TaxTMI 
TaxTMI 
2026 (9) TMI 747
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....etition No. 1554 of 2011 filed by the first respondent. 2. The issue involved pertains to the share of the first respondent in the assets of the partnership firm on its dissolution. Pertinently, the issue centers around the interpretation of the provisions of Sections 46 and 48 of the Indian Partnership Act, 1932 (briefly 'the Partnership Act' hereinafter) in the context of Sections 7 and 43 thereof. 3. At the outset, relevant facts may be noted. 4. In the year 1964, the following persons constituted a partnership firm under the name and style of M/s Viraj Constructions: (1) Kasireddy Lakshmi Narayana Reddy, (2) Vallappareddy Sundara Ram Reddy, (3) Vardhireddy Mohan Krishna Reddy, (4) Vallappareddy Kodanda Ram Reddy, and (5) Vallappareddy Sumitra Reddy. 4.1. Be it stated that Kasireddy Lakshmi Narayana Reddy is the father of the first respondent and the plaintiff in the original suit. Vallappareddy Sundara Ram Reddy is the father-in-law and father of appellant Nos. 1 and 2 i.e. Vallappareddy Sumitra Reddy and Vallappareddy Raja Gopal Reddy. Appellant No. 1 herself is the fifth partner of the aforesaid partnership firm. 5. ....
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....promissory note dated 17.07.1970. Partners of the partnership firm contested the suit taking the stand that the partnership firm was not dissolved. Consequently, Kasireddy Lakshmi Narayana Reddy did not retire and continued to be a partner of the partnership firm. Therefore, he was not entitled to any of the reliefs sought for in the suit. 10. Additional District Judge, Nellore vide the judgment and decree dated 04.05.1979 dismissed O.S. No. 128 of 1975, agreeing with the contentions advanced on behalf of the defendants. The consequence of such dismissal of the suit would mean that the partnership firm continued to remain in existence and Kasireddy Lakshmi Narayana Reddy did not retire from the partnership firm. 11. Kasireddy Lakshmi Narayana Reddy thereafter preferred a first appeal against the judgment and decree dated 04.05.1979 which was registered as ASSR No. 90685 of 1979 before the High Court. However, vide the order dated 02.11.1983, the first appeal was dismissed as not pressed. Thus, the judgment and decree dated 04.05.1979 passed in O.S. No. 128 of 1975 became final and binding between the parties. 12. In the meanwhile, on 15.10.1983, Kasireddy Lakshmi Narayana ....
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....ent of accounts, from 01.04.1970 onwards till the date of realization; 5. the suit as against defendant No. 7 is dismissed; 6. defendant No. 7 shall bear his own costs of the suit; and 7. defendant Nos. 1 to 6, 8 and 9 to pay to the plaintiff a sum of Rs. 4,788.00 towards costs of the suit. 15. Feeling partly aggrieved by the preliminary decree dated 06.11.1995, the plaintiff i.e. Kasireddy Lakshmi Narayana Reddy preferred a first appeal before the High Court which was registered as CCCA No. 52 of 1999. The defendants i.e. the appellants herein preferred cross objection. 16. The High Court vide the order dated 28.03.2001 disposed of CCCA No. 52 of 1999 as well as the cross objection by modifying the preliminary decree dated 06.11.1995 in the following manner: As the partnership is at will, under Section 43 of the Partnership Act, soon after the partner has expressed his willingness to dissolve the partnership firm, after giving notice, the partnership firm M/s. Viraj Constructions was dissolved on 18.10.1983 and the defendants 1 to 6, 8 and 9 are liable to render the accounts to the plaintiff towards his share upto 18.10.1983 and if any amo....
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....or appointment of an advocate as a Commissioner to sell the property whereas defendant Nos. 4 and 5 filed another interlocutory application before the said court being IA No. 892/2005 for appointment of a chartered accountant or a person who is well versed in accounts as the Commissioner for determining the value of the share of the plaintiff as on 18.10.1983 in the dissolved partnership firm. The City Civil Court dismissed the interlocutory application filed by the defendants and allowed the interlocutory application of the plaintiff vide the order dated 25.07.2006. City Civil Court held that the preliminary decree had not limited the right of the plaintiff to receive the value of his share as on 18.10.1983 in the assets of the dissolved firm and that his rights will exist till passing of the final decree. 23. Feeling aggrieved by the order dated 25.07.2006 passed in IA No. 655/2003, the defendants filed CRP No. 3825/2006 before the High Court. 24. Assailing the above order dated 25.07.2006 passed by the City Civil Court in IA No. 892/2005, defendants also filed CRP No. 4063 of 2006 before the High Court which was dismissed at the admission stage on 13.10.2006. The special l....
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.... parties come to an understanding, the plaintiff may also take 25% of the land towards his share instead of selling the property for the purpose of distribution of the same out of the sale proceeds among the partners .... 25.2. In view of the aforesaid findings, CMA No. 1485 of 2004 came to be allowed and CRP No. 3825 of 2006 was dismissed. 26. Thereafter, the plaintiff filed I.A. No. 541 of 2009 before the trial court under Order VII Rule 7 CPC and Section 47 of the Partnership Act for a direction to the advocate Commissioner to sell the land in question and to pay 25% of the sale proceeds to him after discharging the liabilities of the partnership firm, towards his share, while passing the final decree. 27. However, the trial court accepted the plea of the defendants that all that the plaintiff was entitled to receive is the value of the partnership assets assessed as on 18.10.1983 and that he is not entitled to insist on the sale of the property and receive 25% of the sale proceeds. Accordingly, the trial court dismissed I.A. No. 541 of 2009 vide the order dated 28.04.2010. 28. In the meanwhile, the original plaintiff Kasireddy Lakshmi Narayana Reddy died, and the fi....
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....e business by constituting a new firm. 31.2. In O.S. No. 1601/1983 instituted by the plaintiff for rendition of accounts, a preliminary decree dated 06.11.1995 was drawn by the City Civil Court holding that the plaintiff is entitled to 25% out of 100% capital amount of the partnership firm and that the defendants were liable to render accounts to the plaintiff upto 31.03.1970 with plaintiff entitled to claim interest at the rate of 12% per annum on whatever amount found due to him following rendition of accounts. 31.3. The preliminary decree was partially modified by the High Court vide the order dated 28.03.2001 to the extent that the defendants were liable to render accounts to the plaintiff upto 18.10.1983 i.e. the date when the partnership firm stood dissolved. 31.4. Plaintiff initiated final decree proceedings which were ultimately carried to the High Court. Vide the impugned judgment and order dated 09.04.2012, the High Court opined that the landed property should be valued by the advocate Commissioner as on the date when he assesses the value and accordingly directed the advocate Commissioner to sell the asset by public auction and to deposit the sale proceeds befor....
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.... Addanki Narayanapppa Vs. Bhaskara Krishtappa AIR 1966 SC 1300; (ii) Pamuru Vishnu Vinodh Reddy Vs. Chillakuru Chandrasekhara Reddy (2003) 3 SCC 445; (iii) N. Muhammad Ussain Sahib Vs. S.N. Abdul Gaffoor Sahib AIR 1950 Mad 758. 31.9. He submits that the principles that can be culled out from the above decisions are fully applicable to a dissolved partnership at will too. The plaintiff who dissolved the partnership way back in 1983, now cannot be allowed to take advantage of the appreciation in the value of the landed assets. 31.10. He, therefore, submits that the impugned judgment and order of the High Court cannot be sustained and should be set aside and quashed with the further direction that the plaintiff (respondent No. 1) would be entitled to the commensurate share of the partnership as on the date of dissolution i.e. 18.10.1983. 32. In response, learned counsel for the first respondent also referred to the factual background of the case and submits that appellants in the final decree proceedings had raised two objections as to the entitlement of the plaintiff (respondent No. 1) in the context of the preliminary decree: (i) plaintiff is not ....
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....tion i.e. 25 percent share of the plaintiff in the immovable property be restricted to the value of the property prevailing as on 18.10.1983, learned counsel submits that appellants (defendant Nos. 4 and 5) had filed I.A. No. 892 of 2005 for appointment of a Commissioner to determine the value of the share of the plaintiff in the partnership firm as on 18.10.1983. The City Civil Court vide the order dated 25.07.2006 held that the plaintiff's right exist till the passing of the final decree and that his share in the firm including in the immovable property cannot be restricted to 18.10.1983. 32.5. The revision filed by the appellants against the aforesaid order dated 25.07.2006 came to be rejected by the High Court vide the order dated 13.10.2006 in CRP No. 4063 of 2006. The special leave petition filed by the appellants challenging the aforesaid order of the High Court was dismissed by this Court on 05.01.2007. 32.6. In the above backdrop, it is contended on behalf of the plaintiff (respondent No. 1) that it is not open to the appellants to re-agitate that the valuation of the plaintiff's share in the immovable property should be restricted to the date on which the firm stood....
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....rship Act has been enacted to define and amend the law relating to partnership. Section 4 defines 'partnership' to mean the relation between persons who have agreed to share the profits of a business carried on by all or any one of them acting for all. The persons who have entered into partnership with one another are individually called 'partners' and collectively a 'firm'. 38. Section 5 declares that relation of partnership arises from contract and not from status. 39. A partnership firm is not a legal entity, like a company. It continues to exist as a group of individual partners. The firm name is only a compendious name given to the partnership and the partners are the real owners of the assets. In other words, the partnership property belongs to all the partners constituting the partnership firm. If a partner contributes property to the partnership, it does not remain the property of the partner but becomes the property of all the partners constituting the partnership. All the partners would have interest in that property as part of the assets of the partnership in proportion to their shares. 40. Section 7 deals with 'partnership at will'. Since this provision has som....
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.... as per sub-section (1) of Section 43, where the partnership is at will, the firm may be dissolved by any partner by giving notice in writing to all the partners of his intention to dissolve the firm. As per sub-section (2), the firm is dissolved from the date mentioned in the notice as the date of dissolution or, if no date is so mentioned, from the date of communication of the notice. 43. Section 44 provides for dissolution of a partnership firm by the court. It says that at the instance of a partner, a civil suit may be filed, and the court may dissolve a partnership firm on any of the grounds mentioned in the said provision. Amongst the various grounds, a partnership firm can also be dissolved by a civil court on any other ground which renders such dissolution just and equitable. 44. This brings us to the core provisions i.e. Sections 46, 47 and 48. Section 46 says that on the dissolution of a firm, every partner is entitled, as against all other partners, to have the property of the firm applied in payment of the debts and the liabilities of the firm and to have the surplus distributed amongst the partners according to their rights. Needless to observe, a partner include....
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.... agreement by the partners. 47. Let us now deal with some of the case laws relied upon by the parties. 48. In N. Muhammad Ussain Sahib, Madras High Court was considering the question that upon dissolution of the partnership, whether the book value of the assets should be taken for assessing profit and loss of the partnership or whether the market value of those assets should be considered in arriving at the profits. 48.1. The above question arose in the following factual context. The partnership in question was commenced on 01.01.1937. A period of ten years was fixed as the duration of the partnership. The articles of partnership provided for annual settlement of accounts and the method of settling those accounts. The settlement proceeds on the basis of the book value of the assets and not on the real value. On 05.12.1942, the partnership was dissolved. A suit was instituted by one of the erstwhile partners for rendition of accounts and for a share of the profits. A preliminary decree was passed by consent on the basis of which a Commissioner was appointed to go into the accounts and to submit his report to the court. 48.2. It was in the above context that the question ....
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....eath of a partner, his share in the partnership property is to be treated as money and not as land. The Bench endorsed the view that for the purpose of the Partnership Act and irrespective of any mutual agreement between the partners, the share of each partner is his proportion to the partnership assets after they have been all realised and converted into money, and all the partnership debts and liabilities have been paid and discharged. 50. Chillakuru Chandrasekhara Reddy is a 2-Judge Bench decision of this Court wherein the question for consideration was, what would be the relevant date for the purpose of ascertaining the value of the share of the plaintiff in the partnership firm? Whether it would be the date of retirement of the partner from the partnership firm or the date on which the Commissioner made the valuation of the share of the partner? 50.1. After referring to various provisions of the Partnership Act and the facts of that case, this Court observed that the plaintiff partner had retired from the partnership firm on 05.04.1971 after selling his share in the partnership firm. Once he had retired from the partnership firm, he had no right to claim any further shar....
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....tinued to carry on its business as a partnership firm because when there are only two partners and one has agreed to retire, then such a retirement would amount to dissolution of the firm. 52. Let us now sum up our analysis of the case law. 52.1. Madras High Court in N. Muhammad Ussain Sahib was dealing with a partnership which had a fixed duration of existence. It was a case of dissolution of the partnership. The question was, upon dissolution of the partnership, whether the book value of the assets should be taken for assessing the profit and loss of the partnership or whether the market value of those assets should be considered in arriving at the profits? The High Court held that upon dissolution of the partnership or in a case where a partner retires, the settlement of his account should not be on a notional basis. It must be on a real basis. In other words, every asset of the partnership should be converted into money and the account of each partner settled on that basis. In that context, the High Court clarified that post retirement of a partner he is not entitled to take advantage of the appreciation of the value of the assets of the partnership. 52.2. In Adanki Na....
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.... share out of 100 ps. capital amount of the partnership and directed the defendants to render the accounts for payment to the plaintiff his share of the partnership up to 31.03.1970 with the condition that if defendants failed to do so, plaintiff would be at liberty to petition the trial court for a final decree by way of appointment of a Commissioner for settlement of accounts. The trial court further held that plaintiff would be entitled to interest at the rate of 12 percent per annum on the amount found due to be paid to the plaintiff till the date of realization. 55.1. In appeal before the High Court at the instance of the plaintiff (defendants also preferred cross objection), the High Court passed order dated 28.03.2001 disposing of the appeal as well as the cross objection by modifying the preliminary decree dated 06.11.1995 by holding that the plaintiff is entitled to seek rendition of accounts from the defendants till the date of dissolution of the firm i.e. 18.10.1983; since the partnership is at will, the moment the plaintiff as a partner expressed his willingness to dissolve the partnership firm after giving notice, the partnership firm stood dissolved on 18.10.1983 r....
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....01.2009. The High Court set aside the review order dated 26.04.2004 and held that once there is a preliminary decree in favour of the plaintiff for ascertaining the profit of the firm on verification of the accounts rendered by the other partners, value of the movable and immovable properties of the partnership firm has to be ascertained. If the other partners do not pay the share of the plaintiff, the properties would have to be sold and the sale proceeds would have to be distributed rateably as per the respective shares of the partners. The High Court further held that the Commissioner was entitled to take over possession of the property and in fact had taken over possession of the land in question. The High Court directed that the Commissioner has to take steps to get the value of the property assessed. On determination of the value of the property, the plaintiff should be paid 25 percent of the value of the property after deducting the liabilities, if any. If that is not done, the property has to be sold to realize the amount for the purpose of distribution of shares. The High Court put in a caveat that if the parties come to an understanding, the plaintiff may also take 25 per....
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....dation of the assets of the partnership firm is, therefore, a necessary step towards payment of the shares of each partner in the partnership assets. 57.1. The High Court also held that the right of the partner on the dissolution of the partnership firm is to receive the profits till dissolution and to receive the value of the assets in proportion to his share after settlement of accounts. The preliminary decree passed by the trial court as modified by the High Court needs to be understood accordingly. The profits or losses in the business of the partnership firm should be ascertained as on 18.10.1983. The significance of referring to this date is limited to ascertainment of profits and losses alone and it has no relevance to the right of the partners to receive the value in the residue of the assets. 57.2. With the dissolution of the partnership firm, all its assets have to be necessarily liquidated unless any one or more partners of the dissolved firm come forward to pay the market value of the share of the remaining partners/all partners in lieu of liquidation with the consent of the remaining partner or partners. The reconstituted firm has no right whatsoever to utilize t....
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....his share as on 18.10.1983 in the assets of the dissolved firm and that his rights will exist till passing of the final decree. 59. In the judgment and order of the High Court dated 30.01.2009, Section 48(b) of the Partnership Act and the provisions of Order XL Rule 1(b) CPC were examined whereafter the High Court directed that the Commissioner has to take steps to get the value of the property assessed. After determining the value of the property, the other partners may come forward to pay 25 percent of the value of the property to the plaintiff after deducting the liability, if any. The properties can be left with the defendants after satisfying the share of the plaintiff. Otherwise, the property has to be sold to realize the amount for the purpose of distribution. If the parties come to an understanding, the plaintiff may also take 25 percent of the land towards his share instead of selling the property for the purpose of distribution of the sale proceeds amongst the partners. 60. We are of the considered opinion that the decision rendered by the High Court in its impugned judgment and order dated 09.04.2012 is in accordance with law. It is pragmatic and equitable as well.....