The following decisions assist in understanding the concept of partnership, assets of partnership and rights of partners in property of the partnership. It also deals with the aspect whether partner’s right in the partnership asset is movable and immovable.
The most authoritative statement of the law on this subject, is to be found in the decision of the Supreme Court in Addanki Narayanappa v. Bhaskara Krishnappa AIR 1966 SC 1300, 1303, 1304. In this case, the members of two joint Hindu families, which we may for the sake of convenience describe as “A” and “B”, entered into a partnership for carrying on business of hulling rice, decorticating groundnuts, etc. The capital of the partnership consisted, inter alia, of some lands contributed by the two families and in the course of the business of the partnership also, some more lands were acquired by the partnership. The partnership was subsequently dissolved by mutual agreement between the partners and an unregistered document was executed recording the terms and conditions of dissolution which included, inter alia, a stipulation that “A” family had given up their share in the machines, etc., and in the business, and made over the same to the members of “B” family alone completely by way of adjustment. When members of “A” family sought to rely on this document in a subsequent suit for dissolution and accounts of the partnership, members of “B” family raised a contention that since the partnership assets included immovable properties and the document recorded relinquishment by members of “A” family of their interest in those assets, the document was compulsorily registrable under section 17(1)(c) of the Registration Act and, as it was not registered, it was inadmissible in evidence. To determine the validity of this contention, the Supreme Court was called upon to consider what is the true nature of the interest of a partner in a partnership and what happens when the firm is dissolved or a partner retires from the firm. The Supreme Court analysed the relevant provisions of the Partnership Act and proceeded to state the effect of these sections in the following words:
“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.”
The Supreme Court further held as follows:
“…. 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 a deduction of liabilities and prior charges.”
The Supreme Court held that though the partnership assets included immovable properties, the document did not operate as relinquishment of any interest in any of the immovable properties by members of “A” family, but it was merely by way of adjustment of the rights of the partners on dissolution by giving to each his share in the net partnership assets after deduction of liabilities and prior charges and it was, therefore, not compulsorily registrable under section 17(1)(c) of the Registration Act.
The same question again arose before the Supreme Court in a different context in CIT v. Dewas Cine Corporation [1968] 68 ITR 240, 243; [1968] 2 SCR 173 (SC). The two partners, each owning a cinema theatre, formed a partnership to carry on business in partnership as exhibitors of cinematograph films, and they brought their respective theatres into the books of the partnership as its assets. The business was carried on for some time but, thereafter, the partnership was dissolved and, on dissolution, it was agreed that the theatres should be returned to their original owners. In the books of account of the partnership, the theatres were shown as taken over at the original price less the depreciation allowed during the subsistence of the partnership. The Revenue contended on these facts that the assets must in law be deemed to be sold by the partnership to the individual partners in consideration of their respective shares and the difference between the price realised and the written down value should be included in the total income of the partnership under the second proviso to section 10(2)(vii) of IT Act, 1922.
This contention was negatived by the Supreme Court. The Supreme Court, pointed out that on dissolution of a firm the only right of a partner is “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” and this 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.” The SC further observed that “…adjustment of the rights of the partners in a dissolved firm is not a transfer, nor it is for a price. 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.”
These observations, though made in the context of a dissolution of partnership, are equally applicable where a partner retires from the partnership.
Relying on these decisions, the Gujarat High Court in the case of Mohanabhai Pamabhai [1973] 91 ITR 393 (GUJ.), held as follows:
“The interest of a partner in the partnership is not interest in any specific item of the partnership property, but as pointed out by the Supreme Court, it is a right to obtain his share of profits from time to time during the subsistence of the partnership and on dissolution of the partnership or his retirement from the partnership, to get the value of his share in the net partnership assets which remain after satisfying the debts and liabilities of the partnership. When, therefore, a partner retires from a 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 notional sale of the partnership assets and given to him, what he receives is his share in the partnership and not any consideration for transfer of his interest in the partnership to the continuing partners. His share in the partnership is worked out by taking accounts in the manner prescribed by the 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 transfer of interest in the partnership assets by the retiring partner to the continuing partners”
The Decision of Gujarat High Court has been confirmed by Supreme Court in Ad. CIT v Mohanbhai Pamabhai [1987] 165 ITR 166 (SC).