*1* kps IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION SALES TAX REFERENCE NO.8 OF 2003 IN REFERENCE APPLICATION NO.34 OF 1998 M/s Synthetic Suppliers. ..Applicant -Versus- The Commissioner of Sales Tax, Mumbai. ..Respondent ........... Mr.P.V.Surte i/b P.V.Surte & Company for the Applicant/Assessee. Mr.V.A.Sonpal, “A” Panel Counsel for the Respondent/Revenue. .......... CORAM : V.C.DAGA & K.K.TATED, JJ. {Closed for orders : 23rd April, 2010 Pronounced on : 06th May, 2010} JUDGMENT (Per K.K.Tated, J): 1 Heard the learned counsel for the rival parties. 2 This reference, at the instance of the Applicant/Assessee, is made by the 4th Bench of the Maharashtra Sales Tax Tribunal, Mumbai under Section 61(1) of the Bombay Sales Tax Act, 1959 vide its judgment dated 27th September, 2002 for the opinion of this Court on the following question of law :- Whether the transfer of motor car by the firm to its partners constitutes a “sale” under Section 2(28) of the Bombay Sales Tax Act, 1959 and therefore, liable to tax? FACTS 3 The few facts leading to this reference can be briefly summarized as under:- The Applicant is a partnership firm engaged in the *2* business of buying and selling yarn. The said partnership firm was dissolved on 29.12.1989. At the time of dissolution, all three partners executed a Dissolution Deed. The said firm was assessed for the period from 01.04.1989 to 29.12.1989 by the Sales Tax Officer by an order of assessment dated 15.03.1993. The Sales Tax Officer held that there was sale of car from the firm to its partner and taxed the transaction by raising a demand of Rs.28,040/- including interest charged under Section 36(3)(b) of the Bombay Sales Tax Act, 1959 (in short “the BST Act, 1959”). 4 Against the aforesaid order of assessment dated 15.03.1993, the Applicant-Assessee filed first appeal before the Assistant Commissioner of Sales Tax (Appeals), P-III, Mumbai who vide order dated 18.07.1994 partly allowed the said first appeal and redetermined the sale price of car at Rs.70,000/- in place of Rs. 1,06,935/- and determined the tax payable at Rs.10,190/- to which interest of Rs.8,500/- was added and the final amount of Rs. 18,690/- was demanded in place of Rs.28,040/-. 5 Being aggrieved by the order dated 18.07.1994, the Applicant-Assessee preferred the rectification application under Section 62 of the BST Act, 1959 before the Assistant Commissioner of Sales Tax (Appeals) on the ground that there cannot be a sale by the firm to its partner and that the car was taken over by the partner of the firm on dissolution of the firm. It was stated in the rectification application as under:- “With reference to your abovementioned client, your goodself has passed an appeal order having the abovementioned appeal number, vide order dt.16.09.1994, and the same is received by our client on 14.10.1994. After going through the same, we found that your goodself has decided in the order that, a *3* motor-car which was purchased by the firm from M/s Seva Automotive Pvt.Ltd., Vapi and transferred to one of the partners Shri Kamlesh Raichand Parekh, being Maruti Deluxe Car having its No.BLB-7419 at Rs.70,000/- is held by you in your order as a sale by the firm to its partner. In this respect, we would like to submit that if there is a transfer of asset from the firm to its partner then, it will not amount to sale hence, the car transferred by the firm to its partner and held by your goodself as a sale, is a mistake apparent from record.” 6 The Assistant Commissioner of Sales Tax (Appeals) vide order dated 20.03.1995 rejected the said rectification application holding that the car in question was sold by the firm to its partner. 7 Aggrieved by the aforesaid order dated 20.03.1995, the Applicant-Assessee filed the Second Appeal before the Maharashtra Sales Tax Tribunal, Mumbai which was registered as Second Appeal No.591/1995. In the said second appeal, the Applicant contended that there cannot be a sale by the firm to its partner. It was specifically contended that the Assistant Commissioner erred in determining the transfer of motorcar from the firm to its partner as a sale, which is not having any jurisdiction because as per the Sale of Goods Act there should be two parties, one a buyer and the other a seller. Since the firm and a partner are not two different entities, the motorcar transferred to the partner from the firm is not a transaction of sale. Hence, by treating the transaction as a sale by the Assistant Commissioner is itself a mistake apparent on record and hence, rectification application of the Applicant was wrongly not entertained by the Assistant Commissioner. 8 The said Second Appeal No.591/1995 was decided by *4* the 3rd Bench of the Tribunal vide judgment dated 07.03.1998 holding that there was no apparent mistake in the order passed by the Assistant Commissioner (Appeals) on rectification application. The Tribunal held that the the original order in first appeal passed by the lower Appellate Authority dated 18.07.1994 will hold the field and, therefore, confirmed the tax on motorcar at Rs.10,500/- and consequential interest under Section 36(3)(b) of the BST Act, 1959 at Rs.8,190/-. 9 Being aggrieved by the order dated 07.03.1998, the Applicant/Assessee filed Reference Application No.34/1998 before the 4th Bench of the Maharashtra Sales Tax Tribunal, Mumbai under Section 61(1) of the BST Act, 1959 and the Tribunal vide its judgment dated 27.09.2002 referred the above mentioned question of law for the opinion of this Court. DEFINITION OF SALE 10 Before considering the submissions of the parties, it is necessary to reproduce the definition of “sale” as appears under Section 2(28) of the BST Act, 1959 which reads thus:- ““sale” means a sale of goods made within the State for cash or deferred payment or other valuable consideration, and includes any supply by a society or club or an association to its members on payment of a price or of fees or subscription, but does not include a mortgage, hypothecation, charge or pledge; and the words “sell”, “buy” and “purchase”, with all its grammatical variations and cognate expressions, shall be construed accordingly. [Explanation- For the purpose of this clause, (a) a sale within the State includes a sale determined to be inside the State in accordance with the principles formulated in sub-section (2) of section 4 of the Central Sales Tax Act, *5* 1956 (LXXIV of 1956); (b) (i) every disposal of goods referred to in the Explanation to clause (11); (ii) a delivery of goods in hire-purchase or any system of payment by installments; (iii) the supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drinks (whether or not intoxicating, where such supply or service is made or is given on or after the 2nd day of February 1983, for cash deferred payment or other valuable consideration;] [(iv) the transfer, otherwise than in pursuance of a contract of property in any goods for cash, deferred payment or other valuable consideration; (v) the supply of goods by any unincorporated association or body of persons, to a member thereof for cash, deferred payment or other valuable consideration;] shall be deemed to be a sale;]” SUBMISSIONS 11 Mr.Surte, learned counsel appearing for the Applicant submitted that the motorcar was given to the partner as his share in the process of dissolution of firm and, therefore, the transaction does not amount to a sale. Placing on record an extract of balance sheet as well as the profit and loss account for the period from 01.04.1989 to 31.03.1990, Mr.Surte pointed out that the value of car was shown as Rs.41,650/- and the same was transferred to Mr.Kamlesh Parekh, a partner of the firm, for consideration of Rs. 70,000/-. He further pointed out from the extract of profit and loss account for the year 1988-1989 that the value of car was adjusted *6* by way of book entry only. According to him, there was no sale of car by the firm to its partner and therefore, the Sales Tax is not applicable in the present case. He further submitted that the Tribunal has erred in rejecting the contention of the Applicant that there was no sale because the firm and partners are one and same entity. He further submitted that the Applicant had placed on record the judgment in case of Commissioner of Sales Tax, M.P. vs. Khurana & Co. (46 STC 39(MP)) on an identical question of law, but the Tribunal distinguished the same by observing that it is no where stated before the Assistant Commissioner (Appeals) that Mr.Parekh was retiring and car was allotted to him in satisfaction of his claim. 12 Mr.Surte further submitted that in order to constitute a sale it is necessary that there should be an agreement between the parties for the purpose of transferring title to goods which of course pre-supposes capacity to contract, that it must be supported by money consideration and that as a result of the transactions, the property must actually pass in goods for consideration of money. In the present case, the Mr.Parekh received the car in consideration as a partner of the firm. In support of this submission, Mr.Surte relied on the judgment in the matter of Commissioner of Income Tax, U.P. Vs. Bankey Lal Vaidya reported in 79 ITR 594(SC) wherein the Apex Court held that the arrangement between the partners of the firm amounted to a distribution of the assets of the firm on dissolution, therefore, there is no sale or exchange of the partners’ share in the capital assets. Mr.Surte further placed reliance on the judgment in case of Commissioner of Sales Tax, M.P. Vs. Khurana and Company reported in 46 STC 39 (MP) in which the Madhya Pradesh High Court held as under:- *7* “The allotment of the property of a firm to a retiring partner in satisfaction of his claim to his share cannot be considered to be a transfer or sale of that property. Consequently, the assessee-firm which purchased timber at a concessional rate of tax on furnishing a declaration in form XII-A of the Madhya Pradesh General Sales Tax Rules, 1959 will not be liable to a penalty under section 8(2) of the Madhya Pradesh General Sales Tax Act, 1958, by transferring such timber without payment of any further tax to a partner who retired from the firm and started his own separate business.” 13 On the above mentioned submissions, Mr.Surte submitted that the question referred by the Tribunal needs to be answered in favour of the Applicant holding that the transfer of motorcar by the partnership firm in the name of its partner at the time of dissolution of the partnership firm does not amount to a sale as per the BST Act, 1959. PER CONTRA 14 Mr.Sonpal, learned “A” Panel Counsel appearing for the Respondent-Revenue submitted that the real controversy revolves around the issue: whether, there was transfer of motorcar from the firm to its partner as his share or whether there was a sale of motorcar by the firm to its partner? According to him, the fate of this issue depends upon the facts of individual case. If it is evident from the facts of case that the motorcar receipts are distributed among the partners of firm accounting to their respective share then it will be a case of transfer of asset from the firm to its partner and therefore, is not sale. But, if it is evident from the facts of case that the motorcar was sold to its partner for valuable consideration without considering the dissolution process then the same can be *8* considered as sale and is liable to tax. 15 Mr.Sonpal further submitted that the firm was dissolved as per the Dissolution Deed dated 29.12.1989. The asset (car) was valued at Rs.70,000/- and transferred to one partner Mr.Kamlesh Parekh by debiting his account for Rs.70,000/- by way of sale and his personal account was also credited by depositing the money from the Bank. Mr.Sonpal further submitted that in the profit and loss account, interest received was shown as Rs.11,103/-, moreover the profit by sale of car was shown at Rs.28,350/-. After considering the expenses made for the period of assessment, the net profit of Rs.4,067/- was transferred to each partners capital account. Thus, the profit received from the sale of car was distributed amongst the partners. He, therefore, submitted that this itself shows that there was transaction of sale and purchase and therefore, the provisions of the BST Act, 1959 are applicable in the present case. 16 Mr.Sonpal further submitted that the firm and partners are two different legal entities and there can be a sale by firm to its partner. In support of this submission, he relied on the judgment in case of State of Gujarat Vs. Patel Oil Mills reported in 91 STC 25 (Guj.) in which the Gujarat High Court held that under the Indian Partnership Act or under any other statute, there is no prohibition that the partnership firm cannot enter into a contract of purchase or sale of any goods with its partners. In that case only one can say that there is transaction of sale of goods between the partner and firm. 17 On the basis of the above mentioned submissions, Mr.Sonpal submitted that there is no substance in the contentions raised by the Applicant that the motorcar was given to the partner *9* by the firm as his share after dissolution of the firm; and therefore, the Tribunal was correct in confirming the order passed by the Assessing Authority. CONSIDERATIONS 18 We have heard both the sides at length. 19 The sole question for determination in this case is whether the sale tax is applicable on transaction which took place between the firm and its partner? 20 In the present case the transaction in respect of car took place during the period from 01.04.1989 to 31.03.1990. The partnership firm was dissolved by the Dissolution Deed dated 29.12.1989. The car was taken by one of the partner in lieu of his share in partnership firm. It is to be noted that the partnership firm under the Indian Partnership Act, 1932 is not a distinct legal entity apart from the partners constituting it and equally in law the firm as such has no separate right of its own in the partnership assets and when one talks of the firm’s property or firm’s assets in which all partners have a joint or common interest. If that be the position, it is difficult to accept the contention that upon dissolution of the partnership firm, the rights in the partnership assets are extinguished. 21 The firm has no separate rights in the partnership assets; the partners own jointly the common assets of the partnership and, therefore, the consequence of the distribution or division or allotment of the assets which flows to the partners upon dissolution after discharge of liabilities is nothing but a mutual adjustment of rights between the partners and there is no question of extinguishment of the firm’s rights in the partnership assets *10* within the meaning of Section 2(28) of the BST Act, 1959. Therefore, there is no transfer of assets involved even in the sense of any extinguishment of the firm’s rights in the partnership assets when distribution takes place upon dissolution of the partnership. 22 In the present case, the motorcar was transferred in the name of one of its partners in lieu of his share in the partnership firm in the proximity of the process of dissolution of the firm. 23 Whatever may be the character of the property which is brought in the partnership when the partnership is formed or which may be acquired in the course of business of the partnership, it becomes the property of the partnership firm and what a partner is entitled is his share of profit if any accrued from the partnership from the realization of the said property and upon dissolution of the partnership, his share in the money representing the value of property. Therefore, whenever there is dissolution of the partnership firm each partner gets his share in the profit and loss as well as in the property of the firm. 24 Whole concept of partnership is to embark upon a joint venture and for that purpose to bring in as capital money or even property including immovable property. Once that is done whatever brought in the partnership would cease to be exclusive property of a person who brought the property in partnership. It would be trading assets of the partnership in which all the partners would have interest in proportion to their shares. In the present case the car was purchased by the partnership firm and at the time of dissolution of the firm, the said car was taken up by the Applicant as his share in the partnership property. Therefore, this cannot be treated as a sale because in order to constitute a sale as defined under Section 2(29) of the BST Act, 1959 it is necessary that there *11* should be an agreement between the parties for the purpose of transferring title to goods which of course pre-supposes capacity to contract, that it must be supported by money consideration and that as a result of the transactions, the property must actually pass in goods. The Apex Court in the matter of State of Madras Vs. Gannon Dunkerley & Company (Madras) Ltd. reported in 9 STC 353 took a similar view. 25 The authorities cited by the learned “A” panel counsel on behalf of the Revenue are not applicable in the present case. The learned counsel for the Revenue relied on the judgment in the matter of Patel Oil Mills (supra). In this case, the Gujarat High Court held that there can be transaction of buying and selling of the goods by the partnership firm to its partner and the same can be covered by the definition of the word “sale”. In the present case, there is no question of sale of car by the firm to its partner. On dissolution of the partnership firm, the car was transferred to one of the partners for his consideration in the partnership assets. The learned counsel for the Revenue also relied on the judgment in the matter of Commissioner of Sales Tax, MP vs. Khurana and Company reported in 46 STC 39 (MP). In this case, the Madhya Pradesh High Court categorically held that the allotment of property of the firm to its retiring partner to the satisfaction of his claim to his share cannot be considered to be a transfer or a sale of that property. On the basis of these authorities, the Revenue cannot defeat the claim of the Applicant/Assessee in the present case. 26 Considering these facts it is difficult to hold that in the present case the transaction which took place about transfer of motorcar by the firm to its partner amounts to sale under the BST Act, 1959. Under the Indian Partnership Act, 1932 the property *12* which is brought into the partnership by the partners when it is formed or which may be acquired in the course of business of partnership, becomes the property of partnership and the partner is subject to any special arrangement between the partners entitled to his share, upon dissolution of the partnership, in the money representing the value of the property. 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. 27 In the above mentioned facts and circumstances of the case, it is not possible to hold that the transfer of motorcar by the firm to its partner constitutes a sale under Section 2(28) of the BST Act, 1959 and therefore, liable to tax. Therefore, the question referred herein above is answered in favour of the Applicant/Assessee and against the Respondent/Revenue. The reference is, accordingly, disposed of. (K.K.TATED, J.) (V.C.DAGA, J.)