Dissolution of Partnership and Immovable Property
Dissolution of Partnership and Immovable Property
In this article, I examine the treatment of immovable property of a partnership firm, in view of various dissolution scenarios.
- Statutory Framework
Section 14 of the Partnership Act, 1932 (“Partnership Act”) talks of the property of the firm, which include property (a) brought in by the partners, and (b) acquired by or for the firm, for its business (including the goodwill of the business). In this regard, unless stated otherwise, any property acquired from funds of the firm shall be deemed to have been acquired for the firm.
Section 48 of the Partnership Act talks of settlement of accounts upon dissolution of the firm. For the purposes of this article, sub-section (b) talks of assets of the firm, and that upon paying (i) debts of the firm, (ii) the partners, (what they are due for advances as distinguished from capital, and on account of capital. Thereafter, the residue will be divided among the partners in proportion to the profit sharing ratio.
Section 54 of the Transfer of Property Act, 1882 talks of sale, that transfer of immovable property having value of Rs 100 or more shall need to take place by a registered instrument.
Article 41 (C) of Schedule IA of the Indian Stamp Act, 1899 provides for stamp duty applicable on an instrument of dissolution of the partnership firm where ‘property which belonged to one or more partners when the partnership commenced, is distributed/allotted/given to other partner(s)” shall be stamped at 5% of the market value of the property distributed/allotted/given to the partner(s) under the instrument of dissolution, in addition to any duty chargeable on such dissolution if such property had not been distributed/allotted/given.
- Analysis
Section 14 is a clear-cut provision allowing partners to bring properties into the firm. This is validated by various judicial pronouncements, including that of the Supreme Court in Sunil Siddharthbhai vs Commissioner of Income Tax, Ahmedabad, Gujarat. It holds that when rights are transferred from the partner to the firm, the partner does not lose his exclusive interest, instead it becomes a shared interest, with the other partners of the firm. This does not trigger registration, in terms of Section 17 of the Registration Act,1908.
Further, in regard to property, there has been a judicial pronouncement by the High Court of Bombay, which states that “Upon dissolution of the partnership, all partners are entitled for their respective shares in the property of partnership as owners. Therefore, there is no question of sale between the partners but the same is distribution of their own property.”
The corollary to this, should be that upon dissolution of the firm, the distribution of property among the remaining partners may not trigger registration, in terms of Section 17 of the Registration Act,1908.
However, this may not be the case.
In a judicial pronouncement by the High Court of Kerala, in the matter of ‘State of Kerala and others v. V.D. Vincent’ held that the only a valid deed, duly registered can convey the title over immovable property, i.e., only dissolution of partnership does not convey title to immovable property, and only a formal transfer of the title in immovable property through a registered deed of conveyance is recognized under law.
Partners cannot seek a right which is superior than what they obtained, through the dissolution deed. As per the provisions Section 54 of the Transfer of Property Act, 1882, to gain absolute title, rights and interest in an immovable property, then such formal conveyance of the title in the immovable property should take place either in the deed of dissolution or through a deed of conveyance that is recognized in law.
A dissolution deed however only recognizes and allocates the rights of the partner, to his share of the assets, and it, in and of itself, “does not confer on the said partner a right to obtain a mutation of the property in his name”. Consequently, the High Court of Kerala held that “only a valid deed, duly registered, can convey the title over immovable property to the writ petitioners, and it is only thereafter that they can seek a transfer of registry in respect of the said items of immovable property”.
Further, the stamp act also contemplates the computation of stamp duty for an instrument of dissolution in respect of immovable property, to be stamped on the market value of the property.
- CONCLUSION
All partnerships firms need to be mindful of the treatment of their assets, upon dissolution. Immovable Property cannot be transferred through a non-registered document, including dissolution deed. To effect such transfer, they may consider providing for a transfer under the dissolution deed and procuring its registration, in accordance with the provisions of the Registration Act, 1908.
State of Kerala and others v. V.D. Vincent WA No. 1082/2018