Pamuru
Vishnu Vinodh Reddy Vs. Chillakuru Chandrasekhara Reddy & Ors [2003] Insc
88 (17 February 2003)
Shivaraj
V. Patil & K.G. Balakrishnan. Shivaraj V. Patil J.
The
few facts which are relevant and necessary for disposal of this appeal in brief
are that one Pamuru Rama Subba Reddy filed the suit O.S. No. 126 of 1976 for
dissolution and accounting of the partnership assets of the firm Vijay Mahal
Theatre. The defence set up to resist the suit was that the plaintiff and the
4th defendant retired from the firm in the year 1971 and, therefore, the
plaintiff was not entitled to seek dissolution of the partnership and the
settlement of the accounts. The suit was decreed. In the first appeal, the High
Court affirmed the findings of the trial court; however, set aside the decree
for dissolution of the firm and directed the defendants to pay the amounts due
to the plaintiff towards his share in the assets of the firm on valuation
without resorting to the sale of the assets of the firm. The High Court
directed the trial court to make an enquiry into the valuation and to decide
the date on which the valuation of the plaintiff's share shall be arrived at
taking into account that the plaintiff's share was not paid to him. Against the
said judgment of the High Court, special leave petition was filed before this
Court which was dismissed as withdrawn in 1987.
The
first defendant died during the pendency of the suit and defendants 7 to 11
were added as his legal representatives. M.Subbareddy to whom the share of the
plaintiff was said to have been transferred was impleaded as 12th defendant to
the suit as per the directions of the High Court. During the pendency of the
enquiry into the valuation of the plaintiff's share in the assets of the
partnership firm, the plaintiff died and his minor son Pamuru Vishnu Vinodh
Reddy, represented by his natural guardian was added as the legal
representative of the deceased plaintiff.
The
trial court, pursuant to the directions given by the High Court, appointed a
Commissioner for ascertaining the value of the share of the plaintiff as on the
date and also as on 5.4.1971. Thereafter, the son of the deceased plaintiff
(appellant herein) filed I.A. No. 270 of 1987 to decide the date on which the
valuation of the plaintiff's share was to be made before the Commissioner
proceeds to hold an enquiry as per the directions of the High Court. The
learned Addl. District Judge, after hearing the parties, allowed the said
application holding that the date on which the Commissioner values the property
was the relevant date to ascertain the valuation of the plaintiff's share in
the partnership firm. The 3rd defendant, being aggrieved by the said order,
filed a revision petition before the High Court. The High Court allowed the
revision petition, set aside the order of the learned Addl. District Judge and
held that the relevant date for the purpose of ascertaining the value of the
share of the plaintiff was the date on which he ceased to be a partner,
observing that if the latter date than the date on which the plaintiff ceased
to be a partner was taken for the purpose of ascertaining the value of his
share, it would confer unjustified windfall on the outgoing partner and it
would be inconsistent with the concept of retirement or expulsion. The son of
the original plaintiff who was the respondent no. 1 in the revision petition
before the High Court, aggrieved by the order made by the High Court, is before
this Court in this appeal challenging the validity and correctness of the
impugned order.
The
short question that arises for consideration in this appeal is as to which is
the relevant date for the purpose of ascertaining the value of the share of the
plaintiff in the partnership firm i.e. whether 5.4.1971 or the date on which
the Commissioner made the valuation of the share of the plaintiff.
Shri
M.N. Rao, the learned Senior Counsel on behalf of the appellant contended that
the High Court was not justified in reversing the order of the trial court
declaring that the date on which the Commissioner valued the property of the
partnership firm as the relevant date for ascertaining the value of the share
of the plaintiff in the firm; the High Court failed to appreciate that the
trial court had recorded a finding taking note of the observation of the
Division Bench judgment of the High Court dated 24.11.1983 passed in A.S. No.
481/79 to the effect that the trial court while deciding the relevant date for
ascertaining the value of the share of the plaintiff shall take into account
the fact that the value of his share had not been paid. He added that the High
Court by the said judgment dated 24.11.1983 had modified the decree of
dissolution of the partnership firm granted by the trial court only on the
ground of equity to allow the partnership firm to carry on its business and
granted the decree for accounting and also for the payment of value of
plaintiff's share of 25% in the said firm; in that view, the relevant date for
ascertaining the value of the share of the plaintiff can only be the date on
which the Commissioner valued the properties of the partnership firm. He
further submitted that the High Court committed an error in the impugned order
in holding that the plaintiff had admittedly retired from the partnership firm
on 5.4.1971, the date on which an agreement to sell his share was entered into
although neither the value of the share was ascertained nor was it paid till
date; the fact that the High Court in the judgment dated 24.11.1983 made in the
first appeal granted relief of rendering of accounts of partnership firm from
5.4.1971 till date itself clearly indicated that the plaintiff continued to be
partner of the firm.
It was
further submitted that the High Court ought to have appreciated that the share
of the plaintiff was being utilized by the partnership firm and had earned
profits and in such circumstances the relevant date for valuing the share of
the plaintiff should have been the date when the Commissioner ascertained the
value of the assets of the firm.
In
opposition, the learned counsel for the respondents made submissions in support
and justification of the impugned order supporting the same for the very
reasons recorded in the impugned order elaborating them and pointing out
certain factual aspects.
In
order to appreciate the rival contentions touching the controversy raised by
the parties, we feel it necessary to state few more facts as can be gathered
from the judgment of the High Court in A.S. No. 481/1979.
Partnership
with the plaintiff as per Exbt. B/7 was admitted in the written statement but
it was contended that the plaintiff and the 4th defendant gave up their shares
and retired from the partnership; the plaintiff transferred his share to M.Subbareddy
and the same was evidenced by Exbt. B/21 dated 5.4.1971; since Exbt. B/21 was
not filed before the income tax authorities, a fresh deed was executed on
9.11.1971 which was also attested by the plaintiff and the 4th defendant
wherein the wife of the second defendant was also taken as a partner; the
plaintiff denied the attestation of Exbts. B/21 and B/22; they were sent to the
expert; the trial court found that attestation of the two documents by the
plaintiff was proved but held that the plea set up by the defendants that the
plaintiff was paid his share and the account was settled was not accepted; in
that view, the trial court held that the plaintiff continued to be the partner
of the firm and consequently, decreed the suit for dissolution; the auditor who
was examined as DW-3 in the case was common for both the plaintiff and the
defendants; the High Court having considered both documentary and oral
evidence, concluded that the plaintiff had agreed to sell his share and the
agreement was binding on him and that it was affirmed twice both in Exbts. B/21
and B/22. The High Court affirmed the finding that no payment was made to the
plaintiff as agreed. It was also found that the plaintiff retired on 5.4.1971
with the consent of all the partners. The relevant portions of the said
judgment in A.S. No. 481/1979 read as under:- "Once we hold that the
retirement was obtained by consent of all partners Section 32(a) of the
Partnership Act is attracted and a retirement with the consent of all the other
partners can be effected without dissolution. The failure on the part of the
remaining partners to settle the accounts of the retiring partner would make
them liable for the decree for accounting ........... Hence we do not see any
infirmity in granting a decree for accounting including delivery of the share
of the plaintiff without dissolution of the firm as such.
In
fact we have adjourned the case to enable the parties to come to an agreement
regarding the value of the share of the plaintiff and also the amount due to
him towards profits. But since there is no agreement between the parties, we
have to proceed to our judgment.
.......................................
Hence
we have no hesitation to pass a decree for directing delivery of the share of
the plaintiff.
xx xx xx
xx xx xx xx xx xx xx xx xx xx Accordingly, we set aside the decree for
dissolution and direct a preliminary decree directing accounting against
defendants 1 to 5 from 5.4.1971 and also for the payment of the value of the
plaintiff's share of 25% in the suit firm. The Court below should determine the
value of the share of the plaintiff.
The
learned counsel for the plaintiff requested to give a direction regarding the
date on which the valuation of the plaintiff's share shall be arrived at.
However,
as we are directing the trial court to make enquiry into valuation, we shall
direct the trial court itself to decide date taking into account that his share
was not paid till now.
......................"
We think it necessary to notice Sections 32, 37 and 48 of the Indian
Partnership Act which read:- "32. Retirement of a partner –
(1) A
partner may retire,-
(a) with
the consent of all the other partners,
(b) in
accordance with an express agreement by the partners, or
(c) where
the partnership is at will, by giving notice in writing to all the other
partners of his intention to retire.
(2) A
retiring partner may be discharged from any liability to any third party for
acts of the firm done before his retirement by an agreement made by him with
such third party and the partners of the reconstituted firm, and such agreement
may be implied by a course of dealing between such third party and the
reconstituted firm after he had knowledge of the retirement.
(3)
Notwithstanding the retirement of a partner from a firm, he and the partners
continue to be liable as partners to third parties for any act done by any of
them which would have been an act of the firm if done before the retirement,
until public notice is given of the retirement:
Provided
that a retired partner is not liable to any third party who deals with the firm
without knowing that he was a partner.
(4)
Notices under sub-section (3) may be given by the retired partner or by any
partner of the reconstituted firm."
"37.
Right of outgoing partner in certain cases to share subsequent profits Where
any member of a firm has died or otherwise ceased to be a partner, and the
surviving or continuing partners carry on the business of the firm with the
property of the firm without any final settlement of accounts as between them
and the outgoing partner or his estate, then, in the absence of a contract to
the contrary, the outgoing partner or his estate is entitled at the option of
himself or his representatives to such share of the profits made since he
ceased to be a partner as may be attributable to the use of his share of the
property of the firm or to interest at the rate of six per cent per annum on
the amount of his share in the property of the firm;
Provided
that whereby contract between the partners an option is given to surviving or
continuing partners to purchase the interest of a deceased or outgoing partner,
and that option is duly exercised, the estate of the deceased partner, or the
outgoing partner or his estate, as the case may be, is not entitled to any
further or other share of profits; but if any partner assuming to act in exercise
of the option does not in all material respects comply with the terms thereof,
he is liable to account under the forgoing provisions of this section."
"48.
Mode of settlement of accounts between partners In settling the accounts of a
firm after dissolution, the following rules shall, subject to agreement by the
partners, be observed:-
(a)
losses, including deficiencies of capital, shall be paid first out of profits,
next out of capital, and, lastly, if necessary, by the partners individually in
the proportions in which they were entitled to share profits;
(b) the
assets of the firm, including any sums contributed by the partners to make up
deficiencies of capital, shall be applied in the following manner and order:-
(i) in
paying the debts of the firm to third parties;
(ii) in
paying to each partner rateably what is due to him from the firm for advances
as distinguished from capital;
(iii)in
paying to each partner rateably what is due to him on account of capital; and
(iv) the
residue, if any, shall be divided among the partners in the proportions in
which they were entitled to share profits."
Use of
the word 'retire' in Section 32 of the Act is confined to cases where a partner
withdraws from a firm and the remaining partners continue to carry on the
business of the firm without dissolution of partnership as between them. Where
a partner withdraws from a firm by dissolving it, it shall be dissolution and
not the retirement. Retirement of a partner from a firm does not dissolve it,
in other words it does not determine partnership inter se between all the
partners. It only severs the partnership between the retiring partner and
continuing partners, leaving the partnership amongst latter unaffected and the
firm continues with the changed constitution comprising of the continuing
partners. Section 32 provides for retirement of a partner but there is no
express provision in the Act for the separation of his share and the intention
appears to be that it would be determined by agreement between the parties. Section
37 deals with rights of outgoing partners. Although the principle applicable to
such cases is clear but at times some complicated questions arise when disputes
are raised between the outgoing partner or his estate on the one hand and the
continuing or surviving partners on the other in respect of subsequent
business. Such disputes are to be resolved keeping in view the facts of each
case having due regard to Section 37 of the Act. Section 48 deals with the mode
of settlement of accounts between the partners after dissolution of the
partnership firm.
In
this backdrop, now we take up the question for consideration set out above.
The
findings as recorded by the High Court in A.S. No. 481/1979 that the plaintiff
has retired from the partnership firm on 5.4.1971 and that the partnership firm
had also been reconstituted thereafter, have attained finality. In the same
judgment, it is held that the plaintiff had agreed to sell his share and the
agreement was binding on him as affirmed twice in Exbts. B/21 and B/22. By the
said judgment, the High Court set aside the decree granted by the trial court
for dissolution having regard to the fact that the plaintiff had retired from
the partnership firm and the reconstituted firm continued its operations.
From
these findings of fact, it is clear that the plaintiff had retired from the
firm on 5.4.1971 after selling his share in the partnership firm. Once he had
retired from the partnership firm, he had no right to claim any further share
in the profits of the firm. A finding of fact is also recorded that the
defendants had not paid the value of the share of the plaintiff pursuant to the
agreement for retiring from the firm.
If the
defendants have failed to pay the value of the share of the plaintiff as agreed
to, it has become a debt on the defendants and the plaintiff is entitled to
recover the same with interest. After the retirement from the partnership firm
and particularly when the firm was reconstituted with new partners, there was
no question of using the plaintiff's share for earning profit in the
reconstituted firm. The High Court, despite specific request by the counsel for
the plaintiff in A.S. No. 481/1979 to give a direction regarding the date on
which the valuation of the plaintiff's share shall be arrived at, did not give
a direction but directed the trial court to make inquiry into valuation and
decide the date taking into account that his share was not paid till then.
There is no nexus or reason to say that the relevant date for valuation of the
share of the plaintiff is the date when the Commissioner valued his share, that
too after long lapse of time and taking note of the events that the plaintiff
had retired from the firm on 5.4.1971 having sold his share and the firm had
been reconstituted with new partners. When the plaintiff retired from the
partnership firm on 5.4.1971, his share could be valued as on that date which
stands to reason. Once the valuation is made as on that date, for any delay in
payment he is to be compensated by awarding interest as is evident from Section
37 of the Act itself. The value of the share of the plaintiff on the date of
his retirement from the firm could be regarded as a pure debt with effect from
the date on which he ceased to be a partner as per the agreement entered into
between the parties. Otherwise the result would be that he was deemed to have
been continued as partner of the firm even after he retired from the firm by
selling his share. If consideration was not paid as per the agreement, he could
enforce it as per law.
However,
mere non-payment of consideration does not take away the legal effect of
retirement from the partnership firm. The High Court in the impugned order has
observed thus: - "It follows from the above that in cases where there is
an agreement to purchase share of partner, the value of the share of the
outgoing partner or retiring partner shall be ascertained on the basis of the
value on the date of the retirement, unless it is a case where the valuation is
directed by the Court in the exercise of its discretion, in which event, the
relevant date will be the date on which the share is actually valued.
Admittedly, it is a case where the plaintiff had retired from the concern on
5.4.1971 and agreed to sell his share to Sri M.Subbareddy.
Therefore,
there was an express agreement to sell the share, pursuant to which, he sold
his share to defendant no. 12 and thereafter he retired and ceased to be a
partner on 5.4.1971. If there was delay in payment of his financial
entitlement, he is entitled to interest at the rate of six per cent per annum
in the property of the firm.
Section
37 of the Indian Partnership Act also says that in the case of an outgoing
partner, he is entitled to such share of the profits made since he ceased to be
a partner as may be attributable to the use of his share of the property of the
firm or to interest at the rate of six per cent per annum on the amount of his
share in the prop0erty of the firm. The language used in Section 37 is that
"since he ceased to be a partner". In other words, since he ceased to
be a partner, he is entitled to interest at the rate of six per cent per annum
on the amount of his share in the property of the firm.
Section
37 itself makes it clear that the relevant date is the date on which he ceases
to be a partner. The proviso to Section 37 also says that if option is given to
surviving partners to purchase the share of an outgoing partner and if any
partner assuming to act in exercise of the option does not in all material
respects comply with the terms thereof, he is liable to account under Section
37.
Therefore,
in any view of the matter, the relevant date for the purpose of ascertaining
the value of the share of the plaintiff is the date on which he ceased to be a
partner as it is a case where there was an express agreement between the
parties to sell the share of the plaintiff in favour of Sri M.Subbareddy and
with effect from that date he became a secured creditor and there was a debt
due to him from the other partners who are continuing in the partnership
business. It is in the nature of a debt due to him or the amount due to him is
unpaid purchase money. Therefore, the relevant date is the date on which he
ceases to be a partner." [emphasis supplied] The cause of action for the
plaintiff arose on the date of his retirement from the partnership firm and on
which date the liability of the defendants also arose.
In
this view, the plaintiff could certainly claim the value of his share as on
5.4.1971 with interest till the payment was made. The view of the trial court
that the relevant date to value the share of the plaintiff is as on the date of
the Commissioner's report cannot be accepted, as there was no nexus between the
date of retirement of the plaintiff from the firm and the date of Commissioner's
report. The date of Commissioner's report may be fluctuating, i.e. it could be
earlier or later in the absence of any time-frame. In this view, the High Court
was right and justified in passing the impugned order upsetting the order of
the trial court.
We
have every good reason to concur with the finding recorded in the impugned
order by the High Court. We find no merit in the appeal. Consequently, it is
dismissed. No order as to costs.
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