CIT v. Dewas Cine Corpn.:

 Under the Partnership Act, 1932, property which is brought into the partnership by the partners when it is formed or which may be acquired in the course of the business becomes the property of the partnership and a partner is, subject to any special agreement between the partners, entitled upon dissolution to a share in the money representing the value of the property. When the two partners brought in the theatres of their respective ownership into the partnership, the theatres must be deemed to have become the property of the partnership.

Under Section 46 of the Partnership Act, 1932, on the dissolution of the firm every partner or his representative is entitled, as against all the other partners or their representatives, to have the property of the firm applied in payment of the debts and liabilities of the firm, and to have the surplus distributed among the partners or their representatives according to their rights. Section 48 of the Partnership Act provides for the mode of settlement of accounts between the partners. It prescribes the sequence in which the various outgoing are to be applied and the residue remaining is to be divided between the partners. The distribution of surplus is for the purpose of adjustment of the rights of the partners in the assets of the partnership; it does not amount to transfer of assets.

On dissolution of the partnership, each theatre must be deemed to be returned to the original owner, in satisfaction partially or wholly of his claim to a share in the residue of the assets after discharging the debts and other obligations. But thereby the theaters were not in law sold by the partnership to the individual partners in consideration of their respective share in the residue. The expressions “sale” and “sold” are not defined in the Income Tax Act; those expressions are used in Section 10(2) (vii) in their ordinary meaning. “Sale”, according to its ordinary meaning is a transfer of property for a price, and adjustment of the rights of the partners in a dissolved firm is not a transfer, nor it is for a price.

The Solicitor-General appearing for the Revenue submitted that each partner is entitled to have the assets of the partnership sold for discharging the debts and obligations of the partnership, and for the purpose of dividing the residue among the partners if property is allotted to the partners in satisfaction of their claims, the transaction must be deemed in law to take the form of a notional sale of the property to the partner in consideration of the money value of his share. Counsel relied upon the statement of the law in Lindley on Partnership:

“…in the absence of a special agreement to the contrary, the right of each partner on a dissolution is to have the partnership property converted into money by a sale, even although a sale may not be necessary for the payment of debts.”,

and also upon the decision of this Court in Addanki Narayanappa v. Bhaskara Krishnappa. A partner may, it is true, in an action for dissolution insist that the assets of the partnership be realised by sale of its assets, but where in satisfaction of the claim of the partner to his share in the value of the residue determined on the footing of an actual or notional sale property is allotted, the property so allotted to him cannot be deemed in law to be sold to him.

The High Court was, therefore, in our judgment, right in deciding the question referred in favour of the assessee. The appeal fails and is dismissed with costs.