COMMISSIONER OF INCOME TAX Vs. DADHA AND CO

JUDGEMENT

(1.) THE assessee herein is a registered firm carrying on business in pharmaceuticals, chemicals, drugs and money-lending. For the assessment year 1971-72, corresponding to the previous year ended October 30, 1970, it filed a return showing an income of Rs. 1,22,180. While going through the accounts of the assessee, the ITO found that the capital account of the partners showed a credit of l/3rd share of sale proceeds of the house property Nos. 161 and 162, Nyniappa Naicken Street, Madras. THE said two properties had been purchased on June 14, 1948, and February 1, 1950, by the firm and the income from these properties were being assessed in the hands of the firm until the assessment year 1964-65. During the accounting year ended November 4, 1964, entries had been made in the books of the firm removing these properties from the part-nership assets and showing them as the individual properties of the partners and for the income from the property there has also been a return filed by the partners as individuals and that has been accepted by the Revenue for some years. On October 15, 1970, these properties were sold to a third party for Rs. 2,00,000. THE said sale deed had been executed by two of the partners of the firm and the legal representative of the deceased partner by name Lalchand Dadha. THE purchase price as well as the interest received from the purchaser were credited to the accounts of the two partners and the legal representative of the deceased partner. On these facts the ITO came to the conclusion that though the sale deed was executed by the individuals, it should be treated as a sale on behalf of the firm and if so treated the capital gains arising out of the transaction as well as the income from the property and the interest on unpaid purchase price were all to be assessed in the hands of the firm. He also computed the capital gains to be Rs. 1,80,500 and added the same along with the income of Rs. 9,500 and the interest of Rs. 4,390 to the profit under Section 41(2) and ultimately determined the total income of the year at Rs 1,97,260.

(2.) AGGRIEVED by the said decision of the ITO, the assessee went before the AAC who accepted the contention of the assessee that these properties have been taken out of the assets of the firm by the entries in the firm's accounts in the assessment year 1964-65 which has been accepted by the Department and, therefore, the assessment of the said sums in the hands of the firm was untenable. He, therefore, deleted the additions made by the ITO.

(3.) IN the face of this position in law relating to partition of immovable property as between co-owners, there can be no partition in this case. What the co-owners did in this case was merely to debit the asset account relating to the immovable properties in the books of the partnership firm and credit the co-owners, that is to say, a partner, in equal shares of the said value. It is claimed that these book entries have completely, effectively and legally brought a partition of the immovable properties in question. This cannot be accepted. IN the first place, the book entries do not make a conversion of any kind known to law. They are only entries made by the book-keeper. They are rightly called book entries, and those entries find place in the account books. They cannot, by their own force, effect any conveyance, release, partition or other transfer of immovable properties. What is more, the entries do not even evidence a partition. All the entries taken together only show two distinct positions, the original position under which the properties were under co-ownership and the sub-sequent position under which it is shown that separate values of the properties or figures as against the co-owners. A combined reading of these two entries will only give release of what was the position devoutly wished for by the parties which has not been properly brought about by any effective transaction known to law. The law requires a degree of formality in regard to transfers of immovable property. A partition may not technically be a fullfledged transfer of ownership, because those who receive their shares under the partition may be rightly regarded as co-owners and the partition in any case does not confer a new title on them. Still there is a transformation or metamorphosis of the co-owner's title and possession involved in the partition. This would include the mutual release of the respective interests of the co-owners. This is why partition has always been regarded as involving some degree of alteration in the title and possession of the immovable property. Partition, apart from what the Hindu law permits, is always a synallagmatic transaction and it cannot fructify by mere book entries.