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Commissioner Of Income-Tax, Delhi & Rajasthan v. Amber Corporation
Structured Summary of the Opinion (Amber Corporation — Rambagh Palace)
Factual and Procedural Background
The Income-tax Appellate Tribunal, Delhi Bench “A” referred a question to the High Court under section 66(1) of the Indian Income-tax Act, 1922. The question was whether the assessee (Messrs. Amber Corporation, Jaipur), a partnership firm which carried on a hotel business at Rambagh Palace, was entitled to claim depreciation under section 10(2)(vi) of the Act in respect of the building known as Rambagh Palace.
Material facts stated in the statement of the case: Rambagh Palace and land appurtenant thereto were valued at Rs. 25,00,000. The four sons of Maharaja Man Singh contributed the building (Rambagh Palace) as their capital contribution and each brought in cash of Rs. 25,000. The Maharaja contributed furniture and cash amounting to Rs. 1,71,388. For assessment years 1959–60 and 1960–61, the partnership claimed depreciation on the building.
Procedural history: The Income-tax Officer disallowed the depreciation claim on the basis of clause 8 of the partnership deed (which, on dissolution, purported to exclude the Maharaja's share in the building and provide for the building to be taken over by specified partners). The Appellate Assistant Commissioner accepted the assessee's claim. On appeal by the Department, the Tribunal upheld the Appellate Assistant Commissioner's decision. The Commissioner of Income-tax (Delhi — Central and Rajasthan) invoked section 66(1) and referred the question to the High Court for its opinion.
Legal Issues Presented
- Whether, on the facts and in the circumstances of the case, the assessee was entitled to depreciation under section 10(2)(vi) of the Indian Income-tax Act, 1922, in respect of the building known as Rambagh Palace?
Arguments of the Parties
Assessee's Arguments
- The Rambagh Palace was contributed by the four sons of the Maharaja as capital to the partnership (Amber Corporation) and therefore became partnership property.
- As partnership property (an asset of the firm), the building qualified for depreciation under the relevant income-tax provisions for the assessment years in question.
Revenue/Department's Arguments
- The partnership deed contained clause 8 providing that, on dissolution, the Maharaja would have no share in Rambagh Palace and the building would be taken over by other named partners; on that basis the Income-tax Officer contended the firm could not be held to be the owner of the building.
- The Department also raised the point that the partnership deed was not registered and argued that, as a result, the four sons could not have conveyed Rambagh Palace as their contribution to the firm; the department contended that the document might be inadmissible in evidence.
- Learned counsel on behalf of the Department argued (as characterized in the opinion) that if registration invalidated the partnership deed, only clause 5 would go out and clause 8 would remain — an argument the court rejected as unattractive.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Addanki Narayanappa v. Bhaskara Krishnappa, A.I.R. 1966 S.C. 1300 | Principle that property (including immovable property) brought into the partnership as capital ceases to be the exclusive property of the contributor and becomes a trading asset of the partnership. | The court relied on this authority to support the proposition that immovable property contributed as capital becomes partnership property and the contributor cannot claim exclusive rights over it. |
| Firm Ram Sahay Mall Rameshwar Dayal v. Bishwanath Prasad (authority cited; full citation not given in the opinion) | Authority cited to show that such contributions or transfers are not required to be registered under the Indian Registration Act. | The court referred to this authority (as discussed in Mulla's Commentary) to indicate there is ample authority that registration is not required for this sort of contribution; however, the court expressly declined to decide the registration point finally because it was not referred for opinion. |
| Sudhansu Kanta v. Manindra Nath, A.I.R. 1965 Pat. 144 (referenced as approving the same authority) | Approval of the authority that such contributions need not be registered under the Indian Registration Act. | The court noted that another Division Bench had approved the authority, reinforcing the point, but again declined to make a final decision on registration as it was not the referred question. |
| Lindley on Partnership (treatise; page 357 quoted) | Definition of "capital of a partnership" — aggregate of sums (or property) contributed by members to carry on the partnership business and intended to be risked in that business. | The court quoted Lindley to support the textual understanding that capital includes property contributed for the partnership business, implying such capital becomes partnership property. |
Court's Reasoning and Analysis
The court proceeded in a stepwise manner, applying documentary facts and statutory principles cited in the statement of the case:
- Clause 5 of the partnership deed expressly stated that the Rambagh Palace (together with cash contributions) constituted the capital of the partnership. The court treated this as prima facie evidence that the palace was contributed as capital.
- The court relied on established partnership law principles (quoted from Lindley) that capital comprises sums or property contributed to the partnership and intended to be risked in the business.
- Relying on authority in Addanki Narayanappa v. Bhaskara Krishnappa, the court reiterated the orthodox rule that immovable property contributed to a partnership ceases to be the exclusive property of the contributor and becomes a partnership trading asset, in which the partners have interest proportionate to their share in the venture.
- The revenue's reliance on clause 8 (which governs distribution on dissolution) was addressed: the court held that a stipulation about post-dissolution distribution does not, by itself, prevent property from being partnership property during the life of the firm. Section 14 of the Indian Partnership Act was invoked to show property originally brought into the stock of the firm becomes partnership property irrespective of its nature.
- The court acknowledged that partnership deeds can validly provide terms for settlement on dissolution (section 48 of the Indian Partnership Act permits the mode of settlement to be subject to agreement). Thus, having a clause prescribing post-dissolution distribution does not alter the status of the property as partnership property while the firm exists.
- The court compared the present case with the distinction in section 20 of the English Partnership Act, 1890 (quoted), which distinguishes cases where only use of land is contributed versus where the land itself is contributed. The court concluded this case falls under the type where the property itself (not merely its use) was brought into partnership stock (corresponding to section 14 of the Indian Partnership Act and English Act s.20(1)), and not the special situation described in s.20(3).
- Accordingly, the court concluded Rambagh Palace was partnership property and an asset of the firm; depreciation was therefore properly allowable on that asset.
- On the registration argument, the court noted (i) the referred question did not expressly require determination of the registration point, (ii) the statement of the case expressly said the palace was brought in as capital by the sons, and (iii) there are authorities indicating such contributions need not be registered under the Indian Registration Act. The court therefore declined to decide the registration issue finally and treated the stated facts as controlling for the referred question.
Holding and Implications
Question answered in the affirmative.
Holding (core ruling): The court held that Rambagh Palace, having been brought into the partnership stock as capital by the four sons, was partnership property and therefore an asset of the firm on which depreciation could be allowed. The Tribunal's allowance of depreciation was affirmed.
Immediate implications for the parties: The assessee's claim to depreciation in respect of Rambagh Palace was sustained; the Department's contention that the firm was not the owner (by reason of clause 8) was rejected insofar as it affected ownership during the life of the partnership. The court did not finally decide the separate question of admissibility of the partnership deed on the ground of non-registration because that point was not referred for opinion and the statement of the case presented the palace as contributed capital.
The opinion does not purport to set a new general precedent beyond applying established partnership principles to the facts; it answers the referred question in the affirmative and affirms the allowance of depreciation on the building in these cases.
Bhandari, C.J:— The following question has been referred by the Income-tax Appellate Tribunal, Delhi Bench “A”, New Delhi (hereinafter called “the Tribunal”), for the opinion of this court under section 66(1) of the Indian Income-tax Act, 1922 (hereinafter called “the Act”).
“Whether, on the facts and in the circumstances of the case, the assessee was entitled to depreciation under section 10(2)(vi) of the Indian Income-tax Act, 1922, in respect of the building known as Rambagh Palace?”
2. In paragraph 3 of the statement of the case, it has been stated that Messrs. Amber Corporation, Jaipur, the assessee, was a partnership firm which carried on a hotel business at Rambagh Palace (at Jaipur) and land appurtenant thereto was valued at Rs. 25,00,000. The four sons of Maharaja Man Singh brought in the building (Rambagh Palace) as their contribution of capital along with a cash of Rs. 25,000 each. The Maharaja contributed his share in the form of furniture and cash amounting to Rs. 1,71,388. In its returns for the assessment years 1959–60 and 1960–61, the firm claimed depreciation on that building. The claim of the assessee was that the Rambagh Palace was capital contributed by the four partners of the firm and as such it was entitled to claim depreciation under section 10(2) of the Act. This contention was rejected by the Income-tax Officer on the basis of a stipulation in the partnership deed under which on the dissolution of the firm, the Maharaja would have no share in the said building, Rambagh Palace, where the business of the said partnership firm was being carried on, but the same would be taken over by the other partners. The Income-tax Officer was of the view that because of this stipulation the firm could not be held to be the owner of the said building. The assessee then preferred appeals before the Appellate Assistant Commissioner, “A” Range, Jaipur. The Appellate Assistant Commissioner accepted the contention of the assessee in both the appeals. On appeals filed by the Income-tax Officer, ‘A’ Ward, Jaipur, before the Tribunal, it held that on a harmonious construction of the terms of the partnership deed, the decision of the Appellate Assistant Commissioner was correct. On the applications by the Commissioner of Income-tax, Delhi (Central and Rajasthan) under section 66(1) of the Act, the above-mentioned question has been referred to this court for its opinion. The terms of the partnership deed which are relevant for answering this question are contained in clauses 5, 6, 7 and 8 which are quoted herein below verbatim:
“5. The capital of the partnership shall consist of the Rambagh Palace and a sum of Rs. 25,000 to be brought in by each of them, the parties of the second, third and fourth parts and the said minor. Whatever additional capital required for the purpose of the partnership shall be brought in by the party of the first part.
6. The net profits of the partnership shall be divided between the partners in the shares following:
Maharaja Shri Sawai Mansinghji Saheb 24 cents Capt. Maharaj Kumar Bhawani Singhji 19 „ Maharaj Kumar Jaisinghji 19 „ Maharaj Kumar Prithviraji 19 „ Minor admitted to the benefits of the partnership 19 „
In the event of loss the same shall be divided between the parties in the proportion of 25 cents each.
7. The death of any partner shall not dissolve the partnership.
8. On the dissolution of the firm, the said party of the first part shall have no share in the said building, Rambagh Palace, where the business of the said partnership firm has been carried on. It is further agreed that, on such dissolution, the said building shall not be valued, but the same shall be taken over by the parties hereto of the second, third and fourth parts, and the said minor in equal shares at its written down value as appearing in the books of account of the partnership.”
3. It is clear from clause 5 that Rambagh Palace which belonged to the four sons of the Maharaja of Jaipur was contributed by them as part of the capital of the partnership. Prima facie, this capital became the partnership property. Lindley on Partnership, at page 357, has observed:
“By the capital of a partnership is meant the aggregate of the sums contributed by its members for the purpose of commencing or carrying on the partnership business, and intended to be risked by them in that business.”
4. There is no doubt that even immovable property of a partner can be transferred by the partner as contribution to the partnership. In Addanki Narayanappa v. Bhaskara Krishnappa A.I.R 1966 S.C 1300, 1304. it has been observed as follows:
“The whole concept of partnership is to embark upon a joint venture and for that purpose to bring in as capital money or even property including immovable property. Once that is done whatever is brought in would cease to be the exclusive property of the person who brought it in. It would be the trading asset of the partnership in which all the partners would have interest in proportion to their share in the joint venture of the business of partnership. The person who brought it in would, therefore, not be able to claim or exercise any exclusive right over any property which he has brought in, much less over any other partnership property. He would not be able to exercise his right even to the extent of his share in the business of the partnership.”
5. The argument that has been addressed to us is that in clause 8 of the agreement of partnership, the Maharaja of Jaipur was to have no share in the Rambagh Palace on the dissolution of the firm and it was stipulated that the building shall not be valued but the same shall be taken over by the parties thereto of the second, third and fourth parts and the said minor in equal shares at its written down value as appearing in the books of account of the partnership. It is vehemently argued that insertion of this clause clearly shows that it was the intention of the partners that Rambagh Palace was not to form partnership property though the use of the said palace for carrying on business of the said partnership was permitted by the four sons of the Maharaja to whom the palace belonged. Simply because a condition of this nature has been inserted in the partnership deed, it cannot be said that Rambagh Palace did not become partnership property. Under section 14 of the Indian Partnership Act, the property originally brought in the stock of the firm becomes the partnership property whatever be the nature of the property. A partnership deed may contain stipulations governing the rights of the parties when the dissolution takes place and if those conditions are not in any way contrary to law, they may be given effect to because section 48 of the Indian Partnership Act provides that the mode of settlement of accounts between the partners is subject to the agreement by the partners. This being the position, a stipulation can be inserted in the partnership deed providing that the Rambagh Palace would go to the four sons of the Maharaja at the time of dissolution. It does not mean that, before dissolution, it would not be the partnership property. Rambagh Palace is part of the capital contributed by the partners and it became the partnership property. It is not that the four sons of the Maharaja did not intend to contribute as capital the palace itself but only the use thereof. There are cases in which the contribution is only of the use of a building and not of the building itself. Reference in this connection may be made to section 20 of the English Partnership Act, 1890, which relates to the partnership property and under which such a distinction is drawn. Sub-sections (1) and (3) of this section are relevant. They run as follows:
“20. Partnership property.—(1) All property and rights and interests in property originally brought into the partnership stock or acquired, whether by purchase or otherwise, on account of the firm, or for the purposes and in the course of the partnership business, are called in this Act partnership property, and must be held and applied by the partners exclusively for the purposes of the partnership and in accordance with the partnership agreement….
(3) Where co-owners of an estate or interest in any land, or in Scotland of any heritable estate, not being itself partnership property, are partners as to profits made by the use of that land or estate, and purchase other land or estate out of the profits to be used in like manner, the land or estate so purchased belongs to them, in the absence of an agreement to the contrary, not as partners, but as co-owners for the same respective estates and interests as are held by them in the land or estate first mentioned at the date of the purchase.”
6. This case is of the nature provided in sub-section (1) which corresponds to section 14 of the Indian Partnership Act and not of the nature provided in sub-section (3). In this case the Rambagh Palace was brought into partnership stock and not merely its use.
7. In this view of the matter, Rambagh Palace was the partnership property and was thus an asset of the firm on which depreciation was rightly allowed by the Tribunal.
8. An argument has been addressed to us that the partnership deed is not registered and, therefore, the four sons of the Maharaja could not have conveyed their Rambagh Palace as their contribution in the firm without the partnership deed being registered. It is said that the document is inadmissible in evidence and, therefore, it cannot be held that Rambagh Palace was part of the capital contributed by the four sons of the Maharaja. The question referred to us does not expressly say that we have to answer this point. On the other hand, in paragragh 3 of the statement of the case, it has been expressly stated that the palace was brought in by the four sons of the Maharaja as their contribution of capital. We may quote in extenso that paragraph at this place:
“3. This partnership was formed to carry on a hotel business and the partnership name was Amber Corporation. The Palace and land appurtenant thereto was valued at Rs. 25,00,000. The four sons of the Maharaja brought in the building as their contribution of capital along with a cash of Rs. 25,000 each. The Maharaja contributed his share in the form of furniture and cash amounting to Rs. 1,71,388.”
9. We may point out that in the statement of the case it is nowhere the case of the department that the palace was not contributed by the sons as part of the capital. We have to answer the question referred to us in the light of the statement of the case submitted to us by the Tribunal. If the argument addressed by the learned counsel is taken to its logical conclusion, the case of the department will become still weaker because in that case we have to ignore clause 8 of the partnership agreement and the department cannot rely on what is contained in clause 8. Learned counsel on behalf of the department has argued that only clause 5 will go out and not clause 8. This is an argument which does not appeal to us. Moreover, there is ample authority for the proposition that this sort of contribution or transfer is not required to be registered under the Indian Registration Act. Reference in this connection may be made to Firm Ram Sahay Mall Rameshwar Dayal v. Bishwanath Prasad, and the other authorities cited therein. This authority has been referred to in Mulla's Commentary on the Indian Registration Act. This authority has also been approved again by another Division Bench of the Patna High Court in Sudhansu Kanta… v. Manindra Nath…. A.I.R 1965 Pat. 144.. We need not decide this point finally as it is not referred to us and is even contrary to the facts which are mentioned in paragraph 3 of the statement of the case.
10. In our view, the Tribunal has taken the right view with regard to the depreciation to be allowed in these cases. The question is answered in the affirmative.
11. Question answered in the affirmative.
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