1. This reference at the instance of the Revenue pertains to the assessment years 1970-71 to 1974-75.
2. The assessee is a firm styled as M/s. K. Ramaiah, K. Ramakrishna Murthy & Others, Guntur, constituted under a partnership deed dated January 11, 1959. The said firm was carrying on the business of redrying of tobacco up to January 17, 1963, and it was dissolved on March 8, 1963. The assets of the firm such as the godowns, plant and machinery, factory buildings were left to the partners of the dissolved firm, who thereupon became the co-owners of the said assets. The co-owners let out the godowns, factory buildings and plant and machinery to others for being used in the same business of redrying of tobacco The leases were renewed from time to time. For the assessment years 1964-65 to 1969-70, the coowners were assessed to tax as individuals in respect of their shares of the rental income derived from leasing out the assets. Separate assessments were also made on co-owners collectively in the status of association of persons. In appeals, the Appellate Assistant Commissioner cancelled the assessments made in the status of association of persons. On appeal by the Department, the Income-tax Tribunal upheld the order of the Appellate Assistant Commissioner.
3. The co-owners of the assets formed themselves into a partnership under a partnership deed dated July 10, 1969, under the name and style of M/s. Kothuri Ramaiah, Karpurapu Ramakrishna Murthy & Others, Co-owners, Guntur. The business of the firm was mentioned in the deed as 'leasing out the lands, buildings and machinery'. This firm which came into existence on July 10, 1969, leased out the aforesaid assets to another firm on January 11, 1969. The lessor firm applied for registration for the assessment years 1970-71, 1971-72 and 1972-73. It filed returns for these three years in the status of a registered firm disclosing the income under the head 'Business'. The Income-tax Officer refused registration on the ground that the concern cannot be considered as a firm validly constituted under the Partnership Act as it does not carry on any business activity. He was of the view that the income should be assessed in the status of association of persons. He, therefore, refused registration and assessed the income under the head 'Other sources' for all the three years 1970-71, 1971-72 and 1972-73.
4. The firm was reconstituted under another partnership deed dated April 17, 1972. The reconstituted firm was also refused registration by the Income-tax Officer for the assessment years 1973-74 and 1974-75. The income in the hands of the reconstituted firm was assessed in the same manner as in the previous years.
5. The firm preferred appeals and they were allowed by the Appellate Assistant Commissioner on March 28, 1977. The Appellate Assistant Commissioner took the view that since capital assets such as plant, machinery and godowns owned by the co-owners were let out and income realised, the firm must be deemed to be carrying on business. He, therefore, directed registration of the firm and also its continuance for the succeeding years. He cancelled the assessments made on the association of persons as he held that the firm is entitled to registration. He also held that the assessee's income should be assessed to tax under the head 'Business'.
6. Aggrieved by all the orders of the Appellate Assistant Commissioner, the Revenue preferred appeals. The Tribunal consolidated all the appeals and disposed them of by a common order dated July 31, 1979, holding that it is immaterial whether the income is charged under the head 'Business' or 'Other sources' to determine the question whether the firm is entitled to registration as that question has to be considered with reference to the provisions of the Partnership Act. According to the Tribunal, the expression 'business' in the Partnership Act must be understood and construed in a wider sense and since the assets are commercial assets, letting out is one mode of exploitation and in that view, the firm must be held to be carrying on a business activity. The Tribunal confirmed the order of the Appellate Assistant Commissioner and directed the Income-tax Officer to grant registration or continuance of registration, as the case may be, and redo the assessments in the status of a registered firm for all the assessment years. On the facts, the Revenue came up for reference on the following questions :
'(1) Whether, on the facts and in the circumstances of the case, the firm constituted under the partnership deed dated July 10,1969, is entitled to registration for the assessment years 1970-71, 1971-72 and 1972-73
(2) Whether, on the facts and in the circumstances of the case, the firm constituted under the Partnership deed dated April 17, 1972, is entitled to registration for the assessment years 1973-74 and 1974-75
(3) Whether, on the facts and in the circumstances of the case, there could be a partnership carrying on the business of leasing out the commercial asets, which could be granted registration under the Income-tax Act, 1961
(4) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in confirming the orders of the Appellate Assistant Commissioner annulling the assessments made in the status of association of persons as well as on unregistered firm and directing the Income-tax Officer to grant registration to the assessee-firm for the assessment years 1970-71 to 1974-75 ?'
7. All the four questions relate to the same matter, namely, whether the firm is said to be carrying on any business activity so as to entitle itself for registration.
8. Section 185(1) of the Income-tax Act, 1961, confers power on the Income-tax Officer to grant registration if he is satisfied that a genuine firm exists. 'Firm' is not defined as such under the Income-tax Act. But section 2, clause (23), says that firm, partner and partnership have the meanings respectively assigned to them in the Indian Partnership Act. We have, therefore, to go to the Partnership Act to see what a 'firm' means. Section 4 of the Indian Partnership Act defines 'partnership', 'partner' and 'firm' as follows :
'4. 'Partnership' is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.'
9. The word 'business' is again defined under section 2(b) of the Partnership Act as :
''business' includes every trade, occupation and profession.'
10. It may be pointed out here that the definition of 'business' in the Partnership Act is different from the definition under the Income-tax Act. Section 2(13) of the Income-tax Act defines 'business' as :
''business' includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture.'
11.Thus, while the words used in the Income-tax Act are 'trade, commerce or manufacture', the expressions used in the Partnership Act are 'trade, occupation and profession'. Thus, there is a material difference between the two definitions and we are concerned with the definition under the Partnership Act. As seen already, it is an inclusive definition and it includes every trade, occupation or profession. We are not concerned with 'trade' or 'profession' as the Revenue's attempt is to bring it under 'occupation.' The word 'occupation' is of a very wide import.
12. According to Black's Law Dictionary, 5th edition, page 973 :
'Occupation : that which principally takes up one's time, thought and energies, especially one's regular business or employment; also whatever one follows as the means of making a livelihood; particular business, profession, trade, or calling which engages individual's time and efforts.'
13. According to Webster's Third New International Dictionary, volume II, page 1560 :
'Occupation : an activity in which one engages, a way of passing the time; a craft, trade, profession or other means of earning a living.'
14. According to Stroud's Judicial Dictionary, III edition, page 1957 :
'Occupation : the term 'occupation' has not any technical meaning. It ordinarily means that which engages time and attention.'
15. According to 'Words and Phrases Legally Defined', volume 4, page 11, second edition, by John B. Sauwers :
'Occupation : the business in which a man is usually engaged to the knowledge of his neighbours.'
16. Thus, it is seen that the expression 'occupation' is of a very wide import. 'Occupation' is that which engages the regular attention of a person, as a means of making livelihood. With this in mind, let us examine the facts of the present case.
17. In the present case, admittedly, the firm was doing the business of redrying of tobacco with its assets, the plant, machinery, godowns and the factory buildings, which are undoubtedly capital assets. After the dissolution of the firm in 1963, the assets were let out to another firm for doing the same business. There is no doubt that the assessee-firm had abandoned the idea of doing any business by itself. In fact, the Tribunal recorded a finding to that effect and we agree with the said finding. After the dissolution of the firm, they were only letting out the assets, i.e., the plant, machinery, godowns and the factory. This activity of letting out these assets involves some substantial and systematic activity. The plant and machinery consisting of electric transformers, sand surveying machines, refrigerators, hydraulic press and scrap machines require constant attention. They must, at all points, be in a working condition to enable the lessor to realise the full rents therefrom. It is not a case of an ordinary building being let out where no particular systematic activity is involved. It is a lease of assets for commercial purposes. The buildings include laboratory and machine sheds which have to be maintained in a perfect order and this involves a constant organised and systematic activity. It is 'occupation' within the meaning of section 2(b) of the Partnership Act.
18. Yet there is another aspect of the question. Plant, machinery, godowns and factory are admittedly commercial assets in the sense they can be used only for the purpose of a business. Now, do they cease to be commercial assets just because the owners choose to make profit or derive income by letting them out instead of doing business themselves. After all, the owners can either do the business themselves or let it out to others for doing business. In either way, it is exploitation of a commercial asset. The asset does not change its character when it goes into the hands of a lessee. A commercial asset is a commercial asset whether in the hands of a lessor or in the hands of a lessee. If for some reason the owner of the plant, machinery and buildings is not able to do business for himself, he can lease them out and derive income. In either case, it is a business activity as it engages the full attention of the owner to make his own livelihood. We are, therefore, of the view that when plant, machinery, buildings and factory are leased out, a business activity is involved.
19. We will now refer to some decided cases on the point.
20. In Nauharchand Chananram v. CIT , the firm let out a cotton ginning and pressing factory to others. The registration was refused by the Department on the ground that the firm did not carry on any business and the assets ceased to be commercial assets. The Punjab and Haryana High Court repelled this contention and held that the owner of a factory may run it himself or lease it out and in either case, he carries on the business of earning profits from a commercial asset. The learned judges further observed that the provisions of the Income-tax Act have nothing to do with the validity of a partnership either for the purpose of the Partnership Act or its registration under the Income-tax Act.
21. The same view is reiterated in Capital Foundry & Engineering Works v. CIT . The relevant observations are as follows (headnote) :
'That the income derived by an assessee from the lease of the factory premises was business income. The partners were entitled to carry on any other type of business which could be one of leasing the factory premises. The firm carried on business and was, therefore, entitled to registration.'
22. In Ray Talkies v. CIT : 96ITR499(Patna) a Division Bench of the Patna High Court had to consider a question whether the assessee was carrying on any business even after letting out so as to be entitled to renewal of registration. After a review of the various provisions of the lease deed, the court held that the letting out of the factory amounted to exploitation of the commercial assets by the assessee and the income therefrom constituted business income since commercial assets had been let out and not merely property. It was pointed out that the yield of income by a commercial asset is the profit of the business irrespective of the manner in which that asset is exploited by the owner of the business.
23. In Dal Chand and Sons v. CIT it was held that the lease of the factory was as much a business of the assessee as the running of it by itself and the income derived from such leasing out was assessable as income from business.
24. In CEPT v. Shri Lakshmi Silk Mills Limited : 20ITR451(SC) , the question mooted before the Supreme Court was whether a sum of Rs. 20,005 received by the assessee from its lessee by way of rent for the dyeing plant let out to them would be termed as profits from business within the meaning of section 2(5) of the Excess Profits Tax Act, and, therefore, liable to excess profits tax. The Bombay High Court from which the case went up to the Supreme Court held that if the use of a commercial asset has been discontinued and if the assessee lets it out, he is not putting to use something as a commercial asset at the time. On appeal to the Supreme Court, the decision of the Bombay High Court was reversed. The Supreme Court held that there was no warrant in law for the proposition that a commercial asset which yields income must be used as an asset by the assessee himself before his income becomes liable to tax. It was further held that a 'commercial asset is susceptible of being put to a variety of different uses in which gain might be acquired and whichever of these uses it may be put to by the assessee, the profit earned would be a user of the asset of the same business. The yield of income by a commercial asset is the profit of the business irrespective of the manner in which that asset is exploited by the owner of the business. In other words, a mere substitutional use of the commercial asset does not change or alter the nature of the asset. And the assessee is entitled to exploit such asset to his best advantage which he may do so either by using it himself personally or by letting it out to somebody else'. Here it may be pointed out that this is a case arising under the Excess Profits Tax Act and the definition of the word 'business' is almost the same as in the Income-tax Act. Even in that situation, the Supreme Court held that the letting out of a plant and machinery amounted to a business activity. If that be so, this proposition applies with greater force in a case arising under the Partnership Act where the word 'business' is of much wider import.
25. The learned counsel for the Revenue, however, placed strong reliance upon Narain Swadeshi Weaving Mills v. CEPT : 26ITR765(SC) , in support of his contention, that letting out of plant and machinery cannot be said to be a lease of a commercial asset, but only a lease of movable properties. But we find that this case is not very relevant as the Supreme Court was concerned with a different principle of law altogether. The company in question in that case had purchased only the buildings and leasehold rights from the assessee-firm, but took over from it on lease, at an annual rent, the plant and machinery. The assessee-firm thereafter ceased to manufacture anything and it had accordingly no further trading or commercial activity. On those facts and circumstances, the question was whether the letting out of plant and machinery by the assessee-firm to the company could not be held to fall within the definition of 'business' and it was held by the Supreme Court that it cannot be treated as profits from business. On a close scrutiny of the judgment, it is at once discernible that the factors which weighed with the Supreme Court in coming to a conclusion that it was merely a lease of property were the following :
(1) After the formation of the company, the assessee-firm was left with no business at all.
(2) The company purchased the leasehold rights in the lands and buildings where the plant, machinery, etc., were installed.
(3) The firm as such ceased to manufacture any ribbons and laces.
(4) It was left with the plant, machinery, etc., which it did not require and which ceased to be a commercial asset in its hands, for it had no longer any manufacturing business at all.
26. The Supreme Court itself had pointed out the distinction at page 772. It was said that 'the assessee-firm was, therefore, left only with some property which at one time was a commercial asset but had ceased to be so'. There can be little doubt that at the time when the property or an asset is being sought to be let out, if it has lost the character of a commercial asset, then there can never be a question of letting out a commercial asset which is not in existence at the time when the lease is effected. In the present case, it cannot be said that the commercial asset had lost its character as a commercial asset. It was still capable of being used as a commercial asset by the lessee company.
27. In the instant case, the assessee had admittedly done the business of tobacco redrying for a considerable time. Thereafter, the godowns, factory buildings, plant and machinery were let out to another firm for doing the same business. The assessee had to manage and maintain the plant and machinery in a perfect condition. In our opinion, this activity constitutes the business of the assessee. It is a case where a commercial asset is leased out for the purpose of carrying on the business of redrying. The assets did not cease to be commercial assets merely because they were leased out. So long as a business asset is exploited as such and profits or gains are earned from it, the same are profits and gains of a business in whatever way the owner exploits a commercial asset. He makes profits or gains just the same and he makes the same from and in consequence of running and maintaining a business asset.
28. In this view, we hold that the Tribunal was perfectly justified in directing registration of the firm. It is a firm validly constituted under the provisions of the Partnership Act and as such entitled to registration.
29. We accordingly answer all the four questions in the affirmative, i.e., in favour of the assessee and against the Revenue. No costs. Advocate's fee Rs. 500.