Karnataka High Court
Balaji Enterprises vs Commissioner Of Income-Tax on 14 February, 1997
Equivalent citations: (1997)140CTR(KAR)61, [1997]225ITR471(KAR), [1997]225ITR471(KARN)
Bench: P. Krishnamoorthy, S.R. Venkatesha Murthy
JUDGMENT P. Krishna Moorthy, J.
1. The Income-tax Appellate Tribunal, Bangalore Bench, has referred the following two questions under section 256(1) of the Income-tax Act, 1961, at the instance of the assessee :
"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that letting out of the shops by the assessee concern amounts to business activities ?
(2) Whether, on the facts and circumstances of the case and in view of the revised returns filed by the assessee, the assessee is entitled to be assessed in the status of an association of persons under section 26 of the Income-tax Act in respect of the rental income ?"
2. The assessee is a firm evidenced by a partnership deed. According to the assessee, four different groups had joined together and taken a property on lease and built up a structure on the same and was leasing out to various persons.
3. Originally, the assessee had claimed before the Income-tax Officer the status of a registered firm and the return of the income was filed accordingly. The firm had only income from the property. Thereafter, the assessee filed a revised return, in which the status was shown as association of persons. According to the assessee, four different groups had joined together and taken a property on lease and built up a structure on the same. The income of the property has to be shared by these four groups in different proportions and, therefore, they are liable to be assessed as per the provision contained in section 26 of the Income-tax Act, viz., as co-owners. The assessing authority did not accept the contention of the assessee and treated the firm as a registered firm and made the assessment accordingly.
4. Aggrieved by the order of the Assessing Officer, the assessee filed an appeal before the Commissioner of Income-tax (Appeals), who took the view that the assessee was liable to pay tax in the status of association of persons as its only source of income was from house property and the provisions of section 26 of the Income-tax Act would clearly apply. Against the above order, the Department filed an appeal before the Appellate Tribunal.
5. The Appellate Tribunal set aside the order of the appellate authority and held that the assessee has to be assessed in the status of a registered firm. The Appellate Tribunal also found that, taking on lease the property, constructing a building thereon and leasing it out to various tenants, is the business activity of the firm and that the rental income cannot be treated as income from property. In that view of the matter, the Tribunal held that the assessee was carrying on an activity which could be regarded as business. It was further found that the taking of the property on lease and thereafter, developing it by putting up a structure and letting it out to various tenants is the business activity of the firm and, accordingly, the assessee has to be treated as a partnership firm for the purpose of assessment of income-tax. Aggrieved by the order of the Tribunal, the assessee filed an application under section 256 of the Income-tax Act which was allowed by the Tribunal and the two questions mentioned above have been referred to us under section 256(1) of the Income-tax Act.
6. We shall now consider these questions :
The first question that is referred by the Tribunal is as to whether the letting out of the shops by the assessee concern amounts to business activity. It has to be stated that the business of the assessee concern is to take on lease the properties, thereafter develop them by putting up structures and letting them out to the various tenants on rental basis. The question to be decided is as to whether it is a business income or income from the properties or in other words, it can be treated as a business of the concern to constitute a partnership firm as contemplated under section 4 of the Partnership Act. It has to be noted that there is no finding by the Tribunal that the assessee is the owner of the property. It has clearly come out that the activity of the firm is to take the properties on lease, to develop it and to lease it out to others. The question as to whether it can be considered as business activity of the firm or whether they are receiving the rent only as owners of the properties.
7. A similar case came up for consideration before the Supreme Court in S.G. Mercantile Corporation P. Ltd. v. CIT .
8. In the above case, the assessee was a company and the company, whose object inter alia was to take on lease or otherwise acquire and to hold, improve, lease or otherwise dispose of land, houses and other real and personal property and to deal with the same commercially. The assessee-company took on lease a property and undertook to spend Rs. 5 lakhs for the purpose of remodelling and repairing the structure on the site and the assessee was also given a right to sublet the different portions. The appellant, during the period in question, developed the property and let out the portions of the same as shops, stalls and ground space. The question that arose for their Lordships of the Supreme Court was as to whether the income would come under section 10 of the Indian Income-tax Act, 1922, corresponding to section 28 of the Income-tax Act, 1961, or whether it would come under section 12 of the Indian Income-tax Act, 1922, viz., income from other sources corresponding to section 56 of the 1961 Act.
9. In answering that question, their Lordships held that the assessee not being the owner of the property, the income has to be taken as one coming under section 10 of the 1922 Act, viz., the income from the business. In that context, the Lordships observed as follows (at page 704) :
"It is noteworthy that the liability to tax under section 9 of the Act is of the owner of the buildings or lands appurtenant thereto. In case the assessee is the owner of the buildings or lands appurtenant thereto, he would be liable to pay tax under the above provision even if the object of the assessee in purchasing the landed property was to promote and develop markets thereon. It would also make no difference if the assessee was a company which had been incorporated with the object of buying and developing landed properties and promoting and setting up markets thereon. The income derived by such a company from the tenants of the shops and stalls constructed on the land for the purposes of setting up markets would not be taxed as "business income" under section 10 of the Act, to which a more detailed reference would be made hereafter."
10. Thus, their Lordships held that if the rent is received as owner of the building, it would not be business income but would only be an income from the property. But in the above case, their Lordships after noting that the assessee-company was not the owner of the property, it was held that it would come only under section 10 of the Act, 1922. In paragraph 12, it is observed as follows (at page 706) :
"The definition of the word "business" as given in section 2(4) and reproduced above shows its wide amplitude and we agree with Mr. Chagla that it can 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 the shops and stalls in the market. The important question which arises in the latter case is whether the acquisition of the property on lease and letting out of the shops and stalls was in the course of investment or whether it was essentially a part of the business and trading operation of the assessee. The paramount consideration which would weigh is whether the acquisition of the property was by way of investment and whether the property was let out because of the assessee having a title in the same or whether the acquisition and letting out of the property constituted the business and trading activity of the assessee. The question as to whether the above activity is being carried on by an individual or a company, and in the latter case, the further question as to whether the carrying on of the said activity was the object of the incorporation of the company as given in the memorandum of association would also have some relevance."
12. It was further observed (at page 707) :
"Ownership of property and leasing it out may be done as a part of business, or it may be done as landowner. Whether it is the one or the other must necessarily depend upon the object with which the act is done. It is not that no company can own property and enjoy it as property, whether by itself or by giving the use of it to another on rent. Where this happens, the appropriate head to apply is "Income from property" (section 9), even though the company may be doing extensive business otherwise. But a company formed with the specific object of acquiring properties not with the view to leasing them as property but to selling them or turning them to account even by way of leasing them out as an integral part of its business, cannot be said to treat them as landowner but as trader."
13. From the aforesaid decision of the Supreme Court it is clear that if a person receives rental income by leasing out the property as its owner, then the income may come under section 22 of the Income-tax Act, 1961. But if the leasing of the property was done as part of the business concern, the income received therefrom, cannot be said to be received as a land owner but as a trader. In other words, if the property is taken on lease, thereafter developed and leased out to various tenants as part of the business activity of the assessee and not in its activity as the owner, then the income has to be treated as business income. In other words, the dictum of the court is clear to the effect that such an income is received as business income, and not as the owner of the property. In this case, the assessee has taken the property on lease, developed the same and has leased out the same as part of its business.
14. A copy of the partnership deed dated January 1, 1984, by which the assessee-firm was constituted is placed before us. The above partnership deed shows that there was originally a firm which was reconstituted with effect from January 1, 1984, and the original partnership was carrying on the business of dealing in real estate and setting up, development and exploitation of commercial complex and market. The object of the partnership firm, formed on January 1, 1984, which is provided for in clause 3, is to the following effect :
"3. Nature of business. - The nature of the business of the firm shall continue to be that of estate agents, dealers in real estates, to obtain land and building either on leasehold or on freehold basis and setting up commercial complex and markets and cinema theatres, etc., and in particular exploiting and developing the commercial complex and market already set up on the premises No. 125, Sultanpet, Bangalore, as part of the business of the firm. The firm may carry on any other business or businesses with the mutual consent of the partners."
15. As stated earlier, there is no finding by the Tribunal that the assessee is the owner of the property. The objects of the firm are also relevant to be taken note of in deciding the question as to whether developing the property taken on lease and leasing it out to others was part of the business activity or are they receiving the income as owners. In this case, from the provisions of the partnership deed, which we have quoted above, it is clear that the object of the firm itself was to obtain the lands either on leasehold or on freehold basis and set up commercial complex and lease them out. The assessee has received the income as part of their business activity and there cannot be any doubt that the leasing out of the commercial complex made by the assessee-firm is part of its business and it amounts to business activities.
16. The case decided by the Supreme Court in East India Housing and Land Development Trust Ltd. v. CIT , cannot have any application to the facts of this case, for, it was found that the company received the rental income as owner of the property and, accordingly, it would fall within section 9 of the Indian Income-tax Act, 1922.
17. Learned counsel for the assessee placed reliance on a decision of this court in D.R. Puttanna Sons Pvt. Ltd. v. CIT [1986] 162 ITR 468 to contend for the position that the income from the rent, in such circumstances, cannot be considered as income from business.
18. That decision also cannot have any application to the facts of this case. In that case, it was clearly found by this court that the assessee remained as owner of the building for a period of 30 years. The decision has proceeded on the basis that the assessee is the owner of the building. That is not the case here. In these cases, there is no finding that the assessee is the owner of the building. Moreover, clause 18 of the partnership deed itself provides that, at the end of the lease period, it shall be the duty of the surviving partners to hand over possession of the leased property with the buildings constructed on the said property to the lessors. Nothing is before us to infer that the assessee is the owner of the property. In that view of the matter, the dictum laid down in that decision cannot be applied to the facts of this case.
19. As stated earlier, the object for which the assessee-firm is constituted and other circumstances mentioned above, clearly establish that the letting out of the shops by the assessee concern is part of the business activity of the assessee-firm. Accordingly, we answer question No. 1 in the affirmative and against the assessee.
20. Question No. 2. - The question that falls for decision under this head is as to whether the assessee is entitled to be assessed under section 26 of the Income-tax Act.
21. The assessee is a firm constituted under a partnership deed dated January 1, 1984. The partnership deed sets out the share of income of various partners. The firm is also carrying on business activity as held by us while answering question No. 1. In that view of the matter, the assessee is a partnership firm. In order to attract section 26 of the Income-tax Act, the property must be owned by two or more persons and their respective shares must be definite and ascertainable. It is well settled that the partners cannot be said to have a definite and ascertainable share in regard to the properties of the firm. The leading case on the subject is that of the Supreme Court in Addanki Narayanappa v. Bhaskara Krishnappa, . At page 1304, it was held :
"The whole concept of partnership is to embark upon a joint venture and for that purpose to bring in as capital money or even property including immovable property. Once that is done whatever is brought in would cease to be the exclusive property of the person who brought it in. It would be the trading asset of the partnership in which all the partners would have interest in proportion to their share in the joint venture of the business of partnership. The person who brought it in would, therefore, not be able to claim or exercise any exclusive right over any property which he has brought in, much less over any other partnership property. He would not be able to exercise his right even to the extent of his share in the business of the partnership. As already stated his right during the subsistence of the partnership is to get his share of profits from time to time as may be agreed upon among the partners and after the dissolution of the partnership or with his retirement from partnership of the value of his share in the net partnership assets as on the date of dissolution or retirement after a deduction of liabilities and prior charges."
22. Again, in Sunil Siddharthbhai v. CIT [1985] 156 ITR 509 (SC), their Lordships observed as follows (at page 519) :
"During the subsistence of the partnership, the value of the interest of each partner qua that asset cannot be isolated or carved out from the value of the partner's interest in the totality of the partnership assets. And in regard to the latter, the value will be represented by his share in the net assets on the dissolution of the firm or upon the partner's retirement."
23. From the above pronouncements of the Supreme Court, it is absolutely clear that no partner has a definite or ascertainable share in the partnership properties or even in the assets of the firm. His only right is to get the share of his assets after dissolution of the partnership after paying all the debts in accordance with the provisions of the Partnership Act. During the subsistence of the partnership, no partner can be said to have any definite share in any of the assets of the partnership firm.
24. The fact that, in the partnership deed, a provision has been made for allotment of certain properties to certain groups on dissolution or that the share of income has to be paid from the income of the definite portion of the property by itself cannot be a ground to hold that the partner has got a definite share over those properties. Admittedly, the partnership is in operation and none of the partners can be said to have any definite or ascertainable share in any of the assets. We have held that the assessee is a partnership firm as defined under the Partnership Act. In that view of the matter, the assessee-firm is not entitled to claim the status of an association of persons under section 26 of the Income-tax Act in respect of the rental income.
25. Learned counsel for the assessee placed strong reliance on an unreported Division Bench decision of this court in CIT v. Poornima Enterprises (I.T.R.C. Nos. 26 to 29/1991-DD on June 19, 1992). On going through that judgment the decision has proceeded on the basis of a finding of the Tribunal that there is no firm at all. In that view of the matter, their Lordships have stated that no question of considering the question as to whether the firm is a registered firm or not does not arise. As the finding of the Tribunal was that there was no firm, it was found by this court that the persons who are owning property and earning income, could do so, only as co-owners. That case is no parallel to the present one, wherein, we are clearly of the opinion that the assessee is a partnership firm and that the income is received in pursuance of its business activities. In view of what is stated above, we answer question No. 2 in the negative and against the assessee.
26. There will be no order as to costs in the circumstances of the case.
27. Let a copy of this judgment be transmitted to the Income-tax Appellate Tribunal under the seal of the court under section 260 of the Income-tax Act, 1961.