TMI Blog1996 (6) TMI 54X X X X Extracts X X X X X X X X Extracts X X X X ..... me the owners of the machinery so distributed either individually or as co-owners. Shortly thereafter the five partners of the petitioner-firm formed another partnership with three others under the name and style of B. P. Sales Corporation on October 10, 1977, and contributed the said machinery (which were distributed to them by the petitioner-firm) to the new firm by valuing the same at Rs. 1,86,100, Rs. 1,89,900, Rs. 1,92,500, Rs. 1,91,400 and Rs. 1,88,200 in all Rs. 9,48,100. Immediately thereafter, the new firm sold the said machinery for a price of Rs. 10,76,220. The assessing authority by order dated January 20, 1988, held that the distribution of assets was neither as a consequence of dissolution of the firm nor as a consequence of retirement of any partner of the firm and distribution of some of the assets of the firm to its partners, to enable them to hold the same as their own property, amounted to a transfer of such assets, by the firm to the partners. He held that the three transactions, i.e., the distribution of the machinery to the five partners by the assessee-firm at the book value of Rs. 1,26,035, the contribution of such assets by the said five partners immediat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsfer of the assets and hence, it was a case of deemed gift by way of sale of the assets at a consideration less than the market price thereof ? " Sri G. Sarangan, learned counsel appearing for the petitioner, submitted that distribution of assets belonging to a partnership firm to its partners, does not constitute a transfer for the following reasons : (a) a partnership is an association or a combination of persons who agree to carry on business with a motive to share the profits of the business carried on by all or any of them acting for all of them ; (b) a partnership firm is not a legal entity, but is merely a compendious and collective name of the individuals who are the partners ; (c) each partner has dominion over the entire assets of the firm ; (d) no transfer is involved either when any asset of the firm is allotted to a partner on his retirement from the firm or when the assets of the firm are distributed among the partners on the dissolution of the firm, as such allotment amounts to adjustment of share/capital ; similarly, when a partner contributes his personal asset towards the capital of the firm or when a firm distributes its assets to the partner/s during the subs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... operty of the individual partner. But relying on the principle that there is no transfer when partnership property is allotted to a partner on dissolution of the firm or on retirement of a partner from the firm, he contended that there will be no transfer when a partnership distributed its assets to its individual partners, during the subsistence of the partnership. Sri N. V. Seshachala, learned standing counsel for the Department, conceded the correctness of propositions (a) to (c) put forth by the petitioner's learned counsel. He also did not dispute the correctness of the first part of proposition (d) that there is no transfer when assets are allotted to a partner either on his retirement or on dissolution of the firm. But, he contended that the said principle will not apply to a situation where a partner contributes his personal assets to the firm or where a firm distributes its assets to its partners. He, thus, joined issue in regard to the second part of proposition (d) put forth by learned counsel for the petitioner and contended that : (i) a firm is distinct and separate from the individual partners, in so far as taxation laws are concerned ; (ii) contribution of an asset ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a property is transferred otherwise than for adequate consideration, the amount by which the market value of the property at the date of transfer exceeds the value of the consideration, shall be deemed to be a gift made by the transferor. The deemed gifts described in clauses (b) to (e) of section 4(1) and in section 4(2) are not relevant for this case and it is not, therefore, necessary to refer to them. Dealing with the aforesaid provisions, this court in Khoday Eswarsa and Sons v. CGT [1990] 186 ITR 388, observed that the Act is self-contained. The purpose of the special definition of "transfer of property" in section 2(xxiv) is to rope in artificial devices which may include mere agreements or arrangements, intended to confer gifts, which may not however, fall under the normal meaning of "transfer," as gifts ; and the definition of "gift" in section 2(xii) is wide enough to include many transactions which could not ordinarily be described as transfers of property and has a wider import than the meaning given to "gift" in section 122 of the Transfer of Property Act. Moreover, the definition of "gift" in the Act is an inclusive definition and gives an artificial extension to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rm continues. The Indian Act, like the English Act, avoids making a firm a corporate body enjoying the rights of perpetual succession. " (emphasis supplied). Dealing with the question whether any partner can claim any specific right in the assets of the partnership during its subsistence, the Supreme Court in Addanki Narayanappa v. Bhashara Krishnappa, AIR 1966 SC 1300 held : " No doubt, since a firm has no legal existence, the partnership property will vest in all the partners and in that sense every partner has an interest in the property of the partnership. During the subsistence of the partnership, however, no partner can deal with any portion of the property as his own. Nor can he assign his interest in a specific item of the partnership property to any one. His right is to obtain such profits, if any, as fall to his share from time to time and upon the dissolution of the firm to a share in the assets of the firm which remain after satisfying the liabilities. . . . 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. Once that is done whatever is brought in woul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... principles laid down in Addanki Narayanappa's case, AIR 1966 SC 1300, held as follows : " From the observations of the Supreme Court extracted, it is clear that the individual partners of a firm have no exclusive interest in the assets belonging to the firm. They can become exclusive owners of any of the assets belonging to the firm only by all the partners acting on behalf of the firm conveying or transferring their interest to such individual partners. In that event, it is clear that there is an extinguishment of the rights of the firm in the assets in question on the one hand and acquisition of interest in them by such individual partners. In law, such a transaction does amount to a transfer. " (emphasis supplied). In Sunil Siddharthbhai v. CIT [1985] 156 ITR 509 (SC), the question whether contribution of a personal asset by a partner towards the capital of the firm amounted to a transfer of property came up for consideration. The Supreme Court held that it amounted to transfer, on the following reasoning : " In its general sense, the expression 'transfer of property' connotes the passing of rights in property from one person to another. In one case, there may be a passing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eceipt of only one of all the assets. What happens here is that a shared interest in all the assets of the firm is replaced by an exclusive interest in an asset of equal value. That is why it has been held that there is no transfer. It is the realisation of a pre-existing right. The position is different, it seems to us, when a partner brings his personal asset into the partnership firm as his contribution to its capital. . . . An exclusive interest in it before it enters the partnership is reduced on such entry into a shared interest. " Thus, the decisions which hold that there is no transfer of property when there is a distribution of assets on dissolution or when an asset is allotted to a partner on his retirement from the firm, will be inapplicable where an asset is brought in by the partner into the partnership. It follows therefrom that they will be inapplicable, even in a converse situation where a firm distributes or gives its assets to its partner/s by debiting the value thereof to the respective partner's account, without there being either dissolution or retirement. While during the subsistence of a partnership, the value of the interest of each partner qua an asset ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t themselves as owners or co-owners of the assets of the partnership; and the firm was the owner of the property and what was owned by the firm devolved upon the individual partner only by means of the transfer, even though the document executed was termed as a "release deed" and adjustment of consideration in the accounts of the firm was by debiting the value thereof to the respective partner's account. The court held that when the partners of a firm vest the ownership of an asset of the firm in one of the partners, the result is that there will be a transfer of a capital asset of the firm in favour of the partners. We are in respectful agreement with the said view. In view of the extended definition of "transfer of property" under section 2(xxiv) and the aforesaid discussion, there can be no doubt that allotment or distribution of an asset or some of the assets of the firm, by the firm to a partner or partners, during its subsistence, so as to enable such partner/s to hold the said assets in his/their individual capacity, would clearly be a transfer of property and not adjustment of capital. Re : Point (b) : Learned counsel for the petitioner next contended that under the c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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