DISSOLUTION OF PARTNERSHIP:

Whether the interest of a partner in partnership assets is to be treated as movable property or as both moveable and immovable, depending as on the character of the property for the purpose of S. 17 of Registration Act? It is well settled that the share of a partner in the assets of the partnership which has also immovable properties is movable property and the assignment of the share does not require registration under Section 17(1) of the Registration Act.

On dissolution of the firm, after the accounts are settled in accordance with Section 48 of the Partnership Act, each partner is entitled to his share of profits, if any. Thus, if there is residue after the settlement of the account on dissolution of the firm, the entire asset would have to be divided among the partners in the same proportion in which they were entitled to share in the profit.

In S.V. Chandra Pandian v. Sivalinga Nadar, the above question has been discussed in detail after dealing with several cases. The Supreme Court held that regardless of the character, the property brought into the stock of the firm or acquired by the firm during its subsistence for the purpose 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. It was further held that since a partnership is not a legal entity but is only a compendious name, each and every partner has a beneficial interest in the property of the firm, even though he cannot lay claim to any earmarked portion thereof as the same cannot be predicted. Therefore, when any property is allocated to him from the residue it cannot be said that he had only a definite limited interest in the property and that there is a transfer of the remaining interest in his favour within the meaning of Section 17 of Registration Act.

In Addanki Narayanappa v. Bhaskara Krishnappa, it was contended that since the partnership assets included immovable property and the document records relinquishment by the members of the family of their interest in those assets, the document was compulsorily registrable under Section 17(1)(c) of the Registration Act. The Supreme Court held that there is no express reference to any immovable properly therein. No, doubt, the document does recite the fact that one partner had given to another family, certain property. This however, is merely recital of a fact which had taken place earlier.

In C.I.T. v. Juggilal Kamalapal, the question arose “Whether non-registration of the relinquishment deed invalidates the transfer of the business assets to the new partnership?” The Court answered that the deed of relinquishment in respect of the individual interest of the three brothers in the assets of the partnership firm in favour of the trust, consequently, did not require registration.

Under Income Tax Act, 1922 the expression “sale” or “transfer” had not been defined whereas in Income Tax Act, 1961 the expression “transfer” is defined in Section 2(47) as sale, exchange, relinquishment and extinguishment of any rights in relating to capital assets. In Income Tax Act, in 1961 Clauses (iv) to (vi) were added in the present Income tax Act 1961, with effect from 1.4.85 and 1.4.88, giving a very wide meaning to the term “transfer”.

In CIT v. Devan Cine Corporation, the Supreme Court agreed with the High Court and held that the expression “Sale” and “Sold” are not defined in the Income-tax Act, and these expressions are used in Section 10(2)(viii) in their ordinary meaning. “Sale” according to its ordinary meaning is a transfer of property for a price, and adjustment of the right of the partners in a dissolved firm is not a transfer, nor it is for a price.

In CIT v. Bankey Lal Vaidya the question arose whether on a true interpretation of sub-section (1) of section 12B of the Income Tax Act the sum has been correctly taxed as capital gains. The Supreme Court following the law as laid down in CIT v. Dewan Cine Corporation held that there is no sale and payment of price, but payment of the value of share under an arrangement for dissolution of the partnership and distribution of the assets.

In Malabar Fisheries & Co. v. CIT the question arose “Whether on the facts and in the circumstances of the case, there was a transfer of assets within the meaning of the words “otherwise transferred” occurring in S. 34(3) (b) of the Income Tax Act?. The Supreme Court held that there was no question of 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 and as such there is no transfer of assets involved even in the sense of any extinguishment of the firm's rights in the partnership assets when distribution takes place upon dissolution.

In S.V. Chandra Pandian v. S.V. Sivalinga Nadar the Supreme Court felt that the two cases, namely Ratan Lal Sharma v. Purshottam Harit AIR and Lachman Dass v. Ram Lal have no bearing on the case on hand since in the first case the court did not depart from the principle that the share of a partner in the asset of the partnership inclusive of immovable property, movable property and the assignment of the share on dissolution of the partnership did not require registration under Section 17 of the Registration Act, and in the second case that was not a case of assignment of partnership property under a dissolution. It finally opined that on a true reading of the award as a whole, there is no doubt that it essentially deals with the distribution of the surplus properties belonging to the dissolved firms. The award, therefore, did not require registration Under Section 17(1) of the Registration Act.

In Gandadhar Madhavrao Bidwai v. Hanmantrao V. Mungale the land was purchased by individual partner and both partners have been treating it as joint ownership, and the recital in the documents also established that the property at the time of dissolution was owned by the partnership. In this case agreeing with S.V. Chandra Pandian v. S.V. Sivalinga Nadar the Supreme Court held that property at the time of dissolution of partnership was the property of the partnership, and therefore, it did not require registration. Learned counsel for the appellant Mr. A.K. Sen in this case urged that in any case Section 14 of the Partnership Act indicates that any property acquired subsequently becomes partnership property.

Therefore, on the dissolution of partnership, the residue is distributed among the partners after settlement of accounts, and there is no partition, transfer or extinguishment of interest attracting Section 17 of Registration Act.