Partnership property and co-ownership rules bar treating firm-owned immovable assets as partners' separate property for tax

Immovable property acquired with firm funds remained partnership property because mere book entries transferring the debit balance to partners' capital accounts did not divest the firm of title or convert the asset into personal property; a valid transfer of immovable partnership property requires compliance with the legal requirements governing such transfers. Income from that property was also not assessable under section 9(3) on a co-ownership basis because partners have no definite and ascertainable share in specific partnership assets during the subsistence of the firm, their interest being confined to the surplus on dissolution. The income was therefore held assessable in the hands of the firm.

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Issues: (i) Whether immovable property purchased with firm funds and entered in the firm's books ceased to be partnership property merely because of book adjustments transferring the debit balance to the partners' capital accounts; (ii) whether, even if the property remained partnership property, the income therefrom could be assessed in the hands of the partners under section 9(3) as income from property owned by co-owners with definite and ascertainable shares.

Issue (i): Whether immovable property purchased with firm funds and entered in the firm's books ceased to be partnership property merely because of book adjustments transferring the debit balance to the partners' capital accounts.

Analysis: Property acquired with money belonging to the firm is partnership property under the Indian Partnership Act, 1932, and is held and used exclusively for the purposes of the business. A partner's implied authority does not extend to transfer of immovable partnership property, and where such property is to be converted into the partners' personal property, the transfer must be effected in a manner consistent with the legal requirements governing immovable property, including registration where necessary. Mere entries in the books of account, without a proper instrument of transfer, do not divest the firm of title or convert the asset into the separate property of the partners.

Conclusion: The property did not cease to be partnership property; the book entries were ineffective to transfer ownership to the partners.

Issue (ii): Whether, even if the property remained partnership property, the income therefrom could be assessed in the hands of the partners under section 9(3) as income from property owned by co-owners with definite and ascertainable shares.

Analysis: Section 9(3) applies only where property is owned by two or more co-owners and their respective shares are definite and ascertainable. Partnership property is owned by the firm as such for business purposes, and during the subsistence of the partnership no partner has a definite share in any specific asset. A partner's interest is only in the surplus after the debts and accounts of the firm are settled on dissolution. The statutory conditions for section 9(3) were therefore absent.

Conclusion: The partners could not be assessed under section 9(3) on the footing of co-owners with definite and ascertainable shares.

Final Conclusion: The reference was answered against the assessee-firm on both questions, and the income from the property was held assessable in the hands of the firm.

Ratio Decidendi: Partnership immovable property does not become the partners' separate property by mere book entries; a partner has no definite share in specific partnership assets during the continuance of the firm, so section 9(3) does not apply.

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