Partner's Contribution Becomes Firm's Asset, Legal Heirs Have No Ownership Claim : Supreme Court
The Hon’ble Supreme Court, in the case of Sachin Jaiswal v. M/s Hotel Alka Raje & Others, reaffirmed the principle that any contribution made by a partner to a partnership firm becomes the firm's property as per Section 14 of the Partnership Act, 1932. The Court clarified that neither the partner nor their legal heirs would have an exclusive right over the firm’s property after the partner’s death or retirement, except for their share in the profits in proportion to their contribution to the partnership firm.
Transfer of Property to a Partnership Firm
The Supreme Court emphasized that no formal document is required to transfer a property to a partnership firm when a partner contributes it as capital. The transfer occurs automatically by virtue of the partner’s contribution. However, the Court noted that a relinquishment deed could be executed to formalize the transfer of property to the partnership firm, though it is not mandatory.
Case Background
A bench comprising Justices Sudhanshu Dhulia and Ahsanuddin Amanullah heard the matter, wherein the legal heirs of a deceased partner of the partnership firm claimed ownership of a hotel property, arguing that the deceased partner had personally acquired the property before the formation of the firm. The appellants contended that the property, originally acquired by their father, should not have been transferred to the partnership firm.
On the other hand, the respondents (the partnership firm and its partners) filed a suit seeking a declaration of title and a permanent injunction against the appellants. The Trial Court ruled in favor of the partnership firm, a decision subsequently upheld by the High Court. The High Court clarified that the property belonged to the partnership firm and not to any individual partner or their legal heirs, prompting the legal heirs to appeal to the Supreme Court.
Supreme Court’s Observations
The Supreme Court, affirming the High Court’s decision, relied on Section 14 of the Partnership Act, 1932, stating that once property is brought into the partnership stock, it becomes the firm’s property unless a contrary intention is proven. The Court noted that Bhairo Prasad Jaiswal had contributed the land and building to the partnership firm, and the construction of a hotel on the land was clear evidence of his intent to make the property part of the firm’s assets.
Rejecting the appellant’s claim, the Court held that once the property became the firm’s asset, the legal heirs of the contributing partner had no claim over it. The Court also cited Addanki Narayanappa v. Bhaskara Krishnappa (1966), which affirmed that property contributed to a partnership becomes the firm’s property, denying any exclusive rights to the contributor.
Ruling on Relinquishment Deed
The Supreme Court upheld the Madras High Court’s ruling in The Chief Controlling Revenue Authority v. Chidambaram (1970), which held that a partner’s intent alone is sufficient to convert individual property into partnership property, even without a formal document. Thus, the Court rejected the appellant’s argument that a relinquishment deed was insufficient for the property’s transfer to the partnership firm.
Conclusion
On examining the facts of the case, the Court noted:
“It is apparent from a perusal of the record that late Bhairo Prasad Jaiswal first acquired the property in 1965 and then, after constituting the partnership firm (respondent No. 1) in 1972, he jointly constructed a building over the property with his brother and partner, Hanuman Prasad Jaiswal. The building was intended to operate as a hotel, leaving no doubt that the property was contributed to the firm as capital.”
The Court further clarified that the Trial Court’s decree should be read in favor of the partnership firm alone, rather than in favor of both the firm and its individual partners. Given the clear evidence of Bhairo Prasad Jaiswal’s intention to contribute the land and the hotel building to the firm, the Supreme Court dismissed the appeal, affirming that the property belonged solely to the partnership firm.