P.K. Mehta, Accountant Member
1. The cross-appeals of the revenue and the assessee in respect of an order of the ITO under Section 171 of the Income-tax Act, 1961 ('the Act'), for the assessment year 1971-72 are conveniently considered together and disposed of by a common order.
2. The assessee-HUF had claimed partition in respect of immovable properties with effect from 1-7-1970 as per the partition deed, dated 17-11-1970. Another claim of partition was made in respect of a sum of Rs. 1,25,000 out of capital which was accepted by the ITO and with which we are not concerned in these appeals. The claim of partition of immovable properties was rejected by the ITO in the first instance and the matter came up to the Tribunal. The Tribunal by its order, dated 24-8-1977 directed a fresh enquiry to be made by the ITO mainly in respect of the property styled as Amritsar Cotton Mills (ACM) and set aside the order of the ITO. A fresh order has been passed after the order of the Tribunal with which we are concerned now. The ITO in para 46 has stated that the assessee's claim of partition of the amount of Rs. 1,25,000 and all with effect from the other immovable properties except ACM is accepted 17-11-1970. He rejected claim of partition of the property of ACM. The assessee went in appeal to the AAC and he has passed a somewhat peculiar order with which both the sides are aggrieved and both have come in appeal. In brief, his conclusion in the last para of his order is as follows and we quote the relevant extract: Keeping in view the above observation and discussion, I am of the opinion that at the time of partition, the HUF styled as Sobha Singh Jairam Singh was owning 2/16 share and the HUF styled as Sobha Singh Harbhajan Singh was owning 5/16 share in the property of the firm. The remaining share was held by individual partners. In the absence of clear demarcation of shares in the dissolution deed, judicial interpretation will be taken that the property belonging to various partners of the firm in the ratio of the shares being held by such partners in the partnership firm. The Income-tax Officer, is, therefore, directed to pass partition order to the extent of 2/16 share in respect of Sobha Singh Jairam Singh and to the extent of 5/16 share in the case of Sobha Singh Harbhajan Singh (HUF).
3. We may now set out certain relevant facts for resolving one controversy in hand and these are taken from either the statement of facts submitted by the assessee's counsel before us or from the order under Section 171 of the ITO. The property styled as ACM was sold in the year 1947 in equal shares to two persons, namely Amritsar Rayon and Silk Mills, Amritsar, and Shri Balkishan Dass Munjal. However, the sale of half share to Shri Balkishan Dass Munjal did not materialize and that half share reverted back to the following persons:
1. 5 annas share to the assessee-HUF, Sobha Singh Jairam Singh.
2. 5 annas share to the other HUF styled Sobha Singh Harbhajan
3. 6 annas share to S. Hardyal Singh Babbar.
It was explained by the assessee's counsel, Shri K.S. Bajaj, that this happened somewhere in 1950 or so but the ITO in para 12 of his order says that it happened in 1953 and the property, when it reverted, was received by the three persons in accordance with a partition arrangement made in 1935. S. Hardyal Singh sold his 6 annas share as per sale deeds executed in favour of S. Joginder Singh and S. Kirpal Singh. A family tree is given in para 8 of the order of the ITO and in para 10, it is stated that somewhere in 1935 a partition had taken place in the family, according to which the branch of S. Sunder Singh got 6 annas share in the ACM and that of Sobha Singh a share of 10 annas but that partition deed was not available. In para 11 the ITO has mentioned that after the death of Sobha Singh, a complete partition took place between his two sons, Shri Jairam Singh and Shri Harbhajan Singh, and Smt. Bishan Kaur in April 1943. A copy of partition deed dated 6-4-1943 had been filed before the ITO which showed that each of the two brothers took half share in the 10 annas shares of the ACM property. The ITO in para 13 has referred to the fact of S. Hardyal Singh, son of S. Jairam Singh, and S. Kirpal Singh, son of S. Harbhajan Singh, for a consideration paid of Rs. 33,000 by each. In para 14 the ITO has noted that after all these transactions, the ACM property which reverted back finally to the two HUFs and its two members, became a joint property of the following co-owners:
1. S. Harbhajan Singh representing the HUF
Sobha Singh Harbhajan Singh 5 annas share
2. S. Jairam Singh representing the HUF
Sobha Singh Jairam Singh 5 annas share
3. S. Joginder Singh 3 annas share
4. S. Kirpal Singh 3 annas share
The ITO has recorded that Joginder Singh and Kirpal Singh owned their shares independently of their HUFs and this was proved from the fact that in all later years they have admitted their interests to be separate from the HUFs.
4. In the statement of facts of the assessee, it is pointed out that the property of ACM repurchased from Shri Balkishan Dass Munjal comprised of a total land measuring 43,000 sq. yds. out of which 2,200 sq. yds. was covered by roads and pavements. It is also stated that there were 196 quarters, 25 sheds and 13 shops which were mainly rented out at what we will call today as a very small rent ranging from Rs. 2 per month onwards to Rs. 50, and in some cases to Rs. 150, Rs. 400 and Rs. 550, etc.
5. A partnership business of cotton ginning mill came into existence in the year 1953 with the following constitution:
1. S. Harbhajan Singh 5 annas share (representing the HUF of Sobha
Singh Harbhajan Singh)
2. S. Jairam Singh 5 annas share (representing the HUF, Sobha
Singh Jairam Singh)
3. S. Kirpal Singh 3 annas share in individual capacity
4. S. Joginder Singh 3 annas share in individual capacity.
On 2-7-1954, there was change in partnership and one more partner, S. Mohan Singh son of S. Jairam Singh, came in (it may be stated that in para 20 of the order of the ITO, the date of subsequent deed of partnership has been wrongly mentioned as 2-7-1974 instead of correct date 2-7-1954). The profit-sharing ratio of S. Jairam Singh representing his HUF was reduced to 2 annas and the fifth partner, S. Mohan Singh, was given a share of 3 annas. It appears that for income-tax assessment purposes, S. Mohan Singh's share was also got taxed in individual status. The constitution of the partnership evidenced by partnership deed, dated 2-7-1954 remained unchanged till 20-11-1968 when S. Harbhajan Singh died and in his place S. Kirpal Singh stepped in as stated by the ITO in para 21 of his order and he came to have 5 annas share in the capacity of karta of the HUF, Sobha Singh Harbhajan Singh, and 3 annas share in his individual capacity. It is stated in the statement of facts of the assessee that the business of cotton ginning mills was discontinued on 30-6-1970 and thereafter no ginning business was at all done and, thus, this partnership was dissolved. In a succeeding para in the assessee's statement of facts, it is mentioned that whereas S. Harbhajan Singh died on 20-11-1968, the dissolution deed was executed on 31-8-1973. There is controversy about the point of time when it can be said that the firm was dissolved.
6. Another important aspect about this partnership business is whether the whole of the property of ACM was thrown as initial capital by the partners in the partnership business. It is undisputed that following entries were passed in the books of account about the introduction of machinery and building by the partners: Machinery account Rs. 5,00,000
Building account Rs. 5,00,000
By credit to:-- Rs. 1,00,000
Harbhajan Singh 31,250
Jairam Singh 31,250
Joginder Singh 18,750
Kirpal Singh 18,750"
It is also not in dispute as is clear from what is written in the assessee's statement of facts that 'it was brought to the notice of the ITO that it was notional value which was put with regard to the two sheds and machinery to bring about partnership into existence'. The controversy here is that, according to the assessee, it was only two sheds and machinery, with which ginning business was carried on, which had been brought into partnership business. But the ITO, on the other hand, holds that the entire property of ACM was a partnership asset. In support of the ITO's conclusion, the relevant paragraphs are paras 22 to 24, which are quoted below:
22. The firm is claimed to have dissolved on the death of Harbhajan Singh. However, the deed of dissolution was drawn on 31-8-1973--five years after. All the while and even till today, the books of ACM continue in which rental income and ancillary expenses are recorded and the net income is divided.
23. The building account in the books of ACM which started with a debit of Rs. 5,000 in 1953 swelled to Rs. 2,05,356 as on 30-6-1970. During the period of seventeen years, expenses excluding sales of material amounted to more than Rs. one lakh fifty-five thousand. On 30-6-1970, the debit balance of the above mentioned amount in this account was written off equally to the accounts of Sobha Singh Harbhajan Singh--partner No. 1 above--and Sobha Singh Jairam Singh--partner No. 2.
24. All along the entire income of the above property has been accounted for in the books of the ACM and divided along with other income, amongst the partners in their profit-sharing ratio mentioned above. It is to be noted that the property income was never equally divided between the two HUFs, headed by Harbhajan Singh and Jairam Singh--but between the five partners in their profit-sharing ratio. This continued up to 30-6-1970.
In the statement of facts, the assessee has partly accepted the position, but we find that what is stated by the ITO is more correct and we will deal with this aspect later.
7. It may be mentioned that the history of events is not fully documented and the facts have been presented in a jumbled fashion, though in great bulk. In the preceding paras, we have tried to record certain relevant facts.
8. The objections of the assessee against rejection of its claim for partition before us were the same as were raised before the ITO. The ITO has dealt with them in paras 27 to 42 of his order. In para 43 there was another objection whether the property was capable of physical demarcation and division but with that it may not be necessary for us to deal with. The assessee has recounted these objections in its written statement of facts, particularly paras 11 to 16. On behalf of the revenue, the following additional ground was moved by the learned departmental representative with the approval of the Commissioner (Appeals). That the learned AAC erred in holding that a written agreement between the partners was not required and that entries in the books of account of the firm Amritsar Cotton Mills, made on 30-6-1970, were sufficient to transfer the title of the immovable properties of the firm to the partners so as to enable the partner HUFs to partition the immovable properties on 1-7-1970.
The additional ground being purely legal and the relevant facts in respect of its being already on record was admitted. In support of the proposition raised through the additional ground, the departmental representative relied on three authorities of the High Courts and a decision of the Amritsar Bench of the Tribunal and these were--Ram Narain & Bros. v. CIT  73 ITR 423 (All.), CIT v. Bharani Pictures  129 ITR 244 (Mad.) and K.D.Pandeyv. CWT  108 ITR 214 (All) and decision of the Amritsar Bench of the Tribunal in the case of ITO v. Bharati Engg. Corporation [IT Appeal No. 417 (Asr.) of 1980, dated 7-11-1981] to which one of us, the Judicial Member, was a party.
We do feel that once it is found that the entire ACM property had been brought in the firm by the partners as their capital contribution, the real issue will be, which is pinpointed by the revenue by moving the additional ground.
9. Now we will take up the question about the property contributed as capital by the partners. The assessee had claimed that the immovable ACM property consisting of land and building was always owned by the two HUFs--Sobha Singh Harbhajan Singh and Sobha Singh Jairam Singh in equal shares. Further, it was claimed that only two sheds were given to the firm for carrying on its ginning business and the rest of the property was never assigned to it. On considering the submissions of both the sides, we find that the ITO was justified to reject both of them by considering the totality of circumstances. Para 26 of his order appears to have a little factual inaccuracy. He wanted to refer to 8 annas share being held by each HUF and in that context went on to recount the repurchase of ACM property. In para 12, the ITO has stated that half share of the ACM, which was sold to Seth Balkishan Dass Munjal for a consideration of Rs. 10 lakhs, was mortgaged for unpaid consideration and eventually he could not buy the property and resold his share in 1953 for Rs. 2,50,000 to the three sellers, namely (1) branch of Hardyal Singh 6 annas share, (2) Sobha Singh Harbhajan Singh, HUF, through Shri Harbhajan Singh--5 annas share, (5) Sobha Singh Jairam Singh, through Jairam Singh--5 annas share. It is not in dispute that soon after Hardyal Singh sold his 6 annas share to Joginder Singh, son of Jairam Singh, and Kirpal Singh, son of Harbhajan Singh, in equal share. The ITO in paras 16 and 28 has pointed out that both these persons acquired three annas share each from S. Hardyal Singh in their individual capacity and not on behalf of their HUFs and they "had declared the income accordingly and assessed on that basis. This clearly shows that right after the repurchase the two HUFs were not owners of 8 annas share each in the property of ACM. 6 annas share in the property repurchased had gone out of the fold of the two HUFs and gone to the members of HUFs in their individual capacity. This claim of the assessee totally ignored the facts which have obtained for a large number of years and assessments have been courted by the persons concerned on that basis. It may be relevant to show that Joginder Singh and Kirpal Singh were representing their respective HUFs, Sobha Singh Jairam Singh and Sobha Singh Harbhajan Singh, and had used the funds of those HUFs.
9.1 Similar is the position, qua the conduct and evidence in respect of the second claim of the assessee that only two sheds were given to the firm. The ITO has clearly pointed out in para 31 that there was no evidence produced to show what exactly was comprised in the properties, put as capital in the firm and valued at Rs. 50,000. In this connection, it will be useful to refer to the book entries passed which are given in para 6 above and to the statement made in the statement of facts noted therein. It is admitted position, according to that statement, that Rs. 50,000 was the notional value though it is stated that it was in respect of the two sheds. The assessee by no evidence either before the ITO or up to this stage has backed the claim about the real cost of two sheds and what is meant by the notional valuation made. When the position is not clearly brought out by exact data, the true position has to be found out by looking into the two circumstances including the conduct of the parties. In this respect, the ITO's paragraphs 22 to 24 and 31 to 35 are relevant. The ITO has taken note of the fact that the rental income all along of the entire property has been accounted for in the books of the firm and divided in the profit-sharing ratio. The result of this manner and treatment has been that all the partners have courted assessments on that footing and not on the basis that barring two sheds, the income of the rest of the property was to be assessed differently. In fact when we keep in mind the position that property purchased from the branch of S. Hardyal Singh was acquired by the two members of the two families in their individual capacity, the real ratio to divide the property income will be the same as is reflected by the profit-sharing ratio of the firm. Further, the ITO has also relied on the fact that the expenditure on the property was dealt with again through the firm and the entire debit balance in the account in respect of the whole property was only divided half and half on 30-6-1970 when the assessee was set for dividing the ACM property through a partition. These are weighty circumstances and in law the partners have obtained benefit by getting themselves taxed on the rental income by showing a position different from what is now sought to be set up about the ownership of the property. In this connection, it will be relevant to point out the contradictory approach of the assessee insofar as the wealth-tax assessments were concerned. In para 36, the ITO has noted this contention of the assessee. It was claimed that in the wealth-tax assessments, the two HUFs were disclosing the half share of the value of the entire property. This action is incorrect factually, insofar as it does not at least exclude the value of two sheds given to the firm. The conduct in showing the entire property brings out that the parties concerned were thinking in terms of the entire property and not by excluding the two sheds. Secondly, it is a deliberate act where an assessee courts assessment under the Wealth-tax Act, 1957 ('the 1957 Act') on one pattern and under the 1961 Act on another pattern. This kind of conduct reduces the credibility of the assessee. It would appear that the income-tax assessments started earlier than the wealth-tax assessments, the Wealth-tax Act being enacted only in 1957 and, in our view, it will be correct to hold that the position reflected for income-tax purposes was correct. We may point out another factual error that whereas after the repurchase of property from Seth Balkishan Das Munjal and S. Hardyal Singh half share of the property in fact could not belong to each of the two HUFs. This also shows that the position disclosed in wealth-tax assessments was based on wrong appraisal of the situation. About all no evidence has been led to show that what was done in income-tax was wrong or what was done in wealth-tax is right. The real question was from whom the funds proceeded and the evidence in respect thereof. That evidence is not available nor produced and the matter merely rests on oral submissions. One is left wondering about the manner in which arguments and stands are taken to suit the convenience from time to time.
9.2 Taking the totality of circumstances and what was represented before the income-tax authorities by the partners for income-tax assessments, we are inclined to hold that the entire ACM property was brought into the firm. At this stage, another relevant fact has been pointed out by the ITO in para 39 that the property always stood in the name of the firm and not in the name of the partners. This will also show along with the other facts pointed out above that the property belonged to the firm. If there was a ay contrary intention then at the time of repurchase, the property could be got registered in the name of the HUFs.
10. Now we take up the second aspect which is pointedly raised through the additional ground quoted above moved by the revenue, namely, whether the property belonging to the firm could be transferred only through an instrument in writing and whether that should be registered also. We have also pointed out above that the property stood in the name of the firm but apart from that aspect, it is also held that in reality the entire property was introduced as capital contribution by the partners and, therefore, it was the property of the firm. On this issue, the relevant case law is Ram Narain & Bros.' case (supra) and the two Supreme Court decisions namely Addanki Nar ayanappa v. Bhaskara Krishnappa AIR 1966 SC 1300 and Ratan Lal Sharma v. Purshottam Harit AIR 1974 SC 1066. The Allahabad High Court in the case of Ram Narain & Bros's case (supra) has clearly held that an item of immovable property belonging to a firm can be converted into personal property of partners only by means of an instrument in writing and that the entries in the account books of the firm do not have the effect of converting the property of the firm into the personal property of the partners. It is also observed at page 430 that such an instrument may also require registration under Section 17 of the Indian Registration Act, 1908. The Supreme Court decision in Addanki Narayanappd's case (supra) has not been referred to by the Allahabad High Court but the effect of that decision has been considered in a subsequent Supreme Court decision in Ratan Lal Sharma's case (supra), and we quote the four relevant paragraphs from that judgment:
4. It is well settled now that the share of a partner in the assets of the partnership which has also immovable properties is movable property and the assignment of the share does not require registration under Section 17, Registration Act. [See Ajudhia Pershad Ram Pershad v. Sham Sunder AIR 1947 Lahore 13 at p. 20 (FB), Narayanappa v. Bhaskara Krishnappa  3 SCR 400 at pp. 406 and 407 and CIT v. Juggilal Kamlapat  1 SCR 784 at p. 790]. But the award with which we are concerned does not seek to assign the share of the respondent to the appellant either in express words or by necessary implication.
5. The word 'not' is slip here. The parties conceded before the learned Single Judge that the award deals with immovable property worth above Rs. 100. So if it is found by us that the award purports to create rights in the appellant over immovable property, it would require registration under Section 17, Registration Act. [See Satish Kumar v. Surinder Kumar,  2 SCR 244 at pp. 251-252]. On the dissolution of the partnership or with the retirement of a partner from the partnership the share of the partner in the partnership assets is equal to the value of his share in the net partnership assets after deduction of all liabilities and prior charges. Even during the subsistence of the partnership, he may assign his share to another partner. In that event the assignee partner would get only the right to receive the share of profits of the assignor. [See Narayanappa's case (supra) at p. 407 (of 1966 3 SCR 400)].
6. Now the award does not transfer the share of the respondent, interpreted in the aforesaid sense, to the appellant in express words. Nor such is the necessary intendment of the award. It expressly makes an exclusive allotment of the partnership assets including the factory and liabilities to the appellant. It goes further and makes him 'absolutely entitled to the same'. In consideration of a sum of Rs. 17,000 (see Clause 4) plus half of the amount of Rs. 1,924.88 to the respondent and the appellant's renouncement of the right to share in the amounts already received by the respondent. So, in express words it purports to create rights in immovable property worth above Rs. 100 in favour of the appellant. It would accordingly require registration under Section 17, Registration Act. As it is unregistered, the Court could not look into it. If the Court could not, as we hold, look into it, the Court could not pronounce judgment in accordance with it. Section, 17, Arbitration Act presupposes an award which can be validly looked into by the Court. The appellant cannot successfully invoke Section 17.
7. The award is an inseparable tangle of several clauses and cannot be enforced as to the part not dealing with immovable property. As already stated, various other relevant clauses constitute consideration for clause that is, for the creation of absolute rights in the factory and other properties in favour of the appellant. This is perfectly clear from the note of the arbitrators appended to the award as Clause 8. The appellant is not given a right to run the factory unless he has paid the awarded consideration to the respondent. (p. 1067)
It is clear from the reading of the above four paragraphs that where an exclusive allotment of the immovable property of a firm is to be made to a partner, the instrument in writing will also require registration. We may also refer to the Madras High Court decision in the case of Bharani Pictures (supra), which stresses the execution of an instrument in writing when an immovable property of the firm is to be transferred to a partner and considers Addanki Narayan-appa's case (supra) but the High Court did not go further into the aspect of registration. The High Court has analysed the position of the two Supreme Court authorities at pages 252 and 253 of its decision which can be usefully referred to. It may further be stated that following the Allahabad High Court decision in Ram Narain & Bros's case (supra) the Amritsar Bench of which one of us, the Judicial Member was a party took the same view in the case of Bharati Engg. Corpn. (supra).
11. From the above discussion, the legal position that emerges is that an instrument in writing will be required and it will also need registration as the immovable properties of the firm have been allotted to two of the partners, namely, the two HUFs. When confronted with this position, the argument of the assessee's counsel was that the dissolution deed, dated 31-8-1973 was that instrument in writing though it is undisputed that it was not a registered document. In our view, this dissolution deed is neither the right document when it is closely examined nor can it advance the assessee's case. The relevant clauses 1 to 6 are reproduced below:
1. That the partnership firm styled as 'Amritsar Cotton Mills', GT Road, Amritsar has been dissolved as from the date of death of S. Harbhajan Singh Babbar in 1968.
2. That the capital of the dissolved firm has already been withdrawn by the said partners and there is no asset worth the name of the defunct firm at present, except that Old Ginning Mills machinery, in the shape of scrap.
3. That thus the immovable property in which the ginning mills business was carried on and all the godowns, etc., belonged to the said two Hindu undivided families equally.
4. That S. Jairam Singh, karta of the family, partially partitioned his half share in the said immovable properties of 'Amritsar Cotton Mills' in 1970.
5. And similarly, there took place a partial partition between the coparceners of the family of S. Kirpal Singh Babbar and his brothers.
6. That now this deed of dissolution is executed as a memorandum of the dissolution which automatically took place on the death of S. Harbhajan Singh Babbar.
11.1 Before dealing with what is stated in the dissolution deed clauses, it may be pointed out that the instrument in writing, which is contemplated for the purpose of transfer of immovable property from a firm to a partner, has to be executed before the property can move from the firm to the partners. A dissolution deed written on 31-8-1973 cannot be that instrument which will transfer the property to the HUFs on 30-6-1970 and those HUFs then can subject it to partition on different points of time. This appears to be a fundamental objection.
11.2 Now dealing with the dissolution deed for, whatever, it is worth as per Clause (6), it is a memorandum of dissolution which automatically took place on the death of S. Harbhajan Singh Babbar in 1968. It by itself does not purport to do anything and wants to record something which has happened. Such a document cannot be that instrument in writing. Again it states in Clause (3) that the immovable property in which the ginning mills business was carried on and all the godowns, etc., belonged to the said two HUFs equally. It nowhere talks of transferring of any property from the firm to the two HUFs and merely wants to assert that the properties belonged to the two HUFs equally. Here it is also significant to note that entire ACM property is being referred in the dissolution deed of the firm. This may be another clue in support of our conclusion reached above that the entire property belonged to the firm. Clause (4) again refers to the action of S. Jairam Singh to partially partition his half share in the ACM property in 1970. We do not get the impression that the property was transferred at all through this deed. Finally, the dissolution deed is undisputedly not a registered document under the Registration Act.
12. We will also like to refer to another interesting aspect which arises from the assessee's stand that only two sheds were contributed as capital to the firm. It will be worth remembering that on this footing too, it will be necessary to have an instrument in writing which will have to be registered. That having not been done partition claimed for this property on that footing also will fail.
13. Of course once it is held as per discussion above that the ACM property has not been transferred in the eye of law to the two partner-HUFs, the partition deed becomes fruitless, insofar as this property is concerned. Consequently, if has to be held that the ITO was justified in rejecting the partition claimed in respect of the ACM property. We uphold his order and reverse the order of the AAC and allow the appeal of the revenue.
14. We may mention that it is unnecessary after reaching this conclusion to go into the further question of nature of the property from the angle of its physical partition.
15. In the result, the appeal of the assessee fails and the appeal of the revenue is allowed.
U.S. Dhusia, Judicial Member
16. I have read through the order of the learned Accountant Member but have not been persuaded that his finding can be accepted by me. His finding is mainly based on the finding of the ITO. I would, therefore, first examine the finding of the ITO.
17. The only issue that arises for consideration in this appeal is whether there was a partition of property, known as ACM property, comprising of 43,000 sq. yds. (out of which 2,200 sq. yds. is roads and pavements), 196 quarters, 25 sheds, 13 shops as a result of the partition effected on 17-11-1970. The assessee, Sobha Singh Jairam Singh, who claims to be a joint Hindu family and its claim as joint Hindu family has been accepted by the revenue. The claim of the assessee is based on the provisions of a partition agreement, which was duly registered. The agreement brought about a partition among the coparceners of the assessee joint family and Smt. Pukhrajwati, wife of S. Jairman Singh. Other coparceners were Joginder Singh, Mohan Singh, Harbhajan Singh and Avtar Singh. The partition was effected of not only immovables, inter alia, capital of Rs. 1,25,000 lying in the books of the defunct firm, ACM, but also several immovable properties, inclusive of half share in the land, building, quarters, godowns, sheds, known as ACM property situated at GT Road, Amritsar.
18. The ITO does not assail the reality or genuineness or the validity of the partition agreement, dated 17-11-1970. He accepts that there was a partition of the movable and other immovable enumerated in the agreement. What he objected to, was the partition of the ACM properties.
According to him, the ACM properties did not form a part of the estate of the joint Hindu family and, for that reason, the claim of partition of the ACM properties having been effected, was not to be accepted. In my view, the approach of the ITO is not sustainable in law. It is open to him to accept a document as reliable or reject it as unreliable. But it is not open to him to hold in the same breath, that the document was partly reliable and partly unreliable. It is not open to any one, not to the ITO here, to take such a position in law, in considering a document. If he accepts the reality, the genuineness and the validity of a document and accepts the nino-tenths of the content as reliable, it is not open to him in law to disclaim about the remaining one-tenth. The document to be accepted as reliable is to be accepted in full or not at all. It cannot be said that a document is partly reliable and partly unreliable. If the document is unreliable, support for the acceptable portion has to come out from other materials. The unreliable document cannot be depended upon for any support. The ITO has not brought out the material, apart from the partition agreement, which has enabled him to accept the partition of the movables, including capital of Rs. 1,25,000 and all other immovable except ACM properties. Apparently, he has relied upon partition agreement and found it reliable. Looked at from this angle, he should have found support in the agreement itself for the partition of the ACM properties. It is obvious that the ITO has moved arbitrarily in the matter without there being any support available in law, only on the basis of his own conjectures and surmises.
19. The assessee, in this connection, pointed out another document in support of the claim of the partition of the ACM properties--dissolution agreement executed on 31-8-1973. I would like to reproduce para 3 of recitals and covenant Nos. 3, 4 and 5:
3. And whereas, this firm has been showing income from the property, in fact, this property belonged to the two Hindu undivided families, headed by S. Jairam Singh Babbar, S. Mohan Singh Babbar and S. Joginder Singh Babbar (parties of the first, second and third parts) on the one hand and late Harbhajan Singh (which, on his death) succeeded by S. Kirpal Singh Babbar, as karta on the other hand.
iii. That thus the immovable property, in which the ginning mills business was carried on, and all the godowns, etc., belonged to the said two Hindu undivided families equally.
iv. That S. Jairam Singh, karta of the family, resorted to the partial partition of his half share in the said immovable properties of 'Amritsar Cotton Mills' in 1970.
v. And, similarly, there took place a partial partition between the coparceners of the family of S. Kirpal Singh Babbar and his brothers.
A perusal of the foregoing does not leave any doubt that although the income of the ACM properties was being shown in the income of the firm, property belonged to two HUFs only and not to the partnership firm. The dissolution deed was executed on 31-8-1973 with a view to reduce to writing the fact of the dissolution of the firm, which, as articles 1 and 6, reproduced below, indicate, had taken place on the death of one of the partners, Shri Harbhajan Singh Babbar:
1. That the partnership firm styled as Amritsar Cotton Mills, GT Road, Amritsar, has been dissolved as from the date of death of S. Harbhajan Singh Babbar in 1968.
6. That now this deed of dissolution is executed as a memorandum of the dissolution which automatically took place on the death of S. Harbhajan Singh Babbar....
20. The ITO did not assail the validity of correctness of the deed of dissolution, but could not appreciate how a deed, having been executed on 31-8-1973, could bring about dissolution of the firm in 1968. The ITO, in my view, committed an error in taking the view that the dissolution was brought about by the execution of the deed. The deed had not brought about the dissolution as the ITO had mistakenly assumed. The deed had only recorded the factum of dissolution which had taken place on the cessation of the ginning business and on the death of one of the partners, Shri Harbhajan Singh, in the year 1968. The deed of dissolution not having brought about the dissolution, but only recorded the fact, a consideration of its retrospectivity was uncalled for and misconceived. The deed of dissolution has specifically recorded that the ACM property did not belong to the firm and that its ownership vested in the two HUFs. There could not be better evidence of the fact than the voice of the partners, expressing through the dissolution deed, that the ACM property did not belong to it.
21. It was for this reason that when Harbhajan Singh died, the value of his coparcenary interest was shown in the estate duty returns and was, accordingly, assessed as a part of his estate by the ACED as will appear from the following:
5. HALF SHARE IN AMRITSAR COTTON MILLS, ASR
The family owned one-half share in the factory building and lands appurtenant thereto belonging to Amritsar Cotton Mills, Amritsar. This firm is being assessed to income-tax in respect of property income. The scrutiny of the valuation report revealed that the approved valuer has estimated the total value of the property at Rs. 2,49,500 but he excluded agricultural land measuring 2,500 sq. yards. The agricultural land is also subject to estate duty ....
22. The order of the ACED was made on 27-2-1971, long before the issue of order under Section 171 had arisen before the ITO. But before this had happened, the question of ownership had been considered both by the ITO and the WTO. I refer to the appellate order passed on 31-10-1973 for the assessment years 1970-71, 1971-72 and 1972-73. I reproduce the two passages to show the position of the ACM properties vis-a-vis the firm:
2. It was contended by the authorised representative that the appellant had filed the returns of income in all these three years in the status of firm and had shown nil income. In fact, this firm, which was being assessed up to 1969-70, discontinued its business activities by the end of that assessment year and the firm was also dissolved. Now the only source of income was income from property for which there could be no question of existence of the firm. It is true that the ITO has not raised any demand in these cases though the assessments were completed in the status of the AOP but authorised representative's objection in this regard is that the assessments cannot be made in the status of the AOP when the returns were filed in the status of firm as, admittedly, there is no business income of the firm. ** ** **
Since the returns have been filed in the status of the firm, there will be no income assessable in these cases and, therefore, the incomes should be taken at nil for all the three assessment years in the status of the firm as per the returns filed.
Similar view was taken by the ITO for the assessment year 1973-74 as appears from the perusal of the following passage in the appellate order for the assessment year 1973-74:
The ITO, while framing the assessment, observed that the status of the firm was not acceptable on the ground that the firm was dissolved on 20-10-1968 and as such the group of persons owned property which was let out on hire and their shares being definite, the property was to be assessed in the hands of the owners separately. This observation was based on the direction of my predecessor in the case of the appellant for earlier years wherein the same issue was raised for decision. However, the income was computed and the status was adopted as an association of persons. The appellant has agitated against the status and the computation of the income made by the ITO.
After carefully considering the contentions of the appellant's counsel and the facts of the case, I agree with the ITO that where persons join together to acquire, hold and manage property, they fall to be charged as an association of persons. But this general rule must be read subject to the provisions of Section 26 which provides that where house property is owned by two or more persons and their respective shares are definite, and ascertainable, such persons should not in respect of such property be assessed as an association of persons, but each of them should be individually assessed in respect of his share in the income from the property.
The AAC accepted the view of the ITO and dismissed the appeal of the assessee against making the assessments of the property income in the hands of the AOP of the co-owners of the property.
23. Similar approach was adopted by the WTO, who assessed the ACM property in the net wealth of the two joint Hindu families. We refer to the following extract from the first appellate order dated 19-12-1975 in the appeal against the refusal of the ITO to recognize the partition under Section 171:
...Here, it may be mentioned that all along these years, the value of the property, namely, Amritsar Ootton Mills, has always been shown by the two HUFs in their own wealth-tax returns and the same have been accepted by the WTO till the date the assessments have been finalised. . .
On carefully considering the authorised representative's contention and the foregoing facts, I am inclined to agree with the assessee's counsel. It is clear that the property owned by the two HUFs was never transferred to the firm though a part of it'was used by it for the purposes of carrying on business. At no time did it become the property of the firm. As regards the investment in the firm, in the form of repair and reconstruction done from the funds of the firm, the same were transferred to the accounts of both the HUFs. This was also done before the date of partition. On the date when the partition was effected, Shri Jairam Singh and Shri Harbhajan Singh owned half of the Amritsar Cotton Mills. This is further confirmed from the fact that the property has been shown in the wealth-tax returns of both the assessees, which has also been accepted by the WTO ....
When the ITO passed the first order under Section 171 on 22-11-1973, refusing to accept partition, one of the objections of the ITO was that, although the assessee had executed a registered partition deed, it has found that the properties have not been transferred in the municipal records in the name of the receivers. As the necessary mutation had not been effected, the partition of various immovable properties was not complete, according to the ITO, and could not, therefore, be accepted. The AAC, in disposing of the appeal on 19-12-1975, noted in the submission of the appellant that mutation of the properties in the municipal records had been effected.
24. Therefore, on facts, it cannot be held that ACM properties, claimed to have been partitioned, vide partition agreement, dated 17-11-1980, was not vested in the assessee-HUF, but was vested in the partnership. There was overwhelming evidence for the fact that the said property belonged to the two joint HUFs, which, by the partition effected in the year 1970, was partitioned. There was nowhere a whisper in favour of the ITO's claim in any of the documents or materials, to which I have drawn attention above, that the property belonged to the partnership firm. That is why the AAC, who heard the appeal against the first order under Section 171, made the following finding: It is clear that the property owned by the two HUFs was never transferred to the firm, though a part of it was used by it for the purposes of carrying on the business. At no time did it become the property of the firm.
The ITO who passed the second order under Section 171 on 29-3-1978 had, in addition, the benefit of considering the issue in the light of the developments taking place after he had passed the first order. He could not, not only rely on the documents, referred to above, from the treatment given by the ITO, the WTO, the estate duty and municipal authorities but also from the deed of partition, deed of dissolution and also from the subsequent conduct of the parties. The ITO has not brought any material, whatsoever, except his surmises to show that the position claimed and asserted by the HUF was contradicted or denied by any conflict arising between the corparceners concerned or the members of the erstwhile partnership firm. Absence of any conflict or contrary claim, made by the parties, supports the claim of the assessee that ACM properties, which never belonged to the partnership firm and on the contrary belonged to the HUFs, were partitioned away in 1970. The ITO had the advantage, as compared to his predecessors, to reach a finding on the issue in the light of the settled position. If there had been any error or exaggeration in the claim of the assessee, regarding the partition, the same would have surfaced or had been highlighted in these 13 years since the partition was effected. Law of adverse possession begins to operate after the twelfth year. Law does not favour an unsettled position regarding the property to continue for more than 12 years. De jure owner of the property must pose a challenge to the de facto owner only with this period. If he fails, he loses the right to claim his title to the property. If the position stated in the partition agreement had been at variance with the facts, there would have emerged in this period some challenge to the arrangement brought about by the partition agreement as valid and effective. The revenue does not operate in air, but in a real world, peopled with actual claimants and rivals, who have conflicting interests and desires and who never miss an opportunity to pose a challenge if some one transgresses his lawful boundary.
25. The ITO, however, did not proceed on the basis of the above overwhelming material facts on record and the realities of the situation, but proceeded in his own way, on the basis of his surmises and conjectures to refuse the partition of the ACM properties. As these have been relied upon by the learned Accountant Member in his order, it is imperative that I deal with them also.
26. According to the ITO, the ACM properties have been contributed as capital, in the ownership of the partnership and, therefore, belonged to the firm. If it belonged to the partnership, it could not have belonged to the two HUFs. Therefore, how could it be partitioned amongst the coparceners of the two HUFs. There was no evidence of a transfer from the partnership which could only be effected by a registered or unregistered instrument of conveyance. As there was no transfer effected by means of an instrument of conveyance, the claim of the assessee for the partition of the ACM properties, according to the ITO, failed. I examine his first proposition that the ACM properties were transferred as capital to the partnership. The ITO depends upon the entry of the capital as under: Rs. Rs.
Machinery Account 50,000
Building Account 50,000 1,00,000
By credit to Harbhajan Singh 31,250
Jairam Singh 31,250
Jogender Singh 31,250
Kirpal Singh 31,250"
According to the ITO, this entry unmistakably showed that the ACM properties were transferred to the partnership as capital. In this connection, reference is made to para 12 of the first order, passed under Section 171, where the sale to Amritsar Rayon and Silk Mills and Seth Balkishan Dass Munjal for a consideration of Rs. 10,00,000 is referred to this sale was negotiated in the year 1947. The partnership firm came into existence in the year 1953. Can a person, in his senses, possibly suggest that businessman known for their shrewdness, would evaluate the entire property at Rs. 50,000 only, which 7/8 years before, the same property had been negotiated for the sale at Rs. 10,00,000 and thus exposes the same to the threads of attachment by the creditors of the firms in respect of the unpaid bills and advances. The ITO did not once consider the magnitude and variety of this property when he made the aforesaid finding. The property comprises of vast area of vacant land not less than 43,000 sq. yards, 195 quarters, 13 shops and 25 sheds. A reflection on the magnitude of this property, if properly considered by the ITO, would have deterred him from making this finding that the entire ACM property was transferred as capital by the partners. There appears more sense in the claim of the assessee that Rs. 50,000 represented the value of the building, i.e., 2 sheds placed at the disposal of the firm for carrying on the ginning business rather than the entire ACM properties for which the ITO had no corroborating evidence. Therefore, one has to disabuse his mind of this finding of the ITO that the entire ACM properties were placed at the disposal of the firm, which on the facts and in the circumstances of the case, suggests a proposition, which cannot be sustained on serious reflection, on the basis of this entry. If the ACM property in the entirety was not transferred to the firm, could it be held in the alternative, that a part of the ACM property was transferred to the firm. The entry refers to the building only, which, as has been explained by the assessee and had been accepted by the income-tax and wealth-tax authorities, should be considered as confined only to the structure standing on the land. I am not prepared to accept, after a consideration of the amount of Rs. 50,000, that the term 'building' with two sheds should be considered to include also the land on which they stood. For any contrary view that land should also be included, there should be some material to support the view. The firm never approached the municipal authorities for bringing about any mutation in the municipal records. As a rule, in the balance sheet, land and building are separately referred to. The ITO has not been able to derive any support either from the instrument of partnership or from the balance sheet of the firm, prepared year after year in this respect. The ITO could not even refer to the profit and loss account prepared every year and show that the assessee ever made a claim on the depreciation on the building in the two sheds. The ITO, no doubt, referred to the rent receipts considered as the income of the firm and also to the expenditure incurred on the repairs and reconstruction debited to the property account in the books of the firm. As the entry of capital of Rs. 50,000 cannot show that the ACM properties except for the two sheds minus land on which they stood, belonged to the firm, inclusion of rental income in the income of the firm is by no means conclusive or even inconclusive evidence in establishing that the ACM property was made over to the partnership in view of the overwhelming support from the other materials available for the contrary view discussed earlier, which showed that title to the property continued to remain vested with the two HUFs after the partnership came into being. There can be 101 reasons for showing rental income in the hands of the firm. One such reason can be the desire of the assessee to reduce the incidence of tax. Showing the rental income in the hands of the firm had enabled the assessee and its partners to get its assessments in the hands of the five partners instead of the two HUFs. It is true that it was perhaps an example of unconscionable and unethical practice and should not only be discredited but also visited with deterrent punishment. I would suggest to the revenue to see that the assessee is adequately penalised but the penalty to be inflicted cannot be that the entire property should be considered as the property of the firm.
27. Regarding the vesting of the title of an immovable property in a person, natural or legal, one has to refer to the provisions of the Transfer of Property Act, 1882. The claim of the revenue that the ACM properties should be considered as transferred to partner ship because the income derived from it was allowed to be clubbed with the other income of the firm, will not find any support on fact in civil law from the provisions of the Transfer of Property Act. The revenue has not realized that clinging to this view would put the property beyond its reach. Neither the two HUFs, alleged to be the transferors, nor the partnership firm, alleged to be the transferee, accept this claim. No title or right vests in the dead person natural, legal or semi-legal. In an appeal, filed by the partnership firm for the assessment year 1973-74, the AAC had correctly endorsed the finding of the ITO that the property which was let on hire, i.e., two sheds, was also to be assessed in the hands of the HUFs as owners. I reproduce a part of her observation as under:
The ITO, while framing the assessment, observed that the status of the firm was not acceptable on the ground that the firm was dissolved on 20-10-1968 and as such the group of persons owned property, which was let out on hire and their shares being defined, the property was to be assessed in the hands of owners separately. This observation was based on the direction of my predecessor in the case of the appellant for the earlier years, wherein the same issue was raised for decision ....
After carefully considering the contention of the appellant's counsel and the facts of the case, I agree with the ITO that where persons are joining together to acquire, hold and manage property jointly for the purpose of producing income, they fall to be charged as association of persons. But this general rule must be read subject to the provisions which provide that where house property is owned by two or more persons and their respective shares are defined and ascertainable, such shares should not, in respect of such property, be assessed as an association of persons, but each of them should be individually assessed in respect of his share in the property.
I am not in doubt that, in this background, the revenue will not be able to endorse its finding contained in the order under Section 171, as upheld by the learned Accountant Member. The finding is against the facts on record and also against the realities of the situation.
28. The ITO has referred not only to the inclusion of the rental income in that of the firm, but also to the expenses incurred in relation to the property in dispute. He has dealt with this in para 33 of his order. He has found that the debits made to the property account year after year. In para 34, the ITO, relying on the pattern of the expenses, made a finding that the expenses were incurred on extension and reconstruction. He discounted the suggestion that these expenses could not be revenue expenses, which could be debited to the profit and loss account of the firm. In finding that these were debited to the property account, in para 23 of the order under Section 171, the ITO referred to the fact that the debit balance in the property account as on 30-6-1970 was written off equally between the account of the two HUFs, i.e., those of Sobha Singh, Harbhajan Singh and Sobha Singh Jairam Singh. The ITO, however, could not, from this fact, derive the only correct finding that the two sheds allowed to be hired by the firm from the year 1956, when the partnership was constituted, reverted back to the original owners. It was natural that capital expenses incurred in the past amounted to Rs. 2,06,356 should be transferred to the two HUFs only and not to all the five partners of the firm. Therefore, a fair and reasonable consideration of income derived from the property or from the expenses for making extension and construction together with the other facts does not support the case of the ITO that the ACM property should, either in full or in part, belong to the firm and not to the two HUFs and, for that reason, could not be partitioned among the coparceners of the two HUFs. If the property had belonged to the firm, the expenses would have been apportioned in the hands of the five partners and not in the hands of the two HUFs only. If any conclusive evidence was wanted in favour of the claim, that property belonged to the two joint families, here was one based on the entries of the accounts on which the ITO himself had relied. The ITO carried away by his zeal referred to this aspect, but missed to appreciate the correct impact of the entry.
29. Another feature, which has been taken note of by the ITO, is that even after the partition,, the income derived from rent had continued to be accounted for in the books of the ACM. it is not appreciated by me what is aimed at by the ITO by taking note of this fact. Does he mean to suggest that the firm ACM has not been dissolved and that the partnership continued owning the ACM property. This finding could be, however, at complete variance with the finding of the ITO, who made the assessment of the firm for the assessment years 1970-71, 1971-72, 1972-73 and 1973-74 onwards, which had already been referred to. Therefore, no point can be made out by stressing the fact that the co-owners of the property have continued to use same books of account for entering receipts and disbursements. From this fact, no support can be drawn for the finding of the ITO that the firm has continued to be the owner of the property after it had been dissolved in the year 1968.
30. Another plea, which had been vehemently raised by the departmental representative, who went to the extent of claiming as an additional ground, which we allowed to be admitted, that the case of the revenue should be allowed to fail or succeed on the consideration of this plea only. This plea was based on a decision of the Allahabad High Court in the case of Ram Narain & Bros, (supra), which had laid down that the property could be transferred from the firm only by means of an instrument in writing. As I have already brought out that the ACM properties, except for the two sheds, which did not include the land, did not belong to the firm. The question of its retransfer does not arise at all. Therefore, reliance on this case by the departmental representative, for support, is misconceived. If the ACM property was not transferred to the firm, the question of retransfer of the property from it did not arise.
31. One of the pleas raised by the ITO is contained in paras 36 to 38 of his order. According to him, the principle of res judicata did not apply to income-tax proceedings. For this reason, he felt, he was not bound by the finding arrived at in wealth-tax proceedings, where the ACM property had been assessed equally in the hands of the two HUFs. The ITO felt that he was not bound by this finding made by the WTO. Under the provisions of the 1957 Act, the ITO having a jurisdiction over a tax-payer was also to have jurisdiction over the latter under the 1957 Act. This resulted in the same person being the ITO and the WTO. It surpasses my understanding how could the ITO, dealing with Section 171 order, hold that he was not bound by the finding of the ACED, who had made the assessment of the estate left by late Shri Harbhajan Singh. He ignored not only the finding of the WTO and the ACED, but also the finding of the AAC of income-tax and also the ITO, whose finding for the assessment year 1973-74, we have extracted. It is true that an ITO is required to reach a finding independently, but, at the same time, it is imperative for him to see that an issue which arises for consideration in several proceedings, leads to a finding which is consistent with the findings arrived at in other proceedings of the revenue.
32. There is yet another plea advanced by the ITO in para 43 of his order, which he relied to reject the claim of partition. According to him, the ACM properties were not partitioned by metes and bounds. In this connection, I am to note that the ITO did not go through the earlier records on the subject at all. If he had gone into those records, he would have noticed the findings recorded by the AAC, in his order dated 9-12-1975, which had been set aside by the Tribunal, but to which the ITO was himself a party. I reproduce a passage as below: Another stand, which was taken by the ITO during the course of the appellate proceedings, was that though the rest of the properties were divided physically, ACM property was not divided by metes and bounds, and as such the claim of the assessee for acceptance of the partition as regards the said property fails. The authorised representative's reply to the said objection was that the property is incapable of physical division and as such could not be divided. In order to verify the contention of the assessee, the said property was visited by me along with the ITO, Shri M.J. Mujamdhar. On inspection, it was found that the nature of the property is such that it is not capable of physical division either horizontally or vertically. It consists of innumerable units, which are occupied more for residential and commercial purposes. So, even in the division in terms of unit-wise rent is also not practicable, as it is bound to be unequitable. Thus, in view of the Explanation (ii) to Section 171 of the Act, the said property was divided in a way which it admitted of. Accordingly, the objection of the ITO in this respect also does not hold good.
No doubt, the orders of the AAC and the ITO had been set aside by the Tribunal, but that did not mean that the findings already recorded had to be completely ignored and not considered even if the ITO had no better reason to differ. It will appear that the ITO in his haste to repeat his earlier finding lost sight of the fact of inspection of the site by him and the AAC and the consequent finding made on the issue. Having lost sight of the same, he was carried away by his conjectures and surmises. According to him, half of the property was sold to Amritsar Rayon & Silk Mills, while the other half, sold to Balkishan Dass Munjal, reverted to vendors. On the analogy of this sale, he claimed that the remaining property should have been partitioned away by metes and bounds. He lost sight of the fact that the sale of Amritsar Rayon Mills had taken place in the year 1945. It was long long after in the year 1975 that the remaining property had been physically inspected by him and the AAC during the course of appellate proceedings. Where was then the scope for him to raise a plea on the basis of a sale made in the year 1945 after a finding had been recorded during the appellate proceedings in the year 1975 as a result of the inspection made by him and the AAC.
33. This disposes of all the pleas of the ITO on the basis of which he proceeded to discredit the claim of the assessee for the partition of the ACM properties. I may now refer to the findings of the learned Accountant Member which has endorsed the findings of the ITO to reject the appeal of the assessee and allow the appeal of the revenue. Although it is not strictly required after I have examined the pleas of the ITO, I would still refer to it to pinpoint a few aspects.
34. The learned Accountant Member, on the basis of the findings of the ITO, proceeded to hold that the ACM property belonged to the firm. The basis of his finding was partly the original entry relating to the introduction of the capital by the partners joining to carry on the ginning business as a partnership firm and partly the consideration of the rental income having been included in the income of the firm. These were the two grounds on which the ITO had proceeded to hold that the entire ACM property belonged to the partnership firm. I have already dealt with the nature and the purport of the entry as also the aspect of the matter arising from the assessment of the rental income in the hands of the firm. It is needless to repeat them again. In this connection, I again pinpoint the aspect arising from the division of the expenses amounting to Rs. 2,06,356 in the property account in the hands of the two joint families and not in the hands of the five partners. It is pertinent to note that the learned Accountant Member did not notice the ITO could not support his finding by referring to the assets in the balance sheet of the partnership firm for any of the years during which the partnership continued. Since the ACM properties was not included in the balance sheet of the firm, it was natural that the ITO did not refer to this aspect of the matter at all. Nothing was called for in the situation then to pinpoint the fact that the ACM properties were included in the assets of the partnership firm and shown in the balance sheet.
35. Another aspect, which has been dealt with by the learned Accountant Member, is the absence of any registered instrument by which the ACM property could be transferred to the two HUFs. I have dealt with this aspect also. It was pointed out that the ACM property, except of course of the two sheds, not having been transferred to the firm, the question of transferring these from the partnership to the two HUFs did not arise at all. It was also pointed out that no instrument was needed for vesting the property in the two sheds transferred to the firm because what had been transferred by the two HUFs was only the building and not the land.
36. On the facts and in the circumstances of the case, I have no doubt that the claim of the assessee for partition of the ACM property was well-founded both on facts and in law and should be allowed.
37. The learned Accountant Member observed in para 7 as under:
It may be mentioned that the history of events is not fully documented and the facts have been presented in a jumbled fashion though in great bulk.
38. His observation was based from his reliance on findings of facts by the ITO, who shut his eyes to the facts and material brought on record and allowed his surmises and conjectures to have a free play. Therefore, in my opinion, the case of the assessee is well-founded in law and facts and should, therefore, be allowed.
39. In the result, the appeal of the revenue is dismissed and the appeal of the assessee is allowed.
V. Balasubramanian, Vice President
1. IT Appeal Nos. 53 and 90 (Asr.) of 1982 deal with an order of the ITO under Section 171 for the assessment year 1971-72. The other appeals are consequential orders. Since there was a difference of opinion between the Accountant Member and the Judicial Member in respect of the appeals in IT Appeal Nos. 53 and 90 (Asr.) of 1982, the matter was referred to me as Third Member for resolution of the dispute. The consequential orders also involving difference of opinion between the two members, these appeals were also referred to me as Third Member.
2. Before dealing with the matter, it requires to be mentioned that the assessee's appeal relating to the order under Section 171 creates a peculiar situation. The assessee applied for an order under Section 171 claiming partial partition of certain assets. The ITO accepted the partition with regard to certain assets but held that one of the assets did not belong to the assessee-HUF. The appeal of the assessee before the Commissioner (Appeals) relates to this asset and in effect is a prayer for a declaration that this asset belongs to the assessee and has been partitioned in the partial partition. As far as I can see, neither the Commissioner (Appeals) nor the Tribunal is an authority competent to declare the 'ownership' of any asset. If this be not so, I can see no grievance which the assessee could have against the order of the ITO under Section 171. If the ITO considers certain assets as not belonging to the assessee-HUF--in fact he may consider all other assets not covered by this order as not belonging to the assessee--the inevitable corollary would be that he may not include the income therefrom or the value of the assets as net wealth in the income-tax or wealth-tax assessments of the assessee. By excluding, therefore, these assets from an order under Section 171, perhaps the ITO disables himself from levying tax on this asset rather than creating a liability for the assessee. The assessee thus has no grievance at all in respect of the order under Section 171. Where there is no grievance, no appeal under Section 246 of the Act to the Commissioner (Appeals) can lie. It would be proper perhaps to djsmiss this appeal on this simple ground. It would be equally correct for me not to decide the point of difference on this appeal since it would be purely an abstract proposition. The Tribunal, has, therefore, admitted the appeal. I, therefore, proceed to decide the issue.
3. The assessee-HUF claimed a partition with effect from 1-7-1970 based on a partition deed, dated 17-11-1970. There was another claim of partition in respect of a sum of Rs. 1,25,000 stated to be out of the capital of the HUF. The assessee's application for recognition of partition of immovable property as per the deed, dated 17-11-1970 was rejected in the first instance by the ITO as a result of which the matter came up for consideration before the Tribunal. By its order, dated 24-8-1977, the Tribunal directed that a fresh enquiry be made in respect of the property styled as ACM, The ITO accepted the claim of partition with regard to all assets other than ACM with effect from 17-11-1970 acting in pursuance of the Tribunal's directions. There being a grievance with regard to the partition of the ACM, the matter came up before the Tribunal. The learned Judicial and Accountant Members passed separate orders.
4. The property styled as ACM was sold in 1947 in equal shares to two persons, namely, Amritsar Rayon and Silk Mills and Shri Balkishan Dass Munjal. Subsequently, following some changes, the property found its way into the hands of a firm consisting of five partners, Harbhajan Singh and Jairam Singh HUFs and three others, Kirpal Singh, Joginder Singh and Mohan Singh. This firm continued till 20-11-1968 on which date Harbhajah Singh died. The firm is stated to have been dissolved on the death of the above partner but a memorandum of dissolution expressing it was stated to be drawn up on 31-6-1971. In connection with the claim for partition and order under Section 171, the ITO considered the position of the ACM. According to him the books of ACM continued in which rental income and ancillary expenses were recorded and a net income divided. The building account in the books, which started with the debit balance of Rs. 50,000 in 1953, came up to Rs. 2,05,356 as on 30-6-1970 on which date, according to the ITO, the debit balance in the account was written off equally to the accounts of Sobha Singh Harbhajan Singh and Sobha Singh Jairam Singh, two of the partners.
5. The ITO also found that the income of the property had been accounted for in the books against the partners in their profit-sharing ratio right up to 30-6-1970. No instrument in writing was drawn on 30-6-1970 on which date the property was claimed to have been transferred in equal shares to Harbhajan Singh and Jairam Singh but only book entries were passed. From the above facts, the ITO came to the conclusion that even if the property was the personal property of the partners earlier, it became the property of the firm during its existence. There was no transfer of this property to the HUF partners by a properly written up registered instrument. The ITO, therefore, held that the assessee-HUF as well as the other HUF partner, to each of whom half share of the property was stated to be transferred, were not the owners of the alleged respective shares. The partition as regards the above share was, therefore, invalid and the claim in this behalf was rejected by the ITO. It is on this point, after the matter was decided by the Commissioner (Appeals), that the dispute came before the Tribunal.
6. Going through the facts the learned Accountant Member held that the entire property of ACM was brought into the firm. The legal position was that an instrument would be required and it would require registration also if immovable property of the firm was to be allotted to the two partner HUFs. He also held that the dissolution deed written on 31-8-1973 could not be the instrument transferring the property to the HUFs on 30-6-1973. The learned Accountant Member, therefore, held that the property comprised in the ACM had not been legally transferred to the partner HUFs and as a corollary as far as this property was concerned, the partition was ineffective.
7. The learned Judicial Member, however, held analysing the facts that it could not be held that ACM property, claimed to have been partitioned on 17-10-1970, was not vested in the HUF but in the partnership. There was overwhelming evidence for the fact that the said property belonged to the two joint HUFs which by the partition effect in the year 1970 was partitioned. The learned Judicial Member held that the half share of ACM property belonged to the HUFs after the stipulated date and the deed of partition had really effected a partition of this property also. The assessee's claim, therefore, is accepted. On the above difference of opinion between the Members, the following point was referred to me as the Third Member:
(i) Whether the half share of the assessee-HUF in the property known as Amritsar Cotton Mills is validly partitioned as per partition deed, dated 17-11-1970?
(ii) In accordance with the decision on the question of partition, the question of inclusion of the income or wealth, as the case may be, in the quantum assessments will have to be decided.
8. The parties were heard. Before me the points and arguments advanced before the Tribunal earlier and the Commissioner (Appeals) were elaborated. The learned departmental representative pointed out that the property even though originally belonged to the two HUF s became the property of the firm, the income therefrom was considered in the firm and even thereafter it was divided among the five partners. The statement of the assessee, therefore, based on the extracts in the alleged dissolution deed that this property, namely, ACM, was equally divided between the two HUF partners, was neither factually correct nor legally valid. According to the learned Counsel, the other partners had their shares and this has been ignored. Reference was also made to the income-tax, wealth-tax assessments and the conduct of the partners to indicate that there was no transfer of the property from the firm to the two HUFs. Even the claim of the assessee that only a portion of extensive immovable properties was transferred to ACM and that continued to be that of the HUF partners was not substantiated by facts. It is settled, according to the learned Counsel, that even when a firm transfers immovable property to a partner, that has to be done by a registered deed. Decisions were cited in this regard. Merely because the HUFs claimed that they had received half share of the properties and that they have divided it among the members of the families at the time of partition, this could not be accepted as a fact or supported in law.
9. For the assessee going through the details of the formation of the partnership, dissolution of the partnership, the distribution of assets, the book entries, etc., it is pointed out that there was no transfer of any immovable property involved in the present case. On the dissolution of the firm, the assets were distributed. The dissolution though evidenced by a deed of 1973 had taken place earlier and the fact has not been proved to be wrong or incorrect. Against the above background, it is claimed that even for transfer of the property to the HUFs no registration was necessary.
10. According to me, it is not necessary to go into much of the details extracted at length in the orders of the learned Members such as the origin of the property, the manner in which the income was dealt in for income-tax, wealth-tax, etc. The facts relevant for decision of these appeals lie in a short compass. There was a firm of five partners, the two HUFs and three others. On 20-11-1968, Harbhajan Singh died. The firm came to an end on this date. The property known as ACM was an asset of this firm. Both immovable properties and other movable properties constituted assets of this firm. Neither the ITO nor the other authorities including the two learned Members of the Tribunal have questioned and perhaps can question the factum of the dissolution of the firm on the death of the partner. As correctly stated, the memorandum drawn up in 1973 does not dissolve the partnership but it certainly narrates the events and the fact of the dissolution. The dissolution itself has been accepted by the department and so is recorded in the orders of the Commissioner (Appeals) as well as the two learned Members of the Tribunal. All we have, therefore, to see is the position of the partnership on the last day of its existence and the position of the five partners including the two HUFs, whose claim of partition is considered in these appeals. According to the accounts of the firm and the extracts from the books, the capital accounts of the five partners stood at certain figures on the liability side balanced by corresponding assets on the asset side. The balance sheet as on 30-6-1969, i.e., the last balance sheet after the date of the death of the partner showed the building account at Rs. 1,69,584 as an asset of the firm. The capital of the two HUFs stood at Rs. 49,300--Harbhajan Singh and Rs. 43,558--Jairam Singh. The capitals of other three partners were also found recorded in the balance sheet. It was clear from this factual position that the HUF was a partner in the firm with a capital account on the one hand and the ACM represented by the building account was an asset in the partnership. The deed of dissolution of 1973 generally lays down that:
The capital of the dissolved firm has already been withdrawn by the said partners and there is no asset worth the name of the defunct firm at present, except that old Ginning Mills Machinery, in the shape of scrap.
3. That thus the immovable property in which the ginning mills business was carried on and all the godowns, etc., belonged to the said two HUFs equally.
The accounts support the above narration in the deed. The building account has been transferred to the two HUF members, Harbhajan Singh and Jairam Singh, to the extent of Rs. 1,02,678, respectively, which takes into account the sum of Rs. 1,65,585 in the balance sheet. The accounts of the other three partners have been closed in the books of the firm by transferring the credit balances in their accounts to other accounts of Sobha Singh Harbhajan Singh and Sobha Singh Jairam Singh. The effect of these transactions is that the dissolution of the firm has been followed by transfer of these assets to the two partners, and closing the accounts of the other three partners. A subsequent statement of affairs of the firm as on 30-6-1970 shows the accounts of Harbhajan Singh and Jairam Singh credited with an amount of Rs. 15,970 and Rs. 20,213, respectively, as capital corresponding to the remaining assets of the dissolved firm totalling to Rs. 42,199. A still further balance sheet of the dissolved firm shows all the partners being paid off and the total of the balance sheet on either side of Rs. 20,842. These entries clearly indicate that after the dissolution of the firm, there was a dissolution of the assets of the erstwhile firm in specie. The two HUFs took over the immovable properties involved in the present appeals under the head 'ACM'. The other three partners were paid off their dues as per their capital account. The two HUF partners continued to collect the outstanding assets, etc., from year to year until we came to the last balance sheet referred to above. The accounts, in my opinion, undisputedly, therefore, bear out what is mentioned in the memorandum of dissolution of 1973. Here is clearly a distribution of the assets of the firm on dissolution in specie to the partners.
11. Consequent to the above, the legal position to be analysed is as to whether when immovable properties have been distributed to the partners on the dissolution of the firm in specie, is there need for a registered instrument in writing for effectivating the purpose. A clear answer to this obtains in the decisions of the Supreme Court in CIT v. Dewas Cine Corporation  68 ITR 240 and CIT v. Juggilal Kamalapat  63 ITR 292. The matter gets support also from the decision of the Supreme Court in CIT v. Hind Construction Ltd.  83 ITR 211. The law is clearly settled that where on a dissolution of the firm the assets of the firm are distributed in specie to the partners, even if they are immovable properties, there is no 'transfer' from one entity to another requiring registration under Section 170 of the Registration Act. In my opinion, the authorities below have gone on the basis that there was a 'transfer' of certain immovable properties from the firm to the partners. The question whether such a transfer requires registration, an instrument in writing, etc., was considered. As the above would clearly indicate in the present case, there is no 'transfer' of property at all from the firm to the partners. Registration, therefore, is not necessary for vesting the ownership of ACM in the two HUFs as they have claimed. These properties, therefore, constituted the assets of the HUFs and since they have been partitioned by the partition deed, dated 17-11-1970, effect has to be given to this. Though not, therefore, for the reasons mentioned by the learned Judicial Member, I agree with him for the above reasons that the relevant portion of the property known as ACM should be treated as the asset of the assessee-HUF and the partition of the same recorded in the order under Section 171. The assessee's appeal on this point should, therefore, succeed. The matter should go back to the original Bench which heard the appeal for proper disposal of the same.
12. All the other appeals deal with matters consequential to the finding as to the ownership of ACM. The point of difference referred to me in these appeals would also be decided in accordance with the opinion expressed above.