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Issues: (i) Whether immovable property of a partnership firm can be validly transferred between partners by book entries during the subsistence of the partnership without a registered instrument. (ii) Whether the capital gain arising from the sale of such property is assessable in the hands of the firm.
Issue (i): Whether immovable property of a partnership firm can be validly transferred between partners by book entries during the subsistence of the partnership without a registered instrument.
Analysis: During the subsistence of a partnership, no partner can treat any specific item of firm property as his exclusive property or deal with it as such. The rights of partners are limited to their share in profits during continuance of the firm and to their share in the surplus on dissolution. A transaction by which immovable property of the firm is taken out of the firm and allotted to the partners amounts to a release of interest in specific immovable property and effects a transfer. Where the value is Rs. 100 or more, such a transfer attracts the requirement of a registered document under the registration law. The dissolution cases relied on by the assessee were distinguished, as the present case involved transfer during the subsistence of the partnership and not distribution on dissolution.
Conclusion: The transfer by mere book entries was not valid without registration and the answer was against the assessee and in favour of the Revenue.
Issue (ii): Whether the capital gain arising from the sale of such property is assessable in the hands of the firm.
Analysis: Since the property continued to remain the asset of the firm until a legally effective transfer could be made, the gain arising from its sale was attributable to the firm. The view that the property had already passed out of the firm by the internal adjustment entries was rejected.
Conclusion: The capital gain was rightly assessable in the hands of the firm and the answer was against the assessee and in favour of the Revenue.
Final Conclusion: The reference was answered by holding that the alleged transfer of immovable property by book entries was ineffective without registration and that the resulting capital gains were taxable in the firm's hands.
Ratio Decidendi: A transfer of specific immovable property of a partnership during the subsistence of the firm, even if effected by mutual book entries, requires a registered instrument when the transaction amounts to extinguishment or release of interest in the property; otherwise the firm continues to be the owner for tax purposes.
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