been defined by s.2(47) in a very wide manner so as to include not merely a sale or exchange but also extinguishment of any rights in capital assets. The High Court held that a dissolution of a firm amounted to extinguishment of the rights of the firm in the assets of the partnership and accordingly was a transfer within the meaning of s. 2(47) of the Act and that, therefore, the provisions of s. 34(3)(b) applied to the case. It is this view of the High Court that is being challenged before us in these appeals by the assessee. Counsel for the assessee contended that the High Court has clearly erred in taking the view that the dissolution of a firm amounts to extinguishment of the rights of the firm in the assets of the partnership. He pointed out that in the two decisions referred to above this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion and the same got transferred or vested in individual partner or partners as a result of distribution or allotment made between them. He stated, qua the erstwhile partners, there may not be any transfer of assets and there may be a mutual adjustment of rights but, qua the firm, there is certainly extinguishment of its rights in the assets of the partnership and in that sense there is a transfer of assets within the definition under s. 2(47) of the Act. Since in these appeals the question raised relates to the withdrawal of development rebate under s. 34(3)(b) read with s. 155(5) of the 1961 Act in the light of the definition of the expression transfer given under s. 2(47) of the Act, it will be desirable to note what these provisions are. Section 34(3)(b), in so far as is material, reads : 34. Conditions for depreciation allowance and development rebate.-- ................................. 3(b) If any ship, machinery or plant is sold or otherwise transferred by the assessee to any person at any time before the expiry of eight years from the end of the previous year in which it was acquired or installed, any allowance made under section 33 or under the correspon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of a firm extinguishes the firm's rights in the assets of the partnership so as to constitute a transfer of assets under s. 2(47) ? In the Dewas Cine Corporation's case [1968] 68 ITR 240 (SC), the concept of distribution of assets consequent upon the dissolution of the firm was considered in the context of the balancing charge arising under the second proviso to s. 10(2)(vii) of the 1922 Act. In that case two individuals, each of whom owned a cinema theatre, formed a partnership to carry on business of exhibition of cinematograph films, bringing the theatres into the books of the firm as its assets. For the assessment years 1950-51 to 1952-53, the ITO allowed depreciation aggregating to ₹ 44,380 in the assessment of the firm in respect of the two theatres. On the dissolution of the firm on September 30, 1951, the theatres were returned to their original owners. In the books of the firm the assets were shown as taken over at the original price less the depreciation allowed, the depreciation being equally divided between the two erstwhile partners. The Tribunal took the view that by restoring the theatres to the original owners there was a transfer by the partnership ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tered into a partnership with D to carry on business of manufacturing and selling pharmaceutical products and literature relating thereto. On the dissolution of the partnership, its assets, which included goodwill, machinery, furniture, medicines, library and copyright in respect of certain publications, were valued at ₹ 2,50,000. Since a large majority of assets was incapable of physical division, it was agreed that the assets be taken over by D and the respondent-assessee be paid his share of the value of the assets in money and accordingly he was paid ₹ 1,25,000. The question was whether the sum of ₹ 65,000, being part of the amount received by the respondent-assessee could be brought to tax as capital gains under s. 12B(1) of the Act ? This court held that the arrangement between the partners of the firm amounted to a distribution of the assets of the firm on dissolution, that there was no sale or exchange of the respondent's share in the capital assets to D, nor did he transfer his share in the capital assets and, therefore, the sum of ₹ 65,000 could not be taxed as capital gains. The court observed that the rights of the parties were adjusted by ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctions; but are always either debtors to or creditors of the firm. Owing to this impersonification of the firm, there is a tendency to regard its rights and obligations as unaffected by the introduction of a new partner, or by the death or retirement of an old one. Notwithstanding such changes among its members, the firm is considered as continuing the same; and the rights and obligations of the old firm are regarded as continuing in favour of or against the new firm as if no changes had occurred. The partners are the agents and sureties of the firm; its agent for the transaction of its business; its sureties for the liquidation of its liabilities so far as the assets of the firm are insufficient to meet them. The liabilities of the firm are regarded as the liabilities of the partners only in case they cannot be met by the firm and discharged out of its assets. But this is not the legal notion of a firm. The firm is not recognised by English lawyers as distinct from the members composing it. In taking partnership accounts and in administering partnership assets, courts have to some extent adopted the mercantile view, and actions may now, speaking generally, be brought by or a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he partnership or after it has been dissolved. As regards the nature of a share of a partner in a firm the following passage in Lindley on Partnership, at page 375, brings out the legal position very clearly : What is meant by the share of a partner is his proportion of the partnership assets after they have been all realised and converted into money,and all the partnership debts and liabilities have been paid and discharged. This it is, and this only, which on the death of a partner passes to his representatives, or to a legatee of his share; ............... and which on his bankruptcy passes to his trustee. The position as regards the nature of a firm and its property in Indian law under the Indian Partnership Act, 1932, is almost the same as in English law. Here also a partnership firm is not a distinct legal entity and the partnership property in law belongs to all the partners constituting the firm. In Bhagwanji Morarji Goculdas v. Alembic Chemical Works Co. Ltd., AIR 1948 PC 100; 18 Comp Cas 205, the Privy Council in para. 10 of the judgment observed thus (see also [1948] 18 Comp Cas 209) : Before the Board it was argued that under the Indian Partnership A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e discussion, it seems to us clear that a partnership firm under the Indian Partnership Act, 1932, is not a distinct legal entity apart from the partners constituting it and equally in law the firm as such has no separate rights of its own in the partnership assets and when one talks of the firm's property or firm's assets all that is meant is property or assets in which all partners have a joint or common interest. If that be the position, it is difficult to accept the contention that upon dissolution the firm's rights in the partnership assets are extinguished. The firm as such has no separate rights of its own in the partnership assets but it is the partners who own jointly or in common the assets of the partnership and, therefore, the consequence of the distribution, division or allotment of assets to the partners which flows upon dissolution after discharge of liabilities is nothing but a mutual adjustment of rights between the partners and there is no question of any extinguishment of the firm's rights in the partnership assets amounting to a transfer of assets within the meaning of s. 2(47) of the Act. In our view, therefore, there is no transfer of assets in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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