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Synopsis

The Supreme Court recently said that when the separate property of an individual partner is brought in at the time of forming a partnership firm, it becomes the property of the partnership firm by virtue of Section 14 of the Partnership Act.

A bench of Justices Sudhanshu Dhulia and Ahsanuddin Amanullah found no scope for interference in the Allahabad High Court's judgment dated March 9, 2022.

The high court rejected a plea that ownership rights or interest in a property cannot be transferred by way of a relinquishment deed and can only be done through the modes of transfer defined in the Transfer of Property Act, i.e., sale, mortgage, exchange, or gift.

As per the facts of the matter, Bhairo Prasad Jaiswal purchased a plot in Faizabad in 1965, and in 1971, he entered into a partnership deed with his brother Hanuman Prasad Jaiswal in 1972 to build a hotel there. Thus, a partnership firm, M/s Alka Raje, was constituted, and a building was jointly constructed. In 2005, Bhairo passed away, and a new partnership deed was executed. In 2017, Hanuman Prasad sought to retire, and a new partner was inducted into the firm.

In October 2018, Bhairo’s son sought to take over possession of the hotel on the ground that it was built on the land acquired by his father. The respondents filed a civil suit, and the trial court decreed that the respondents were the sole owners in possession of the property and that the appellants had no right, interest, or title in it.

The trial court also said Bhairo had relinquished all rights, interest, and title in the property in favor of M/s Hotel Alka Raje and that Bhairo's successor would have no share in the property.

In the first appeal, the high court held that the partnership firm would be the owner in possession of the property, having rights, title, and interest.

Before the apex court, the appellants contended that ownership rights or interest in a property cannot be transferred by way of a relinquishment deed and can only be done through the modes of transfer defined in the Transfer of Property Act, i.e., sale, mortgage, exchange, or gift.

The court decided to examine whether the high court was correct in passing the clarifications and, secondly, whether the high court erred by not considering the appellant’s contention that the transfer of title over the property could not have taken place through a relinquishment deed.

The high court held that a bare perusal of Section 14 of the Partnership Act indicates that any property brought into the stock of the firm becomes the firm’s perpetual property. In the high court’s opinion, the hotel constructed by late Bhairo Prasad Jaiswal on the property he had bought in 1965 was his contribution to the firm. Thus, the property was brought into the stock of the firm and became the ‘property of the firm’ as per Section 14 of the Partnership Act.

Having heard counsel for the appellant and reviewed the record, the bench said, "We are in complete agreement with the High Court on this aspect. The High Court based its order on an interpretation of Section 14 of the Partnership Act and taking into consideration the fact that it was an admitted position that the property was contributed by late Bhairo Prasad Jaiswal to the partnership firm."

The court pointed out that the law on this point is settled—separate property of an individual partner can be converted into partnership property.

From a perusal of the record, the court noted that late Bhairo Prasad Jaiswal first acquired the property in 1965 and, after constituting the partnership firm (respondent No. 1) in 1972, jointly constructed a building over the property with his brother and partner, Hanuman Prasad Jaiswal. Pursuant to this, the building was constructed to be run as a hotel.

"This leaves no room for any doubt that late Bhairo Prasad had brought the property in question to the stock of the partnership firm as his contribution to the same," the bench said.

In fact, this was precisely the reason that prompted the high court to clarify that the decree rendered by the trial court ought to be read in favor of the partnership firm—respondent No. 1 alone—as opposed to being read in favor of the firm along with the other three partners, i.e., respondent Nos. 2 to 4, because the property became the firm’s property at the very moment late Bhairo Prasad Jaiswal started constructing the hotel on his land after constituting the partnership, the bench said.

"The evidence of his intention to contribute the land and the building of ‘Hotel Alka Raje’ is quite clear," the court opined.

With these findings, there was no occasion for the high court to separately address the contention put forth by the appellant regarding relinquishment and its legal aspects, the court observed.

Dismissing the appeal, the bench said, "We therefore see no reason to take a view different from that of the High Court in this regard. There is absolutely no scope for our interference with the order of the High Court, in the exercise of our jurisdiction under Article 136 of the Constitution of India."

Case Title: Sachin Jaiswal Versus M/s Hotel Alka Raje & Other