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K.D Pandey v. Commissioner Of Wealth-Tax, Lucknow.
Factual and Procedural Background
The assessee, originally the sole proprietor of a hotel business, entered into a partnership with his son under a deed dated April 16, 1966, wherein he held a 75% share of profits and losses. The assessee claimed in the wealth-tax assessment for 1967-68 that he had transferred all business assets, including the hotel building, to the partnership firm, asserting that the building became partnership property and only 75% of its value should be included in his net wealth. The Wealth-tax Officer included the entire value of the building in the assessee's net wealth. The Appellate Assistant Commissioner upheld the assessee's claim, but the Income-tax Appellate Tribunal reversed this, holding there was no effective transfer of the building to the partnership and that the entire value was assessable to the assessee individually. The Tribunal referred two questions to this court under section 27(1) of the Wealth-tax Act, 1957, concerning the necessity of a registered deed for transfer of the building and the assessability of the building's entire value in the hands of the assessee.
Legal Issues Presented
- Whether the Tribunal was justified in holding that the business asset consisting of the Grand Hotel building could be transferred to the partnership only by a registered deed, and in the absence of such a deed the building remained the individual property of Shri K.D Pandey?
- Whether the Tribunal was justified in holding that the entire value of the building was assessable in the hands of the assessee, individually?
Arguments of the Parties
The opinion does not contain a detailed account of the parties' legal arguments.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Prem Raj Brahmin v. Bhani Ram Brahmin [1946] ILR 1946 1 Cal 191 | Under sections 239 of the Indian Contract Act and 14 of the Indian Partnership Act, no written document is necessary to bring separate properties of a partner into firm stock; intention and treatment suffice. | Supported the view that immovable property can be brought into partnership stock without a registered instrument if intention is clear. |
| Firm Ram Sahay Mall Rameshwar Dayal v. Bishwanath Prasad AIR 1963 Pat 221 | No written or registered document is necessary for an individual to contribute immovable property as capital to a partnership. | Reinforced the principle that immovable property can be contributed without formal registration. |
| Commissioner of Income-tax v. Janab N. Hyath Batcha Sahib [1969] 72 ITR 528 (Mad) | Property brought into partnership at formation becomes partnership property by intention, not by transfer. | Confirmed change of ownership arises from parties' intention to treat property as partnership asset. |
| Chief Controlling Revenue Authority v. Chidambaram AIR 1970 Mad 5 | Section 14 of the Partnership Act allows property to be brought into partnership stock without formal document when intention to treat it as partnership property exists. | Supported the view that formal documentation is not required for immovable property contribution to partnership. |
| R.M Ramanathan Chettiar v. Controller of Estate Duty [1975] 99 ITR 410 (Mad) | Similar principle endorsing property contribution without formal documentation. | Further affirmed the principle established by prior Madras High Court decisions. |
| Ram Narain and Brothers v. Commissioner of Income-tax [1969] 73 ITR 423 (All) | Conversion of firm property into personal property requires a written instrument; mere book entries are insufficient. | Distinguished from the present case as it did not address contribution of individual property to firm; held that transfer from firm to partner requires written instrument. |
| Commissioner Of Income Tax, West Bengal v. Hind Construction Ltd. [1972] 83 ITR 211 (SC) | Handing over goods to partnership as share of capital does not amount to sale to the partnership. | Clarified that this does not imply immovable property cannot be contributed without registered instrument. |
Court's Reasoning and Analysis
The court analyzed the definition of transfer of property under the Transfer of Property Act, the requirement of registration under the Registration Act, and the provisions of the Indian Partnership Act, particularly section 14. It noted that while registration is generally required for transfer of immovable property, the contribution of a partner's individual property to the partnership stock does not necessarily require a registered deed. The court relied on precedents from various High Courts holding that intention and treatment of the property as partnership property suffice to effect the transfer without formal registration. The court distinguished a prior decision of this court which dealt with transfer of property from the firm to a partner, not contribution from a partner to the firm. Observations from the Supreme Court regarding goods contributed as capital were interpreted not to negate the principle that immovable property can be contributed without a registered instrument. Based on this reasoning, the court found the Tribunal's requirement of a registered deed for transfer of the hotel building to the partnership incorrect.
Holding and Implications
Holding: The court answered both referred questions in favour of the assessee, holding that:
- The Tribunal was not justified in holding that transfer of the hotel building to the partnership required a registered deed and that in the absence of such deed the building remained individual property.
- The Tribunal was not justified in holding that the entire value of the building was assessable in the hands of the assessee individually.
Implications: The decision confirms that a partner can bring immovable property into the partnership stock by intention and treatment without a registered instrument, affecting the assessment of net wealth accordingly. The assessee was awarded costs against the revenue. No new precedent beyond the application of existing principles was established.
Chandrashekhar, J.:— At the instance of the assessee, the Income-tax Appellate Tribunal (hereinafter referred to as “the Tribunal”) has referred to this court the following two questions under sub-section (1) of section 27 of the Wealth-tax Act, 1957:
“(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the business asset consisting of the Grand Hotel building could be transferred to the partnership only by a registered deed, and in the absence of such a deed the building remained the individual property of Shri K.D Pandey?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the entire value of the building was assessable in the hands of the assessee, individual?”
2. The facts of the case have been set out in the statement of the case and it is unnecessary to repeat them here. Suffice it to say that the assessee who was running a hotel as its sole proprietor entered into a partnership with his son under a deed of partnership dated April 16, 1966, to run the same business. In that firm his share of profits and losses was 75 per cent. In the wealth-tax assessment for the year 1967-68 he claimed that he had transferred his entire business assets including the hotel building which belonged to him individually to the newly formed partnership, that the building became the property of the firm and that he had only 75 per cent. share in the building.
3. The Wealth-tax Officer included the entire value of the building in the assessee's net wealth.
4. In the appeal preferred by the assessee, the Appellate Assistant Commissioner upheld his claim that the building had become the property of the partnership firm and that only his share of 75 per cent. of the value of the building should be included in his net wealth.
5. In the further appeal by the revenue, the Tribunal held there was no effective transfer of the building from the assessee to the partnership firm, that he continued to be the owner of the entire building and that the entire value thereof should be included in his net wealth.
6. Section 14 of the Indian Partnership Act, 1932, reads:
“14. 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 purpose 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 deemed to have been acquired for the firm.”
7. The principal question that arises for determination in this reference is whether the assessee brought the building in which he was carrying on the hotel business, into the stock or capital of the firm.
8. Section 5 of the Transfer of Property Act, 1882, defines transfer of property as an act by which a living person conveys property, in present or in future, to one or more other living persons, or to himself and one or more other living persons. Thus, a person can transfer a property from himself to himself and one or more other living persons.
9. Section 17(1)(b) of the Registration Act, 1908, provides, inter alia, that a non-testamentary instrument which purports or operates to create, declare, assign, limit or extinguish any right, title or interest of the value of one hundred rupees and upwards, to or in immovable property, shall be registered.
10. If the hotel building was transferred by the assessee to the partnership firm under an instrument of conveyance, such instrument should have been registered under the Registration Act in order to constitute a valid transfer. It is undisputed that in the present case there was no instrument under which the assessee purported to convey the hotel building to the partnership firm. But the question is whether a partner can bring his individual immovable property into the stock or capital of the firm otherwise than by means of a registered instrument of conveyance.
11. In Prem Raj Brahmin v. Bhani Ram Brahmin [1946] ILR 1946 1 Cal 191, a Division Bench of the Calcutta High Court referred to section 239 of the Indian Contract Act and section 14 of the Indian Partnership Act and held that under the provisions of those two Acts for the purpose of bringing the separate properties of a partner into the stock of the firm it is not necessary to have recourse to any written document at all, that as soon as a partner intends that his separate properties should become partnership properties and they are treated as such, then by virtue of the provisions of the Contract Act and the Partnership Act, the properties become the properties of the firm and that this result is not prohibited by any provision in the Transfer of Property Act or the Indian Registration Act.
12. A similar view was taken by a Division Bench of the Patna High Court in Firm Ram Sahay Mall Rameshwar Dayal v. Bishwanath Prasad AIR 1963 Pat 221. Their Lordships observed thus at page 223:
“The legal position, therefore, appears to be that no written or registered document is necessary for an individual to contribute any land or immovable property as a contribution against his share of the capital of a new partnership business.”
13. In Commmissioner of Income-tax v. Janab N. Hyath Batcha Sahib [1969] 72 ITR 528 (Mad) a Division Bench of the Madras High Court held that when a partner brings in certain items into the partnership at the time of its formation, such items become the property of the partnership and that such change of ownership is brought about not by any transfer, but by the very intention of the parties to treat such property belonging to one or more of the members of the partnership as that of the firm.
14. In Chief Controlling Revenue Authority v. Chidambaram AIR 1970 Mad 5, a Division Bench of the Madras High Court held that when a partner brings some of his assets with an intention to treat the same as partnership asset, by virtue of section 14 of the Partnership Act, such property could be thrown into the partnership stock without any formal document so as to make it the property of the firm.
15. The same view was taken by another Division Bench of the Madras High Court in R.M Ramanathan Chettiar v. Controller of Estate Duty [1975] 99 ITR 410 (Mad).
16. From the aforesaid decisions it is clear that a partner can bring his immovable property to the stock or capital of the firm as his contribution thereto without a registered instrument. But the learned standing counsel maintained that on this question the Supreme Court and this court have taken a contrary view. He referred us to the decision of this court in Ram Narain and Brothers v. Commissioner of Income-tax [1969] 73 ITR 423 (All). There, a partnership firm had purchased certain immovable properties. Subsequently, the partners claimed that the ownership of one of such properties had been transferred by the firm to one of the individual partners by adjustment made in the relevant entries in the books of accounts. One of the questions that arose for determination in that case was whether a property admittedly once owned by the firm as such, ceased to be so owned by it by reason of certain entries made in the account books of the firm. A Division Bench of this court took the view that the partners of a firm can convert an immovable property belonging to the firm into personal property of any of them by means only of an instrument in writing, that mere entries in the books of accounts of the firm do not have the effect of converting such property of the firm into the personal property of any of the partners and that such property, therefore, continues to remain the property of the firm despite such entry.
17. In the aforesaid case the question whether a partner can bring his immovable property as his contribution to the stock or capital of the firm without a registered instrument, did not arise for determination. Hence, that decision cannot be of any assistance to the learned standing counsel.
18. The learned standing counsel next sought to derive support from the following observations of the Supreme Court in Commissioner Of Income Tax, West Bengal v. Hind Construction Ltd. [1972] 83 ITR 211, 214 (SC):
“Nor can a person by handing over his goods to a partnership of which he is a partner and that as his share of capital be considered as having sold the goods to the partnership.”
19. The aforesaid observations cannot, in our opinion, be understood as laying down the proposition that a partner cannot bring his immovable property as his contribution to the stock or capital of the firm except by means of a registered instrument of transfer.
20. As a result of the foregoing discussion, our answers to the questions referred to us are in favour of the assessee and as follows:
“(1) On the facts and in the circumstances of the case, the Tribunal was not justified in holding that the business assets consisting of the Grand Hotel could be transferred to the partnership only by a registered deed and that in the absence of such deed the building remained the individual property of Shri K.D Pandey.
(2) On the facts and in the circumstances of the case, the Tribunal was not justified in holding that the entire value of the building was assessable in the hands of the assessee, individual.”
21. The assessee will get his costs from the revenue. Advocate's fee is assessed at Rs. 200.
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