New Delhi: The Supreme Court has dismissed an appeal against a Andhra Pradesh High Court order directing sale of a dissolved partnership firm's land by public auction, holding that an outgoing partner who dissolved a partnership at will is entitled to the value of his share in the firm's immovable assets as prevailing on the date of the final decree, and not as frozen on the date of dissolution, and that the remaining partners could not continue to use the dissolved firm's property through a reconstituted firm without settling his share.
The Bench of Justice Ujjal Bhuyan and Justice Vipul M. Pancholi was hearing a civil appeal filed by two partners of the erstwhile firm M/s Viraj Constructions against the judgment of the High Court dated 09.04.2012, which had allowed a civil revision petition filed by the legal representative of the original plaintiff and directed sale of the firm's land through an advocate Commissioner for distribution of the plaintiff's twenty-five percent share of the sale proceeds.
The dispute traced back to a partnership at will constituted in 1964 for carrying on construction works with the Railways, in which the plaintiff's father held a twenty-five percent share. Having found it unable to continue, he issued a notice of dissolution to the other partners in 1983 and instituted a suit for rendition of accounts. A trial court decree, later modified by the High Court, held that the accounts of the firm had to be rendered to him up to 18.10.1983, the date on which the firm stood dissolved.
During final decree proceedings, the remaining partners, who had continued to run the business through a reconstituted firm using the same land at Begumpet, Hyderabad, contended that the plaintiff's entitlement was limited to the value of his share as it stood on the date of dissolution in 1983, and that he was not entitled to the benefit of any subsequent appreciation in the value of the property. The plaintiff's side maintained that his right to receive the value of his share in the assets would continue to subsist until the passing of the final decree, and that the property had to be valued as on the date of assessment by the Commissioner appointed to sell it.
Counsel for the appellants, relying on the Supreme Court's decisions in Addanki Narayanappa v. Bhaskara Krishtappa, Pamuru Vishnu Vinodh Reddy v. Chillakuru Chandrasekhara Reddy, and the Madras High Court's ruling in N. Muhammad Ussain Sahib v. S.N. Abdul Gaffoor Sahib, argued that a partner who has severed his connection with a firm cannot be permitted to take advantage of a subsequent increase in the value of its assets, and that the cut-off date fixed in the preliminary decree was meant to govern valuation for the final decree as well.
Rejecting this contention, the Court examined the scheme of Sections 46 and 48 of the Indian Partnership Act, 1932, and held that on dissolution, a partner's right is two-fold: to have accounts settled up to the date of dissolution, and to receive his proportionate share in the surplus of the firm's assets after liquidation and discharge of liabilities. The Court held that the cut-off date of 18.10.1983 fixed in the preliminary decree was relevant only for ascertaining profits and losses of the business and had no bearing on the valuation of the residue of the firm's assets, which remained the plaintiff's right until the final decree was passed.
The Court further held that a partnership firm is not a distinct legal entity and that its property belongs jointly to all partners in proportion to their shares. It observed that upon dissolution, the remaining partners had no right to continue using the firm's assets through a reconstituted business unless they either purchased the outgoing partner's share by mutual agreement or the assets were liquidated and the proceeds distributed among all partners as per Section 48 of the Partnership Act. Retention of the land by the reconstituted firm without settling the plaintiff's share was accordingly held to be impermissible.
The Court also found merit in the High Court's reasoning that compelling the plaintiff to accept the 1983 value of the property, more than three decades after dissolution, would be inequitable and impractical, and that no partner could be permitted to appropriate the benefit of appreciation in the value of jointly owned assets to the exclusion of an outgoing partner.
Upholding the High Court's directions for public auction of the land through the advocate Commissioner, and distribution of twenty-five percent of the sale proceeds to the plaintiff's legal representative after discharge of the firm's liabilities, the Supreme Court dismissed the appeal and vacated all interim stay orders, while leaving open the option for the appellants to purchase the property at auction and distribute the proceeds among the erstwhile partners as per their shares. There was no order as to costs.
Case Title: V. Sumitra Reddy & Anr. vs. K. Ranganadha Reddy & Ors., Civil Appeal No. 8167 of 2017
