M/S Onkar Rice Mills vs State Of U.P. Thru Secy. Tax & ...
2019 Latest Caselaw 4919 ALL

HIGH COURT OF JUDICATURE AT ALLAHABAD, LUCKNOW BENCH
 
 

AFR
 
Judgment reserved on:07.01.2019 
 
Judgment delivered on:23.05.2019
 
Court No. - 7
 

 
Case :- MISC. SINGLE No. - 2791 of 2003
 

 
Petitioner :- M/S Onkar Rice Mills
 
Respondent :- State Of U.P. Thru Secy. Tax & Registration
 
Counsel for Petitioner :- N.K. Seth,Ashish Chaturvedi,Azhar Ikram,Manish Singh,P.C. Mishra
 
Counsel for Respondent :- C.S.C.
 

 
Hon'ble Rajan Roy,J.

Heard Shri Manish Singh along with Shri Azhar Ikram, learned counsel for the petitioner and Shri Jagdish Prasad Maurya, learned Additional Chief Standing Counsel for the State.

This is a writ petition under Article 226 of the Constitution of India challenging an order passed by the Additional District Magistrate, Finance and Revenue under Section 47-A read with Section 33/38 of the Indian Stamp Act, 1899 (For short ''the Act, 1899') as amended for its application to the State of U.P. as well as the revisional order passed under Section 56 of the said Act, 1899, affirming the same.

The facts of the case in brief are that a partnership Firm in the name and style M/s Onkar Rice Mills was in existence since prior to independence. The partnership was at Will. Shri Ram Autar and Shri Ram Tirath were two of the 7 partners of the said Firm. Movable properties were purchased by the Firm in the name of these two partners on 15.06.1964 and they were made part of the capital pool of the partnership Firm about which there is no dispute. On 13.09.1994 out of the seven partners four, namely, Shri Sita Ram, Shri Jai Bhagwan, Shri Ram Autar and Shri Atul Kumar retired and a retirement deed to this effect was executed, a copy of which is annexed as Annexure No. 6 to the writ petition. Consequently, the Firm was reconstituted with 3 continuing/remaining partners and 5 new partners and a deed to this effect was executed on 14.09.1994 a copy of which is also annexed as Annexure No. 7 to the writ petition.

Consequent to the aforesaid events an alleged release deed dated 21.11.1994, a copy of which is annexed as Annexure No. 8 to the writ petition, was executed by the retiring partners. The release deed (Dast Bardarinama) contains the details of the property measuring 1 acre 9 decimal and building situated thereon in respect of which the retiring partners were relinquishing their claims, rights and interests as already mentioned in the retiring deed.

On a perusal of the release deed conjointly with the two sale deeds dated 15.06.1964, copies of which are also annexed as Annexure No. 2 and 3, the Court finds that the properties mentioned in the release deed were the same which were purchased on 15.06.1964.

It appears that some audit objections were raised by the Office of the Accountant General Allahabad, U.P. with regard to stamp duty paid on the release deed @ Rs.190, accordingly, the matter was referred by the Deputy Registrar to the Collector/ A.D.M., Lakhimpur Kheeri under Section 38 and 47-A of the Indian Stamp Act, 1899 as applicable to the State U.P., whereupon, notices were issued to the petitioner treating the deed to be a conveyance deed and liable to be Stamped accordingly. Objections were filed by the petitioner stating that the deed in question was not a conveyance deed but a release deed, therefore, referable to Article 55 of Schedule- I-B of the Act, 1899 as applicable to the State of U.P. and not to Article 23(a) of Scheduled-I-B of the Act, 1899.

Ultimately, the A.D.M., Finance and Revenue/ Collector, Stamps passed an order dated 27.02.1998 in case No. 719/96-97 holding that in view of Article 23 Schedule I-B read with the definition of conveyance in Section 2(10) of the Act, 1899 the deed in question was a conveyance deed upon which stamp was payable accordingly as per Article 23(a) of Schedule I-B and not Article 55. Consequently, the market value of the property was determined at Rs.2,38,62,000/- and deficiency of stamp was determined at Rs.29,82,560/-.

Being aggrieved the petitioner herein filed a revision before the Commissioner under Section 56 of the Act, 1899. The said revision was dismissed on 31.07.2003 and the order of the A.D.M., Finance and Revenue was affirmed.

Being further aggrieved the petitioner herein filed this writ petition before this Court on 11.08.2003 challenging the aforesaid orders and while entertaining the writ petition this Court on 31.08.2003 passed an interim order staying the operation and implementation of the impugned orders.

During the course of hearing while assailing the impugned orders the contention of the learned counsel for the petitioner was that it not being in dispute that the property in question was part of the capital of the partnership Firm, it is evident that it was the property of the Firm and the partners did not have any right to sell the said property or any portion thereof nor could they be said to be the owner of the said properties or any portion thereof. All the partners were entitled to their the share in the profit as per the agreement arrived at in the partnership deed. In this view of the matter, once the retiring partners retired then as per the release deed all that the retiring partners relinquished was their claim/share in respect of the assets of the Firm, in favour of the other partners or the Firm to which the property belonged.

He further contended that the legal position in such a situation is that the deed in question would be a release deed and not a conveyance deed and this is no longer res-integra as would be evident from the judgments of the Special Bench of this Court reported in AIR 1979 Alld 312; Board of Revenue U.P. Vs. Auto Sales, Allahabad, 1971 ALJ 847; Govind Das and Ors. Vs. the Board of Revenue, U.P., Lucknow, 1971 ALJ 1974; Narendra Bahadur Singh Vs. Chief Inspector of Stamps, U.P., AIR 1984 Alld. 107; Smt. Balwant Kaur and Ors. Vs. State of U.P. and the decision in the case of Balbir Singh Vs. State of U.P. and Ors. (Civil Misc. Writ Petition No. 536 of 2006) dated 02.03.2012 reported in 2012 (4) ALJ 430.

It was also the contention that as far as Explanation to Section 2(10) of the Act, 1899 as introduced by the State amendment in U.P. is concerned, though the status of a partner is somewhat similar to that a co-owner but the difference is that in the case of a partner he does not have any defined share in the property which is of the Firm as has been held by this Court in the case of Balbir Singh (supra) and on account of this distinction it has been held in the said case that consequent to retirement or dissolution, the relinquishment of any share, right and interest by one of the partners in favour of the other partners or so to say the Firm, is not a sale but a release.

Shri Jagdish Prasad Maurya, learned Additional Chief Standing Counsel appearing on behalf of the State contends on the other hand that the reasoning given in the impugned order is perfectly justified and legal. The deed in question on a bare reading of the contents thereof qualifies as a conveyance deed as per Section 2(10) of the Act, 1899 specially in view of the explanation thereof added by the State Amendment, therefore, the stamp payable was in terms of Article 23 of Schedule I-B of the Act, 1899 and not Article 55. The impugned orders do not suffer from any error, therefore, no interference is called for in exercise of extraordinary jurisdiction by this Court under Article 226 of the Constitution of India. In support of his contention he relied upon a decision of the Rajasthan High Court reported in AIR 1998 Rajasthan 223; Gyan Chand Vs. State and Ors., which was a case of joint ownership of a property wherein it was held that every joint owner had his individual title and interest in the property purchased jointly by them, thus, relinquishment of title and interest in the joint property by one joint owner in favour of another joint owner would only be transfer of interest of one joint owner in favour of another joint owner, each joint owner having distinguishable, independent, individual title in the jointly purchased property. Thus, where one joint owner released his share in favour of another joint owner by a deed titled as ''release deed', the deed would be liable to be treated as conveyance deed and not release deed because by way of release deed title of the property can be transferred to one having no title before transfer.

The moot point which has arisen for consideration in this case is as to whether the deed in question which is dated 21.11.1999 is a conveyance deed or a release deed. Based on the answer to this question the supplementary question would automatically stand answered i.e. whether stamp on the deed in question was liable to be paid as per Article 23 of Schedule I-B or Article 55 of the same Schedule of the Act, 1899.

Article 23 of Schedule I-B of the Act, 1899 as applicable in the State of U.P. on 21.11.1994 was as under:-

"23. Conveyance [as defined by Section 2(10)] not being a TRANSFER charged or exempted under No. 62.-

Where the amount or value of the consideration of such conveyance as set forth therein or the market value of the property which is the subject of such conveyance, whichever is greater, does not exceed Rs.50. Rs. P.6.25

Where it exceeds Rs.50 but does not exceed Rs. 100. 12.50

Where it exceeds Rs.100 but does not exceed Rs. 200. 25.00

Where it exceeds Rs.200 but does not exceed Rs. 300. 37.50

Where it exceeds Rs.300 but does not exceed Rs. 400. 50.00

Where it exceeds Rs.400 but does not exceed Rs. 500. 62.52

Where it exceeds Rs.500 but does not exceed Rs. 600. 75.00

Where it exceeds Rs.600 but does not exceed Rs. 700. 87.50

Where it exceeds Rs.700 but does not exceed Rs. 800. 100.00

Where it exceeds Rs.800 but does not exceed Rs. 900. 112.50

Where it exceeds Rs.900 but does not exceed Rs. 1,000. 125.00

And for every Rs.500 or part thereof in excess of Rs. 1,000. 62.50

Exemption

Assignment of copyright in musical works by resident of, or first published in India.

Article 55 of the same Schedule I-B was/is as Under:-

"55. Release, that is to say, any instrument not being such a release as is provided for by section 23 (A) whereby a person renounces a claim upon another person or against any specified property-

(a) if the amount or value of the claim does not exceed Rs. 2,500;

(b) in any other case

Section 2(10) of the Act, 1899 as applicable in State of U.P. is as under:-

"(10) "Conveyance".-"Conveyance" includes a conveyance on sale and every instrument by which property, whether movable or immovable, is transferred inter vivos and which is not otherwise specifically provided for by Schedule I, Schedule I-A or Schedule I-B, as the case may be;

Explanation.- An instrument whereby a co-owner or a property having defined share therein, transfers such share or part thereof to another co-owner of the property, is for the purposes of this clause an instrument by which property is transferred;"

Before proceeding to consider the contents of the deed its purport and other relevant factual aspects, it is necessary to refer to the legal position on the question involved herein as is borne out from various authorities which have been cited before this Court.

A Special Bench of this Court in the case of Auto Sales, Allahabad (supra) had the occasion to consider the law on the nature of rights of a partner qua partnership property. It observed that a partner of a Firm is in the same position as a co-owner of the joint property in relation to other co-owners. The concept of partnership is to embark upon a joint venture and for that purpose to bring in capital money or even property, including immovable property. Once a partner brings his properties to the common hotch-potch of a partnership, whatever is brought in would cease to be the exclusive property of that partner. It would be the trading asset of the partnership in which all the partners would have their shares. As a practical matter, now the partnership, rather the partners, owns the Firm's property. A partner, subject to any agreement between the partners, has an equal right with his partners to possess specific partnership property for partnership purposes, but has no right to possess such property for any other purpose. Hence, in the absence of a special agreement, neither a partner separately owns or has the exclusive right of possession of, any particular article of partnership property, nor does either partner own any proportional part of any partnership property, but each has dominion over the whole article and over the entire partnership property.

In the case at hand it is nobody's case that there was any special agreement as referred hereinabove, to the contrary.

The Special Bench further went on to consider the provisions of Section 14 and 15 of the Indian Partnership Act and to hold that such property shall be held for the purpose of partnership, thereby indicating that so long as the partnership continues, no part of the assets of the partnership could be regarded as belonging to any individual partner. No individual partner can predicate his share in a particular property belonging to the Firm. He can get his share in the properties of the partnership only after the assets have been converted into money, and that too after the debts and liabilities have been paid and discharged.

The Supreme Court in the case of Narayanappa Vs. Bhaskara Krishnappa reported in 1966 (3) SCR 400 held as under:-

"From a perusal of these provisions, it would be abundantly clear that whatever may be the character of the property which is brought in by the partners when the partnership is formed or which may be acquired in the course of the business of the partnership it becomes the property of the Firm and what a partner is entitled to is his share of profits, if any, accruing to the partnership from the realisation of this property and upon dissolution of the partnership to a share in the money representing the value of the property. 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 anyone. 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 set out in Clause (a) and Sub-clauses (i), (ii) and (iii) of Clause (b) of Section 48."

"...... his right during the subsistence of the partnership is to get his share of profits from time to time as may be agreed upon among the partners and after the dissolution of the partnership or with his retirement from partnership of the value of his share in the net partnership assets as on the date of dissolution or retirement after deduction of liabilities and prior charges."

The Special Bench in Auto Sales, Allahabad (supra) considered the aforesaid Supreme Court decision and observed as under:-

"The law laid down above would show that the interest of a partner in the partnership is not an interest in a specific item of the partnership property. But, as pointed out above by the Supreme Court itself, a partner has a right only to get his share of profits during the period that a partnership subsists and on its dissolution to get the value of his share in the assets of the partnership Firm. The law in regard to dissolution of partnership would equally apply is the case of retirement. There is no difference in principle on the basis of which the position of a partner may be different in case of his retirement. He stands in the same position qua the properties of partnership when he is retiring from the Firm as his position becomes on dissolution."

The Special Bench also referred to a decision of a Full Bench of the Gujarat High Court in the case of Velo Industries Vs. Collector Bhavnagar reported in 1971 (80) ITR 291, wherein it was held as under:-

"When, therefore a partner retires from the partnership and the amount of his share in the net partnership assets after deduction of liabilities and prior charges is determined on taking accounts on the footing of a notional sale of the partnership assets and given to him, what he receives is his share in the partnership and not any price for sale of his interest in the partnership. His share in the partnership is worked out by taking accounts in the manner prescribed by relevant provisions of the partnership law and it is this and this only, namely, his share in the partnership, which he receives in terms, of money. There is in this transaction no element of sale; the retiring partner does not sell his interest in the partnership to the continuing partners. He on the contrary, carves out his interest and takes it away by evaluating it. This is exactly what happened in the present case."

After considering the aforesaid Full Bench decision of the Gujarat High Court, the Special Bench of this Court observed that the view taken by the Full Bench was that a retiring partner does not sell his interest in the partnership to the continuing partners. He only gets his interest carved out.

The Supreme Court in the case of Commissioner of Income Tax, M.P. Vs. Devas Cine Corporation reported in 1968 (68) ITR 240 (SC) while dealing with the settlement of accounts of a partnership Firm on its dissolution held that 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. It would not be a sale.

Similar view has been taken by two other Special Benches of this Court in the case of Govind Das (supra) and Narendra Bahadur Singh (supra) wherein it was held that the deed of retirement was not a deed of conveyance but one of release. The Special Bench in the case of Auto Sales (supra) differentiated between a conveyance and release deed and held as under:-

"Reference may also be made to the essential difference between a conveyance and a release. In the case of a conveyance, there is a transfer, whereas in the case of a release there is no transfer of an interest or right to another. A release can be made only in favour of a person who has a pre-existing right or claim and by reason of the release the right is enlarged. In Kuppuswami v. Arumugam [1967]1SCR275 the Supreme Court accepted the proposition as correct, that a release can only feed title but cannot transfer title or that renunciation must be in favour of a person who had already title to the estate, the effect of which is only to enlarge the right. Renunciation does not vest in a person a title where it did not exist."

The distinction between a conveyance and release deed was also laid down in the case of Balbir Singh (supra) as under:-

"10. Perusal of record also reveals that on execution of the deed of dissolution, the immovable properties have been allotted in the deed of dissolution to the releases and therefore, the consequential deed of release is only based on the dissolution and in such circumstances, the document can never be treated as a conveyance. The immovable properties have been allotted in the deed of dissolution to the partners. The deed of release is only a sort of acknowledgement of the title of the partners to the immovable properties which was conferred on them by the deed of dissolution. It cannot by any stretch of imagination be treated as a conveyance of the properties because the releasors had no right to the properties at the time of the release. In that view, the document cannot be treated as a conveyance and stamp duty cannot be demanded on that basis. The view taken by the authorities that the document in question is a document of conveyance is not correct. Hence, the contention of the petitioners is correct."

As per Section 4 of the Indian Partnership Act, 1932 (hereafter referred to as ''the Act, 1932') partnership is a relation between persons who have agreed to share the profits of a business carried out by all or any of them acting for all. Persons who have entered into partnership with one another are called individually ''Partners' and collectively a ''Firm' and the name under which their business is carried on is called the ''Firm Name'.

From the authorities discussed hereinabove it is clear that once the partners pool their capital or immovable property into the stock of the ''Firm' they cease to have exclusive ownership over such property or any part of it, which becomes the property of the Firm i.e. of the partners collectively, without any of them having any defined share in it. The partners also do not have any exclusive right of possession of any particular Article of partnership property and as stated earlier nor does any partner own any proportional part of any partnership property and as stated in the case of Auto Sales Allahabad (supra) each has dominion over the whole Article and over the entire partnership property. It becomes the trading asset of the partnership Firm in which all the partners have a share collectively and not a defined one. As, stated in Auto Sales Allahabad (supra) it is the ''partnership', rather the partners, which owns the Firm's property. In this regard Sections 14 and 15 of the Act, 1932 are relevant which support the aforesaid view. Thus, a partner does not have a defined share in the partnership property. While the partnership subsists he only has a share in the profits which is to be worked out by taking accounts in accordance with law. Upon dissolution of the Firm or retirement he has a share in the money representing the value of the property and as observed by the Supreme Court in Narayanappa (supra) during the subsistence of 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 set out as per Section 48 of the Act, 1932. Thus, a partner does not have definite share in the partnership property.

It is also evident from the enunciation of law hereinabove that a release deed by which a partner or partners release their rights and interest in the partnership in favour of the remaining partners or the Firm does not amount to conveyance and stamp duty can not be demanded on that basis. It amounts to a release. The principles in this regard as applicable in a case of dissolution of partnership apply equally to a case of retirement such as the present one and this has been specifically observed in the case of Auto Sales Allahabad (supra) and other decisions referred hereinabove.

In the present case, a partnership in the name and style of M/s Onkar Rice Mills existed since prior to independence. The property in dispute was property of the said Firm and there is no dispute in this regard. It has been stated in the writ petition that it was shown as property of the Firm in the accounts and in the income tax return etc. As per the retirement deed dated 13.09.1994 four of the partners, namely, Sita Ram, Jai Bhagwan, Ram Autar and Atul Kumar retired from the Firm. Though, the retirement deed is dated 13.09.1994 in the body of the deed at some places the date of retirement is mentioned as 11.09.1994 which appears to be a typographical error The retirement deed in its heading mentions it to be ''a deed of retirement and dissolution' which is obviously an error as no dissolution took place and this fact is evident from the contents of the deed itself which mentions that the continuing partners could carry on the same old business under the same old name with the said office at the same place with or without any charge in the remaining constitution and that the retiring partners had also agreed to release their shares etc. in the business of the partnership and all partnership assets, goodwill etc. including a right, if any, in the movables belonging to or under possession of the Firm. On 14.09.1994 another deed was executed between three continuing partners, namely, Amar Singh, Ashok Kumar Garg and Satish Garg and five new partners, namely, Ramesh Chandra Garg, Sushil Kumar Agarwal, Anurag Agarwal, Smt. Krishna Devi and Smt. Anjali Devi, which was obviously a consequence of retirement of the erstwhile four partners on 13.09.1994. The said partnership was deemed to have commenced w.e.f. 14.09.1994, however, in Clause 2 it was also mentioned that the partnership constituted in past vide deed dated 08.11.1982 and 02.02.1993 shall continue with all its assets and liabilities with a change that Shri Ram Autar, Sita Ram and Jai Bhagwan and Atul Kumar shall be deemed to have retired from the partnership business w.e.f. 14.09.1994. Mention of this date 14.09.1994 as the date of deemed retirement again appears to be a typographical error, as, the said persons had retired on 13.09.1994. However, the said clause is indicative of the fact that no new Firm had came into existence but it was the old Firm which was reconstituted consequent to the retirement of four partners and subsequent induction of five new partners. Clause 6 of the said deed mentions that the capital of the partnership business is the money advanced by the partners. The partners shall manage for the money according to scope and requirements of the partnership business. They can raise loans and pay interests thereon. Clause 7 of it mentions about the entitlement of the partners to receive interests on their respective capital investments and Clause 10 mentions the ratio in which they were entitled to profits or were liable to bear the losses.

Although, the four partners had already retired and a written deed of retirement had been drawn on 13.09.1994, but, for reasons of abundant caution, as stated in the writ petition, a release deed was got executed on 21.11.1994. It is on account of the language used in this deed, which is termed as ''Dast Bardarinama', that the Authorities below have treated it to be a conveyance deed as according to them it transferred the title of the retiring partners in favour of a new Firm. The deed says, as the Firm had been dissolved and partners have received their shares and as the property mentioned in the Scheduled annexed with it belonged to the Firm in which all the partners had their shares as such the retiring partners after receiving their shares were now releasing/relinquishing their title in the land/property ''in favour of the reconstituted Firm' and that they shall not have any title thereto hereinafter nor would they have any such claim to title in future. The property mentioned in the schedule measures 1 acre 9 decimals.

The A.D.M., Finance and Revenue held the deed to be a conveyance deed in view of the provisions of Section 2(10) read with Section 23(a) of the Indian Stamp Act, 1899. He was persuaded by the fact that what was being released/relinquished was the right and interest in the movable property and not any claim and that the partners were co-sharers in the property and had transferred the same to the other co-sharers. As regards the reliance placed by him on Section 2(10) of the Act, 1899 which defines conveyance, is concerned, in view of the law discussed hereinabove a partner in the Firm does not have any defined share in the Firm's property and even on retirement he is only entitled to claim his share in the value of the Firm's property. Moreover, it has already been held by this Court and the Supreme Court that release of such share on retirement in favour of continuing partners or the Firm does not amount to transfer or sale but it is a release simplicitor. This Court in Balbir Singh's case (supra) has already considered the purport of Section 2(10) of the Act, 1899 and held that the same is not attracted in the case of release of claim of a partner in favour of the Firm or the continuing partners. The A.D.M., Finance and Revenue has taken a hyper technical view of the matter that what was being released was not a claim but rights and interests. The claim of a partner is to the share in the value of the Firm's property, which is released by a partner at the time of retirement and not a title, right or interest. Sometimes the words ''share' or ''right and interest' are used interchangeably but legally they denote the claim to share in the assets as aforesaid in the context of a partnership Firm, and have to be understood accordingly. Moreover, this aspect of the matter i.e. the explanation to Section 2(10), fell for consideration before a Single Judge Bench of this Court in the case of Balbir Singh (supra) wherein after considering the said explanation it was held that the relinquishment of claim of share by one partner in favour of the other partners or the Firm would not constitute a conveyance under Section 2(10) but would be a release deed as was the case in the said matter. Para 6 of the said judgment reads as under:-

"6. In order to attract the provision of explanation to Section 2(10) of Indian Stamp Act, the essential feature is that a person who is transferring his right in the property should have a definite and assigned share in the property before its transfer to other partners. Firstly as stated herein above, there is no assigned or definite share of the partners in the movable or immovable assets and assigning of shares on dissolution is done on the basis of the shares which the partners hold in the Firm. By no stretch of imagination, does it fall within the explanation of Section 2(10) of the Indian Stamp Act. Reliance has been placed on the Apex Court Judgement in Addanki Narayanappa and another v. Bhaskara Krishnappa (dead) and thereafter his heirs and others, AIR 1966 (SC) 1300, wherein in paragraph 3 (iv) the Hon'ble Apex Court has held as under:

"(iv) the residue, if any, shall be divided among the partners in the proportions in which they were entitled to share profits."

From a perusal of these provisions it would be abundantly clear that whatever may be the character of the property which is brought in by the partners when the partnership is formed or which may be acquired in the course of the business of the partnership it becomes the property of the Firm and what a partner is entitled to is his share of profits, if any, accruing, to the partnership from the realisation of this property, and upon dissolution of the partnership to a share in the money representing the value of the property. 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 anyone. 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 set out in clause (a) and sub-clauses (i), (ii) and (iii) of clause (b) of Section 48."

In view of the above, the decision in the case of Smt. Balwant Kuar (supra) relied upon by Shri Maurya, does not apply in this case. The order of the A.D.M., Finance and Revenue is based on erroneous premise.

As regards the revisional authorities' order, he was persuaded by the fact that the Firm which came into existence on 14.09.1994 consequent to the retirement of the erstwhile partners was a new Firm and as the release deed had been executed thereafter on 21.11.1994, by the language of it, a dissolution had taken place consequent to which the partners had got their shares in the Firm's property and the executors of the said release deed who had retired earlier were transferring their title in the movable property to the newly constituted Firm which was entirely a new legal entity. These conclusions have been drawn by the Revisional Authority on the basis of the language used in the release deed.

In the case of Sharad Vastant Kotak and Ors. Vs. Ramniklal Mohanlal Chawda and Ors. reported in (1998) 2 SCC 171 the issue before the Supreme Court was- whether on a reconstitution of the Firm a fresh registration was required? This question cropped up in the context of maintainability of a suit where the reconstituted Firm was a party, considering the import of Section 69 of the Act, 1932. The Supreme Court considered the distinction between dissolution and reconstitution of a Firm. In this regard it referred to a Division Bench judgment of the Madras High Court in the case of Tyresoles (India), Calcutta Vs. Commissioner of Income- Tax, Coimbatore reported in (1963) 49 ITR 515 (Madras) wherein this aspect had been considered as under:-

"The dissolution and reconstitution of a partnership are two different legal concepts. The dissolution puts an end to the partnership, but reconstitution keeps it subsisting, though in another form. A dissolution followed by some of the erstwhile partners taking over the assets and liabilities of the dissolved partnership and forming themselves into a partnership is not reconstitution of the original partnership. The partnership formed after the dissolution is a new partnership and not a continuation of the old partnership, for it would be a contradiction in terms to say that what ceased to exist was continued. A reconstitution of a firm of partnership necessarily implies that the firm never became extinct. What it denotes is a structural alteration of the membership of the firm, by addition or reduction of members, and an incidental redistribution of the shares of the partners."

It also considered a decision of the Supreme Court in the case of Commissioner of Income-tax, West Bengal-III Vs. M/s. Pigot Champan and Co. reported in (1982) 135 ITR 620 (SC) wherein it was held as under:-

"The principle is well settled that it is on examination of relevant documents and relevant facts and circumstances that the Court has to be satisfied in each case as to whether there has been a succession or a mere change in the Constitution of the partnership. It cannot be disputed that 'dissolution' and 're-constitution' are two distinct legal concepts, for, a dissolution brings the partnership to an end while a re Constitution means the continuation of the partnership under altered circumstances but in our view in law there would be no difficulty in a dissolution of a firm being followed by the Constitution of a new firm by some of the erstwhile partners who may take over the assets and liabilities of the dissolved firm."

After noticing the distinction between a dissolution of a Firm and its reconstitution their Lordship held that a reconstituted Firm is not a new Firm but the existing/ old Firm continues in a reconstituted Firm and does not require registration, therefore, the prohibition under Section 69 of the Act, 1932 was not attracted. It held as under:-

"At the outset, we would like to deal with the substance of the Partnership Deeds in this case. As noticed earlier, the first Deed of Partnership was entered into on 29.11.79 and that partnership firm was registered on 15.12.80. One of the partners (Shri Mohanlal Hinji Chawda) died on 6.5.86 and in his place, his widow was inducted. The second Deed of Partnership was drawn on 20.10.86. By reason of the second Deed of Partnership, can it be said that the existing firm dissolved or ceased. It is relevant here to note that in both the deeds it was expressly made that the death, insolvency or retirement of any partner shall not dissolve the partnership firm. On the other hand, the partner shall be entitled to carry on the partnership business on the terms and conditions mutually agreed upon by the said partners (vide Clause 11). Therefore, it cannot be contended by the appellants that by reason of death of one of the partners, the existing firm stands dissolved. Can it then be said that by reason of inducting the widow of the deceased partner the existing registered firm ceased and totally a new partnership firm came into existence. According to the appellants, by reason of Clauses 4 and 5 in the second Deed of Partnership, it must be deemed that the old partnership ceased and entirely a new partnership firm was found under the second Deed. We are unable to agree with the contention of the learned senior counsel for the appellants on this aspect. Clauses 4 and 5 relate to commencement of the partnership and accounting year. These are minimal changes introduced in the second Deed of Partnership by reason of the introduction of a new partner in place of Clauses 4 and 5 in the first Partnership Deed and in other respects, namely, the name of the partnership firm, the address and location of the firm, the business carried on and shares allotted among the partners and duration of the partnership, are identical. Moreover a careful reading of clauses 5 of and 6 of the second partnership deed will give an impression that the partners have agreed to continue the existing firm. The profits or losses for the period prior to and up to the death of deceased partner is dealt with and provided. There is no indication that the old firm was dissolved. Likewise, reliance placed on the recitals in the third Deed of Partnership drawn on 3.11.92 will not come to the help of the appellants. Learned counsel for the appellants placed reliance on the term used in the third Partnership Deed reconstituted in the Preamble portion. We are of the opinion that this does not make any substantial difference when we look into the substance of the three deeds."

Reference may also be made in this regard to the decision of the Supreme Court in the case of S.V. Chandra Pandian Vs. S.V. Sivalinga Nadar reported in (1993)1 SCC 589 wherein the question considered was - whether an Arbitration award directing dissolution of partnership Firm and providing for distribution of residue or surplus properties of the dissolved Firm among partners after settlement of accounts, is required to be registered under Section 17(1) of the Registration Act. The Supreme Court considered the nature and character of partnership property and held as under:-

"The property falling to the share of the partner on the distribution of the residue would naturally then belong to him exclusively but so long as in the eye of law it is money and not immovable property there is no question of registration under Section 17 of the Registration Act."

Similar view was expressed by the Supreme Court in the case of N. Khadervali Saheb (dead) by Lrs. Vs. N. Gudu Sahib (dead) and Ors. reported in (2003) 3 SCC 229. Reference may also be made to a judgment of the Kerala High Court in the case of Noble Kuries Vs. Sebastian reported in 2009 (4) KLT 806 where the question considered was - whether after reconstitution of a Firm, it requires a fresh registration under the Registration Act and it was held that there is no provision in the Act which states that when there is reconstitution of a Firm which is already registered, a further registration is required after such reconstitution. The question whether a deed of release of his share in the partnership by a partner, even though, the partnership owns immovable property, is required to be registered under Section 17(1)(b) of the Registration Act also came up for consideration and it was held that the same was not required. The relevant paragraphs of the said judgment are quoted herein below:-

"Partners may convert which was property of the partnership, movable or immovable into separate property of the individual partner or property of the individual partners into property of the firm by agreement which may be express or implied. What is relevant is the intention of the partners. For such conversion no document, registered or otherwise is necessary. There must be some evidence to prove that intention. Such intention may even be proved by a course of conduct, for eg., by entires in the partnership books. The term ''partnership property' is generally used to denote everything to which the firm, i.e., all the partners quo the partners can be considered to be entitled. The partners may be entitled jointly or in common to some property, and the same persons may happen to be partners, yet the property may not be partnership property. Even when conversion of individual immovable property of the partner into property of the partnership is made as per a written instrument, it does not require registration compulsorily. A deed of release of his share in the partnership by a partner even though the partnership owns immovable property is not required to be registered as an instrument under S.17(1)(b) of the Registration Act. This is because even though a partner may be a co-owner of partnership property, he has no right to ask for a share in that property, but only that the partnership business be wound up including sale of the immovable property and to ask for his share in the resultant assets. That interest of a partner in the partnership assets, of movable or immovable property is not a right, title or interest in immovable property within the meaning of S.17(1)(b) of the Registration Act."

The aforesaid decisions were considered by the Kerala High Court in the case of M/s Park Residencey Ernakulam Vs. State of Kerala and Ors.; Writ Petition (C) No. 28573 of 2011 (V) decided on 21.02.2013.

The language used in the release deed is apparently erroneous, as, firstly, no dissolution had taken place as already stated earlier and as is evident from the retirement deed. Even from the partnership deed dated 14.09.1994 which in fact was a reconstitution of the Firm there is nothing to suggest that the earlier Firm had been dissolved and a new Firm was being constituted. In fact from the contents it is evident that it is the old Firm which was being continued after the retirement of some of the partners and induction of new partners but the use of term dissolution and also the use of the term title in the release deed has led to the conclusions which have been arrived at by the Revisional Authority as already noticed hereinabove. The Revisional Authority has erred on this count. The Revisional Authority has relied upon the decision of the Madras High Court reported in AIR 1982 Madras 113-114; Chief Controlling Revenue Authority, Board of Revenue, Madras Vs. Tvl. Inca Cables (Pvt.) Ltd., Madras and another decision reported in AIR 1995 (Alld.) 583; to contend that the Firm comprised of five new inductees as partners who did not have any pre existing rights in the property in respect of which the retiring partners were releasing their title and as it is the language of the deed which alone is the determining factor, therefore the deed was a conveyance deed and not a release deed, as, release is permissible only in respect of a partner who has a pre existing right. As already observed earlier this confusion has arisen on account of the language used in the release deed. No doubt language of the release deed is important but in the facts of the present case one can not loose sight of the sequence of events and the contents of the retirement deed dated 13.09.1994 as also the partnership deed dated 14.09.1994 reconstituting the Firm and any pedantic approach in this regard would not be justified. Reference may be made in this regard to the observation made by a Division Bench of the Madras High Court in the case of Tyresoles (supra) wherein it was observed - "In our opinion, the test of the pudding is in the eating and the true scope of the instrument can readily be ascertained from what actually happened instead of merely depending upon expressions which the parties might have under some mistaken notion loosely used." At least two clauses of the retirement deed dated 13.09.1994 by which the four erstwhile partners retired are relevant and they are as under:-

"AND WHEREAS, the retiring partners have agreed to retire from the said partnership on and from this day of 11th September, 1994 and leaving the Continuing Partners from carrying on the same old business under the same old name with it's head-office at the same old place with or without any charge in the remaining constitution.

Now this deed hereby witnesseth as follows:

(1)...........................

(2)...........................

(3)...........................

(4) That the retiring partners have no objection what-so-ever if the Continuing partners do the same business in partnership of some other persons. And the Retiring partner have also agreed to release their shares, rights and interest in the business of the partnership and all partnership assets good-will, firm's name & licences etc; including a right, if any in the immoveables belonging to or under possession of the firm."

The aforesaid provisions of the retirement deed are ample proof of the fact that there was no dissolution of partnership by the said deed, although in the heading the word ''dissolution' is mentioned. In fact the deed very clearly states that the retiring partners have agreed to retire from the said partnership leaving the continuing Partners to carry on the same old business under the same old name with it's head-office at the same old place with or without any charge in the remaining constitution. There was a specific provision in the said retirement deed dated 13.09.1994 that the retiring partners had also agreed to release their shares, rights and interest in the business of the partnership and all partnership assets good-will, firm's name & licences etc. including a right, if any, in the immovables belonging to or under possession of the firm. Therefore, the retirement deed also contained a clause regarding release of their claim in the partnership and the partnership Firm. This was obviously a release in favour of the remaining/continuing partners as on 13.09.1994 as till then neither the Firm had been reconstituted nor any new partnership had been formed nor any dissolution had taken place. In fact, as the release deed dated 13.09.1994 itself mentioned about release of the claim of the retiring partners, the subsequent release deed dated 21.11.1994 was quite unnecessary and appears to have been prepared on a wrong advise. The retirement and release had already taken place on 13.09.1994 itself. In any case on 14.09.1994 i.e. a day after the retirement deed dated 13.09.1994 had been executed, another deed was executed reconstituting the Firm. Now, this deed has been taken by the Revisional Authority as if a new partnership Firm had come into existence. On a bare reading of the said deed dated 14.09.1994 as already noticed earlier also this Court finds that the partnership constituted in past vide deeds dated 08.11.1982 and 02.02.1983 were continued with all its assets and liabilities with the change that the four of the erstwhile partners had retired a facts which is clearly mentioned in Clause 2. Now, this reconstituted partnership commenced w.e.f. 14.09.1994. When the contents of this partnership deed are read conjointly with the retirement deed dated 13.09.1994 it is difficult to arrive at the conclusion as arrived at by the Revisional Authority that what was constituted by the said deed on 14.09.1994, was a new partnership Firm. This Court has no doubt in its mind that the old Firm had merely been reconstituted and the old entity continued subject to the retirement of four of its erstwhile partners and induction of five new partners. The Revisional Authority has erred on this count.

Now, it is in this context the question, as to whether the release deed dated 21.11.1994 by which allegedly the title of the retiring partners in the immovable property of the Firm was released in favour of the reconstituted Firm could be treated as a conveyance, as, the five new inductees did not have any pre existing right and the release was in favour of the reconstituted Firm and not the remaining continuing partners gains significance. The reasoning given by the Revisional Authority no doubt appears very attractive at first blush but on a closer scrutiny it does not hold ground. As already mentioned earlier, persons, who have entered into partnership with one another are individually called ''partners' and collectively a ''Firm'. Although, a partnership Firm does not have any independent legal entity separate from its partners but it is equally true that once the partners pool their capital or property into the stock of the Firm then such property becomes that of the partnership Firm and not of any individual partner as already discussed in detail, earlier. When a retiring partner retires he releases his share in the value of the partnership property in favour of such Firm to which the property belongs. In this case 4 partners retired on 13.09.1994 when the Firm had neither been reconstituted nor any new partners had been inducted. The retirement deed dated 13.09.1994 itself contained a clause regarding release of their share, rights and interest in the partnership and the partnership property including immovables, therefore, as stated earlier there was no necessity of the subsequent deed dated 21.11.1994. The release was in favour of the remaining partners or the Firm as then existing. Even if, the said deed was executed subsequently on 21.11.1994, in the facts of the present case, it can not be treated as a conveyance as, what was released was the share of retiring persons in the immovable property of the partnership Firm in favour of the Firm in which five new partners were subsequently inducted and accordingly the Firm was reconstituted. It is not a case of release of title in respect of property of an erstwhile Firm in favour of a new Firm but in favour of the same Firm as on 13.09.1994, which was subsequently reconstituted on 14.09.1994. Further, merely because the word ''title' has been used in the release deed dated 21.11.1994 it would not change the nature of the transaction which is nothing but release of the claim of their share in the partnership property. The remaining continuing partners as also the newly inducted partners do not have any defined share in the said property and the property is of the Firm, therefore, for this reason also, the release of their claims by the retiring partners in the Firm property is in favour of the Firm to which the property belongs and can not be treated as a sale or conveyance nor can the instruments be stamped as a conveyance.

A Full Bench of the Karnataka High Court had the occasion to consider the question - When a retiring partner takes only the money towards the value of his share, whether the Firm should be made liable to pay capital gains even then there is no distribution of capital asset/assets among the partners under Section 45(4) of the Income Tax Act ? This was a case where one of the partners retired and 5 new partners were inducted. The old partners retired through a deed of retirement. The contention of the revenue was that this was a device adopted to transfer of immovable property. It was said that it was a device adopted by these partners in order to evade payment of profits or gains and the same was taxable. The Karnataka High Court held that this argument proceeds on the premise that the immovable property belongs to the erstwhile partners and that after the retirement the erstwhile partners have taken cash and given the property to the incoming partners. The property belongs to the partnership firm. It did not belong to the partners. The partners only had a share in the partnership asset. When the five partners came into the partnership and brought cash by way of capital contribution to the extent of their contribution, they were entitled to the proportionate share in the interest in the partnership firm. When the retiring partners took cash and retired, they were not relinquishing their interest in the immovable property. What they relinquished is their share in the partnership. Therefore, there is no transfer of a capital asset, as such, no capital gains or profit arises in the facts of this case. In that view of the matter, Section 45(4) has no application to the facts of this case. The principle contained in the judgment applies on all its fours to the facts and issues involved in this case. Thus, the Revisional Authority has erred on this count also.

In view of the above discussion, the impugned orders can not be sustained. They are accordingly quashed. Consequences shall follow accordingly as per law.

The writ petition is allowed in the aforesaid terms.

 
Order Date :- 23.05.2019
 
R.K.P.						(Rajan Roy,J.)