Partnership property recharacterisation without registration: rental income from godowns treated as co-ownership income, not firm income.

Partners may, by mutual contract, exclude firm property from partnership assets and recharacterise it as co-owned property without compulsory registration, where no fresh transfer to strangers is created. On the stated facts, the dissolution deed recorded an intention to remove the godowns from the firm, distribute rights and liabilities among the partners in their profit-sharing ratios, and continue letting the properties only as agents of the individual co-owners. The rental income was therefore not assessable as the firm's income, but as income in the hands of the partners as co-owners.

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Issues: Whether the 9 godowns ceased to be partnership assets under the dissolution deed dated 31-1-1979 without compulsory registration, and whether the income from letting out those godowns was assessable as the firm's income or as income from co-ownership in the hands of the partners.

Analysis: Sections 14 and 15 of the Indian Partnership Act, 1932 make the property of the firm and its application subject to contract between the partners. On the facts, the deed recorded a clear intention to exclude the godown section from the firm's assets, distribute the properties and liabilities among the partners in their profit-sharing ratios, and continue the letting activity only as agents of the individual co-owners. The adjustment of mutual rights among partners in respect of partnership property, where the same persons continued to hold the properties in their individual capacities in the same proportion, was treated as a contractual rearrangement of rights rather than a transfer requiring registration under section 17(1)(b) of the Indian Registration Act, 1908. The income from the godowns was therefore not to be assessed as firm income, but in the hands of the partners as co-owners.

Conclusion: The exclusion of the godowns from the firm's assets was effective without registration, and the rental income was assessable as co-ownership income in favour of the assessee.

Final Conclusion: The appeal succeeded because the deed validly altered the character of the godown properties from partnership assets to jointly owned assets of the partners, and the resulting rental receipts were not taxable as the firm's income.

Ratio Decidendi: Where partners, by mutual contract, exclude property from the firm's assets and merely adjust their respective rights without creating a fresh transfer to strangers, the transaction does not require compulsory registration and the income is assessable according to the altered ownership character.

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