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Yelisetty Bhadrayya Setty Vs. Income-tax Officer - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Hyderabad
Decided On
Judge
Reported in(1982)1ITD644(Hyd.)
AppellantYelisetty Bhadrayya Setty
Respondentincome-tax Officer
Excerpt:
.....of the aac declining to interfere with the order of the ito refusing to grant registration to the assessee-firm.2. according to the order under section 185(1)(b), the assessee, a firm of five partners, of whom the details are given below, claimed registration : 3. the ito stated that according to the partnership deed the object of the firm was to construct godowns and to let out the same to the government or private parties on rent and to divide the rent received among the partners.4. the ito then went on to state that income from letting out of the godowns was clearly assessable under section 22 of the income-tax act, 1961 ("the act"), under the head "income from house property" and not under section 28 of the act as profit from business. for that he stated that the site on which the.....
Judgment:
1. This appeal by the assessee relates to the assessment year 1978-79 and is against the decision of the AAC declining to interfere with the order of the ITO refusing to grant registration to the assessee-firm.

2. According to the order under Section 185(1)(b), the assessee, a firm of five partners, of whom the details are given below, claimed registration : 3. The ITO stated that according to the partnership deed the object of the firm was to construct godowns and to let out the same to the Government or private parties on rent and to divide the rent received among the partners.

4. The ITO then went on to state that income from letting out of the godowns was clearly assessable under Section 22 of the Income-tax Act, 1961 ("the Act"), under the head "Income from house property" and not under Section 28 of the Act as profit from business. For that he stated that the site on which the godown was constructed belonged only to the first partner, Yelisetty Bhadrayya, and further he alone had entered into an agreement with the Food Corporation of India (FCI) for letting out the building and with the Canara Bank for taking a loan for constructing the godown. For these reasons, he came to the conclusion that there was no business activity carried on by the firm. He came to this conclusion after setting out the objects of the assessee which were primarily to the effect that as long as the firm carried on business "in the general or wider sense", it was adequate and the business need not be one under the narrower concept of the Income-tax Act. Certain judicial pronouncements were also relied on by the assessee in this regard and this have been referred to in the order declining registration. The ITO emphasized that house owning, however profitable, was not a trade or bussiness and ownership by itself was the criterion of assessment under the Income-tax Act. According to him, the cases relied on by the assessee were not similar on facts.

5. The ITO finally referred to the decision of the Supreme Court in East India Housing & Land Development Trust Ltd. v. CIT [1961] 42 ITR 49 and held that the rental income could be assessed only under the head "Income from house property".

6. Alternatively, the ITO stated that even if it was held that a bussiness was carried on, yet the firm was not genuine. For this, he had given four reasons, viz., (a) the site belonged to Y. Bhadrayya who himself had made an application to the FCI for construction of the godown : (h) Y. Bhadrayya acquired a loan from the Canara Bank with the recommendation of the FCI on his own account and not on behalf of the firm ; (e) Y. Bhadrayya entered into an agreement on 16-12-1977 with FCI on his own account and the rent was to be paid by FCI to Bhadrayya ; and (d) the rent received was credited to loan account with the Canara Bank which was in Bhadrayya's own name and he had drawn certain amounts for personal use. After making a reference to the elements of partnership, viz., that there must be an agreement entered into by all partners concerned, that the agreement must be to share the profits of a business, and that the business must be carried on by all or any of the persons concerned acting for all, the ITO stated that such elements were absent in the present case and there was also no element of agency. For all the aforesaid reasons, he declined to grant registration.

7. The AAC on appeal set out the facts briefly and then upheld the decision of the ITO stating that no partnership could have been formed on the facts of the case to exploit the godown and secondly the element of agency was absent and, therefore, a firm did not exist in the eye of law.

8. The assessee is in appeal before us. The contention of the learned counsel for the assessee was that the head under which income was assessable was not conclusive of the nature of the income. In support of this proposition, he relied on the decision of the Supreme Court in CIT v. Chugandas &Co. [1965] 55 ITR 17. He stressed that even if income was assessable under any or under any of the specific heads stipulated under the Act such as "Interest on securities", "Income from house property", etc., still such income would be from business.

9. The learned counsel then referred to the decision of the Allahabad High Court in Edulji Meharbanji Boyce v. Shyam Sunder Lal AIR 1943 All.

192, and stated that the word "business" does not necessarily mean under the Partnership Act an undertaking of an industrial or commercial nature and the owners of building which they let out to tenants, could combine to deal with the property in such a way as to form a partnership. This decision he stated was direct authority for the proposition that he was canvassing, viz., that in the present case the letting out of the godown amounted to business.

10. The learned counsel submitted that there were several decisions under the Income-tax Act itself where exploitation of a commercial asset was held to be business, and reference in this regard was made to the decision of the Patna High Court in Ray Talkies v. CIT [1974] 96 ITR 499 and that of the Orissa High Court in Narasingha Kar & Co. v.CIT [1978] 113 ITR 712. It was contended that in the latter case where certain rooms were constructed and let out, it was held by the Court that there was a business carried on.

11. The learned counsel then took us through the partnership deed and submitted that one of the partners had brought in as a partnership asset, the site which he possessed, instead of contributing capital and the construction was carried out by the other partners as evidenced by drawings from their accounts as also a loan raised. The mere fact that loan was initially raised by one of the partners, he submitted, would not detract from the genuineness of the partnership.

12. The learned departmental representative, on the other hand, submitted that the agreement dated 8-12-1976 with FCI clearly showed that the lease agreement was entered into with partner Bhadrayya in his individual capacity. The loan was also taken in his individual capacity. He, therefore, submitted that there was no question of forming a partnership in such circumstances in relation to the income which the constructed godowns yielded. He also submitted that there was no business carried on and in all such cases it was as a rule held that income was assessable under the head "Income from house property" alone. A case on which considerable stress was laid was the decision of the Supreme Court in East India Housing & Land Development Trust Ltd. (supra), where the learned departmental representative stated, income realised from letting out shops and stalls was held by the Supreme Court to be assessable only under the head "Income from house properly". He, therefore, stressed that in the present case there was no business carried on and, therefore, there could be no firm within the meaning of the Partnership Act. He also relied on the arguments put forth by the ITO in support of the proposition that there was no genuine firm in existence. He, therefore, pleaded that the order of the ITO be upheld.13. The learned counsel for the assessee submitted in reply that even if income was assessable in the present case under the head "Income from house property", nevertheless, there would still be a business. As a last alternative, he submitted that all the partners would have to be construed in any event as co-owners and only the appropriate share income could be assessed in the hands of each person, even if it was held that there was no business carried on, but he submitted that this was purely an alternative contention.

14. We have considered the rival submissions. The first point which we have to determine in the present case is whether the legal requirements of a firm are satisfied in this case. The partnership, according to the definition in Section 4 of the Partnership Act, is the relation between persons who have agreed to share profits of a business carried on by all or any of them acting for all. Therefore, the existence of a business is a prerequisite to there being a partnership. In the present case, the partnership deed is dated 31-1-1977 and it came into existence on 3-1-1977. It was stated that it was formed for constructing a godown or godowns, lease the same out to private parties or to Government and thereafter to share the income received by letting out the godowns. It was also mentioned that Bhadrayya was giving the site to construct the godowns and as such he was not investing any capital, but if further godowns were to be constructed, he would have to invest capital. There was an advertisement by FCI and a letter was issued by Bhadrayya on 29-11-1976 consequent to which an agreement was executed on 8-12-1976 by Bhadrayya with FCI and a loan was taken by Bhadrayya from Canara Bank on 9-12-1976. The godown was constructed partly out of this loan and partly out of capital invested by the other partners and thereafter the godown account figured in the firm's books.

The question that has to be decided is whether in such a case there could be a business.

15. The decision of the Allahabad High Court in Edulji's case (supra) is direct authority for the proposition that where two owners of buildings let the same out to tenants, a partnership could be formed because it tantamounts to business. There is also the decision of the Orissa High Court in Narasingha Kar & Co.'s case (supra), which supports the proposition canvassed that the term "business" as used in the partnership Act is of very wide import. It is now settled law after the decision of the Supreme Court in Chugandas & Co. (supra) which refers to the earlier case on the point, that even if income is assessed under a particular head under the Income-tax Act other than the head "Profits and gains of business or profession", still such income may arise out of business.

16. Having regard to the aforesaid position, we hold that in the present case there was an agreement to exploit the commercial asset, viz., the godown by Bhadrayya and the other persons mentioned as partners in the partnership deed referred to. The asset no doubt was not being exploited by themselves and leased out to others. But, income was being earned from exploiting the. asset itself. We would, therefore, come to the conclusion that the exploiting of this asset, which was a commercial asset tantamounted to carrying on a business within the meaning of the Partnership Act and, therefore, the requirement was satisfied for the formation of a partnership.

17. Coming to the aspect of genuineness of the firm, we have to state that the original agreement of 8-12-1976 was entered into by Bhadrayya personally with FCI, but there is a subsequent agreement on 18-12-1977 on record which states that it is an agreement between the firm and FCI. The loan was no doubt taken by Bhadrayya in his personal capacity and Bhadrayya brought in land belonging to him personally when the partnership was commenced. Section 14 of the Partnership Act envisages property being brought into the stock of the firm originally by any of the partners which would become property of the firm. Therefore, Bhadrayya bringing in his individual property, viz., the land on which the godown was being constructed, and treating it as the firm's property, does not militate against the genuineness of the firm, nor does the loan taken in his individual capacity initially. The firm has considered the construction of the godown as construction by itself. In these circumstances, even assuming that FCI was unaware of the formation of the partnership, since there is no contravention of any statutory requirement nor is there any action on the part of the assessee which is opposed to public policy, it cannot be said that the formation of a partnership for exploiting the godown is in any manner vitiated.

18. We are unable to agree with the authorities below that the firm in question which was duly evidenced by a partnership deed was not genuine. Each of the partners had contributed capital either in kind or by way of money. We, therefore, come to the conclusion that in the present case there was no warrant for refusing registration to the assessee-firm. Registration is, accordingly, directed to be granted for the assessment year 1978-79 and the appeal is allowed.


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