ORDER
V. Rajagopalan, Judicial Member
1. This appeal is filed by the assessee against the order of the Commissioner (Appeals) dismissing the appeal preferred against the order of the ITO for the assessment year 1975-76 (year ending 31-3-1975).
2. The firm of Chittalur Pedda Venkata Subbaiah & Co., Nandyal, was carrying on business in iron, etc., at Nandyal, having been constituted under a deed of partnership dated 5-4-1957. This firm was registered under the Income-tax Act, 1961 (‘the Act’), and the registration was continued up to and inclusive of the assessment year 1974-75. For the assessment year 1975-76, being the year under appeal, the continuation of the registration was applied for in Form No, 12. The ITO observed that the firm had stopped doing any business since long and the only income of the firm was rents received from houses owned by it. Observing further that the collection of rents did not amount to the carrying on of business, he held that the firm did not carry on any business during the accounting year under appeal. He, therefore, held that the assessee-firm was not entitled to the benefit of registration for the assessment year 1975-76 under appeal. He, however, determined the status of the assessee as an AOP. The ITO also brought to tax the net income from house property of Rs. 26,425. The ITO also computed the long-term capital gains in respect of the sales of properties of the firm on the basis of sale proceeds received as per sale deeds executed in the accounting year, though registered later. He computed the long-term capital gains at Rs. 1,86,941. The assessee appealed to the Commissioner (Appeals) and contended before him that there was no justification for treating the assessee as an AOP. It was pointed out that the firm did not cease to exist merely because the business was discontinued, that realising business assets and payments of business liabilities would constitute carrying on business by the firm and that even if the business of the firm was discontinued, the assessment of the total income of the firm should be made as if no such discontinuance had taken place. The Commissioner (Appeals) found from the records that Chittalur Pedda Venkata Subbaiah & Co. was a firm dealing in iron and hardware, constituted on 5-4-1957 ; that it continued to carry on the business till December, 1970, when as noted in the assessment order for 1972-73 the firm stopped doing business on account of pressure from creditors and from the assessment year 1972-73 onwards the only income of the assessee was under the head “House property” and a small amount receivable on account of return of annuity deposits, that in the meanwhile the partner Shri C. Satyanarayana, filed a suit for dissolution of the firm in the court of the Fifth Additional Judge, City Civil Court, Hyderabad, in O.S. No. 43 of 1974 and the court appointed on 7-3-1974 Shri S. Sreerama Reddy, Advocate, Hyderabad, as receiver to realise the assets of the firm and the partners and to discharge the liabilities and pay the balance into the court ; that in pursuance thereof the receiver sold certain properties during the accounting year ended 31-3-1975 and hence for the assessment year 1975-76 there were also capital gains assessable to tax. The Commissioner (Appeals) observed that it was clear from the records, particularly the assessee’s letter dated 31-1-1978 addressed to the ITO in the course of the assessment proceedings for the year 1975-76, as also from the finding of the ITO in the assessment order for 1972-73 that the firm had discontinued business under pressure from its creditors as early as December, 1970, that the receiver came to be appointed long afterwards on 7-3-1974 and that the warrant of appointment of receiver made it clear that the receiver was not authorised to carry on business but was only authorised to realise the assets for the purpose of liquidating the firm. The Commissioner (Appeals), therefore, held that there was no merit in the contention of the assessee that the assessee should be treated as having carried on the business during the year under appeal. The Commissioner (Appeals) also observed that as per the principles laid down by the Calcutta High Court in the case of Sunil Krishna Paul v. CIT [1966] 59 ITR 457, the contention of the assessee that even if the business was discontinued, the assessment of the total income of the firm shall be made as if no such discontinuance had taken place cannot be accepted. The Commissioner (Appeals) then considered another contention raised on behalf of the assessee to the effect that even assuming that the assessee should be treated as an AOP, the income from property and capital gains should have been assessed in the hands of the partners individually and not in the hands of the AOP. The Commissioner (Appeals) was of the view that Section 26 of the Act would apply to the case only if the respective shares of the individual members in the properties were definite and ascertainable and that in this case it was not possible to say that the shares of the partners in the properties were definite and ascertainable. Taking the view that partners would be entitled to share the surplus, if any, of the assets of the firm after liquidation of the liabilities, he held that it cannot be said that the partners had any claim for specific shares in the house property in question. He, therefore, rejected this contention. The Commissioner (Appeals) also rejected another contention taken on behalf of the assessee to the effect that the assessee did not derive any gain on sale of properties as the proceeds were distributed to the creditors and no surplus remained with the firm after the distribution was made. The assessee has come on further appeal before us against the said order of the Commissioner (Appeals).
3. The learned counsel for the assessee, Shri A. Satyanarayana, with his usual ability, urged before us the contention, viz., that both the income from house property and the capital gains should have been assessed in the hands of the three partners individually after the dissolution of the firm. He pointed out that the firm of Chittalur Pedda Venkata Subbaiah & Co., which comprised of the following three partners : C. Pedda Venkata Subbaiah, C. Sreeramulu and C. Satyanarayana, was a partnership at will, that partner Shri C. Satyanarayana had filed a suit for the dissolution of the firm in the court of 5th Additional Chief Judge, City Civil Court, Hyderabad, in O.S. No. 43/1974, and that the court appointed a receiver on 7-3-1974, and that, therefore, there was a dissolution of the firm on the date of filing of the above suit. He referred to Section 43(1) of the Indian Partnership Act, 1932 (‘Partnership Act’), and the following rulings in support of his stand-Sathappa Chetty v. S.N. Subrahmanyan Chetty AIR 1927 PC 70, Manohar Lal Motilal [1974] 76 PLR 251 (Punj. & Har.) and Radha Kanta Pal v. Benode Behari Pal AIR 1934 (Cal.) 444.
The learned counsel urged that the income from property belonged to the firm and after the dissolution of the firm there would be no AOP in regard to such income. In this connection he referred us to the ruling of the Andhra Pradesh High Court in the case of Deccan Wine & General Stores v. CIT [1977] 106 ITR 111. He also referred us to the ruling of the Kerala High Court in the case of CIT v. TV. Suresh Chandran [1980] 121 ITR 985. He then referred to Section 43 and pointed out that after dissolution the residue of the property that belonged to the firm should be divided among the partners in the proportions in which they are entitled to share the profits. He also referred to the ruling of the Supreme Court in the case of Malabar Fisheries Co. v. CIT [1979] 120 ITR 49 in support of his submission. On behalf of the revenue, the learned departmental representative, Shri N. Santhanam, besides supporting the orders of the lower authorities, submitted that Section 26 would not apply to the facts of this case. He referred to the rulings of the Supreme Court in Malabar Fisheries Co. (supra). He pointed out that in the absence of a specification of the shares of the partners in the properties, Section 26 would not be attracted. He submitted that even otherwise there was an AOP in this case. He referred to the following rulings-CIT v. Indira Balkrishna [1960] 39 ITR 546 (SC), N.V. Shanmugham & Co. v. CIT [1971] 81 ITR 310 (SC), CIT v. Laxmidas Devidas [1937] 5 ITR 584 (Bom.), CIT v. Krishna Reddy [1962] 46 ITR 784 (AP) and Dwarakanath Harischandra Pitale In re [1937] 5 ITR 716 (Bom.).
He also referred to the ruling of the Andhra Pradesh High Court in the case of Deccan Wine and General Stores (supra) and submitted that at least there was a BOI in this case. The learned departmental representative further submitted that in any case the Tribunal should give a direction regarding the status in which the assessee should be assessed. In this connection he referred to the ruling of the Punjab and Haryana High Court in the case of Mongol Ram Hazari Mai v. CIT [1968] 67 ITR 788. In reply the learned counsel for the assessee submitted that he is giving an undertaking to the effect that the three partners of the erstwhile firm would file their returns, offering for assessment their individual shares in the income from the property under consideration and also in the capital gains under consideration for the year under appeal before the ITO concerned.
4. We have considered the rival submissions. It is common ground that the assessee-firm was not carrying on any business during the accounting year relevant to the assessment year under appeal. In fact the ITO had assessed the income from house property under the head “Income from house property” and not as income from business. The ITO had likewise computed the long-term capital gains separately. Therefore, we are of the opinion that the authorities below have correctly held that the firm of Chittalur Pedda Venkata Subbaiah & Co. was not entitled to the continuation of the registration for the assessment year under appeal. However, we are unable to agree with the finding of the authorities below that the income from house property and the income from long-term capital gains is assessable in the hands of the erstwhile partners of the said firm as an AOP. The above firm was constituted under a deed dated 5-4-1957. The learned counsel for the assessee placed before us an agreed English translation of the above deed of partnership which is in Telugu. As per the said deed, Chittalur Pedda Venkata Subbaiah, C. Satyanarayana and C. Sreeramulu had entered into a contract of partnership to carry on the business in iron, etc., at Nandyal, on and from 2-4-1957, under the name and style of, Chittalur Pedda Venkata Subbaiah & Co. and they had agreed to share the profits of the business in equal shares. The above deed did not provide for the duration of the partnership. Therefore, the said partnership was a partnership at will. It is also common ground that partner No. 2, viz., C. Satyanarayana, held filed a suit before the Fifth Additional Chief Judge, City Civil Court, Hyderabad, in O.S. No. 43/1974 in January, 1974. The said partner had filed a suit against the other two partners and the firm and the chief prayer in that suit was as under :
For the dissolution of the 1st defendant firm and for accounting by appointing a receiver to liquidate the immovables, to realise the assets, to discharge the liabilities and to account for the shares of the plaintiff.
In IA No. 110 of 1974 passed in that suit, the Fifth Additional Judge, City Civil Court, by order dated 7-3-1974 had appointed Shri S. Sreeram Reddy, Advocate, as receiver for the purpose of taking charge of the assets and accounts of the firm of Chittalur Pedda Venkata Subbaiah & Co., to liquidate the immovables into cash and to realise all the assets, to ascertain the debts and after discharging the liabilities to pay the balance into court. The learned counsel for the assessee, as pointed out earlier, had urged that on the filing of the above suit there was a dissolution of the above firm in accordance with Section 43 of the Partnership Act. This submission of the learned counsel is well-founded. Section 43(1) provides that where the partnership is at will the firm may be dissolved by any partner giving notice in writing to all the other partners of his intention to dissolve the firm. In Banarsi Das Kundanlal v. Kanshi Ram AIR 1963 SC 1165, the Supreme Court referred to Section 43(1) and 43(2) of the Partnership Act and observed that the firm could be dissolved as from the date mentioned in the notice as the date of dissolution or, if no date is so mentioned, as from the date of communication of the notice. The Supreme Court, therefore, observed that the date of the service of summons accompanied by a copy of the plaint cannot be regarded as the date of dissolution of the partnership and Section 43 of the Partnership Act would be of no assistance. However, the Supreme Court proceeded to observe that even assuming that the term “notice” in the above provision was wide enough to include within it a plaint filed in a suit for dissolution of partnership, Sub-section (2) of Section 43 of the Partnership Act itself provides that the firm will be deemed to be dissolved as from the date of communication of notice. The Supreme Court, therefore, stated that it would follow that a partnership would be deemed to be dissolved when the summons accompanied by a copy of the plaint was served on the defendant where there is only one defendant, and on all defendants where there are several defendants. The Supreme Court held that since the partnership would be deemed to be dissolved only from one date, the date of dissolution would have to be regarded to be the one on which the last summons was served. Since in the case before it the Supreme Court was not clear about that date, it held that the High Court was in error in holding that the suit was barred by time. In the above judgment the Supreme Court had no doubt left the matter open as regards the date of dissolution of a partnership at will on the mere filing of a suit. However, in further observations referred to above, to the effect that the partnership would be deemed to be dissolved from the date on which the last summons were served, would seem to indicate that the Supreme Court was inclined to take the view that a partnership at will would stand dissolved on the service of the summons on the defendant. In the instant case, a receiver had been appointed by the City Civil Court, as pointed out above, on 7-3-1974, which clearly indicates that the summons had been served on the parties before that date. The Privy Council in the case of Sathappa Chetty v. S.N. Subrahmanyan Chetty (supra) had laid down the proposition that filing a plaint in a suit for dissolution would put an end to the partnership at will. The Punjab and Haryana High Court in the case of Manohar Lal (supra) had referred to another decision of the Privy Council in Ram Singh v. Ram Chand AIR 1924 PC 2 to the effect that a partnership at will can be dissolved at the instance of any of the partners and that Section 43 of the Partnership Act provides that any partner may dissolve a partnership at will by merely serving a notice of his intention to do so on all other partners. The Punjab and Haryana High Court in Manohar Lal’s case held at page 254 of the above volume as under :
It is also well-settled that even if no such notice is given, a partnership at will is automatically deemed to have been dissolved with effect from the date on which a partner of such a firm files a suit for its dissolution.
In the instant case, as pointed out earlier, the suit in O.S. No. 43/1974 was specifically filed by one of the partners against the other partners of the firm praying for the dissolution of the firm and for accounts, etc. The Calcutta High Court in the case of Radha Kanta Pal (supra) had held that the institution of the suit in the case of a partnership at will operates as dissolution thereof. Respectfully following the above rulings, we hold that there was a dissolution of the firm of Chittalur Pedda Venkata Subbaiah & Co. in January 1974 when the suit was filed by partner Shri C, Satyanarayana. It is common ground that all the properties under consideration, both in regard to the income from property as well as in regard to the computation of capital gains, were acquired by the firm after it was formed. Under Section 48 of the Partnership Act, in settling the accounts between the partners on dissolution in the absence of the contract to the contrary, the residue after settling the items in Clause (a) and the items (i) to (ii) of Clause (b) of Section 48 had to be divided among the partners in the proportions in which they were entitled to share profits. As already pointed out, there was no contract to the contrary regarding the mode of settlement of accounts in the deed of partnership. As per the deed of partnership, the three partners should divide the profits equally. It, therefore, follows that in the properties under consideration also the three partners were entitled to equal shares. As laid down by the Supreme Court in Addanki Narayanappa v. Bhaskara Krishnappa AIR 1966 SC 1300, which is referred to in the later decision in Malabar fisheries Co. (supra), during the subsistence of the partnership no partner can deal with any portion of the property as his own but upon the dissolution of the firm every partner is entitled to a share in the assets of the firm which remain after satisfying the liabilities set out in Clause (a) and Sub-clauses (i), (ii), (iii) of Clause (b) of Section 48 of the Partnership Act. The question that now arises is whether the partners of a dissolved firm would constitute an AOP. On this point the entire case law was discussed by the Andhra Pradesh High Court in the case of Deccan Wine & General Stores (supra). At page 117, the Andhra Pradesh High Court observed that an AOP would not mean any and every combination of persons, that it was only when they associated themselves in an income-producing activity that they became an AOP and that they must combine to engage in such an activity. It was also pointed out that the engagement must be pursuant to the combined will of the persons constituting the association. It was stressed that production of income alone was not enough. In the absence of a common design there could be no AOP. It was also pointed out that the expression “body of individuals” cannot be so widely intepreted as to include a combination of individuals who merely receive income jointly without anything further, as in the case of co-heirs inheriting shares. It was further pointed out that though the term “body of individuals” would be wide enough to include a “combination of individuals” which has unity of interest but who are not actuated by a common design, yet it is necessary that one or more of whose members should produce or help to produce income for the benefit of all. In the instant case, on the suit in O. S. No. 43/1974 filed by one of the partners for dissolution of the firm, as pointed out above, a receiver has been appointed to take charge of the properties and to realise the income from the property, to sell the properties, etc., as per the extract of the authorisation given to the court receiver mentioned by the court above. There was no combination, association or common design of the erstwhile partners for earning the income from property. On the other hand, the receiver appointed by the order of the court was in receipt of the income in which the partners had shares in accordance with the profit-sharing ratio mentioned in the partnership deed, which was equal. We are, therefore, clearly of the opinion that the income from property and the capital gains arising out of the properties sold by the receiver appointed by the court could not be assessed in the status of an AOP. The properties under consideration, after dissolution, belonged to the three partners of the firm in the same proportions, viz., equal proportions, in which they shared the profits of the erstwhile firm. In such a situation Section 26 would clearly apply. According to Section 26 where property consisting of buildings is owned by two or more persons and their respective shares are definite and ascertainable, such persons should not in respect of such property be assessed as an AOP, but the share of each such person should be assessed in their hands by computing the income from property in accordance with Sections 22 to 25. The learned counsel for the assessee, as pointed out earlier, has undertaken to file the returns of income by the respective three partners, offering for assessment their share in the income from house properties as well as capital gains. We, therefore, hold that the assessment of the income from house property and the capital gains made in the hands of an AOP in this appeal is not sustainable in law. We, accordingly, delete the same.
5. In the result, the appeal is allowed.
