The present case is a civil appeal in the High Court of Kerala, by the State of Kerala and its Revenue Officers, against the decision of single bench judge of high Court of Kerala. The respondents in this case have appealed in the Supreme Court, but its judgement has not been yet pronounced. This case determines the position of distribution of immovable property according to the Indian Partnership Act, 1932. This judgement takes into consideration many precedents, regarding registration of property, before its distribution among partners during the time of dissolution of partnership. The division bench overrules the precedents and pronounces that registration must be mandatory during distribution of property.

Partnership property and its nature

Property of a partnership can be the one brought in by the partners or the one acquired after commencement of partnership firm. Property also includes intangible property, i.e. the goodwill of the firm. It is an intangible asset of the partners. Section 14 of the Indian Partnership Act, 1932[2] defines what is included in the property of the firm. Property belonging to a partner can be brought into the partnership firm. But once it is brought into the firm, the property has to be used exclusively for the purpose of business of the firm. It is important to note that the status of partnership firm in India is similar to that of the English law. Partnership firm is not a separate legal entity, like a public or private ltd. company. It is given legal status for a limited purpose, like for taxation. So the property of the firm vests in all partners of the firm.

Once brought into the firm, all partners have equal right to use the property for business purpose. The actual owner no longer remains the owner of the property and does not possess exclusive right over the property. Partners cannot divide the property among themselves during the existence of the firm. On dissolution of the firm only, the property can be distributed among the partners.

Property owned by others can also be used for the business, only if there is expressed or implied agreement that the property would be used exclusively for the purpose of business. In case separate property of a partner has been consistently used in the business, it will be presumed that such property has been thrown in the common stock and has become the property of the firm.

Transfer of Property in partnership

In Sunil Siddharth v Commissioner of Income Tax[3], the Supreme Court held that in general sense, ‘Transfer of Property’ connotes passing of rights in the property from one person to another. Transfer of property has been defined under the section 5 of Transfer of Property Act 1882[4]. There can be three cases regarding the transfer of property in partnership.

In one case, there may be transfer of entire rights from the transferor to the transferee. In another case, the transfer may consist of one of the estates only out of all the estates, comprising the totality of rights in the property. In third case, there might be reduction in the exclusive rights of the actual owner into joint or shared interest with others. When a partner brings in his personal asset into the capital of the partnership firm as his contribution to the capital, he reduces his exclusive right in the asset to share it with other partners of the firm.

Property belonging to a partner as his personal property, in absence of any agreement, does not ipso facto become the property of the partnership, merely because it is used for the business of the partnership.[5]

Effect of Transfer

The evaluation of partner’s interest takes place only when there is a dissolution of the firm or upon his retirement from it. All separate properties, which the partners may have brought in the common stock as their contribution to the common business are parts of the partnership property. To bring an immovable property, is not prohibited either by Transfer of Property Act 1882 or Registration Act, 1908. Even if a property contributed by one partner be an immovable property, no document registered or otherwise, is required for transferring the property to the firm.

This view was held by Calcutta High Court in Prem Raj Brahmin v. Bhanti Ram Brahmin.[6] It was said that, registration is not required, by virtue of sections 14 and 16 of Indian Partnership Act and certain provisions of Indian Contract Act, They became properties of the firm as soon as the partners intended so.

Facts
The present case is a writ petition in the division bench of Kerala High Court against the judgement of single bench judge of Kerala High Court. The respondent in the present case is a partner at a registered partnership firm ‘Universal Builders and Developers’. The partners had brought their individual properties in the common stock of the firm. The firm had started functioning in 2010. One of the partners of the firm, Joseph died in 2011. In 2015, his wife Sabina was inducted in the firm and a new partnership deed was made and the firm was registered on 22nd December 2015.

The new firm was dissolved after 70 days, on 1stMarch 2016. During the process of dissolution, the properties brought in by the partners during the formation of partnership, got exchanged amongst them. When the partners approached the revenue officers for getting done the transfer of registry of the property obtained by them, the same was refused by the revenue officers. The single judge ruled in favour of the partners and ordered the revenue officers to transfer the registry. The State of Kerala and its revenue officers approached the division bench of the High Court seeking reversal of the judgement of single judge bench.

Issue raised
The issue raised in the present case was whether the title of the property of a partnership firm on its dissolution can be transferred to its actual owner, without its registration under the section 17 of Registration Act, 1908.

Procedural History
In this case, the learned single judge bench relying on various precedents pronounced an order, compelling the revenue officers of state of Kerala to transfer the respective properties of the partners, based on the evidence provided by the dissolution deed. The court relied on M/s.Malabar Fisheries Co. v. The Commissioner of Income-tax[7], Kerala and N. Khadervali Saheb (Dead) By LRS. And Another v. N. Gudu Sahib (Dead) and Others[8].

It was held that, though the partnership firm is not a separate legal entity, the property brought in by the partners is used exclusively for the purpose of business. So, once a partner brings his property in the firm for business purpose, he can no longer treat the property as his own. By referring to George V.J. and Others v. V.V. George and Others[9] and S.V. Chandra Pandian and Others v. S. V. Sivalinga Nadar and Others[10], it was held that as per the registration Act, no registration of property is required to bring the property for the use of business. As no registration was required to bring the property in the firm, at first place, so no registration needs to be done at the time of dissolution of the firm.

The division bench of the Kerala High Court relied on various judgements and reversed the judgement of the single judge bench. The appellant state contended that according to the section 5 of Transfer of Property Act , which defines transfer of property, the term ‘living person’ includes a partnership firm and so while transferring its property to the partners, it is treated as a living person. Under the section 17 of the Registration Act, registration of non-testamentary documents is compulsory. And so, while transferring the property, the dissolution deed itself is not sufficient, registry of property is also required.

The judges referred the case of Addanki Narayanappa and another v. Bhaskara Krishtappa.
In Addanki Narayanappa and Another v. Bhaskara Krishnappa[11], the Supreme Court held that once immovable property is brought in a partnership firm, it will cease to be a trading property of the individual and would be treated as the property of the firm. He would get from time to time, his share in the profits of the firm and on dissolution or on his retirement, would get the value of his share in the net partnership assets, till the date of dissolution or retirement, after deduction of liabilities and prior assets.

In S.V. Chandra Pandian and Others v. S.V. Sivalinga Nadar and Others, it was held that on dissolution of the firm, the partner is entitled to get his share of profits, only after settling the accounts of the firm as mentioned in section 48 of the Indian Partnership Act 1932. After settling the accounts, the partners are entitled to get share of the residue. But while receiving it, they would receive it in form of movable property, i.e. cash. So it would not attract section 17 of Registration Act. According to the section 48 of the Indian Partnership Act 1932, after selling the assets of the partnership firm, the liabilities need to discharged first and then the remaining portion need to be distributed among the partners in their profit sharing ratio. Once the assets are sold, they are converted into the movable property i.e. cash and hence the section 17 of Registration Act does not apply.

In Ratan Lal Sharma v. Purshottam Harit, one of the issues was regarding registration of property of the firm under the registration act. The case was decided by arbitration and the arbitral award was confirmed by the single judge bench of Delhi High Court. The judge held that allotment of shares of immovable property to a partner does not require registration under the registration act. But in the arbitration award, it specifically made exclusive allotment of property of the partnership. So, create right in immoavble property worth about Rs. 100, registration under Section 17 of Indian Registration Act, 1908 ought to be done.

Judgement
The judges held that in the present case the dissolution deed merely allocates the immovable property to the partners. The case would have been different had the property of the partners been allotted to the original owners. The judges said that the dissolution deed does recognize the interest of the partner concerned in the assets of the dissolved firm, but the partners are seeking rights superior than what they obtained through the dissolution deed. They seek absolute right over the property allocated to them. But according to the provision of Transfer of Property Act and Transfer of Registry rules, absolute right over the property can be granted to them only through formal conveyance of title by deed of dissolution or deed of conveyance recognized by the law. Thus the court set aside the judgement of single judge bench and ordered that transfer can be done only after registration of property.

Analysis
The researcher agrees with the judgement of the division bench if the Kerala High Court. Registration is indeed very important. Earlier, when personal property was brought into partnership firm, registration was not required. As it was not mandatory, it was used as a way to evade taxes. The property was brought in the firm without making sale deed and paying registration fee and stamp duty. As there was no sale deed, capital gains tax was evaded by the partner. In the Income Tax act 1961, according to section 47 (ii) distribution of assets after dissolution of firm was not considered to be transfer an so, no capital gains tax was imposed. After amendment in the Income tax act, by Finance Act 1987, this section was deleted and section 45 (3)[14] was inserted. Accordingly contribution made by partner in form of capital assets was made subject to capital gains tax. The amount credited to the partner’s account was considered as consideration received by him. Also section 45 (4)[15] was inserted and accordingly, assets distributed on dissolution were also made subject to capital gains tax. Thus the loop hole regarding tax evasion was solved.

Also, unless a property is registered under the Registration Act, the ownership of the property cannot be transferred. The Registration Act, 1908, was enacted with the intention of providing orderliness, discipline and public notice in regard to transactions relating to immovable property and protection from fraud and forgery of documents of transfer.[16]The registry acts as a proof of ownership. Registration of property after its allotment to the partners would in turn be useful for the partners. Once the property is registered, no one can make any claim over the property of another. In the present case, the properties of the partners have been exchanged amongst themselves. So, if ownership is transferred to them directly through the dissolution deed, some dispute may arise in future regarding its ownership. In case of a dispute, one will not have any rights on the property if it is not registered in one’s name.

Conclusion
The researcher thus concludes that the judgement given by the division bench of Kerala High Court is correct in the circumstances of the present case. Registration of property would leave no doubt over the owner of the property. As the properties have been exchanged among the partners, it would be appropriate if the registration is done before transfer of title of the property.

Many of the previous cases, regarding the registration of property after dissolution of partnership have been overruled in the present judgement, due to the reason that the properties have been exchanged among the partners.


End-Notes:

1. State Of Kerala V. V.D.Vincent, WA No. 1082/2018
2. Section 14 -THE PROPERTY OF THE FIRM- Subject to contract between the partners, the property of the firm includes all property and rights and interest in property originally brought into the stock of the firm, or acquired, by purchase or otherwise, by or for the firm for the purposes and in the course of the business of the firm, and includes also the goodwill of the business. Unless the contrary intention appears, property and rights and interest in property acquired with money belonging to the firm are deemed to have been acquired for the firm.
3. Sunil Siddharth v Commissioner of Income Tax, 1986 AIR 368, 1985 SCR Supl. (3) 102.
4. Section 5 “Transfer of property” defined In the following sections “transfer of property” means an act by which a living person conveys property, in present or in future, to one or more other living persons, or to himself, 2[or to himself] and one or more other living persons; and “to transfer property” is to perform such act. 2 [In this section “living person” includes a company or association or body of individuals, whether incorporated or not, but nothing herein contained shall affect any law for the time being in force relating to transfer of property to or by companies, associations or bodies of individuals.]
5. C.L. Gupta, ‘Law of Partnership’, p.194.
6. Prem Raj Brahmin v. Bhanti Ram Brahmin, ILR (1964) 1Cal 191.
7. M/s.Malabar Fisheries Co. v. The Commissioner of Income-tax, 1980 AIR 176, 1980 SCR (1) 696
8. N. Khadervali Saheb (Dead) By LRS. And Another v. N. Gudu Sahib (Dead) and Others, (2003) 3 SCC 229.
9. V.J. and Others v. V.V. George and Others, SA.No. 339 of 2001.
10. S.V. Chandra Pandian and Others v. S. V. Sivalinga Nadar and Others, 1993 SCR (1) 58, 1993 SCC (1) 589.
11. Addanki Narayanappa and Another v. Bhaskara Krishnappa, AIR 1966 SC 1300
12. Ratan Lal Sharma v. Purshottam Harit , 1974 AIR 1066, 1974 SCR (3) 109.
13. Documents of which registration is compulsory.—(l) The following documents shall be registered, if the property to which they relate is situate in a district in which, and if they have been executed on or after the date on which, Act No. XVI of 1864, or the Indian Registration Act, 1866, or the Indian Registration Act, 1871, or the Indian Registration Act, 1877, or this Act came or comes into force, namely 1) instruments of gift of immovable property;
    2)other non-testamentary instruments which purport or operate to create, declare, assign, limit or extinguish, whether in present or in future, any right, title or interest, whether vested or contingent, of the value of one hundred rupees and upwards, to or in immovable property.
14. The profits or gains arising from the transfer of a capital asset by a person to a firm or other association of persons or body of individuals (not being a company or a co- operative society) in which he is or becomes a partner or member, by way of capital contribution or otherwise, shall be chargeable to tax as his income of the previous year in which such transfer takes place and, for the purposes of section 48, the amount recorded in the books of account of the firm, association or body as the value of the capital asset shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset.
15. The profits or gains arising from the transfer of a capital asset by way of distribution of capital assets on the dissolution of a firm or other association of persons or body of individuals (not being a company or a co- operative society) or otherwise, shall be chargeable to tax as the income of the firm, association or body, of the previous year in which the said transfer takes place and, for the purposes of section 48, the fair market value of the asset on the date of such transfer shall be deemed to be the full value of the consideration received or accruing as a result of the transfer.]
16. Suraj Lamp and Industries Pvt. Ltd. versus State of Haryana and Another, AIR 2012 SC 206.