1. The question referred for our decision is :
'Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in holding that there was a valid partnership in law ?'
2. An interesting question indeed. Phabiomal Mulchand Mirpuri and, is three sons, Jiwatram, Gopichand and Bhagchand, who own a building in common entered into an agreement of partnership to let out the building and share the rents. The deed of partnership executed on May 1, 1974, recites that the firm's business shall be realising rents from letting out the building. The firm applied for registration under section 185(1)(b) of the Income-tax Act, 1961, for the assessment year 1975-76 and for continuation of the benefit of registration for the year 1976-77. By order dated October 14, 1976, the Income-tax Officer refused registration and made the assessment treating the assessee as a body of individuals. The Income-tax Officer took the view that no business is carried on by the firm and letting out a building and collecting rents do not amount to carrying on of any business. He also held that the building is not a commercial asset. On appeal, the Appellate Assistant Commissioner confirmed the order of the Income-tax Officer. On a further appeal by the assessee, the Tribunal disagreed with the view of the Income-tax Officer and the Appellate Assistant Commissioner. The Tribunal held that 'business' is a term of wide import and anything which is in occupation requiring attention amounts to 'business' and since letting out a building involves keeping the property in good repair and paying taxes regularly, there is a continuous and organised activity amounting to 'business'. The Tribunal directed the Income-tax Officer to grant registration. Hence, this reference by the Revenue.
3. It is submitted by Mr. M. Suryanarayana Murthy, the learned standing counsel for the Income-tax Department, that the view of the Tribunal is erroneous and unsustainable.
4. On the other hand, Mr. Ch. Sreerama Rao, the learned counsel for the assessee and Mr. A. Satyanarayana, who intervened, made their submissions supporting the view of the Tribunal.
5. To resolve the controversy, it is necessary to refer to section 185(1) of the Income-tax Act, 1961, which pertains to registration of firms.
'185. (1) On receipt of an application for the registration of a firm, the Income-tax Officer shall inquire into the genuineness of the firm and its constitution as specified in the instrument of partnership, and -
(a) if he is satisfied that there is or was during the previous year in existence a genuine firm with the constitution so specified, he shall pass an order in writing registering the firm for the assessment year;
(b) if he is not so satisfied, he shall pass an order in writing refusing to register the firm.'
6. 'Firm', 'Partner' and 'Partnership' are not defined under the Income-tax Act. But, sub-section (2) of section 2 says that they have the same meaning as assigned under Indian Partnership Act.
7. Section 4 of the Partnership Act defines 'partnership' as :
''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.'
8. It is seen from this definition that partnership involves an agreement to carry on business. The expression 'business' is defined under section 2(b) as 'including every trade, occupation and profession'. This is an inclusive definition. Letting out of a house does not accord with the general concept of business. It is one mode of enjoyment of a property owned. Then, does it come under 'trade', 'occupation' or 'profession' as contained in the definition. The learned counsel tried to bring it under 'occupation'. It is submitted that letting out involves labour and time, attending to repairs and for taking legal proceedings if necessary for collection of rents, etc. We have given our deep consideration to this question and we find it difficult to accept the submission of the learned counsel for the assessee. Letting out and realising rents is by no means doing a business. It is incidental to ownership. The expressions used in the definition are 'agreed to share the profits of a business by all or any of them', which implies the existence of a business. We fail to see any business in the act of letting out a building of which one is an owner.
9. In Ramniklal Sunderlal v. CIT : 36ITR464(Bom) a similar question arose. The father, Sunderlal, his wife and two sons entered into an agreement of partnership. The deed mentioned that income derived from certain properties and leases shall be divided by the partners in equal shares. The work pertaining to courts, offices, recovery of rents, etc., was agreed to be done by the father, Sunderlal, with the consent of the other partners. The firm applied for registration which was refused by the Income-tax Officer who assessed the assessee as an association of persons. On a reference, the Bombay High Court held as follows (p. 469) :
'If two joint-owners of a house agree that one of them should have the general management and provide funds for the necessary repairs so as to render the property fit for the habitation of tenants and agree to divide the net rent between them, it cannot be said that they are carrying on a business or that they have become partners.'
10. We are in complete agreement with this view of the Bombay High Court.
11. The learned counsel for the assessee, however, referred to some decisions as supporting the proposition canvassed by him.
12. In Narasingha Kar Co. v. CIT : 113ITR712(Orissa) one N entered into an agreement with the management of a school, undertaking to construct 20 shop rooms on the land belonging to the school. Later, N entered into a partnership and this firm undertook the construction and, after the construction was over, let out the shops and collected the rents in terms of the right conferred on N under the agreement. The Income. tax Officer assessed the income as income from house property holding that the assessee was not carrying on any business and as such there is no firm which could be registered. On appeal, the Appellate Assistant Commissioner and the Tribunal confirmed the view that there was no partnership which could be registered. On a reference, the Orissa High Court held that the word 'business' is a word of large and indefinite import. It is something which occupies attention and labour of a person for the purpose of profit and that it means almost anything which is an occupation or duty requiring attention as distinguished from sports or pleasure and is used in the sense of an occupation continuously carried on for the purpose of profit. This decision was cited to say that 'business' is a word of wide import and that it means anything in occupation which requires attention. But, in this case, neither N nor the partnership entered into by him is the owner of the land. The partnership consisting of N took up the business of construction of shops and collected the rent towards the investment made by the firm paying the school a monthly sum of Rs. 1,000 out of the rents. Within the 20 years certain period for which the agreement was to last, the assessee had to receive back its investment with such profits as it could make. The activity of N involved outlay of capital, attention and all appropriate elements which go with the concept of business. It was, therefore, a business undertaking. But no such thing is involved in the present case. The assessee is the owner here unlike in the Orissa case, where the partnership had nothing to do with the land and their only connection with the land was to build 20 shops on it by investing capital and make profit out of it. This case does not render any assistance to the assessee.
13. Sultan Brothers P. Ltd. v. CIT : 51ITR353(SC) , is a case where the Supreme Court said that whether a particular letting out is business or not has to be decided in the circumstances of each case and the case has to be looked at from the businessman's point of view to find out whether letting was for doing of a business or exploitation of the property by a owner. This decision speaks of a general principle that in considering the question whether letting amounts to business, each case has to be decided on the facts of that case.
14. In S. G. Mercantile Corporation P. Ltd. v. CIT : 83ITR700(SC) , the facts were that the assessee took on lease a market place for a term of 50 years undertaking to spend Rs. 5 lakhs for remodelling and repairing the structures on the site. It was also given the right to sub-let different portions. The question was whether the assessee's activity amounted to business. It was held that 'business' would embrace in itself dealing in real property as also the activity of taking a property on lease, setting up a market the thereon and letting out the shops and stalls in the market. The taking of the property on lease and sub-letting portions thereof was held to be a part of business and trading activity of the appellant. We fail to see how this case renders any assistance to the assessee. This was not a case of enjoyment of the property by an owner by giving it for rent. It is a case where property is taken on lease for the purpose of construction of a market and realising profits by sub-letting it in portions as the lease was for a period of 50 years. It certainly amounts to a business activity as distinguished from the activity carried on by the assessee in the case before us, namely, mere letting out a building of which he is the owner.
15. Nauharchand Chananram v. CIT , is a case of exploitation of a commercial asset. The owner of a factory instead of running it himself leased it out. The Punjab High Court said that it amounts to a business activity for earning profits from a commercial asset.
16. In another decision in Karnani Properties Ltd. v. CIT : 82ITR547(SC) , the facts were that the assessee owned a big mansion consisting of numerous residential flats and a dozen shops and the tenants not only paid the rents, but also electricity charges for the use of lifts, for supply of hot and cold water, for arrangement for scavenging, for providing watch and ward facilities and other amenities. The assessee maintained a separate water pump-house and a boiler for the supply of hot and cold water to the tenants. For all these purposes, the assessee maintained a large number of permanent staff. In these circumstances, it was held by Justice Hegde, speaking for the court, that 'it is a business activity as the services rendered were the result of its activities carried on continuously in an organised manner with a set purpose and with a view to earn profits. This is a case of a multi-storeyed complex with residential flats and shops rendering numerous services to the tenants by making special provisions like lifts, separate water connections and boilers and maintaining a big establishment and staff. This case, in our view, has no application at all to the facts of the present case.
17. The learned counsel for the assessee, Mr. Ch. Sreerama Rao, very much relied upon the following observations of the Allahabad High Court in Edulji Meharbanji v. Shyam Sunder, : AIR1943All192 .
'Two owners of buildings, which they let out to tenants, can combine, dealing with the property in such a way as to form a partnership.'
18. Relying on these observations, it is contended that there could be a valid partnership between two owners to let out property. These are some passing observations made by the learned judges by way of an illustration. The case before them was not a case of owners of a building forming into a partnership for letting it out. Even if the Allahabad High Court decided in that manner, with respect, we do not agree with this view.
19. In CIT v. Admiralty Flats Motel : 133ITR895(Mad) , one G, who obtained properties in a partition gifted to his wife and daughters the land which he obtained on partition and made some constructions on the land. G and his wife entered into a partnership for carrying on business as lodging house-keepers along with the two daughters. The Income-tax Officer refused registration among other grounds that the income derived by the firm by letting out flats is an income from property and there was no business with reference to which there could be a firm. The question was whether this view of the Income-tax Officer was right. On the facts, the court held that the intention of the parties was to run a business of lodging housekeepers, that the letting out of furniture and other articles had been conceived by the firm as a substantive, systematic and organised course of activity and that it was linked with and incidental to the carrying on of business of a lodging house and hence the income from the letting out of furniture and other articles would be of a business nature. Thus, this is a case where the partnership was formed for the purpose of running a lodging house and the letting out of furniture was linked with that business.
20. In CIT v. Lakshmi Company : 133ITR904(Mad) , the assessee therein had taken buildings on lease and let them as warehouses and godowns and realised rents therefrom. The Income-tax Officer and the Appellate Assistant Commissioner held that the activity is not a business activity. The Tribunal held to the contra observing that it comes under 'occupation' within the meaning of section 2(b) of the Partnership Act. On a reference, it was held by the Madras High Court that the activity of taking premises on lease, putting up constructions as annexe thereto and letting them out to various tenants was in the nature of a business activity and 'not what an ordinary property owner would do'. We fail to see how this decision can help the assessee. On the other hand, it is against the assessee as the court expressly observed that such activity is a business activity and that it was not incidental to the ownership of the property.
21. Thus, all the above decisions cited by the learned counsel for the assessee do not advance his case at all. The case before us is a simple case where three co-owners agreed to divide the rents by letting out their building. The test to determine whether co-owners sharing profits of any property are partners or not is to inquire whether there is really a business and whether the business is carried on by one or more of them. The court has to ascertain the real intention of the parties not only from the words in the deed, but also from the entire facts of the case. As observed by Lord Justice Lindley in a famous case 'look at the facts; look at the evidence; look at the accounts; look at the way in which the parties acted; and see what is the proper inference from all that.....; co-owners keep accounts on a totally different footing'. We have looked at the facts and we looked at the evidence. But we are unable to find the existence of any business between the father and the three sons who signed the partnership agreement.
22. For the reasons given by us, we answer the reference in the negative, against the assessee and in favour of the Revenue. No costs.
23. Before parting with the case, we would like to mention one thing which we noticed while going through the papers. Obviously, the assessee declared in the returns filed for the assessment years 1975-76 and 1976-77, income derived from letting out of the properties, as if it was income derived from 'business' assessable under section 28 of the Act. The Income-tax Officer completed the assessments adding a few inadmissible expenses to the income returned. In the first place, there is no indication in the assessment orders that the income was computed under the head 'Income from property' under section 22 of the Act. Necessary statutory deductions in the computation of income under the head 'Property' have not been given, for example, the deduction on account of repairs, municipal taxes, etc. Consistent with the finding that the assessee was deriving income from property, the Income-tax Officer ought to have computed the income under the head 'Property' in accordance with the provisions contained in sections 22 to 26 of the Act. What is more, the Income-tax Officer does not seem to have considered the application of section 26 of the Act, which deals with the computation of income from property in the hands of co-owners. The so-called agreement of partnership between the parties evidences the arrangement regarding the sharing of the income from the properties and the agreement can, therefore, be considered to be one between co-owners. Accordingly, section 26 of the Act comes into operation and the assessment should have been made on each of the co-owners in accordance with the provisions contained therein. It does not appear that the Income-tax Officer has applied his mind to these aspects while completing the assessments. The Commissioner of Income-tax may call for the records and exercise his revisionary powers suo motu under section 264 of the Act if, on scrutiny, he finds that the assessments made by the Income-tax Officer are not in accordance with the provisions contained in sections 22 to 26 of the Act.
24. We are unable to certify that the case is a fit one for appeal to the Supreme Court. Oral request for leave refused