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Commissioner of Income-tax Vs. Narang Dairy Products - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAllahabad High Court
Decided On
Case NumberIncome-tax Reference No. 16 of 1977
Judge
Reported in(1985)49CTR(All)311; [1986]159ITR243(All); [1985]22TAXMAN286(All)
ActsIncome Tax Act, 1961 - Sections 4, 185, 256 and 256(1); ;Partnership Act
AppellantCommissioner of Income-tax
RespondentNarang Dairy Products
Appellant AdvocateBharatji Agarwal, Adv.
Respondent AdvocateR.R. Agrawal and ;R.K. Gulati, Advs.
Excerpt:
.....which has been referred are conceraed, it is apparent that the emphasis was only on the point that the income from leasing out of the milk spray plant having been found to be assessable under the head 'other sources 'and not as income from business, the assessee was not entitled to the benefit of continuation of registration. the assessee-firm since itsinception has acted like a 'rentier' and it has never carried on any business. whatever may be the head of assessment under the income-tax act, so long as what was carried on by the firm could be classified as business in the sense of the partnership act, the firm would be entitled to registration provided the other conditions necessary are satisfied......act claiming continuation of registration. the income-tax officer, however, found that during this year the assessee had derived income only from leasing out its milk spray plant and had done no business. he accordingly required the assessee to explain as to why its registration may not be cancelled. according to the income-tax officer, the assessee was not entitled to claim continuation of registration for the assessment year 1971-72, inasmuch as it, not having carried on any business in that year, had ceased to be a genuine firm. the income-tax officer after hearing the assessee cancelled its registration. in regard to the income derived by the assessee from leasing out the milk spray plant, he held that this income was from ' other sources ' and not from business. the order was upheld.....
Judgment:

N.D. Ojha, J.

1. The following question has been referred to us by the Income-tax Appellate Tribunal for our opinion :

' Whether, on the facts and in the circumstances of the case, the assessee was entitled to the benefit of continuation of registration under Section 185 during the assessment year 1971-72, even though the income derived by it daring this year was held to be assessable as income from other sources ?'

2. The relevant facts in a narrow compass as appear from the statement of the case drawn up by the Tribunal are that the assessee, opposite party, was carrying on business of manufacturing milk powder and other dairy products and was registered under the Income-tax Act, 1961 (hereinafter referred to as ' the Act'), as a partnership firm in the year 1965-66. By virtue of declarations made in this behalf, the registration was continued in the succeeding years. In the assessment year 1971-72 also, the assessee filed a declaration under Section 184(7) of the Act claiming continuation of registration. The Income-tax Officer, however, found that during this year the assessee had derived income only from leasing out its milk spray plant and had done no business. He accordingly required the assessee to explain as to why its registration may not be cancelled. According to the Income-tax Officer, the assessee was not entitled to claim continuation of registration for the assessment year 1971-72, inasmuch as it, not having carried on any business in that year, had ceased to be a genuine firm. The Income-tax Officer after hearing the assessee cancelled its registration. In regard to the income derived by the assessee from leasing out the milk spray plant, he held that this income was from ' other sources ' and not from business. The order was upheld by the Appellate Assistant Commissioner of Income-tax. The appeal filed by the assessee before the Tribunal was, however, allowed. The Tribunal, after referring to its finding in the appeal against the assessment order for the year 1971-72, held that the assessee had failed to establish that there was only a temporary lull in the business during the aforesaid year and that the income derived by it from the leasing out of the milk spray plant was assessable as income from business. According to the Tribunal, the income derived by the assessee from letting out of the milk spray plant was assessable under the head ' Other sources '. The Tribunal further held that simply because the income derived by the assessee from leasing out of the milk spray plant was assessable under the head ' Other sources ', it cannot be said that there was no genuine firm in existence in the assessment year 1971-72. In this connection, the Tribunal, after pointing out that the assessee had admittedly carried on business in all the earlier years, held that it cannot be said that this partnership had been formed only with a view to divide the rental income of the milk spray plant between the partners.

3. Aggrieved by the order of the Tribunal allowing the appeal, the Commissioner of Income-tax made an application before the Tribunal under Section 256(1) of the Income-tax Act with a prayer to refer the following questions of law to this court for its opinion :

'(1) Having rejected the assessee's contentions that the income from letting out of the plant was assessable as business income, whether the Tribunal was in law justified in upholding the assessee's claim for registration?

(2) Whether, on the facts and in the circumstances of the case, the assessee-firm was entitled to be assessed in the status of a registered firm ?'

4. The Tribunal, however, after hearing the parties, did not refer the two questions mentioned in the application under Section 256(1), but referred only one question as already pointed out above. It has been urged by Sri Markandey Katju, counsel for the Income-tax Department, that on the finding recorded by it that the assessee had closed its business and that it had failed to establish that there was only a temporary lull in its business during the assessment year 1971-72, the Tribunal could not have allowed the appeal and reversed the order of cancellation of registration passed by the Income-tax Officer and affirmed by the Appellate Assistant Commissioner. In this connection, he placed reliance on Section 2(6B) of the old Act [corresponding to Section 2(23) of the 1961 Act] which provides that 'firm', 'partner' and 'partnership' have the same meanings respectively as in the Partnership Act. He also placed reliance on Section 4 of the Partnership Act which, inter alia, provides that ' partnership ' is therelation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. On this basis, it was urged that carrying on business was a condition precedent for the existence of a partnership and since no business was carried on by the assessee in the assessment year 1971-72, the Income-tax Officer was right in cancelling the registration on the ground that there was no genuine firm in existence in that year. As regards the income received by the assessee from leasing out the milk spray plant, reliance was placed by Sri Katju on Explanation 1 to Section 6 of the Partnership Act which provides that sharing of profits or gross returns arising from property by persons holding a joint or common interest in that property does not of itself make such persons partners.

5. Counsel for the assessee-opposite party, on the other hand, urged that on the finding recorded by the Tribunal that the assessee continued to be a genuine firm even in the assessment year 1971-72, continuation of registration could not be refused merely on the ground that the only income which the assessee derived in that year from leasing out the milk spray plant was taxable under the head ' Other sources '. According to him, since it was not asserted by the Commissioner in his application under Section 256(1) of the Act that the finding of the Tribunal that the assessee continued to be a genuine firm even in 1971-72 was vitiated in law and since no question to the effect that the finding of the Tribunal that the assessee continued to be a genuine firm was vitiated in law has been referred to this court for its opinion, it was not open to the counsel to the Revenue to challenge the said finding before this court. In reply, it was urged by Sri Katju, counsel for the Revenue, that the question which has been referred to this court by the Tribunal was a comprehensive one and included within its ambit even the question that the finding of the Tribunal that the assessee continued to be a genuine firm even in 1971-72 was vitiated in law.

6. Having considered the respective submissions made by counsel for the parties, we find it difficult to agree with the aforesaid submission of the counsel for the Revenue. Reliance was placed by counsel for the Revenue on the decision of the Supreme Court in CIT v. Scindia Steam Navigation Co. Ltd. : [1961]42ITR589(SC) . While dealing with the equivalent provision contained in Section 66 of the Indian Income-tax Act, 1922, it was held in that case (p. 612):

' Section 66(1) speaks of a question of law that arises out of the order of the Tribunal. Now a question of law might be a simple one, having its impact at one point, or it may be a complex one, trenching over an area with approaches leading to different points therein. Such a question might involve more than one aspect, requiring to be tackled from different standpoints. All that Section 66(1) requires is that the question of law which isreferred to the court for decision and which the court is to decide must be the question which was in issue before the Tribunal. Where the question itself was under issue, there is no further limitation imposed by the section that the reference should be limited to those aspects of the question which had been argued before the Tribunal. It will be an over-refinement of the position to hold that each aspect of a question is itself a distinct question for the purpose of Section 66(1) of the Act. '

7. In order to appreciate the true import of the aforesaid observations, it is necessary to refer to an earlier observation in the same case. While pointing out the difference between the British Statute on the point and Section 66(1) of the 1922 Act, it was held (p. 608):

' The British statute does not cast, as does Section 66(1) of the Act, a duty on the assessee to put in an application stating the questions of law which he desires the Commissioners to refer to the court and requiring them to refer the questions which arise out of that order. In Commissioner of Income-tax v. Arunachalam Chettiar : [1953]23ITR180(SC) , this court has decided that the requirements of Section 66(1) are matters affecting the jurisdiction to make a reference under that section. The attempt of the respondents to equate the position under Section 66(1) of the Act with that under the British statute on the ground that the Tribunal has to draw up a statement of the case and refer it, and that the court is to decide questions of law raised by it, must break down when the real purpose of a statement in a reference is kept in view. A statement of case is in the nature of a pleading wherein all the facts found are set out. These is nothing in it which calls for a decision by the court. It is the question of law referred under Section 66(1) that calls for decision under Section 66(5) and it is that that constitutes the pivotal point on which the jurisdiction of the court hinges. The statement of the case is material only as furnishing the facts for the purpose of enabling the court to decide the question referred. '

8. A perusal of the two observations quoted above indicates that the jurisdiction of the court depends on the question of law which was in the application under Section 66(1) desired to be referred and was referred by the Tribunal,

9. If, however, the question referred is a complex one trenching over an area with approaches leading to different points therein and thus involving more than one aspect, all those different points or aspects can be gone into by the court.

10. Viewed in the background of this legal position, the question referred to us by the Tribunal cannot be said to be a complex one of the nature mentioned above. In paragraph 4 of the application under Section 256(1) ofthe Act, it was stated that the following questions of law arise out of the order of the Tribunal:

' 1. Having rejected the assessee's contentions that the income from letting out of the plant was assessable as business income, whether the Tribunal was in law justified in upholding the assessee's claim for registration ?

2. Whether, in the facts and in the circumstances of the case, the assessee-firm was entitled to be assessed in the status of a registered firm '

11. Question No. 2 aforesaid may be said to arise out of the order of the Tribunal in the appeal against the assessment order but it cannot, in our opinion, be said to arise out of the order of the Tribunal, which was a separate order, whereby the orders of the the Income-tax Officer and the Appellate Assistant Commissioner cancelling the registration of the assessee-firm was set aside on the ground that the authorities below were not justified in holding that there was no genuine firm in existence in the assessment year 1971-72. And it appears that for this reason this question was not referred to this court by the Tribunal.

12. In so far as question No. 1 which was desired to be referred as well as the question which has been referred are conceraed, it is apparent that the emphasis was only on the point that the income from leasing out of the milk spray plant having been found to be assessable under the head ' Other sources ' and not as income from business, the assessee was not entitled to the benefit of continuation of registration. The question that the finding of the Tribunal that the assessee continued to be a genuine firm in the assessment year 1971-72 was vitiated in law cannot, therefore, be treated to be involved in the question referred to us by the Tribunal.

13. The submission made by counsel for the Revenue that the assessee was not a genuine firm in the assessment year 1971-72, based on Section 4 and Explanation 1 to Section 6 of the Partnership Act, cannot, therefore, be appropritely gone into in this reference.

14. The question which, therefore, really arises for our consideration is whether the assessee which continued to be a genuine firm in the assessment year 1971-72, as found by the Tribunal, was entitled to the benefit of continuation of registration under Section 185 of the Act, even though the only income which it derived during that year from the leasing out of the milk spray plant was assessable under the head ' Other sources ' and not as ' Income from business. ' In regard to this question, reliance was placed by counsel for the Revenue on the finding of the Tribunal whereby the assessee's contention that there was only a temporary lull in its business and that the income derived by it from the leasing out of the milk spary plant was assessable as income from business was rejected and on a decision ofthe Bombay High Court in Ramniklal Sunderlal v. CIT : [1959]36ITR464(Bom) , to the following effect (p. 467):

' An owner of a property who derives income by letting out the same to a number of tenants cannot substitute a partnership between himself and his wife and children by dividing the property among all of them and by simply calling the co-owners, members of a partnership firm, nor can he do so by describing the writing as a deed of partnership. A relationship of this nature would require some management and the element of agency may not be difficult to establish, but what would be lacking in an agreement of this nature would be the existence of a business. '

15. Firstly, even in the case of Ramniklal Sunderlal : [1959]36ITR464(Bom) , it was subsequently observed by the learned judges that they did not intend to be understood to suggest that there may not be a partnership between the owners of a property and that there could be a partnership between the owners of a property if they deal with the same in such a manner as to amount to carrying on of a business. Secondly, this case doos not squarely deal with the question whether even if the Tribunal has found that the assessee was a genuine firm in the relevant year, registration or continuance of registration could be refused simply because the income derived by it during that year had been held to be assessable as income from other sources.

16. This question, however, came up for consideration in some other cases which we shall now consider. In Nauharchand Chananram v. CIT , the Tribunal had recorded the following findings (p. 191) :

'(a) On the above facts, we think that it cannot be said that the assessee carried on any business. It is no doubt true that ' Nauharchand Chananram Factory' was at one time a commercial asset, but it ceased to be so when it was let out because it was leased out as a whole and, thereafter, the owners never worked the factory themselves. Four of the partners did not even join the new lease partnership and, evidently, they did not want to carry on the business. In our opinion, the asset no longer maintains its character as a commercial asset and it is merely a capital investment from which the owners derive rental income.

(b) Another finding of fact is necessary, viz., was the lease only a temporary phase of business We find that it was not a temporary phase inasmuch as the partnership never carried on the ginning business. Similarly, we also record the finding that it was not a case when the main business was carried on but a subsidiary portion was let out. The factory was leased out as a whole as an entity.

(c) The economic distinction between 'business activities' and the activity of 'a rentier ' needs no elaboration. The assessee-firm since itsinception has acted like a 'rentier' and it has never carried on any business. We would, therefore, record this finding that the 'leasing of the factory' was not, in the circumstances of the case, an activity in the nature of business.

(d) If this conclusion is arrived at, then it cannot but be held that the partnership is not entitled to registration because the fundamental requirement of a valid partnership, viz., 'carrying on of business', is not fulfilled.'

17. On the basis of those findings, it was argued on behalf of the Revenue that the assessee was not entitled to be registered. Repelling this argument, it was held (at pp. 192-193):

' The only argument addressed by the learned counsel for the Department was that earning of rental income is not income from business. That may or may not be so. But that is a matter wholly irrelevant for the purpose of determining whether a partnership should or should not be registered under Section 26A of the Act. All that has to be seen is whether there is a validly constituted partnership and for that purpose one has to refer to the provisions of the Partnership Act. The learned counsel for the Department was unable to point out any provision in the Partnership Act which would render such a partnership illegal. It was not disputed that if there was a legal partnership, it was entitled to registration under Section 26A of the Act. Therefore, the controversy merely rested on the short matter as to whether the partnership in question is a legal partnership or not. The learned counsel drew our attention to the decision of the Supreme Court in New Savan Sugar and Gur Refining Co. Ltd. v. Commissioner of Income-tax : [1969]74ITR7(SC) , for his contention that the income of such a partnership being merely rental income would only be assessable under Section 12 and not under Section 10 of the Act. That is a matter which has nothing to do with registration of the partnership under Section 26A of the Act.

It may be that the income of this partnership may have to be assessed under Section 12, but that is a matter on which we are not called upon to pronounce. All that we have to determine is whether Section 12 or Section 10 of the Act stands in the way of the partnership being registered under Section 26A of the Act. In our opinion, these provisions have nothing to do with the validity of a partnership either under the Partnership Act or its registration under Section 26A of the Income-tax Act.'

18. In CIT v. Lakshmi Company : [1982]133ITR904(Mad) , it was held that in order to find out whether a firm could come into existence, it is necessary to look only to the provisions of the Indian Partnership Act, 1932. It is that Act which regulates the constitution or creation of thefirm. One of the conditions necessary for the constitution of a firm is that there must be business carried on by all the partners. The Income-tax Act divides income under various heads for the purpose of enabling an assessment to be made. The classification of various heads of income under the Income-tax Act is only for the purpose of convenience of administration of that statute, and the concept of business as envisaged under the Income-tax Act cannot be imported into the determination of the question whether a group of individuals, by agreement, carry on business as a firm. Hence, it cannot be stated that whatever is classified under the head ' Business', under the Income-tax Act, would alone constitute business in the sense of the Partnership Act. Whatever may be the head of assessment under the Income-tax Act, so long as what was carried on by the firm could be classified as business in the sense of the Partnership Act, the firm would be entitled to registration provided the other conditions necessary are satisfied.

19. We are in respectful agreement with the principle of law laid down in the aforesaid cases and are accordingly of opinion that the assessee was entitled to the benefit of continuation of registration under Section 185 of the Act during the assessment year 1971-72, even though the income derived by it during this year was held to be assessable as income from other sources. The question referred to us, therefore, is answered in the affirmative, in favour of the assessee and against the Revenue. The assessee will be entitled to Rs. 200 as costs.


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