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TMI Blog1988 (1) TMI 26X X X X Extracts X X X X X X X X Extracts X X X X ..... was represented that the stock of cloth was sold to one of the partners. The purchaser paid Rs. 2,04,114.36 being the book value of the cloth to the firm. The sale proceeds, after dissolution, were distributed among the three partners V. Balaiah Gupta-Rs. 98,557.18, V. Subrahmanyam-Rs. 98,557.18 and V. Subbamma, the spouse of the deceased partner, was allotted Rs. 7,000. The Income-tax Officer rejected the " sale " and distribution of sale proceeds. He held that the firm cannot " self-create profit " and estimated the firm's profit by adding ten per cent. to the book value of cloth and thus added Rs. 20,411 to the total income of the firm. The assessee's appeal was allowed accepting the representation made on behalf of the firm. Later, in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business is in law considered the property of the partnership. A partner is entitled upon dissolution to a share in the accretions along with the property brought by him. This is recognised in sections 14 and 15 of the Act. Section 14 reads : " 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e takes out of that stock. The partners are not indebted to each other. The partner is a debtor or creditor only to the firm. 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. 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 These concepts were enunciated by the Privy Council, in interpreting the Act, in Bhagwanji Morarji Goculdas v. Alembic Chemical Works Co. Ltd., AIR 1948 PC 100. See what the Privy Council said (at p. 101): "Before the Board it was argued that under the Indian Partnership Act, 1932, a firm is recognised as an entit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his was again elaborated in CIT v. Bankey Lal Vaidya [1971] 79 ITR 594, 597 (SC): "...the property allotted to a partner in satisfaction of his claim to his share, cannot be deemed in law to be sold to him ". The following passage explains further (at p. 50 of 120 ITR): " Upon dissolution, the firm ceases to exist, then follows the making up of accounts, then the discharge of debts and liabilities and thereupon distribution, division or allotment of assets takes place inter se between the erstwhile partners by way of mutual adjustment of rights between them. The distribution, division or allotment of assets among the erstwhile partners, is not done by the dissolved firm. In this sense, there is no transfer of assets by the assessee (dissolv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the firm. Merely because the account is settled for one purpose in a particular manner, it does not follow, as pointed out by Lord Wrenbury in the same case, that that method of taking account would be good also for another purpose. The annual accounts are never taken with a view to determine the rights of a deceased partner Or that of a retiring partner. The object of annual settlement is only for the definite purpose of assessing the profits at the end of the year and so long as the partnership is continued, it does not make any difference to the partners even if notional value is taken as the value of the assets." (Cruikshank v. Sutherland [1923] 92 LJ Ch 136). The ratio in Cruikshank v. Sutherland was adopted by the Madras High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad to be valued at their market value. " The decision in A. L. A. Firm v. CIT [1976] 102 ITR 622 (Mad) was seriously assailed by the assessee during the debate. The assessee argued that in [1976] 102 ITR 622 (Mad), section 184 of the Income-tax Act with its full implications was not considered. The conclusion is not preceded by any discussion and, therefore, it is argued that the conclusion is not well-founded and also not well-considered. We have earlier stated that the issue is no more res integra in this court because of the decision in Muhammad Ussain Sahib v. Abdul Gafoor Sahib, AIR 1950 Mad 758. The second question reads: "If the answer to question No. 1 is in the affirmative: (a) Whether the concept of sale at market value can be a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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