VRAJLAL MAKANDAS VALIYA Vs. L D JOSHI COLLECTOR DISTRICT BHAVNAGAR

JUDGEMENT

(1.) This is a reference made to us by the Chief Controlling Revenue Authority under sec. 54(1A) of the Bombay Stamp Act 1958 The question which arises for consideration on the reference is as to what is the proper Article of the Act under which a certain instrument executed between the partners of Messrs. Veto Industries is chargeable. To determine the question it is necessary to refer briefly to a few facts giving rise to the reference. Prior to Aso Vad Amas Samvat Year 2021 ten persons carried on business in partnership in the firm name of Messrs. Velo Industries. Three of them retired from the firm with effect from Aso Vad Amas Samvat Year 2021 leaving the other seven as continuing partners of the firm. The terms and conditions of retirement were recorded in an instrument dated 24/10/1963 executed by and between the partners and since the entire controversy between the parties has turned on the true interpretation of this instrument it would be desirable to set out some of its material provisions in extenso. They read according to their English translation:-

(2.) The charging section in the Act is sec. 3 which provides inter alia that subject to the provisions of the Act and the exemptions contained in Schedule I every instrument mentioned in that Schedule which is executed in the State on or after the date of the commencement of the Act shall be chargeable with duty of the amount indicated in that Schedule as the proper duty for the instrument. Article 25 of Schedule I prescribes the amount of duty for conveyance. It consists of two clauses:- (a) and (b). It is not material for our purpose to notice the difference between the two clauses since the common requirement in both clauses is that the -instrument must be conveyance and the only question before us is whether the instrument in the present case could be said to be a conveyance. Now conveyance is defined in sec. 2(g) to include 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. The argument of the Revenue was that the present instrument was a conveyance on sale since it transferred the interest of the retiring partners in the partnership assets to the continuing partners for a sum of money and the transaction therefore satisfied the essential elements of a sale. This argument was sought to be supported by reference to a recent Full Bench decision of the Mysore High Court in Venkatachalapathi v. State A.I.R. 1966 Mysore 323. But we do not think the argument is well founded. It ignores the true nature of the transaction embodied in the instrument. We have already set out the relevant provisions of the instrument and it is clear from those provisions that the instrument is nothing but a simple deed of retirement recording the terms and conditions on which three partners retired from the firm. On retirement the three partners undoubtedly ceased to have interest in the partnership assets and the partnership assets continued to belong to the firm consisting of the continuing partners but there was no transfer of interest from the retiring partners to the continuing partners in consideration of a sum of money. The retiring partners merely took moneys representing their respective shares in the partnership and went out of the firm. This position becomes very clear if we consider what is the true nature of the interest of a partner in a partnership and what happens when a partner retires from the firm. The following statement of the law is to he found in Lindley on Partnership (Twelfth Edition) at page 375 where the learned author describes the nature of the share of a partner in a partnership:- What is meant by the share of a partner in his proportion of the partnership assets after they have been all realised and converted into money and all the partnership debts and liabilities have been paid and discharged. This it is and this only which on the death of a partner passes to his representative or to a legatee of his share; ............and which on his bankruptcy passes to his trustee. The Supreme Court had also occasion to consider this question in Narayanappa v. Bhaskara Krishnappa A. I. R. 1966 S.C. 1300 and there after referring to the relevant provisions of the Partnership Act the Supreme Court 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 311 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 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 in Cl. (a) and sub-clauses (i) (ii) and (iii) of Clause (b) of sec. 48. Then again at another place in the same judgment the Supreme Court reiterated this position by saying in clear and specific terms:- 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. It is clear 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 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 remained after satisfying the liabilities set out in clause (a) and sub-clauses (i) (ii) and (iii) of clause (b) of sec. 48. When therefore a partner retires from the partnership and the amount of his share in the net partnership assets after deducting 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 ill 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. The three partners retired from the firm and their respective shares in the partnership at the date of retirement were ascertained on taking accounts and the amounts representing the shares were credited in the respective accounts with the firm:- the firm continued with the remaining partners and the partnership assets continued to belong to the firm composed of the continuing partners. There was here clearly and indisputably no sale of interest in the partnership assets by the retiring partners to the continuing partners.

(3.) This conclusion would seem to be clear and inevitable on principle and there would appear to be no need of authority to support it but since the Mysore High Court has taken a different view in Venkatachalapathi v. State (supra) we might profitably refer to the decision of the Supreme Court in Commissioner of Income-tax v. Dewas Cine Corporation 68 I.T.R. 240 which completely supports the view we are taking. There 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 books of the partnership as its assets. The Income tax Officer allowed depreciation aggregating to Rs. 44 380 in the assessments of the partnership in respect of the two theatres for the assessment years 1950-51 to 1952-53. On the dissolution of the partnership on 30/09/1951 it was agreed that the theatres should be returned to their original owners and in the books of account of the partnership the assets were shown as taken over at the original price less the depreciation allowed the depreciation being equally divided between the two partners. The question arose whether by restoring the theatres to the original owners there was a transfer by the partnership and the entries adjusting the depreciation and writing off the assets at the original value amounted to total recoupment of the entire depreciation by the partnership and on that account the second proviso to sec. 10(2)(vii) of the Indian Income-tax Act 1922 was attracted. The Supreme Court held that on the dissolution of the partnership each theatre had to be deemed to be returned to the original owner in satisfaction partially or wholly of his claim to a share in the residue of the assets after discharging the debts and other obligations and there was accordingly no sale of the theatres by the partnership to the individual partners in consideration of their respective shares in the residue and consequently the amount of Rs. 44 380 could not be included in the total income of the partnership under the second proviso to sec. 10(2)(vii). Shah J. speaking on behalf of the Supreme Court stated the law on the subject in these terms:- Under sec. 46 of the Partnership Act 1932 on the dissolution of the firm every partner of his representative is entitled as against all the other partners or their representatives to have the property of the firm applied in payment of the debts and liabilities of the firm and to have the surplus distributed among the partners or their representatives according to their rights. Sec. 48 of the Partnership Act provides for the mode of settlement of accounts between the partners. It prescribes the sequence in which the various outgoings are to be applied and the residue remaining is to be divided between the partners. The distribution of surplus is for the purpose of adjustment of the rights of the partners in the assets of the partnership:- it does not amount to transfer of assets. On dissolution of the partnership each theatre must be deemed to be returned to the original owner in satisfaction partially or wholly of his claim to a share in the residue of the assets after discharging the debts and other obligations. But thereby the theatres were not in law 501d by the partnership to the individual partners in consideration of their respective shares in the residue. The expression sale and sold are not defined in the Income-tax Act:- those expressions are used in sec. 10(2)(vii) in their ordinary meaning. Sale according to its ordinary meaning is a transfer of property for a price and adjustment of the rights of the partners in a dissolved firm is not a transfer nor it is for a price. 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. (underlining is ours). These observations though made in the context of a dissolution of a partnership are equally applicable where a partner retires from the partnership. What is given to him by way of his share in the partnership whether it be cash or some property of the partnership is received by him as his share in the net partnership assets after deducting liabilities and prior charges on settlement of accounts and there is no transfer of any interest in property from him to the continuing partners nor is it for a price. It is merely an adjustment of the right between the retiring partner and the continuing partners in the assets of the partnership:- the share of the retiring partner in the partnership is made over to him.