Conundrum on Section 45(4) – Pre- and Post-SC Ruling in the case of Mansukh Dyeing

BACKGROUND

The general concept of a partnership, firmly established by law, is that a firm is not an ‘entity’ or ‘person’ in law but is merely an association of individuals and a firm name is only a collective name of those individuals who constitute the firm. In other words, a firm name is merely an expression, only a compendious mode of designating the persons who have agreed to carry on business in partnership.

Prior to the insertion of section 45(4), it was a judicially well-settled position that cash/capital assets received by the partner on retirement or dissolution of the partnership firm neither resulted in the transfer of any asset from the perspective of the firm nor resulted in transfer of partnership interest from the perspective of partners¹. The judicial decisions were rendered on the premise that (a) a partnership firm is not a distinct legal entity (b) a partnership firm has no separate rights of its own in the partnership assets (c) the firm’s property or firm’s assets are property or assets in which all partners have a joint or common interest (d) distribution of asset or property by the firm to its partners is nothing but a mutual adjustment of rights between the partners and there is no question of any extinguishment of the firm’s rights in the partnership assets (e) what a partner receives on retirement/di