Income Tax Appellate Tribunal - Hyderabad
Jayalakshmi Estates vs Assistant Commissioner Of Income-Tax on 27 December, 1993
Equivalent citations: [1994]51ITD417(HYD)
ORDER
T.V. Rajagopala Rao, Judicial Member
1. This is an assessee's appeal for assessment year 1989-90 directed against the order of the Commissioner of Income-tax (Appeals), Visakhapatnam dated 10th August, 1992 holding the assessee to be an association of persons liable to tax at maximum marginal rate under Section 167B of the Income-tax Act, 1961.
2. The follpwing grounds are taken in this appeal :
(1) The learned Commissioner (Appeals) erred in upholding the status of the assessee as an association of persons in the facts and circumstances of the case.
(2) Without prejudice to the above ground, the Assessing Officer was not justified in rejecting the status claimed without rejecting the application for registration under Section 185 and without giving the appellant an opportunity to agitate the matter of registration in accordance with law.
(3) The learned Commissioner of Income-tax (Appeals) erred in holding that income derived on development of real estate by providing amenities in pursuance of the object of partnership does not constitute business and further he erred in holding that the status of the assessee should not be treated as registered firm.
(4) Without prejudice to the above ground, in the event of the income being treated as property income, the Assessing Officer should have applied Section 26 and made separate assessment. For application of Section 26 there is no need of any agreement to declare and the alleged overdrawings of some partners are not relevant for the purpose. He should have held that the partnership deed should at least serve the purpose of specification of shares. Even if the partnership deed was ignored, Section 15 of the T.P. Act will apply and the shares get divided on the basis of proportion of capital contribution or in the absence of proof, the shares are presumed equal. Hence there can be no co-owned property without specified shares. Application of maximum marginal rate on the assumption of unspecified shares is not correct.
(5) The Commissioner of Income tax (Appeals) was not justified in aggregating the income of M/s Ramaiah and Co., which is a separate firm with its own constitution. The income of such firm in pursuance of services rendered by it on the basis of independent written contracts cannot be the income of the appellant firm. It is not disputed that the services are actually rendered by that firm or that its remuneration is distinctly received. Simply because there are common partners or because the property belonged to the appellant it does not mean that the appellant alone should undertake provision of amenities. The assumption that the owner only should provide amenities or the fact that both the firms had common partners or the fact that the service charge was fixed in relation to floor space or the charge was higher than cost of service could be a ground for rejecting the written agreement constituting legal relationship. Such sort of arrangements could not be ignored as unreal by the application of McDowel's case especially when such arrangement is supported by written independent agreement. The partners in these firms are not completely identical and unless all of them are treated as benamidars of the partners of the assessee firm, the aggregation of income of M/s. Ramaiah & Co. would not be justified. There is not even a suggestion about allegation of such benami inference. Neither capital nor other services were supplied by the appellant firm. The destination of income is distinct. None of the ingredients of benami are present. Without formally examining the partners of the appellant firm and partners of M/s. Ramaiah and Co. the written contracts were ignored. The inclusion of income of M/s. Ramaiah & Co. is unwarranted.
3. The facts leading to the appeal may briefly be stated as follows. There is a land measuring 2000 sq. ft. or 8 grounds at 8, Haddows Road, Madras. On 17-4-1973, two persons by name Smt. B.V. Ramanamma and Shri BWS Ramesh Kumar, her son, purchased the whole extent of Rs. 2000 sq. yds. under registered sale deeds. Subsequently they sold two plots of 500 sq. yds. each to Smt. P. J. Jayalakshmi, daughter of Smt. Ramanamma and to Shri P.V. Krishna Rao, brother-in-law of Smt. Jayalakshmi under separate sale deeds dated 5-1 -1976. All four of them along with Shri BWS Ramesh Kumar representing the HUF constituted into a partnership for the purpose of constructing buildings/office complex and deriving rental income by letting out to several parties. They entered into a partnership by means of a partnership deed dated 17-5-1978. Each of the five partners had equal shares in it. Four co-owners of the land brought their respective extents into the partnership towards their share by valuing each of their shares at Rs. 50,000. Each co-owner brought Rs. 1,00,000 towards their capital contribution. Thus each of the four co-owners of the land brought Rs. 1.50 lakhs towards each of their shares. Shri B.V.Ramaiah representing his HUF brought Rs. 1,50,000 into the partnership towards his share. They constructed multi-storeyed buildings under the name and style of M/s. Jayalaskhmi Estates in the said extent of 2000 sq. yds. The construction started in February 1979 and completed in December 1981. Cost of construction was Rs. 38 lakhs. Apart from the capital contribution as stated above, remaining cost of construction was met out of borrowed funds. While so, on 1-10-1982, Shri P.V. Krishna Rao, one of the co-owners retired from the partnership firm. He walked out of the firm after accepting the amounts standing to his credit in his capital account and nothing more. After Shri P.V. Krishna Rao made the exit from the firm, the remaining four partners continued in the firm having equal shares. Again on 1-7-1984, M/s. Jayalakshmi Estates Ltd., a Limited Company, became a partner by contributing Rs. 8 lakhs as its share capital. At the time of allowing the limited company to be a partner the value of the building was arrived at about Rs. 40 lakhs. Therefore, after accepting Rs. 8 lakhs from the Limited Company towards its capital contribution it was allotted share of 20% in the partnership. Thus after 1-7-1984, again 5 partners each having 20% share continued in the firm. As the matter stands thus Smt. B.V. Ramanamma died on 13-6-1986 leaving a Will by which she bequeathed her interest in the partnership equally between her husband, Shri B.V. Ramaiah (Individual) and Smt. S.B. Ranganayaki (aunt of B.B. Ramaiah) in equal shares. The only business carried on by the partnership was 'to acquire by purchase, lease, exchange or otherwise, land, buildings and heriditaments of any nature and description situated in the city of Madras or elsewhere and any estate or interest therein and any rights over or connected with land and to turn the same into account and in particular by preparing building sites and by constructing, reconstructing, altering, improving, decorating, furnishing and maintaining offices, flats, houses, shops, godowns and conveniences of all kinds and by consolidating or annexation or sub-dividing properties by leasing and disposing of the same and to carry any other business that may be decided by the partners from time to time. The only activity undertaken by the firm was to construct a multi-storeyed building over the above said vacant land and to let it out in parts to several tenants. Shri B.B. Ramaiah and Smt. S.B. Ranganayaki who were the successors to in interest of Smt. B.V. Ramanamma have equally divided the fixed capital of Rs. 1.5 lakhs left behind by Smt. Ramanamma and credited the same as their respective capital contributions in the firm.
4. Now let us look into the facts about formation of M/s. Ramaiah & Co. M/s. Ramaiah & Co. was constituted as a partnership firm through a deed dated 18-10-1978 with Sri B.B. Ramaiah, his daughter-in-law, Smt. B. Rama Devi and his daughter Smt. P. Jansi Jayalakshmi as partners. The business of the partnership was to enter into contract with owners of buildings, factories and to own, lease out, provide, maintain, repair, upkeep service facilities such as water, electricity, drainage, lift, telephones, cleaning, airconditioning equipment, furniture and furnishing etc. to houses shops and other class of buildings in the city of Madras and elsewhere to collect service charges for rendering the same and to carry on any other business as may be decided upon by the partners from time to time. Till 31-3-1981 that firm had no activity. The initial capital contribution of that firm was Rs. 10,000 and it was raised to Rs. 60,000 during the accounting period ending on 31-3-1982 and it was never raised thereafter. During the accounting period relevant to assessment year 1982-83, it made certain investments in the building at No. 8, Haddows Road, Madras belonging to M/s. Jayalakshmi Estates. During the subsequent accounting periods also certain further investments were made. The total investments actually made by this firm upto 31-3-1987 was Rs. 8.39 lakhs. The investment was made in providing electrical fittings, fans, lift, generator, furniture and air conditioner in the said building. However, this investment was made without entering into any contract with the owner of the building. There was no formal contract and no written record of any contractual agreement. M/s. Ramaiah & Co. has simply been allowed to instal certain fixtures and fittings in the building owned by the appellant without any stipulation of mutual rights and obligations for these provisions. The tenants of the building have been asked to enter into two sets of agreement - one set with the appellant for payment of rent for occupation of the building and another set of agreement with M/s. Ramaiah & Co. for payment of service charges for providing the fixtures and fittings.
5. Shri C.V.K. Prasad, learned advocate for the assessee had filed before us a paper book containing 125 pages and also other bunch of papers containing the assessments made for assessment years 1990-91 and 1991-92 which are subsequent to the assessment now under consideration before us. Reference to these documents would be made as and when it is felt essential.
6. Now let us take up the ground urged in the appeal before us one after the other. Grounds 1 and 2 may be taken up together since in those grounds it was urged that the Assessing Officer was not justified in rejecting the status of the assessee as a registered firm without rejecting the application made to him under Section 185. In fact the date of application under which registration was sought for by the assessee firm and the date when it was filed, were never submitted before us. Further this ground was not also urged before the first appellate authority. It is a mixed question of fact and law and so it should be raised at the earliest possible stage. Procedurally we feel that this ground should not be taken up since it was raised for the first time only in the ground before this Tribunal without urging the same before any of the lower authorities. No material facts relevant to deal with this ground was ever produced before this Tribunal. The copy of the petition through which registration of the assessee firm was prayed for and the date when it was filed was not furnished before us either in oral arguments or in the bulky paper book filed on behalf of the assessee. So this ground is liable to be dismissed as unsubstantiated. Even otherwise we are convinced that the assessee did not carry on any business in the absence of which it is not entitled to registration. The Income-tax Officer felt that there was no business activity carried on by the assessee and realisation of rentals from out of several portions of the office building constructed by the assessee cannot be considered as business income. We fully agree with this reasoning and hold that the assessee cannot be considered to have carried on business or to have derived business income by merely deriving rental income from portions of office complex let out to several persons. Even providing amenities like lift, staircase, sewerage and providing space for parking cars of the tenants, the provision for drinking water, by providing watch and ward staff and the receipt of service charges for providing these facilities cannot also turn the activities as business activities. In this connection we wish to follow the Supreme Court's judgment in East India Housing & Land Development Trust Ltd. v. CIT [1961] 42 ITR 49. Their Lordship had followed the decision of an English case in Fry v. Salisbury House Estates Co. Ltd. [1930] A.C. 432. In that case a company was formed to acquire, manage and deal with a block of buildings. The said company had let out the rooms in the block of buildings as unfurnished offices to tenants. Under the tenancy agreements entered into with the tenants, the assessee company had undertaken to provide staff to operate the lifts and to act as porters to watch and protect the building; and also had undertaken to provide certain services such as heating and cleaning to the tenants at an additional charge. The taxing authorities had sought to charge the income from letting out of the rooms as receipts of trade. However, that claim was negatived by the House of Lords holding that the rents were profits arising from the ownership of land and that the same could not be included in the assessment as trade receipts. Therefore, even if we hold that Ramaiah & Co. is only a benami for the assessee company and that all the services provided by Ramaiah & Co. to the tenants should be considered only as services rendered by the assessee and taking it for granted that all the receipts from the services rendered to the tenants should all be considered as receipts of the assessee, even in such a case following the above decision of the Supreme Court it cannot be held that the assessee was deriving business income. We have to hold that by collecting rents as well as service charges through Ramaiah & Co. was only deriving property income and nothing else. Therefore, the assessee is not entitled to registration or continuation of registration. Further the claim of registration or continuation of registration right from 1983-84 was denied to the assessee either by the Assessing Officer or by the first appellate authority. However, the assessee did not succeed till now to get registration from any of the higher appellate authorities.
7. We have to consider next whether the assessee is only an Association of persons having shares which are definite and ascertainable or the assessee consists of persons whose individual shares in the whole or any part of the income are indeterminate or unknown, in which case under the provisions of Section 167B, the income of the association should be charged with maximum marginal rate. In any event, as far as we see, the parties are not at variance with each other regarding the status of the assessee. Both of them agree that the assessee is an AOP. The only disagreement between the parties was about the definite and ascertainable nature of their shares and about the individual shares of the members of the AOP in whole or in part was indeterminate or unknown. To put it straight, the assessee and the Revenue are at variance with each other with regard to the application of Section 26 of the Income-tax Act to the income earned by the assessee. Section 26 of the Income-tax Act is as follows :
26. Where property consisting of buildings or buildings and lands appurtenant thereto is owned by two or more persons and their respective shares are definite and ascertainable, such persons shall not in respect of such property be assessed as an association of persons, but the shares of each such person in the income from the property as computed in accordance with Sections 22 to 25 shall be included in his total income.
Explanation : For the purposes of this section in applying the provisions of Sub-section (2) of Section 23 for computing the share of each such person as is referred to in this section, such share shall be computed, as if each such person is individually entitled to the relief provided in that sub-section.
In fact it is the claim of the assessee that it is entitled to the benefits of Section 26 of the Income-tax Act whereas it is the case of Revenue that the assessee is not entitled to the benefits given under Section 26 of the Act. In the impugned order passed by the learned Commissioner of Income-tax (Appeals) he merely followed his appellate order dated 10-10-1990 passed for assessment year 1987-88 which was provided at pages 43 to 56 of the paper book filed on behalf of the assessee. Following objections were raised by the learned Commissioner (Appeals) in his appellate order for assessment year 1987-88 for applying the provisions of Section 26 of the Act to the income earned by the assessee :
(1) No business has been carried on by the group of persons calling themselves as partners of a partnership firm. There was, therefore, no partnership under law. The group of persons claiming ownership of the income from property cannot be called co-owners since ownership of the property has not vested in them through any legally acceptable mode. By virtue of the so-called partnership agreement they may claim their share of interest in the income from property but that claim is not the claim of a co-owner as understood under law, but of a person having such claim under a financial arrangement styled as a partnership deed.
(2) The so-called partnership deeds do not specify the specific shares of the partners in the property. One of the partners who had retired was paid off only to the extent of his capital balance and that payment has no relation with the sum actually payable to him taking into consideration the value of the property.
(3) The capital contribution has no relationship with the profit sharing ratio. M/s. Jayalakshmi Estate Ltd. being allowed only 20% share although their fixed capital was in excess of the total fixed capital of the other partners. Shri B.B. Ramaiah had heavily overdrawn both in his individual and HUF capacities and yet he continued to enjoy the same interest in the profit.
(4) If the settlement of accounts between the so-called partners as per Section 48 of the Indian Partnership Act is worked out, as on the last day of the various accounting periods, the amount receivable by each partner would not only be different from year to year and interest in shares would also vary.
Therefore, he concluded that though the assessee was an AOP it is liable to be taxed at maximum marginal rate by virtue of the provisions of Section 147 of the Income-tax Act. The learned Commissioner (Appeals) had relied upon the A.P. High Court's decision in CIT v. Phabiomal & Sons [1986] 158 ITR 773. In that case it was held that letting out of building and realizing rents therefrom did not amount to carrying on of business. It was incidental to ownership. For a partnership firm, the requirement of Section 4 of the Indian Partnership Act, 1932 was the existence of business. There was no business in the act of letting out of a building in which one is an owner. We feel, that the decision of the A.P. High Court in Phabiomal & Sons' case (supra) is distinguishable. Firstly whether the assessee in that case was entitled to registration or not is the only question confronting the Hon'ble High Court. They were not called upon to decide whether the partners of the assessee firm are co-owners and whether they are entitled to benefits of Section 26 of the Income-tax Act or not. The existence of a valid partnership is not at all essential for invoking the provisions of Section 26 of the Income-tax Act. It is enough if there exists an association of persons and those persons should all be interested in the property and should be co-owners. There are cases where firms are attempted to be formed but due to infirmity partnerships were not valid. In such a case the question is whether the persons who came together to form a partnership can be considered to be association of persons. In this connection, the A.P. High Court's decision in CIT v. Krishna Reddy [1962] 46 ITR 784 is very instructive and a binding decision against us. In that case a licence for carrying on Abkari business under Hyderabad Abkari Act was issued in the name of K. Without obtaining the prior approval of the talukdar as required by the Act, K entered into partnership with A. The question was what is the type of relationship between the persons who conducted the business under the Partnership. The Hon'ble Andhra Pradesh High Court held the partnership being in contravention of law was void but as the partners had joined with the common purpose of earning profits they were assessable as association of persons on the profits made. They held that both A & K were jointly and severally liable for the entire profits. An association of persons need not necessarily be on the basis of contract. In one of the earliest cases, i.e., B.N. Elias, In re [1935] 3 ITR 408 (Cal.), Derbyshire, C J. had set up the following test in order to determine whether there is an association of individuals. At page 415 he stated the following :
Did these individuals join in a common purpose, or common action, thereby becoming an association of individuals? In my view they did. In the first place, they joined together in the purchase of this property... In the second place, they have remained joint as owners of this property from the date of the purchase down to the present time. Thirdly, they have joined together, as the powers of attorney show, for the purpose of holding this property and of using it for the purpose of earning income to the best advantage of them all. Under these circumstances, it seems to me that looking at the position and construing the words of the Act in their ordinary common meaning, the four persons named are 'an association of individuals'.
Whenever individuals employ their assets in a joint enterprise with a view to make profit, though not as partners, they constitute an AOP by reason of their common purpose or common action. In such an enterprise the distinction between a firm and an AOP may often be thin and sometimes very obscure. This was the ratio of the Kerala High Court in CIT v. C. Karunakaran [1988] 170 ITR 426 at pages 429 & 430. Therefore, having regard to the facts of this case, three had brought their interest in the land apart from capital contributions. Others had brought in the capital contributions and all of them employed their assets in a joint enterprise to put up a massive office complex with a view to make profit. Though all these persons may not be partners as we understand under Partnership law, they certainly formed an association of persons. Therefore, the first objection raised by the learned Commissioner (Appeals) does not appear to be correct under law.
8. Now let us take up the second objection which is that all the persons in the association are not owners in the property and all the persons constituting the AOP cannot become co-owners and unless they are co-owners Section 26 cannot come into operation. Here the property in question comprised of not only building but also lands appurtenant thereto. The question is whether all the persons who formed the association in this case can be called as co-owners either in the land or in the buildings. While considering whether all the persons in the association can be considered to be co-owners, the decision of the Rajasthan High Court in the case of Saiffuddin v. CIT [1985] 156 ITR 127 may be kept in view. In that case the assessee purchased a plot of land. A hotel was constructed on the land and the expenses of construction were borne by the assessee and two of his brothers. There was no written agreement regarding the construction and no mutation was made nor was a sale deed executed by the assessee in favour of the brothers. The Income-tax Officer assessed the entire income from the property in the hands of the assessee and this was upheld by the Tribunal. On a reference, the Rajasthan High Court held that so far as construction on the plot which was purchased by the assessee was concerned, as the expenses of the same were borne by the assessee and his two brothers in equal proportion, the assessee and his two brothers were joint owners, each having l/3rd share. The entire income from the property was not assessable in the hands of the assessee. In this case also, at the time of formation of the partnership for the first time on 17-5-1978, there are five partners and each of them was having or were assigned l/5th share in the property. Each of the partners contributed capital of Rs. 1.50 lakhs. Out of five partners there are four partners who held the total extent of land of 2000 sq. yds. on which the complex was going to be built. Each of the four partners was entiiled to 500 sq. yds. on which the complex was bui\t and each oi them brought their respective extents of land in the partnership as assets by valuing each of their bits at Rs. 50,000 and apart from bringing their land into partnership asset, they had contributed Rs. 1 lakh each towards capital, whereas Shri B.B. Ramaiah, who had no land to bring into the partnership asset had contributed Rs. 1,50,000 as capital. Thus as far as capital contribution is concerned, all the five partners did put together Rs. 7.5 lakhs and each of them was assigned 20% share in the partnership. It is no doubt true that subsequently, they have borrowed huge amounts and they had brought into existence an office complex at a cost of Rs. 38 lakhs. All the partnership deeds were filed before the Income-tax Officer at the time of assessment for assessment year 1983-84. As can be seen from the assessment order dated 13-3-1990 found at pages 108 to 110, it is clearly stated that in support of its claim for applicability of Section 26 of the Act the assessee in its letter dated 11-1-1990 sought to rely upon the undermentioned documents :
(a) Partnership deed
(b) Account books
(c) Income-tax and wealth-tax returns filed by the respective co-owners.
In the said assessment itself, at page 109 of the paper book the following particulars were given along with a table by the Asstt. Commissioner of Income-tax :
The first partnership deed dated 17-5-1978 shows the aforesaid five persons as partners. As per subsequent partnership deeds there were three changes in the computation of ownership of the building. The following are the particulars :
_________________________________________________________________ SI. Name of persons shown Period and shareholding No. to be partners and capital in lacs _____________________________________ 17-5-1978 1-10-1982 1-7-1984 14-6-1986 to to to to date 30-9-1982 30-6-1984 13-6-1986 __________________________________________________________________ Rs Rs. Rs. Rs.
1. Sri B.B. Ramaiah (HUF) 20% (1.5 25% (1.5 20% (1.5 20%(1.5 lacs) lacs) lacs) lacs)
2. Smt. B.V. Ramanamma 20%" 25%" 20%" -
3. Shri B.V.V.S. Ramesh Kumar 20% " 25%" 20%" 20%"
4. Smt. P.J. Jayalakshmi 20% " 25%" 20%" 20%"
5. Shri P.V. Krishna Rao 20% - - -
6. M/s. Jayalakshmi Estates Ltd. - - 20% (8.00 20% (8.00 lacs) lacs)
7. Shri B.B. Ramaiah (Ind) - - - 10%(0.75 lacs)
8. Smt. S.B. Ranganayaki - - - 10%"
It is one of the grounds raised by the Commissioner (Appeals) that the capital contribution has no relationship with the profit sharing ratio. Jayalakshmi Estates Ltd. was allowed only 20% share although the fixed capital was in excess of the total contributed capital of other partners. This criticism is ill-founded. Jayalakshmi Estates became a partner under the partnership deed dated 1-7-1984 by which date the whole complex was already constructed. Cost of construction was about Rs. 38 lakhs. Till then only four persons were partners. Before the fifth partner is being admitted the property was valued at Rs. 49 lakhs and l/5th thereof namely Rs. 8 lakhs was determined towards capital before Jayalakshmi Estate was admitted into the partnership. So the capital contribution of 8 lakhs by Jayalakshmi Estate is only to equalise the shares. On 13-6-1986 Smt. B.V. Ramanamma died. On the date of death she was having 20% interest in the property. She had executed a will by which she bequeathed to Shri B. B. Ramaiah her husband and to Smt. S.B. Ranganayaki equally. They equally divided 20% share held by Smt. Ramanamma in the common property. When Ramanamma who contributed her bit of site, the legatees under her Will equally are entitled to the site in her place. The title passes through the Will even with regard to immovable properties bequeathed thereunder and no registration is necessary. Thus for the accounting year in question, the following five persons had already held or acquired ownership in the land on which the building was constructed :
(1) Sri B.B. Ramaiah (HUF) (2) Sri BWS Ramesh Kumar (3) Sri P.J. Jayalakshmi (4) Shri B.B. Ramaiah (Individual) (5) Smt. S.B. Ranganayaki.
The first three among them held 20% each whereas the last two held 10% share each. It is no doubt that M/s. Jayalakshmi Estates Ltd. had no title to the land but having contributed Rs. 8 lakhs towards its share capital it has acquired title in the building constructed or in the complex which was constructed on the land. So also S.No. 1 having contributed Rs. 1.5 lakhs acquired title in the complex constructed. Rest of the co-owners having held 80% share in the land allowed Jayalakshmi Estates to become one of the co-owners and it was also permitted to enjoy the common property along with them. The objection that there is no relationship whatsoever between the capital contribution made by different co-owners at different points of time to the original cost of the building or the share ascribed to them is not correct. We have already stated how the co-owners in the beginning had contributed equally Rs. 1,50,000. Afterwards every time a fresh deed of partnership was executed the co-owners always equalised their shares with reference to the value of the property. It is already stated that when Shri P.V. Krishna Rao walked out of the partnership firm, he had taken away only what remained in his capital account without demanding his share in the value of the property. Therefore, at the time of his exit from the partnership firm, the remaining 4 co-owners only began enjoying the common property with equal rights. While so, at the time when Jayalakshmi Estates was admitted as a partner, the common property was valued at Rs. 40 lakhs. The co-owners are four and including the newly admitted co-owner they are five. Therefore, unless the newly admitted co-owner contributed towards his capital 1/5th share in the value of the property, it was not admitted. Thus the contribution of Rs. 8 lakhs by Jayalakshmi Estates would show that the parties always tried to equalise their shares with reference to the value of the common property held by them. After Jayalakshmi Estate also was admitted as a co-owner there are five partners each holding 20% share. On 13-6-1986 one of the co-owners, namely, Smt. B.V. Ramanamma died and her share went to her legatees, namely, ShriB.B. Ramaiah and Smt. S.B. Ranganayaki in equal proportions. Thus her 20% interest was divided equally between them and each of the legatees thus held 10% share in the common property. Therefore, ultimately after 14-6-1986, there are six partners holding interest shown against each of them as under :
(1) Shri B.B. Ramaiah (HUF) - 20% (2) Smt. P.J. Jayalakshmi - 20% (3) Shri BWS Ramesh Kumar - 20% (4) M/s. Jayalakshmi Estates - 20% (5) Shri B.B. Ramaiah (Individual) - 10% (6) Smt. S.B. Ranganayaki - 10%
Thus each of the co-owners held proportionate shares in the common property with reference to the value thereof and therefore, we hold that in view of the ratio of the Rajasthan High Court's decision in Saiffuddin's case (supra), even though M/s. Jayalakshmi Estate and B.B. Ramaiah (HUF) had no title originally in the land on which the complex was constructed inasmuch as it had contributed l/5th in the total value of the common property at the time when they were admitted as co-owners they became co-owners of 1/5th share each. In the facts of the Rajasthan case also, the assessee purchased a plot on which subsequently 'Park View Hotel' was constructed. The plot was purchased for Rs. 53,200. The said amountwas debited in the account of the assessee with a firm M/s. Khan Mohd. Katha, Trading Co., Udaipur. Subsequently the entries were reversed crediting the accounts of the assessee in the firm by Rs. 53,200 and debiting his account and the two other co-owners, namely, Allah Bux and Abid Ali by Rs. 17,733. Regarding the amounts spent for construction the co-owners Allah Bux and Abid Ali also bore the cost of construction and ultimately Park View Hotel came into being on the said land. The question was whether the income from property shall be taxed in the hands of the assessee exclusively. The findings of the Tribunal were summed up as follows :
(1) That the plot in question was purchased by Shri Saiffuddin from the UTI and the sales certificate was issued in his name. The entire payment was made by him.
(2) Even the cost of construction of the property was borne by Shri Saiffuddin.
(3) It is settled law by now that title to the land and building could not pass to other persons till the conveyance was executed and registered.
Regarding the construction it was found that a sum of Rs. 59,760 was spent from October 1967 to September 1968. It was also found that it was the firm which made the payment to the contractor Noor Mohd. from time to time and subsequently the same was distributed amongst the partners. viz., the assessees - Saiffuddin, Allah Bux and Abid Ali In these circumstances, the Hon'ble High Court held that there was no basis for the Tribunal to hold that the amount of cost of construction of Park View Hotel was spent by the assessee. There is no agreement between the assessee and his two brothers for the construction of Park View Hotel and further neither the mutation was made nor was the registered sale deed executed by the assessee in favour of his brothers, Allah Bux and Abid Ali so as to pass valid title to them. The High Court held that the plot was the property of the assessee and that he was the owner. So far as the construction on the plot was concerned i.e., the superstructure, it belongs to the assessee and his two brothers viz., Allah Bux and Abid Ali. Their Lordships followed the following decisions :
(1) R.R. Jodha Mai Kuthialav. CIT [1971] 82 ITR 570 (SC) (2) CITv. Madras Cricket Club [1934] 2 ITR 209 (Mad.) (3) CIT v. Fazalbhoy Investment Co. (P.) Ltd. [1977] 109 ITR 802 (Bom.), and (4) Smt. Kala Rani v. CIT [1981] 130 ITR 321 (Punj. & Har.).
Ultimately they held that though the plot was purchased by the assessee the cost of construction was all borne by the assessee and his brothers Allah Bux and Abid Ali in equal proportions. Thus the assessee and his two brothers are joint owners. The law in India as enunciated in Madras Cricket Club (supra) was held to be as follows :
The rule in India which is different from that in England, is that a person who builds a superstructure upon the land of another man remains the owner of the superstructure and can at the end of his term remove that superstructure from the land, whereas in England a person who erects a building on the land of another cannot do so as the building at the end of the lease becomes the property of the lessor.
Here also though the title to the land ultimately vested in 4 persons, the title of Jayalakshmi Estates Ltd. and B.B. Ramaiah (HUF), vests only in the building constructed for which they had contributed that equal shares and thus they became owners in the building according to the above decision. Thus we hold that all the six persons are the co-owners of the common property. The assessee co-ownership had drawn profit and loss account as well as balance-sheet at the end of every accounting year. In the balance-sheet the capital of the co-owners were used to be shown. For assessment year 1983-84, the balance-sheet drawn as on31-3-1983 was found at page 120 of the paper book and the capital account of each of its partners was shown with a credit of Rs. 1,50,000. For assessment year 1984-85, the balance sheet drawn as on 31 -3-1984 was furnished at page 98 of the assessee's paper book and each of the partners was credited with capital contribution of Rs. 1,50,000 and the total contribution was thus shown at Rs. 6 lakhs. For assessment year 1985-86, the balance-sheet drawn as on 31-3-1985 was furnished at page 82. There are five partners. The erstwhile partners' contribution was shown at Rs. 1,50,000 each whereas the newly added Jayalakshmi Estates Limited was shown to have contributed Rs. 8 lakhs. Thus the total capital contribution was shown at Rs. 14 lakhs. For assessment year 1986-87 in the balance-sheet drawn on 31-3-1986 same capital was shown. For assessment year 1987-88 in the balance-sheet drawn as on 31-3-1987, the capital contribution was shown at Rs. 14 lakhs and the partners were shown to be six in number instead of four in number. These partners as well as their contribution are as unde ¦:
(1) Shri B.B. Ramaiah (HUF) .. Rs. 1,50,000
(2) Shri B.B. Ramaiah (Ind.) .. Rs. 75,000
(3) Shri BWS Ramesh Kumar .. Rs. 1,50,000
(4) Smt. P.J. Jayalakshmi .. Rs. 1,50,000
(5) M/s. Jayalakshmi Estates Ltd. .. Rs. 8,00,000
(6) Smt. S.B. Ranganayaki .. Rs. 75,000
_____________
Rs. 14,00,000
For 1988-89, the balance-sheet was provided at page 23 of the paper compilation and for 1989-90 it was provided at page 6 of the paper compilation. The names of the partners as well as their capital contribution were shown similarly as for assessment year 1987-88.
9. It is significant that in 1990-91 which is the immediately succeeding assessment year to the one under consideration, the Assessing Officer [Deputy Commissioner of Income-tax (Spl. Range), Vijayawada] had accepted the contention of the assessee that it was entitled to the benefits of Section 26 of the Income-tax Act. The assessment order framed against the assessee for 1990-91 as well as 1991-92 was furnished to us in a separate paper compilation at the fag end of the hearing. In that it was held that the first point raised before him was that the instrument of partnership dated 17-5-1978 under which the business was to be carried on, specified the shares of the partners in definite ratios and that was in proportion to the capital contribution. When the immovable properties are brought to a partnership concern and the partners are credited with the value of the said properties, there was no need for registration of the documents in view of the authority of the A.P. High Court in CIT v. A.V. Bhanoji Rao [1983] 142 ITR 706. Similar view was also taken in CIT v. Amber Corporation [1981] 127 ITR 29 (Raj.), CIT v. Amber Corporation [1974] 95 ITR 178 (Raj.) and R.M. Ramanathan Chettiar v. CED [1975] 99 ITR 410 (Mad.). The Supreme Court's decision in Nawab Sir Mir Osman Ali Khan v. CWT [1986] 162 ITR 898 which lays down that unless a property is registered it does not belong to the transferee was argued and accepted to be distinguishable firstly on the ground that in the said decision the words "belonging to" occurring in Wealth-tax Act and not 'owner' used in Section 26 of the Income-tax Act was interpreted and secondly the Supreme Court's decision is not a case where partners brought property as capital contribution. The Assessing Officer had held in the assessment order for 1990-91 that sharing of the income by the co-owners was according to capital contribution and so on a legal basis. He held the following at paras 7 and 8 :
Another contention raised in this case is that even though no business was carried on by the firm since the share of the members are not indeterminate or unknown it should be assessed as such in accordance with the decision of the A. P. High Court in CIT v. Phabiomal & Sons (158 ITR 773), a decision binding on the authorities in A.P. As to the contention that sharing of profit is not according to the capital contribution, the argument is that when the partnership started on 17-5-1978 the sharing was strictly according to the capital contribution and this continued even after retirement of a partner on 1-10-1982. When a partner was inducted on 1-7-1984, its contribution of Rs. 8 lakhs was also according to the value of the building taken at Rs. 40 lakhs and its share was proportionate to the capital at 20%. When one of the partners died on 13-6-1986 the two legatees who stepped into the shoes of the deceased acquired the right of the deceased as per her will in equal proportion. Thus the sharing of the income was according to the capital contribution and on a legal basis. When a person acquires any right by will in an immovable property there is no question of registration also.
10. Another legal contention was also raised before the Assessing Officer. That was under Section 27(iii) where the words "owner of house property" were defined. Section 27(iiib) is as follows :
27. For the purposes of Sections 22 to 26-
(iiib) a person who acquires any rights (excluding any rights by way of a lease from month to month or for a period not exceeding one year) in or with respect to any building or part thereof, by virtue of any such transaction as is referred to in Clause (f) of Section 269UA, shall be deemed to be the owner of that building or part thereof;
Section 269UA(d)(ii) which is relevant to be considered as follows :
269UA. In this Chapter, unless the context otherwise requires,-
(f) 'transfer' -
(i) ** ** **
(ii) in relation to any immovable property of the nature referred to in Sub-clause (ii) of Clause (d), means the doing of anything (whether by way of admitting as a member of or by way of transfer of shares in a co-operative society or company or other association of persons or by way of any agreement or arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, such property.
Section 269UA(d)(ii) defined 'immovable property' as follows :
269UA(d) 'immovable property' means-
(i) ** ** **
(ii) any rights in or with respect to any land or any building or a part of a building (whether or not including any machinery, plant, furniture, fittings or other things therein) which has been constructed or which is to be constructed, accruing or arising from any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, company or other association of persons, or by way of any agreement or any arrangement of whatever nature) not being a transaction by way of sale, exchange or lease of such land, building or part of a building;
For application of the above provisions, the document under which a person claims rights should not be either sale, exchange or lease of land, building or part of building. All the co-owners claimed their right only under the partnership deeds and none of them can be considered to be sales, exchanges or leases of either land or buildings. Even according to the Revenue they are members of an association and the partnership deeds, though may be ineffective to evidence partnerships can as well be used for collateral purpose of proving the nature of possession of the partners thereunder in the common property. They disclosed that all the partners under each of the partnership deeds were enjoying the common property or the recitals under each of these deeds were meant to enable such enjoyment to the co-owners or to all the persons constituting the AOP. Therefore, by virtue of Section 27(ii) read with Section 269UA(d) & (f) of the Income-tax Act which came into force from 1-4-1988, all the partners under each of these partnership deeds can be stated to have become owners of the common property. The previous year relevant to assessment year under consideration ended on 31-3-1989 and, therefore, these provisions very much apply to the assessment year in question. This contention which was advanced on behalf of the assessee for assessment year 1989-90 was also accepted by the Assessing Officer while framing the assessment for 1990-91 as can be seen from the following portion of his assessment order :
I have considered the submissions of the assessee. In view of Section 27(iiib) read with Section 269VA(b) (ii) the assessee consisting of 6 members are in enjoyment of the property. The shares of the members are definite and ascertainable under Section 26. The share is in proportion to the capital contribution. By operation of Section 27(iii) read with Section 269VA(b)(ii) the question of registration of the property under Section 19 of the Registration Act does not arise for this current year apart from the binding nature of the A.P. High Court's decision in 142 ITR 706. The assessee is not an Association of Persons wherein the Individual shares are unknown and indeterminate as contemplated in Section 167B. As held by the Supreme Court in 108 ITR 555 the question of shares being indeterminate or unknown is to be judged for each year and accordingly it is not so for this year. The assessment is, therefore, made in the hands of the members under Section 26 in accordance with the decision of the Andhra Pradesh High Court in 158 ITR 773 without prejudice to the assessments of earlier years.
11. Another argument taken is that according to Section 27(iii) read with Section 269UA(b)(i) any person who acquires any right by virtue of doing anything which has the effect of providing enjoyment of the property by way of sharing or agreement or in any other manner whatsoever is a deemed 'owner' for the purpose of Section 26. This amendment made with effect from 1-4-1988 and which has not been considered earlier, should be applied and on the basis of the instrument of partnership each of the members are owners for purpose of Section 26 and they have a definite and ascertained share in the income and it has not been denied that all the persons are in enjoyment of the property or income. Admittedly, the members of the association were both in enjoyment of the property as well as deriving lease income over the property and the said income only is sought to be taxed in this assessment. This contention was accepted by the Assessing Officer himself for assessment year 1990-91.
12. We fully agree with the assessment made by the Assessing Officer and we hold that the said provisions equally apply for assessment year 1989-90 since law as on 1-4-1989 should be applied to the facts of the case. When once we hold that the members of the association should be deemed to be owners of the property and when their shares were also accepted to be definite and ascertainable and the only income derived by the association was the lease income of the office complex, then provisions of Section 26 of the Income-tax Act, automatically follow. Section 26 states as follows :
Where property consisting of buildings or buildings and lands appurtenant thereto is owned by two or more persons and their respective shares are definite and ascertainable, such persons shall not in respect of such property be assessed as an association of persons, but the share of each such person in the income from the property as computed in accordance with Sections 22 to 25 shall be included in his total income.
On a conspectus view of the whole matter, we hold that the shares of the members of the association are definite and ascertainable in the common property and therefore, the share of each such person is to be assessed in view of the provisions of Section 26 of the Income-tax Act and they should not be assessed as an association of persons.
13. Now the question remains how far the Revenue is justifiable to include the income earned by M/s. Ramaiah & Co. in the hands of the assessee. We have already seen that the assessee comprised of six members. M/s. Ramaiah & Co. is stated to be a partnership firm formed by three persons, namely, Shri B.B. Ramaiah with 25% interest, Smt. P. Jansi Jayalakshmi with 25% and Smt. B. Rama Devi with 50% interest. If we compare the constitution of this partnership firm with the names of the persons who constituted the AOP of the assessee, the significant factor which invites our attention is that. Smt. B. Rama Devi who was holding 50% interest in M/s. Ramaiah&Co. is not one among the members oftheAOP constituting the assessee. Firstly we hold that the assessee AOP and M/s. Ramaiah & Co. are two distinct persons different from each other. This firm was constituted through a partnership deed dated 18-10-1978. The above three persons were the partners thereunder. The business of the partnership was stated to be "to enter into contracts with owners of buildings, factories and to own, lease out, provide, maintain, repair, upkeep service facilities such as water, electricity, drainage, lift, telephones, cleaning, air-conditioning equipment, furniture and furnishing etc. to houses, shops and any other class of buildings in the city of Madras and elsewhere to collect service charges for rendering the same and to carry on any other business as may be decided upon by the partners from time to time". Till 31-3-1989, this firm had no activity. Initial capital contribution of partners was Rs. 10,000 and it was subsequently raised to Rs. 60,000 during the accounting year ended on 31-3-1982 and it was never raised thereafter. However in the accounting period relevant to assessment year 1982-93, it made certain investments in the building at 8, Haddows Road, Madras belonging to the assessee A.O.P. and during the subsequent accounting periods certain further investments also were made. While investment made in the initial years was around Rs. 5 lakhs, the total investment actually made up to 31-3-1987 was Rs. 8.39 lakhs. The investment was made in providing electrical fittings, fans, lift, generator, furniture and air-conditioners in the said building. However, contrary to the stipulation found in the partnership deed under which it was constituted, the investment made by this firm was without entering into any contract with the owners of the building. M/s. Ramaiah & Co. have simply been allowed to instal certain fixtures and fittings as mentioned above in the building owned by the assessee AOP without any stipulation of mutual rights and obligations of these provisions. Tenants were asked to execute two types of agreements - one with the assessee AOP for payment of rent whereas another agreement with M/s. Ramaiah & Co. for payment of service charges. Agreement for service charges were entered into with M/s. Harita Finance Pvt. Ltd. and M/s. Sundaram Clayton Limited as well as other tenants. While rent for accommodation is paid according to floor space provided for service charges are also paid to M/s. Ramaiah & Co. according to floor space occupied and not by taking into consideration the fixtures and fittings actually provided for. Till 1984-85, the only source of income of M/s. Ramaiah & Co. was from the above service charges. For assessment years 1985-86, 1986-87 and 1987-88 M/s. Ramaiah & Co. had independent business activity also in manufacture of HDPE bags. However that business was wound up during the accounting period relevant to assessment year 1987-88. During the course of assessment proceedings for 1987-88 the assessee AOP was asked to state as to why the income disclosed in the hands of M/s. Ramaiah & Co. as income from service charges should not be assessed in its hands. The assessee AOP contended that the amenities were provided for by another concern and therefore, the income is not assessable in its hands. The Assessing Officer rejected the claim for the following reasons :
(1) The partners of the firm and the members of the appellant are either common or are closely related to each other;
(2) The income from service charges is out of all proportion with the investment made by M/s. Ramaiah & Co.;
(3) The building along with the service facilities for electricity, sewerage and water supply is owned by the appellant; and (4) The fixture and fittings are inseparable from letting-out of the building.
The Commissioner of Income-tax (Appeals) while disposing of the appeal for 1987-88 held as follows: It is no doubt true that M/s. Ramaiah & Co. was protectively assessed in the assessment for 1987-88 which is in dispute before him. Any view taken in the preceding assessment though may merit reference will not be binding for deciding the matter as each assessment proceeding is separate and distinct and the principles of res judicata do not apply. If the partnership agreement between the members of the association and the assessee and the partnership agreement in the case of M/s. Ramaiah & Co. are read together it would be apparent that Shri B.B. Ramaiah is the sole motivator and controller of these two businesses. He used to take all decisions both for the assessee as well as for Ramaiah & Co. though Ramaiah & Co. was constituted barely few months after the constitution of the assessee AOP for almost three years Ramaiah & Co. did not carry on any business which it had intended to pursue. It waited till the structure at 8 Haddows Road, Madras was completed and then decided to make certain investments in that building that too without any contractual agreement with the owners of the building. The investment made by M/s. Ramaiah & Co. is also entirely financed by the advances and deposits received from the tenants as is apparent from a mere glance of the balance-sheet as on 31-3-1978 and subsequent balance-sheets. Therefore, he held that the arrangement with M/s. Ramaiah & Co. obviously advise for diversion of income. He went through the amenities agreement entered into by M/s. Ramaiah & Co. with M/s. Harita Finance Pvt. Ltd., Sundaram Clayton Ltd. as also M/s. Widia India Ltd. The amenities agreement entered into by M/s. Sundaram Clayton Limited states that two Aluminium Doors 5' x 7' are stated to have been let out. However, the balance-sheet of M/s. Ramaiah & Co. does not show any ownership by them of any aluminium door whereas the assessee AOP had purchased and installed aluminium doors worth Rs. 65,000 approximately. The service charges have no relationship with the fittings and facilities expected to be provided for and are payable according to floor space of accommodation. M/s. National Organic Chemical Industries Ltd. (NOCIL) took on rent 5510 sq. ft. of floor space whereas M/s. Sundaram Clayton Ltd. took on lease 11950 of floor space. They paid for accommodation at Rs. 2 per sq. ft. of floor space. Service charges paid by them were Re. 1 per sq. ft. However, the items purported to have been hired out to them are shown in the table below :
NOCIL Sundaram Clayton
Limited
(i) Double Tube light
fittings 50 79
(ii) Single Tube light
fittings 15 50
(iii) Ceiling fans 3 46
(iv) Exhaust fans 2 4
(v) Pedestal fans 70
(vi) Wash Basin mirrors 5 6
(vii) Aluminium doors - 2
Both the amenities, as well as accommodation agreements provided for exclusive possession and use of covered parking space for one car and open parking space for three cars. M/s. Ramaiah & Co. definitely is not the owner of any part of the building. If so, how is it entitled to provide parking spaces either covered or open to the lessees and how can it collect charges for providing these amenities also. So also Ramaiah & Co. have undertaken to maintain stair case and common passage in fit and proper manner. However, the said firm did not own these spaces. However, the accommodation agreements also contained the same undertaking.
14. As per Clause (g) of the Amenities Agreement with M/s. Marshall Sons & Co. (India) Limited, Calcutta, M/s. Ramaiah and Co. will allow the lessee liberty to construct, fix, erect, in or upon or fasten to the demised premises, temporary partitions, counters, racks and all office business and trade fixtures and fittings etc. as well as electrical equipment like air-conditioners in order to enable the lessee to better enjoy the premise and subject always to the requirements that at the end of the lease or sooner determination thereof to dismantle and remove and take away all such fixtures and fittings and equipment, after restoring the demised building to its original condition. Similar provision is made in the Amenities Agreement with regard to the fixation of air-conditioners by the lessees. M/s. Ramaiah & Co. even undertook to keep the tenanted premises in tenantable condition and also undertook to do external colour washing at reasonable intervals.
15. M/s. Ramaiah & Co. was permitted enjoyment of open space around the building in common with other tenants. Some of the stipulations in the accommodation agreement entered into by the assessee AOP with the tenants come in conflict with some of the stipulations or undertakings in the amenities agreement. Under the accommodation agreement, the following stipulations are found :
(1) Electricity and water charges are paid by the tenants.
(2) Parking space and enjoyment of open space is provided for by the assessee AOP.
(3) Tenants are allowed to air-condition the premises and the assessee AOP had undertaken to carry out all structural repairs to the tenanted premises that may become necessary and shall keep the demised premises wind and water tight and inhabitable condition and to carry out all necessary repairs for damages arising from the following :
(a) inherent defects in construction,
(b) unforeseen calamities,
(c) by fire, tempest, leakage or rain,
(d) providing water for drinking and flushing purposes,
(e) break-down of the plumbing system,
(f) fusing of electrical installations and to undertake the maintenance of the exterior portion of the demised premises with sufficient sanitations.
(4) Under Clause 3(a) of the Agreement with M/s. NOCIL states that the "appellant" will maintain the lift staircase and common passage in a fit and proper manner for which the lessor (appellant) alone will be liable.
(5) In the agreement with M/s. Harita Finance Pvt. Ltd. the rent is fixed at Rs. 2.50 per sq. ft. "for the area measuring about 3000 sq. ft. comprising general office reception, toilets, stair case landing, lift, lobby, common passage etc.". It is further declared in that deed that the lessor has not encumbered the said property by mortgage or otherwise in any manner in favour of any person and is competent to grant the lease.
A comparison of the stipulations found in the so-called amenities agreement and accommodation agreement would show that amenities agreement entered into with M/s. Ramaiah & Co. was a ruse for diversion of income. For assessment year 1987-88, the rent received on hiring out of accommodation was Rs. 10,86,000 which gives a rate of 25.2% return approximately on investment in land and superstructure. M/s. Ramaiah & Co. purported to have received service charges amounting to Rs. 6,93,000 on the investment made by M/s. Ramaiah & Co. The investment made by M/s. Ramaiah & Co. is only 16.3% of the total investment, whereas its share of overall earning is 39%. Thus not only by the rate of return on investment but also by the respective shares of return on investment M/s. Ramaiah & Co. has been allowed a major part of the cake in the income, that too without any contractual obligation. With this reasoning, the Commissioner (Appeals) held that it is a case where the ratio of the decision of the Supreme Court in McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148 should be applied and the income offered by M/s. Ramaiah & Co. should be assessed in the hands of the assessee AOP. The rent received by M/s. Ramaiah & Co. which was clubbed in the hands of the assessee for assessment year 1989-90 was Rs. 5,93,399 (Rs. 9,23,124 -Rs. 3,29,725). The addition of the said income in the hands of the assessee was confirmed by the Commissioner (Appeals), Visakhapatnam by following his appellate order for assessment year 1987-88 from which we have extracted in the prior paras of this order.
16. The first question which falls for consideration was when Ramaiah & Co. was assessed previously in the status of a partnership firm, is it now open to club the income in the hands of the assessee. We reject this contention put forward on behalf of the assessee. The proceeding in each of the assessment years is separate and distinct. There is no resjudicata applicable to the income-tax proceedings. The assessment made in an earlier assessment year does not automatically apply and becomes binding in a subsequent assessment year. Assuming for a while that for assessment year 1989-90 the lease amount collected by M/s. Ramaiah & Co. was assessed to tax in its hands even then such assessment would not debar the Income-tax Department to assess the same income in the hands of the assessee-AOP, if it feels that the assessee AOP is the only proper person in whose hands it must be assessed and Ramaiah & Co. is not the proper entity to be assessed with that income. In this connection we need to quote only the Allahabad High Court's decision in S. Gyani Ram & Co. v. ITO [1963] 47 ITR 472. In the headnote of the decision, the following is what is stated :
The mere fact that a particular income has been assessed in the hands of a particular person as his income will not prevent the Income-tax Officer from coming to the conclusion on fresh materials that that income is the income of another person and taking proceedings under Section 34 of the Act for reassessment against the latter on the ground that this income had escaped assessment in his assessment.
In that case it was contended that the two entities whose incomes were sought to be clubbed are no other than members of an Association of persons. In such a case if one member of an association of persons is assessed with a particular income, the same income cannot be brought to tax in the hands of the AOP in which he is only a member. Repelling the said contention, the Allahabad High Court held at page 476 as follows :
It is, therefore, clear that the two entities are entirely distinct, the one having nothing to do with the other, contrary to a case where the two persons concerned may be an association of persons and the members of that association or a firm and its partners. That two completely unconnected persons can be proceeded against in respect of the same income has been ruled in a later Division Bench case of this court in Moti Chandra v. Income-tax Officer, Kanpur (AIR 1962 All. 291).
We have already observed that M/s. Ramaiah & Co. and the assessee association are two distinct and separate persons and two different entities. One has nothing to do with the other. We have compared even the names of persons who constituted the assessee AOP and M/s. Ramaiah & Co. We held that Smt. B. Rama Devi, the daughter-in-law of Sri B.B. Ramaiah though was a partner having 50% interest in Ramaiah & Co. is not one of the members of the assessee AOP. Therefore, even assuming that Ramaiah & Co. was assessed as a firm with this income it does not operate as resjudicata as far as A.Y. 1989-90 is concerned. So also it does not prevent the Revenue to consider the same income in the hands of the assessee AOP especially when the assessee AOP and Ramaiah & Co. are quite different and distinct persons.
17. Now let us consider whether the income earned by M/s. Ramaiah & Co. belongs to the said firm or belongs to the assessee AOP. Admittedly the income was derived by M/s. Ramaiah & Co. only for providing amenities to the lessees in the office complex situated at 8 Haddows Road, Madras which belongs to the assessee AOP. We have already stated that M/s. Ramaiah & Co. did not obtain either a licence or anything in writing from the assessee-AOP under which the assessee AOP had given its consent for Ramaiah & Co. to provide the amenities or facilities to the tenants. Without being the owner of the building or without obtaining any licence or permission from the owner of the building how can Ramaiah & Co. provide amenities to the tenants ofthe Office Complex at 8, Haddows Road, Madras which exclusively belongs to the assessee AOP? What is the legal right vested in M/s. Ramaiah & Co. to collect rents under amenities agreement and how can such rights prevail over the exclusive rights of ownership in the said building belonging to the AOP? When the open space in the premises or when the stair case in the premises or when the space where lifts were fixed belonged to the assessee, how can Ramaiah & Co. make use of those space and collect rents for the so-called amenities provided for. To put in a nutshell when the whole building belong to the assessee AOP absolutely and when it is not subjected to either mortgage, lease or licence, Ramaiah & Co. would not be left with any title to erect the so-called conveniences to let the tenants use them over which it could collect monies. However, in this case one cannot deny payment of moneys under amenities agreement. The question is who is the lawful owner entitled to collect such charges for providing amenities. In our opinion, unhesitatingly it is the assessee who is entitled to collect the charges for providing amenities to the tenants and definitely not M/s. Ramaiah & Co. In our considered opinion, simply because Ramaiah & Co. invested the amount of Rs. 8.39 lakhs in order to provide electrical fittings, fans, lift, generator, furniture and air-conditioner in the said building that by itself would not entitle the said firm to collect rents from the tenants on the ground that it had provided amenities. Unless and until M/s. Ramaiah & Co. was able to show that investments were made by it in electrical fittings, fans, generator, furniture, air-conditioner etc. were all provided in the building with the consent or permission of the assessee AOP on agreed terms, M/s. Ramaiah & Co. cannot claim that the income under the amenities agreement belonged to it. How Ramaiah & Co. is able to recover Rs. 8.39 lakhs which it had invested is quite a different matter and beside the point, which need not be dilated in this order. Shri B.B. Ramaiah and Smt. P.J. Jayalakshmi are the co-owners in the AOP (assessee) and they are also shown as partners in M/s. Ramaiah & Co. Since B.B. Ramaiah is the person who is allowed to manage the affairs of both the assessee AOP as well as the firm he might have thought to charge the rentals under two separate heads, one for occupation and another for providing facilities in the premises, only as a tax saving device. The obligation of operating lifts, maintaining stair-case, providing water, putting up points for tube-lights, fans etc. go along with lessor's obligation or large buildings like office complexes. Any rent realised therefrom would only be taxable under Section 22 to Section 26. We have already cited from an English case in Salisbury House Estates Co. Ltd.'s case (supra) which was approvingly quoted by the Hon'ble Supreme Court in East India Housing & Land Development Trust Ltd. 's case (supra). In that case a company was formed to acquire, manage and deal with a block of buildings, having let out the rooms as unfurnished offices to tenants. The company itself had provided staff to operate lifts, to act as porters, provided watch and ward to protect the building and also provided certain services such as heating and cleaning to the tenants at an additional charge. The question was whether the income derived was assessable as property income or business income. Their Lordships held that it is property income.
Similarly we hold that rent charged in this case for accommodation as well as for amenities are all to be assessed only as property income. We have also no reservation in our minds to hold that the collection of charges under amenities agreement is only a tax saving device. We agree with the lower authorities and hold that the income derived by M/s. Ramaiah & Co. under amenities agreement should all be assessed in the hands of assessee-AOP only. In this regard we reject the contention of the assessee AOP that the said income should be assessed only in the hands of M/s. Ramaiah & Co. which is a separate firm.
18. In the result, the appeal of the assessee is partly allowed.