Income Tax Appellate Tribunal - Amritsar
Income Tax Officer vs Mohinder Singh Davinder Singh & Co. on 16 July, 1999
Equivalent citations: [2000]73ITD448(ASR)
ORDER
D. R. Singh, J.M.
1. ITA Nos. 93 & 94/Asr/1992 have been filed by the Revenue against the single order of the CIT(A), Jalandhar in Appeal Nos. 478 & 479/90-91/CIT(A)/Jal., dt. 15th November, 1991 on the following effective grounds :
"1. On the facts and in the circumstances of the case, the learned CIT(A) has erred in setting aside the order of the AO.
1a. The learned CIT(A) was not justified to set aside the order of the AO with the direction, that the income may be assessed in the hands of individual co-owners whereas the assessee entered into partnership and accordingly partnership deed was executed on 10th March, 1986. The AO had rightly assessed the income in view of the decision of Hon'ble Supreme Court in the case of S.G. Mercantile Corporation (P) Ltd. vs. CIT (1972) 83 ITR 700 (SC)."
2. ITA Nos. 1064 & 1065/Asr/1992 have been filed by the Revenue against the single order of the CIT(A) in Appeal Nos. 477 & 476/1990-91/CIT(A)/Jal., dt. 7th July, 1992 on the following effective grounds :
"1. That on the facts and in the circumstances of the case, the learned CIT(A) has erred in allowing assessee's appeal by relying on the decision of the CIT(A) passed on No. 478-479/1990-91/CIT(A)/Jal., dt. 15th November, 1991 which has not been accepted by the Department.
2. That it is prayed that the order of learned CIT(A) be set aside and that of the AO be restored."
3. All the grounds are taken up and disposed of together by this common order because the decisions on all those grounds mainly depends upon the decision of the single common issue; whether co-owners sharing profits of any property are partners or not under the deed of partnership in the case of the assessee.
4. Stated briefly, the undisputed relevant and material facts for the disposal of the abovestated issue/grounds are as under.
5. Perusal of the combined assessment order for both the years shows that it has been passed under s. 144. In this regard notice under s. 148 was issued for both the years and returns were filed in the name of M/s. Mohinder Singh Davinder Singh showing nil income. It was also stated by the assessee that he was only a co-owner in the property. The AO has stated that three groups of persons 'A', 'B' and 'C' had come together and drafted a partnership deed on 10th March, 1986 and the same was dissolved on 30th March, 1988. That the assessee had as such formed a firm and income was assessable in the status of URF. The case was referred for directions to the IAC who has stated that groups 'A', 'B' and 'C' had entered into an agreement with the sole purpose of acquiring property on ownership basis or on lease basis and then renting it out to prospective lessees. That in furtherance of this motive some land in village Dhandowal was taken on annual rent of Rs. 9,500 and open platforms were constructed and leased out to FCI w.e.f. 18th October, 1986. That the platforms constructed were open to sky and as such this did not constitute house property and partnership deed specifically mentions that business of the assessee would be acquiring and leasing out real estate. That as such the income of the assessee was not assessable as income from house property in view of the Madras High Court decision in Anaikar Traders & Estates (P) Ltd. vs. CIT (1990) 186 ITR 175 (Mad). That income from property could be assessed where there was no specific indication in the memorandum of association that assessee-company wanted to sell or lease the property. It was, therefore, stated that case of the assessee is that of carrying on business activity rather than deriving income from house property. The AO was accordingly, directed to frame the assessment. The AO upon the instructions of the IAC assessed the respondent-assessee as unregistered firm.
6. Aggrieved with the orders of the AO, the respondent-assessee went in appeal before the CIT(A), who by his detailed order allowed the appeals of the assessee and set aside the orders of the AO for both the assessment years and directed the AO to assess the assessee as individual co-owner.
7. Now, the Revenue is in appeal before us for setting aside the order of the CIT(A) and for restoration of the order of the AO.
8. The learned Departmental Representative for the Revenue has relied upon the order of the AO and on the decisions of the Hon'ble Madras High Court in the case of Anaikar Traders & Estates (P) Ltd. (supra) and S.G. Mercantile Corpn. (P) Ltd. vs. CIT (1972)i 83 ITR 700 (SC). In support of the grounds that three groups of persons 'A', 'B' and 'C' had come together and drafted a partnership deed on 10th March, 1986 and the same was dissolved on 30th March, 1988, so the assessee, as such, had formed a firm and income was assessable in the status of URF. It has further been argued by the learned Departmental Representative that this agreement has been executed with the sole purpose of acquiring property on ownership basis or on lease basis and then renting it out to the prospective lessees and in furtherance of this motive, he constructed an open platform and leased out the same to the FCI w.e.f. 18th October, 1986 and as such the platforms constructed were open to sky and this did not constitute house property and partnership deed did specifically mention that the business of the assessee could be acquiring and leasing out the real estate and so in view of the citation Anaikar Traders & Estate (P) Ltd.'s case (supra) it was not assessable as income from house property. He further argued that the case of the assessee was that of carrying on business activity rather than deriving income from house property and as such the AO was fully justified in assessing the assessee in the status of the URF. He also relied upon the Supreme Court decision S.G. Mercantile Corpn. (P) Ltd.'s case (supra) contending that in the similar circumstances, it was held that the definition of "business" in s. 2(4) was of wide amplitude and it could embrace within itself dealing in real property as also the activity of taking a property on lease, setting up a market thereon and letting out shops and stalls in the market.
9. Lastly, the Departmental Representative concluded that in this partnership, all the ingredients of partnership were there because the co-owners were sharing profits by letting out the property. Hence, this was a business activity under the Deed of Partnership and so the partnership deed executed by the partners was in fact, a legal partnership deed and the same was properly assessed by the AO as URF.
10. The facts of the case of Anaikar Traders & Estates (P) Ltd. (supra) and the ratio of the decision is of no help to the Revenue because in that case, it was held that a perusal of the Memorandum of Association of the assessee-company clearly established that its object was to acquire and possess properties. There was no indication that the assessee-company intended to sell those properties or even turn them to account by way of leasing them as part of its business activities. Hence, the properties were not held by the assessee as part of its business assets. The income therefrom was assessable as income from property.
11. On going through this finding, it becomes clear that in that case, the assessee-company had intended to sell the properties or even turn to account by way of leasing them as a part of its business activity. In that case, it was held that the properties could not be said to have been held as part of business assets and income would be assessable as income from property. In the present case, the assessee has neither sold the property nor turn to account by way of long-term lease, rather the property has been constructed and given on rent. Hence, we find that this citation given by the Department is of no assistance to the Department.
12. On the other hand, it has been argued by the counsel of the assessee that there was no legal firm constituted by the respondent-assessee as the partnership deed was written only for the convenience of the co-owners and the Department concerned, i.e., FCI to collect the rent from FCI. The plinth block consisting of plinth, office block, toilets, check post and chowkidar accommodation was constructed by the co-owners, who contributed individually for this construction. The so-called firm M/s. Mohinder Singh Davinder Singh only collected the rent from FCI on behalf of the co-owners and distributed the rent so collected among the co-owners. In fact, no business was made by M/s. Mohinder Singh Devinder Singh, as firm. No balance sheet was prepared and no investment was made by M/s. Mohinder Singh Davinder Singh. Lastly, it is argued that since there was no legal firm constituted and no legal partnership deed was made and no business was conducted, so the partnership deed so executed in the instant case may be only considered as an agreement amongst the co-owners and hence the appeals of the Revenue are liable to be dismissed.
13. In support of his contention, the learned counsel for the assessee has relied upon the ratio of the decision of the Tribunal, Ahmedabad Bench in the case of ITO vs. Narol Highway Commercial Centre (1985) 21 TTJ (Ahd) 62 and in the case of CIT vs. Phabiomal & Sons (1986) 158 ITR 773 (AP) in which even the request of the Department for Special Leave to Supreme Court was also refused.
14. For appreciating this argument, we now revert back to the wordings of the partnership deed executed on 10th March, 1986 relying on which the AO came to the conclusion that partnership deed was executed in legal sense because the partners were to carry on the business of real estate whereas, on the other hand, relying on the same wordings, it has been argued by the counsel for the assessee that, in fact, the co-owners of the land consisting of groups 'A', 'B' and 'C' executed this deed simply to rent out their lands after raising certain plinths and structure, according to the specifications given by the FCI as per their agreement dt. 14th March, 1986. Since it was a simple letting out of the lands by the co-owners, i.e., groups 'A', 'B' and 'C' vide lease deed dt. 24th April, 1987, so this firm was not a legal one.
15. Now, we reproduce the relevant extracts of partnership deed as below :
"Whereas the aforesaid partners intend to carry on the business of real estate at Jalandhar City in the name and style of M/s. Mohinder Singh Devinder Singh & Co., the terms and conditions hereinafter appearing :
Now this deed is partnership witnesseth as :-
The partnership business shall be that of real estate, i.e., acquiring property, on ownership basis or on lease basis and then renting out the same to the prospective lessees."
16. On going through this clause, we find that in the first portion of the agreement, it has been mentioned by the parties that "the partners intend to carry on the business of the real estate" but in the second portion of this lease agreement even the meaning of 'real estate' has been cleared by stating that "the partnership business shall be that of real estate, i.e., acquiring property, on ownership basis or on lease basis and then renting out the same to the prospective lessees." This clearly indicated that, in fact, the partnership deed though mentioned the words 'business of real estate' but, in fact, it was only written amongst the co-owners with the purpose of raising certain structure as per specification of FCI and thereafter letting out the same to them with the purpose of earning rent as it is evident from the fact that this partnership deed was executed on 10th March, 1986 and thereafter an agreement was executed with FCI on 14th March, 1986 for specifying the structure to be made by the co-owners and lastly vide lease deed dt. 24th April, 1987, the same was let out to FCI on rent. The words 'firm', 'partner' and 'partnership deed' are not defined in the IT Act, 1961 but sub-s. (2) of s. 2 says they have the same meaning as assigned under the Indian Partnership Act. Sec. 4 of the Partnership Act defined "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". It is seen from this definition that partnership involves an agreement to carry on business. The expression "business" is defined under s. 2(b) as "including every trade, occupation and profession". In CIT Phabiomal & Sons (supra), it has been held by the Judges of the Hon'ble Andhra Pradesh High Court that letting out of a building and realising rents therefrom did not amount to carrying on of business. It was incidental to ownership. The expression used in s. 4 of the Indian Partnership Act, 1932, are "agreed to share the profits of a business carried on by all or any of them", which implied the existence of a business. There was no business in the act of letting out of a building of which one is an owner. In the instant case, the co-owners agreed to divide the rents by letting out their building. There was no existence of any business between P and his three sons who signed the partnership agreement. The so-called agreement of partnership between the parties evidenced an arrangement regarding the sharing of the income from the properties and the agreement could only be considered to be one between co-owners. Therefore, there was no valid partnership in law entitled to registration.
17. In this very judgment, while arriving at the above conclusion, the Hon'ble High Court took into consideration the authorities and discussed them very liberally including S.G. Mercantile Corpn. (P) Ltd.'s case (supra), relied upon by the Departmental Representative for the Department and mentioned that in this case 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 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.
18. In CIT vs. Phabiomal & Sons (supra), it was laid down by the Hon'ble High Court that 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.
19. In the case in hand, M/s. Mohinder Singh Davinder Singh are co-owners of land. They have written partnership deed by the name of M/s. Mohinder Singh Davinder Singh to let out their lands after raising certain structures and plinths over the same in compliance to the agreement with the FCI and after completing the same let out the same, to the FCI by lease deed on rent. It clearly shows that in fact, these co-owners never constituted a legal firm but this partnership deed was simply written for the convenience of the co-owners and that agreement was executed between them so that the co-owners could collect the rent from the FCI and M/s. Mohinder Singh Davinder Singh later on distributed the rent so collected among the co-owners. In these circumstances, the facts which are quite similar to the case of CIT vs. Phabiomal & Sons (supra), it has been clearly held by the Hon'ble High Court that letting out of a building and realising rents, by no means, is doing a business. It is incidental to ownership. They further held that the act of letting out a building was one as an owner is not a business. Following this decision, which is fully applicable to the facts of this case in hand, we also hold that no legal partnership deed was executed among the co-owners as the element of business was missing because they simply wrote this partnership deed to earn rent from land after letting out the same to FCI by raising the plinths block consisting of plinths office complex, check-post, chowkidar block, urine block with a boundary wall and the act of letting out the building of which one is an owner is not business. Since we have held that the element of business is missing in the partnership deed, so the co-owners of the firm M/s. Mohinder Singh Davinder Singh sharing profits are not partners in the legal sense and hence the issue requires to be settled by us is now decided against the Revenue.
20. Hence, we conclude that there are no merits in the grounds of appeal taken by the Revenue and the well-reasoned and well-discussed order of the CIT(A) does not suffer from any illegality or infirmity and the same does not call for any interference from our side and hence the same is upheld and the grounds of appeal of the Revenue are rejected.
21. The sequel to our findings, as above is that all the appeals of the Revenue in ITA Nos. 93, 94, 1064 & 1065/Asr/1992 have no merits and accordingly the same are dismissed and the orders of the CIT(A) are upheld.