1. These are two appeals preferred by the revenue. The appeals relate to the assessment years 1978-79 and 1979-80. The appeals contest the decision of the AAC directing grant of registration to the assessee, a concern which was treated by the ITO as an unregistered firm for each of the assessment years 1978-79 and 1979-80.
2. The reasons given by the ITO for denying registration to the assessee, in each of the assessment years and as appearing in the assessment orders are set out in extenso as under together with the manner of computation of total income : Status : The assessee filed a partnership deed dated 29-10-1977 along with Form No. 11 claiming registration up to 31-10-1977.
Subsequently, a fresh partnership deed executed on 27-2-1978 along with Form No. 11A was filed claiming registration up to 31-3-1978.
The assessee during the year of account did not carry on any business. Hence, the question of granting registration does not arise. The assessee received rents only by leasing the godowns.
Hence, I proceed to assess the assessee in the status of unregistered firm.
The assessee returned a total income of Rs. 16,720. This is returned under the head Net profit as per 'Profit and loss account.' But actually, the assessee did not carry on any business during the year of account but obtained rents of Rs. 10,296 for the first period, i.e., from 1-4-1977 to 31-10-1977 and Rs. 6,425 for the period from 1-11-1977 to 31-3-1978. The case has been posted for hearing. After discussing the case with the assessee's representative, Shri V. 'Sundaram, C.A. present, the income returned is accepted.
Status : The assessee filed Form No. 12 on 27-7-1979 for continuation of registration. During the previous year relevant for the assessment year 1979-80 the assessee did not carry on any business. Hence, the question of granting registration does not arise. The assessee received rents only by leasing godowns. Hence, I proceed to assess the assessee in the status of unregistered firm.
The assessee filed a return of income on 27-7-1979 admitting an income of Rs. 18,800. In response to a notice issued under Section 143(2) assessee's representative assessment is made as under : 3. The assessee appealed to the AAC and it was contended that refusal of registration was not justified. According to the assessee, the activity of the firm in leasing out its lands and godowns constituted 'business'. The AAC was of the view that a godown was used for storing commercial goods and was a commercial asset and leasing out of commercial assets, he concluded, was doing business. He, therefore, directed the grant of registration for the two years.
4. The revenue is aggrieved with the decision of the AAC. The contention of the learned departmental representative briefly put, which was also the main plank of the arguments for refusal of registration by the ITO, was that since the assessee did not do any business, there is no firm in existence to which registration could be granted. Merely because the rents were realised by letting out a godown, it was urged that there was no business activity, the income derived being only income from property.
5. The learned Counsel for the assessee, on the other hand, submitted that the assessee-firm had validly come into existence for the purpose of earning income by constructing a hotel, doing business in hotels, as also letting out godowns, etc. He stated that two of the partners who had purchased a plot of land with some sheds on it, brought in the sheds by them as their capital when the firm was initially constituted and in the interregnum till construction of the hotel building was complete, the sheds were let out as godowns and thereafter the sheds were demolished. It was urged that all these were business activities and there having been a valid firm in existence in each of the assessment years, registration should have been allowed by the ITO.6. The learned departmental representative had also made a point that for the assessment year 1976-77, the Tribunal had in IT Appeal No. 1170 of 1978-79 by order dated 20-5-1980 upheld the refusal of registration for similar reasons, as done by the ITO for this year. The submission of the learned Counsel for the assessee in reply was that, that appeal was decided ex parte, as none appeared for the assessee and the matter, thus, remained uncontested before the Tribunal. He, therefore, urged that the decision for this year should be rendered after due consideration of the arguments put forth and the material relied on, i.e., the various partnership deeds and in fact the entire records of the case through which he had taken us.
7. We have considered the rival submissions. For the assessment year 1977-78 also, registration had been refused for the same reasons as in the years now under consideration. The matter was taken up in appeal.
The AAC upheld the refusal of registration for the same reasons as weighed with the Tribunal for the assessment year 1976-77. There was no further appeal in that year. Thus, the matter was decided ex parte by both the appellate authorities in each of the different assessment years. To decide the issue of the nature now before us, it is essential to begin at the beginning.
8. On 9-10-1975, a partnership deed was entered into between 9 persons.
It is not necessary to mention the names of all the partners beyond stating that one M. Gopala Krishna and one J. Venkateswara Rao were two of the partners. Clause 2 of the deed stated that the partnership commenced from 1-11-1974 for the purpose of carrying business of : (i) Construction and running the hotel and lodging home, bar, or restaurants and other businesses like letting out portions or buildings for the establishment of shops or godowns and shall be terminable at will.
Clause 6 of the partnership deed further stated that site and buildings purchased by the two particular partners referred to earlier, in their names, in the Court auction together with charges on the property purchased would be the property of the firm. It was further stated that the aforesaid two partners together with one Venkata Ramanarao would be the managing partners of the firm. Finally, Clause 15 stated that in the event of the leasing out of the hotel and buildings, the net rent after paying the taxes and repairs would be distributed among the partners in accordance with their shares and no management allowance was payable. Clause 17 provided that the partners shall meet at least quarterly once and discuss all the problems connected with the management of the business of the partnership.
9. It may be mentioned that the balance sheet of the firm as on 31-3-1975 showed investment in property described as 'site' at Rs. 2.05 lakhs. This was the value of the land of the area of 2,000 sq. metres Which was purchased in Court auction in Suryaraopet. The actual consideration paid was Rs. 14,000 and mortgage liability to the extent of Rs. 1,15,000 had also been taken over by the two partners who purchased the property and brought the same by way of their capital into the firm. On 31-3-1976 in the balance sheet, the value of this property was Rs. 2.18 lakhs and building construction Rs. 12,631 and on 31-3-1977 the building under construction was shown at Rs. 35,673 in addition to site value.
10. On 29-10-1977 (deed stated as executed on 23-11-1977), another deed of partnership was drawn up. According to this, there were 14 partners, i.e., 5 more partners were admitted. The firm as constituted with 14 partners which came into effect from 29-10-1977. This deed of partnership stated that the approval received from the Department of Tourism, New Delhi, vide letter No. 5 T.H.I. (27)/75, dated 11-9-1975 in the name of Shri M. Gopalakrishna, one of the managing partners of the firm, would be deemed to be the property of the firm and all the rights and liabilities which went with the said approval shall accrue and attach to the firm. Many more businesses were added to the objects of the partnership then obtaining in the earlier deed. Though there was no specific mention of letting out of godowns, it was stated that the objects would be to construct hotels, restaurants, bars, rest houses, lodgings, etc., and also many other multifarious businesses and finally to do any other business which can be conveniently or usefully carried on in continuation of the objects of the firm. According to Clause 5 of the instrument, the property purchased by the two partners earlier mentioned having been transferred to the firm, all the partners acquired the shares in the same proportion to their profit-sharing ratio, i.e., the shares specified in Clause 6. Shri Mootha Gopala Krishna was one of the managing partners specifically empowered on behalf of the firm to look after the construction of the building and carry on the day to day business and do all acts which was incidental to carry on the business. It was also provided that the firm would not dissolve on death or retirement of a partner. There was yet another partnership deed executed on 27-11-1978 by which three partners, Smt.
D.D. Rajakumari, Kumari S. Janaki and Kumari J. Nirmala retired from the partnership taking their capital contribution and two new partners were admitted. The firm with the new constitution was stated to have come into effect from 27-2-1978 and the principles and the objects of the partnership were legion. In particular leasing out of godowns was mentioned. There was again reiteration that the property purchased by the two partners Gopalakrishna and Venkateswara Rao continued as the property of the firm. Each of the 14 (should be 13) partners were stated to have interest in proportion to their share. The new partners were to contribute in cash towards their capital. M. Gopalakrishna was again to be the managing partner of the firm along with Venkateswara Rao, Krishnam Raju, Kripa Jeevan and Gopalakrishna.
11. On 31-3-1978, the value of building construction went up to Rs. 4.11 lakhs. Site value was Rs. 2.45 lakhs.
12. To complete the record, it may be mentioned that a lease deed was executed between the Food Corporation of India (FCI) and M.Gopalakrishna on 27-9-1975 for lease of the sheds, i.e., the godown which stood on the property brought in by the two partners into the firm. The lease deed did not specify the status of M. Gopalakrishna nor did it state in what capacity M. Gopalakrishna signed as lessor.
13. Section 2(23) of the Income-tax Act, 1961 ('the Act') reads as under : 'Firm', 'partner' and 'partnership' have the meanings respectively assigned to them in the Indian Partnership Act, 1932 (9 of 1932) ; but the expression 'partner' shall also include any person who, being a minor, has been admitted to the benefits of partnership ; In the case of CIT v. Admiralty Flats Motel  133 ITR 895, the Madras High Court observed : Under Section 2(23) of the Income-tax Act, the expressions 'firm', 'partner' and 'partnership' have the meanings respectively assigned to them in the Indian Partnership Act. Section 4 of the Partnership Act defines 'partnership' as 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. While as a result of Section 2(23) of the Income-tax Act, the concept of the Partnership Act has been imported into the Income-tax Act, there is no provision in the Partnership Act which imports into it the concept of income-tax law. Therefore, because of the classification of the income under several heads under the Income-tax Act, it cannot be stated that whatever is classified under the head 'Business' under the Income-tax Act alone could constitute business in the sense of the Partnership Act, So, the result is 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.
The above observations show that the concept of the definitions in the Indian Partnership Act, 1932 have been imported into the Act and the definitions to be considered for the purposes of deciding whether an entity is a 'firm' or not in both the Acts would, thus, be synonymous.
We now come to Section 4 of the Indian Partnership Act which reads as under : '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.
Persons who have entered into partnership with one another are called individually 'partners' and collectively 'a firm', and the name under which their business is carried on is called the 'firm name'.
Therefore, partnership 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. Section 14 of the Indian Partnership Act further speaks of the property of the firm and reads as under : Subject to contract between the partners, the property of the firm includes all property and rights and interests in property originally brought into the stock of the firm, or acquired, by purchase or otherwise, by or for the firm, or for the purposes and in the course of the business of the firm, and includes also the goodwill of the business.
Unless the contrary intention appears, property and rights and interests in property acquired with money belonging to the firm are deemed to have been acquired for the firm.
What we have to consider in the present case is whether on the facts there is a business carried on by the persons who have held themselves out to be partners.
14. In the case of Sitaram Kalani v. Manmal Gattani AIR 1956 MB 60, which is the leading case on the point, as to what constitutes carrying on of business within the meaning of the Indian Partnership Act, there are the following observations : (7) The evidence as a whole, in my opinion supports the defendant's version that a definite agreement had been reached about the capital to be subscribed by each partner and about the share each one would have in the profits. It was on this understanding that the business was started at Ratlam and an account was opened in the Imperial Bank of India in the name of Madhya Bharat Metal Industries (Ex. p. 13) In brief, the business was started when the cardinal points were agreed upon and it was only after this, that steps were taken for receiving the engine and for purchasing the machinery, etc. The mere fact that a formal agreement with other minor details and stipulations was to be drawn up later should not prevent us from considering the agreement of partnership as concluded.
On the evidence as a whole, I feel that this cannot be called a case only of an inchoate agreement. The version of the plaintiff that he had advanced the money on the understanding that he would have the option of becoming a partner at some future date cannot, in the least, be inferred from the evidence and from the course of conduct adopted by him and by the other partners in this case.
Therefore, the learned Counsel for the appellant seems to be right when he contends that as soon as parties agreed to subscribe capital and to get shares in the profits and as soon as they started business in pursuance of this agreement, Section 4, Indian Partnership Act was attracted.
(8) There is no doubt that it is the carrying on of a business, not an agreement to carry it on, which is the test of partnership. In the present case, the business was actually started as is already seen above. Mr. Chaphekar for the respondent, however, advanced a rather ingenious argument that till brass utensils were actually manufactured, it could not be said that 'business was carried on' within the meaning of Section 4, Indian Partnership Act.
In my opinion this contention is without force as each and every step taken for the erection of the factory, which was to manufacture utensils, would be considered within the purview of 'carrying on business'. This term has been used in the Indian Partnership Act in a broad and general sense. It may be observed that as soon as a partnership starts its commercial life having its own capital, its own assets and liabilities, its own employees and its own credit in the market--in short as soon as it becomes business entity it would be regarded as 'carrying on business' within the meaning of Section 4, Indian Partnership Act.
(9) I, therefore, come to the conclusion that the partnership had actually come into existence and if afterwards a partner wants his share back he cannot get it through a Court of law without filing a suit for dissolution and for rendition of accounts.
It is clear from the above observations that the term 'carrying on business' in the Indian Partnership Act is used in a broad and general sense. According to the aforesaid ratio, as soon as a partnership starts its commercial life, having its own capital and its own assets and liabilities, it becomes an entity which could be regarded as 'carrying on business' within the meaning of Section 4 of the Indian Partnership Act.
15. Here, in the present case, the persons who have held themselves out to be partners, have come together ; two of the persons had brought in property which they had earlier purchased, into the firm's books and the value of such property brought in was evidenced by the firm's balance sheet. This property, thus, became property of the firm in terms of Section 14 of the Indian Partnership Act. A permit from the Director of Tourism was also made property of the firm. Construction for building a hotel was also started soon after inception and by 1978 the total investment on construction came to as much as Rs. 4,00,000.
Each and every step taken for the erection of the hotel building, i.e., starting with the purchase of raw material, etc., all constituted carrying on business. In the interregnum some sheds which were lying vacant were let out and money was earned. Merely because one of the partners entered into the lease agreement with FCI without the lease deed mentioning that the property was that of the firm, does not make the income cease to be that of the firm, firstly because the person concerned was a managing partner and what is more important and clinching under Section 16 of the Indian Partnership Act in the absence of contract to the contrary, profits even if earned by the partner by use of the firm's property becomes the firm's income. There was, therefore, clearly a firm which came into existence under the partnership deed of 1975. Once a firm has come into existence, by satisfying the requirements of Section 4 of the Indian Partnership Act, then registration under the 1961 Act can be refused only if the requirements of Section 185 of the 1961 Act and other provisions relating to the grant of registration under the 1961 Act are not satisfied. In the present case, there is absolutely no material on record to show that any of these requirements remained unsatisfied.
Therefore, we have to hold that the assessee-firm was entitled to the grant of registration in each of the assessment years.
16. In the present appeals, we are not concerned with the head of income under which the receipts of rent are to be assessed. We are only on the point whether there was a firm and such firm was entitled to the grant of registration. Both these aspects have been found in favour of the assessee. We, therefore, uphold grant of registration for each of the assessment years.