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Assistant Commissioner of Vs. Mahesh Investments - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT
Decided On
Judge
Reported in(2004)88ITD221(Bang.)
AppellantAssistant Commissioner of
RespondentMahesh Investments
Excerpt:
.....firm without any business activity. section 4 of the indian partnership act, 1932 defines the firm partnership which reads 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. 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.according to the above definition, three essential conditions are required to be fulfilled for a valid partnership firm. i. there must be an agreement entered into by all the partners concerned. iii. business must be carried on by all or any one of the partners acting for all.8. while examining the provisions of.....
Judgment:
1. All these appeal of the revenue relates to assessment years 1984-85 to 1991 -92.

2. The only grievance of the revenue in these appeals is regarding the direction of the CIT(A) to assess the property income in the status of registered firm. We have heard all the appeals together and disposing of the same by this common order.

The assessee firm was constituted by a Deed of Partnership dated 20-3-1980. According to Partnership Deed there are two parties and one minor was admitted to the benefit of the Partnership. According to Clause-Ill of the Partnership Deed, the business of the firm shall be to take on lease or hire, to purchase or acquire immovable properties and demolish, improve or reconstruct the said properties for the purpose of hiring or selling out them to the best advantage of the firm and in particular to develop immediately the property at 70 & 70/1, M.G. Road, Bangalore-560 001. On 21-3-1980 one of the partner Smt. Asha Nanjaraj took the premises bearing No. 70/70/1, M.G. Road, Bangalore on lease for and on behalf of assessee firm by means of registered lease deed from Shri A.K. Anand Narain and Shri Prem Narain. The lease deed was for a period of 40 years. As per the terms of lease deed, the existing building was to be demolished and a multi-storeyed building was to be put up by the assessee. After the expiry of the lease period, the lessee shall deliver the leased premises to the lessor back with all the buildings erected thereon by the lessee. As per the lease deed the existing building was demolished and a multi-storeyed building was constructed and the same was leased out to various other persons. For the assessment year 1983-84, the assessee was offering the rental income received from the above said buildings as income from house property.

Assessments were completed in the status of the registered firm and the income of the assessee was accepted as income from house property. No income was offered by the assessee under the head 'business'. For the assessment year 1990-91, the Assessing Officer appears to have taken a view that since no business was carried on by the assessee's firm there could be no assessment in the status of a firm. On appeal by the assessee the first appellate authority concluded that the activity of the assessee is a business within the meaning of Indian Partnership Act and that was sufficient to treat the assessee as registered firm.

3. In all assessment years under consideration, the first appellate authority concluded that the rental income received by the assessee is an income under the head 'house property. For arriving this conclusion, the first appellate authority followed the judgment of the jurisdictional High Court in the case of D.R. Puttana Sons (P.) Lid. v.CIT [1986] 162 ITR 468' (Kar.) and also the judgment of the Supreme Court in the case of S.G. Mercantile Corpn. (P.) Ltd. v. CIT [1972] 83 ITR 700. Apart from this, the assessee himself claimed the income as income from house property all along. The CIT(A) further observed that the term business has been defined in the Income-tax Act, however, the same was not defined in the Indian Partnership Act. Upon this observation, the CIT(A) came to the conclusion that the activities of the assessee is in the nature of the organised one with an intention to generate income and the same is within the wide meaning of the term business as understood in the commercial parlance by the public.

According to CIT(A), the activity of the assessee is business for the purpose of Section 4 of the Indian Partnership Act. Hence, CIT(A), directed the Assessing Officer to treat the same in the status of a firm. Against this direction of CIT(A), the revenue has filed the present appeal before this Tribunal.

4. Mr. Lakshminarayana, the learned departmental representative submitted that one Smt. Asha Nanjaraj(took the property on lease in her individual name and hence, it cannot be construed that the property was taken on lease by the Partnership Firm. The learned departmental representative has also submitted that the bench of this Tribunal in the case of Famous Commercial Complex v. ITO[IT Appeal No. 749 (Bang.) of 1989 dated 31-12-2001] took a decision that when there is no business, there cannot be valid firm within the meaning of Section 4 of the Indian Partnership Act, but the income is to be taxed in hands of partners as co-owners under Section 26 of the Act. In this case also, there is no business carried on by the assessee apart from the rental income received by the assessee. Under these circumstances, the assessee cannot be treated as registered firm.

5. On the contrary, Shri N.R. Thirumal, the learned representative for the assessee submitted that in the assessee's own case for the assessment years 1990-91 & 1992-93, this Tribunal upheld the similar orders of CIT(A). In view of the decision of this Tribunal in the assessee's own case in ITA No. 1755(B)/92 and ITA No. 524(B)/96 dated 19-1-2001 and 29-11-2001, the assessee firm has to be treated as registered firm, even though the assessee has income only from house property.

6. We have heard the rival submission on both sides and we have also perused the material available on record. It is admitted case of both parties that the rental income received by the assessee has to be treated as income from house property. In fact, the assessee has filed the return claiming the income as income from house property. The lower authorities also concluded that the income is only from house property.

Section 2(b) of Indian Partnership Act, 1932 defines business. It is an inclusive definition as in the case of Indian Income-tax Act. Section 2(b) of the Indian Partnership Act reads as follows: 2. In this Act, unless there is anything repugnant in this subject or context.

Section 2(13) of the Income-tax Act, 1961 ('the Act') also defines business. Section 2(13) of the Act reads as follows: (13) 'Business' includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture.

This is also an inclusive definition. The definition of word "business" is no more res Integra. The Apex Court in various decision held that even a single activity with an intention to earn profit will amount to business. In fact the definition of business as defined in Section 2(13) of the Income-tax Act is very wide so as to include an adventure.

In these circumstances, in our opinion, the word "business" as defined in Section 2(b) of the Indian Partnership Act, 1932 fall within the wide ambit of the term "business" as defined in Section 2(13) of the Income-tax Act.

7. Now we have to sec whether there can be a valid Partnership Firm without any business activity. Section 4 of the Indian Partnership Act, 1932 defines the firm Partnership which reads 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.

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.

According to the above definition, three essential conditions are required to be fulfilled for a valid Partnership Firm.

i. There must be an agreement entered into by all the partners concerned.

iii. Business must be carried on by all or any one of the partners acting for all.

8. While examining the provisions of Indian Partnership Act in order to find out whether there can be a valid Partnership Firm or not we have to first find out whether there is an agreement between the partners to share the profit of a business. The agreement wherein Partnership firm was created evidences sharing of profit of the business. Both the parties before us conceded that the rental income is income from house property. The conclusion arrived by the CIT(A) treating the rental income as income from house properly is not challenged before vis. In other words, the assessee accepted the treatment of rental income as income from house property. Hon'ble Karnataka High Court in the case of D.R. Puttana & Sons (P.) Lid. (supra) in similar situation held the income is taxable under the head "Income from house property" only. The head note in the said case reads as under: So long as the title and ownership of a structure built by an assessee remained vested in the lessee (assessee), the income derived from the property has to be assessed as 'income from property'.

Therefore, where the assessee took on lease a site for a period of 30 years and constructed a building on it at its own cost and let out the building, the assessee has to be treated as the owner of the building during the period of the lease and the income derived by way of rent from the, building had to be assessed under the head 'Income from property' and not under the head 'Income from business'.

9. Somewhat similar question arose for consideration before this Tribunal in the case of ITO v. Poornima Enterprises [IT Appeal No. 837 and 838 (Bang.) 1984]. This Tribunal by its order dated 14-7-1986 held that in a similar circumstances the assessee is not carrying on business hence, there cannot be an assessment in the status of a firm.

The revenue took up the matter on reference before the High Court.

Hon'ble Karnataka High Court by its order dated 19-6-1992 in ITRC No.26 to 29/1991 approved the decision of this Tribunal. The jurisdictional High Court held that when there is no firm, the question of considering as to whether there is a registered firm or not docs not arise. The income from property will be taxed in hands of partners as co-owners in view of Section 26 of the Act. However, the said decision has no application in present set of facts, as the genuineness of firm is not questioned, but status is changed to Association of Persons instead of a registered firm.

10. Under the Income-tax Act, income is chargeable to tax under various heads. The heads as mutually exclusive. Income is computed as per relevant provision of the Act. Hon'ble Supreme Court in cases of United Commercial Bank v. CIT[ 1957] 32 ITR 688 and East India Housing & Land Development Trust Ltd. v. CIT [1961] 42 ITR 49 held that where an item of income falls under one head, it has to be charged under that head only and no other. Hon'ble Delhi High Court in the case of Bhai Sunder Dass & Sons v. CIT [1972] 85 ITR 28 held that property owned by the firm has to be treated as property of firm and not of its partners and its income can be assessed in the hands of the firm. A firm is said to be carrying on business as per Partnership Act, 1932, even if its only source of income is 'property income' it is not provided under the Partnership Act that the firm to be validly constituted should have income chargeable under the head 'Profits of Business' under the Act of 1961. It is also not the requirement tinder the Income-tax Act that to claim the status as registered firm, the firm should earn income chargeable under the head "Profits of Business".

It is to be clearly understood that taxing the income solely. Under the head "house property" docs not mean that firm is not carrying on business so as to treat it as not validly existing. Under the Partnership Act, 1932, the firm is said to be carrying on business. At this juncture, it is important to note the observation of Hon'ble Madras High Court in the case of CIT v. Admirality Flats Motel [1982] 133 ITR 895, wherein the court held as under: The classification of various heads of income under the Income-tax Act is only for the purpose of convenience of administration of the Act and the concept of "business" as envisaged under the Income-tax Act cannot be imported into the determination of the question as to whether a group of individuals, by agreement carry on business as a firm. 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 the Income-tax law. Accordingly, because of the classification of income under several heads under the Income-tax Act, it cannot be staled that whatever is classified under the head "Business" under the Income-lax Act alone could constitude 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 could be entitled to registration if the other conditions are satisfied.

11. In the present case the firm, as per its objects set out in Partnership Deed acquired the property on lease, demolished the structure, constructed new building, leased it to various lessees, maintains it, collects rents, other administrative functioning are also carried on. This is business of firm, though income from which may be taxable as income from house property. Similar view has been taken by ITAT in assessee's own case for earlier years relied by counsel for assessee. No further material is brought to our notice to take a different view.

12. In view of the above discussion, we are of the considered opinion that there is business activity in order to constitute a valid Partnership Firm. Since there is firm and since the other conditions are fulfilled, the firm is to be treated as registered firm.


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