Introduction:
Dissolution of a partnership firm entails closure of the business of the partnership, settlement of books and accounts of the partnership and distribution of the surplus property (i.e. remaining property of the partnership after settlement of debts and liabilities of the firm) among partners as per their respective shares in the partnership firm.
On dissolution of a firm, the assets belonging to the partnership are settled in the manner stipulated under Section 48 of the Indian Partnership Act, 1932 (“Partnership Act”). Dissolution of a partnership firm can be effectuated by virtue of an arbitration award or by mutual settlement between the partners (i.e. a deed of dissolution). Since every instrument which creates, declares, assigns, limits or extinguishes any right, title or interest to or in immovable property must be compulsorily registered as per Section 17(1) of the Indian Registration Act, 1908 (“Registration Act”), a pertinent question may arise on whether registration of a deed of dissolution or an arbitration award is mandatory when immovable property belonging to a partnership firm is involved?
Analysis:
This question has been addressed by the Supreme Court and relevant High Courts, in its various judgments[1] as stated below:
(a) a firm has no legal existence under the Partnership Act and the partnership property will, therefore, be deemed to be held by the partners for the business of the partnership. The whole concept of a partnership is to embark upon a joint venture and for that purpose to bring in money or even property (including immovable property) as capital. Once that is done, whatever is brought in would cease to be the exclusive property of the person who brought it in and would be the trading asset of the partnership in which all partners would have interest in proportion to their share in the joint venture of the business of the partnership.
(b) on dissolution of the partnership firm, accounts are settled among partners and the assets of the partnership are distributed among partners as per their respective share in the firm and such distribution does not amount to a sale as ‘sale’ according to its ordinary meaning is a transfer of property for a price, and adjustment of the rights of partners in a dissolved firm is not a transfer, nor is it for a price.
(c) in case of distribution of assets by way of an arbitration award, such award does not require registration under Section 17 of the Registration Act since it does not transfer or assign interest in any asset.
Thus, (i) the consequence of distribution or division of allotment of assets after dissolution is nothing but a mutual adjustment of rights between the partners i.e. the assets, which before the dissolution of the firm belonged to each partner, and will after dissolution of the firm stand allotted to the partners individually and (ii) there is no transfer of assets involved even in the sense of extinguishment of the firm’s rights in the assets when distribution takes place upon dissolution of the firm.
Conclusion:
Based on the various judicial precedents, we can conclude that distribution of immovable property among individual partners as per their respective share in the firm upon dissolution of a partnership firm, does not tantamount to a ‘transfer’ and nor does it entail creation of right, title and interest in the immovable property and accordingly the instrument recording such distribution will not require registration under Section 17 of Registration Act.
For further information, please contact:
Hiral Motta, Partner, Cyril Amarchand Mangaldas
hiral.motta@cyrilshroff.com.
[1] Synthetic Suppliers v Commissioner of Sales Tax, Mumbai – (2010) 30 VST 632;
Jai Rattan Bhalla v. Puri Investments – 2011 SCC OnLine Del 5560;
Addanki Narayanappa and Others v. Bhaskara Krishtappa and Others – AIR 1966 SC 1300;
Madhya Pradesh, Nagpur and Bhandara v. Dewas Cine Corporation – AIR 1968 SC 676;
CIT v. Bankey Lal Vaidya – 1971 (1) SCC 355; and
- Khadervali Saheb and Others v. N. Gudu Sahib and Others – (2003) 3 SCC 229.
