1. Suit for dissolution of partnership and rendition of accounts — dispute over whether a partnership was dissolved by mutual consent prior to the death of a partner. (Para 2 , 3 )
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1996 Supreme(SC) 1860
1997(1) Supreme 537
SUPREME COURT OF INDIA
K. Ramaswamy and G.B. Pattanaik, JJ.
K.P.A. Vellayappa Nadar (Dead) through LRs. -Appellants
versus
Bhagirathi Ammal & Ors. -Respondents
Civil Appeal No. 2566 of 1980
Decided on 6-11-1996
Counsel for the Parties :
For the Appellants : M/s. S. Balakrishnan, S. Prasad and Raymond, Advocates.
For the Respondents : Mr. A.T.M. Sampath, Advocate.
Important Points
A partnership firm is dissolved by mutual consent when partners agree to set off shares in goodwill against liabilities. The subsequent formation of a new partnership to continue the same business by some former partners supports the conclusion that the original firm was dissolved.
Subject
Partnership - DISSOLUTION
Act Referred
Headnote
PARTNERSHIP-Two brothers and appellant, a stranger were partners-Appellant due to his old age, stepped out from business, foregoing his right to share in goodwill of firm-Partnership firm mutually stood dissolved on 14-2-70-Respondents constituted new partnership firm and continued same business-High Court was not right in concluding that old firm was subsisting on 29-2-1972 and consequently, appellant is liable to render account for same. (Para 6)
Legal Category Hierarchy
Table of Contents
2. Appellant claims partnership was dissolved by mutual consent with accounts settled; respondent contends dissolution occurred only upon a partner's death without prior settlement. (Para 3 , 5 )
3. Cessation of trading does not automatically dissolve a partnership, but the formation of a new firm continuing the business indicates mutual dissolution and settlement of accounts. (Para 6 )
4. Mutual agreement to exit a partnership, evidenced by the formation of a new firm continuing the business, constitutes dissolution regardless of formal settlement documents. (Para 6 )
5. Appeal allowed — High Court judgment set aside and Trial Court decree confirmed. (Para 7 )
6. Does the mere cessation of trading activity automatically result in the dissolution of a partnership firm?
No, the mere cessation of trading activity does not automatically result in the dissolution of a partnership firm, leaving behind no rights and liabilities, unless it is dissolved and accounts are settled. (Para 6 )
7. How is the dissolution of a partnership by mutual consent established when a new firm continues the same business?
Dissolution can be inferred where a new partnership is constituted to continue the same business in the same premises, and a partner steps out by foregoing their share in goodwill to set off liabilities. (Para 6 )
8. What is the evidentiary value of income tax returns in determining the subsistence of a partnership?
Income tax returns are not conclusive evidence of a partner's continued status unless the returns for the relevant subsequent accounting years were signed or acknowledged by that partner. (Para 6 )
ORDER
Substitution allowed.
2. The decision impugned herein is a reversing judgment of the Madras High Court in Appeal No. 180/76, dated April 3, 1980. This appeal by special leave relates to an action which took place between the filing of the suit by the respondent for dissolution and rendition of accounts by the appellant.
3. The admitted position is that one N.A.P. Alagiri Raja, son of Pappu Raja, and Raja Ramalinga Raja, two brothers and the appellant, K.P.A. Vellayappa Nadar a stranger, since dead, admittedly, were partners of "N.A. Pappuraja Sons" started way back in 1943. The partnership agreement was reduced to writing for the first time under Ex. A-2, dated March 31, 1954. Another admitted fact is that on February 15, 1970, another partnership was constituted under Ex. B-1 consisting of the first two partners and their sons, together four, with the same partnership business in the same place and with the same registration number of the partnership firm with the Registrar of the Firms. Raja Ramalinga Raja died on May 31, 1972. Thereon, the respondent laid the suit for dissolution of the partnership firm and for rendition of accounts by the appellant on April 26 , 1973. The case of the appellant is that due to his old age, viz., 70 years as on February 14, 1970, there was mutual agreement by which the appellant had stepped out from the partnership business leaving all assets and liabilities with the two partners. His right to share in the goodwill was mutually agreed to be set-off against liabilities falling within his share. The partnership under Ex. A-2 mutually stood dissolved on February 14, 1970 settling the accounts between the partners. The new partnership came into existence on February 15, 1970 under Ex. B-1. Therefore, there is no liability on his part to render any accounts or to bear any losses incurred by the new partnership firm under Ex. B-1 to which he was not a member on and from February 15, 1970. The trial Court recorded the findings as under:
"The question relating to the goodwill and Vilasam and fixed assets of the business of "Pappuraja and Sons" were discussed. In the end, in view of all these facts, it was agreed (1) that the first plaintiff and his brother should take over the business as a running concern; and (2) that the amounts shown as debits against the defendant should be considered to have been wiped out as having been set out against this defendant s share in the goodwill and in the share of profits really made for the above 2 years. It was on this understanding that the firm was dissolved on 14,2.1970 by consent of all parties concerned. The first plaintiff and his brother and others from their family started their business in the same vilasam with the same R.C. No. and in the same premises from 15.2.1970 in pursuance of the above conclusion. Thus, the firm was dissolved on 14.2.1970 itself with no need whatsoever for taking any account in respect of the dissolved firm in the above circumstances."
4. On the basis of this finding the trial Court came to the conclusion that the partnership firm under Ex. A-2 stood dissolved with the settlement of accounts. The appellant has nothing to do with the business run by the respondent-plaintiffs after Ex. B-1 dated February 15, 1970 was entered into among the respondent-plaintiff and the deceased Raja Ramalinga Raja and other. The trial Court also found thus:
"No document was filed to show whether the defendant along with the plaintiffs signed in the subsequent returns. On an analysis of the entire evidence, it is clear that the old firm was dissolved on 14.2.1970 with the consent of all the partners and the plaintiffs have started a new partnership as mentioned in Ex. B-1 and they are continuing the same business of the old firm."
5. However, no documents were filed to show whether the defendant along with the plaintiffs signed in the subsequent returns. On the analysis of the entire evidence, it is clear that the old firm was dissolved on 14.2.1970
