Kerala High Court
Commissioner Of Income-Tax vs P.M. Thomas on 17 July, 1989
Equivalent citations: [1990]181ITR256(KER)
Author: K.S. Paripoornan
Bench: K.S. Paripoornan
JUDGMENT K.A. Nayar, J.
1. At the instance of the Commissioner of Income-tax, Cochin, the Income-tax Appellate Tribunal, Cochin Bench, has referred the following question of law arising out of the common order of the Tribunal dated March 2, 1984, in Income-tax Appeals Nos. 379, 380 and 381 (Coch) of 1982:
"Whether, on the facts and in the circumstances of. the case, the Tribunal was right in holding that the annual letting value of the ground floor of a building belonging to the assessee and which was in the occupation of a firm in which the assessee was a partner is not includible in the income of the assessee under Section 22 of the Income-tax Act, 1961, and, consequently, in holding that the reopening of the assessment is not sustainable ?"
2. The matter arises out of the income-tax assessment for the years 1969-70, 1970-71 and 1971-72 for which the accounting period ended on March 31, 1969, March 31, 1970, and March 31, 1971, respectively. The assessee was a partner in a firm "Fashion Jewellery". The original assessments for the aforesaid three years were completed on the assessee as an individual on November 20, 1970, February 24, 1971, and March 7, 1974. During the relevant accounting period, the assessee had allowed the firm to use the ground floor of the building belonging to him for the purpose of the business of the firm. He had neither let out the ground floor nor collected any rent for the same and, therefore, the assessee had not returned any income from the ground floor. But the assessment was reopened on the ground that the assessee failed to disclose the particulars of income relating to the ground floor. The assessee objected to the reopening on the ground that the annual value relating to the ground floor is not income chargeable to tax as the same is exempt under Section 22 of the Income-tax Act. Under Section 22, the annual value of a building of which the assessee is the owner and which he is occupying for the purpose of a business carried on by him, the profits of which are chargeable to income-tax, is exempted from taxation. But, the Income-tax Officer rejected the contention of the assessee and assessment was completed including the annual value of the ground floor of the building also as his income. On appeal, the Appellate Assistant Commissioner accepted the contention of the assessee. The Department came up in appeal against the decision of the Appellate Assistant Commissioner for the three years. But the Tribunal confirmed the order of the Appellate Assistant Commissioner and in so doing the Tribunal followed the decision of the Gujarat High Court in CIT v. Rasiklal Balabhai [1979] 119 ITR 303, wherein it was held that when a partnership carries on a business, each partner thereof carries on that business and further held that when the partnership is in occupation, the assessee must also be deemed to be in occupation thereof. It is thereafter that the above question of law was formulated and referred to this court.
3. We heard counsel for the Revenue as well as for the assessee.
4. The Tribunal appreciated the facts that the assessee was the managing partner and the other partners were his sons. The licence issued by the excise authorities for carrying on business in gold was in the name of the assessee. The licence had also mentioned the ground floor of the building as the premises where the business was carried on under the licence. Therefore, the assessee as the managing partner is carrying on business in partnership using the licence issued in his name in the ground floor of the building belonging to him and occupied by him as partner. Under Section 14, all income chargeable to income-tax is classified. Income from house property is one such head of income. Sections 22 to 27 relate to computation of income from house property. Section 22 says that the annual value of property consisting of any buildings or lands appurtenant thereto of which the assessee is the owner is chargeable to income-tax under the head "Income from house property", unless otherwise provided. Such portion of such property as he may occupy for the purposes of any business carried on by him the profits of which are chargeable to income-tax is exempted. If the owner occupied the property for the purpose of his business the profits of which are assessable to tax, no tax is payable in respect of that house property. The tax is on the owner and not on the occupant and levied not on actual income but on the annual value as determined under Section 23. The charge is not on rent but on the inherent capacity of the property to yield profit. Even if the owner receives no income, the charge will be there on the artificial or notional income statutorily fixed. In order to be taxed under Section 22, the conditions to be satisfied are (a) the property should consist of buildings or lands appurtenant thereto ; (b) the assessee should be the owner ; (c) the property should not be used by the owner for the purpose of any business carried on by him the profits of which are chargeable to income-tax. We are concerned here with the third condition. If it is not satisfied, Section 22 will not be attracted. If a person occupies his house property for the purpose of his business, the annual value thereof will not be chargeable provided the profits thereof are taxable. In other words, when an owner occupies any portion of house property for the purpose of his business carried on by him the profits of which are chargeable to income-tax, the annual value will not be chargeable. In order to claim exemption also, three conditions should be satisfied, viz., (a) the assessee should be in occupation of the property; (b) the occupation must be for the business carried on by the assessee; and (c) the profits of the business should be chargeable to tax. The admitted case is that the elements of conditions "b and c" mentioned above have been satisfied in the case as the, assessee is carrying on business as the managing partner of the firm and the profits of the business are chargeable to tax.
5. The contention strongly pressed on behalf of the Revenue is that the assessee cannot be deemed to be in occupation of the premises as the occupation of the firm cannot be treated as occupation by the partner. For this purpose, counsel strongly relied on the decision of the Karnataka High Court in CIT v. K.N. Guruswamy [1984] 146 ITR 34 and submitted that exemption under Section 22 is available only to the owner of a house property who occupies it for the purpose of any business carried on by him. If the property or portion of it, owned by an assessee, is occupied by him for the purpose of his own business or profession, or a property owned by a firm is used for its business, such assessee is entitled to exemption. In that case, the question to be considered was similar like the one in question, viz., whether the notional income from house property owned by a partner of a firm, and used in the firm's business, can be included in the total income of the partner. The Income-tax Officer rejected the assessee's claim and included the annual value in the assessee's income. But the Appellate Assistant Commissioner upheld the contention of the assesses and deleted the addition. The Tribunal also agreed with the view taken by the Appellate Assistant Commissioner in that case. On a reference at the instance of the Revenue, the Division Bench of the High Court held that it is "only the owner of the property who can claim deduction and that owner must be an assessee and the property concerned must have been used or occupied for the assessee's business. The "occupation" of the property, in the context, must mean "occupation as owner or his own occupation". The fact of occupation, therefore, must go with the owner of the building which means actual occupation for the purpose of his business or profession. Therefore, the Division Bench stated that the conclusion of the law is as under (at p. 38) :
"If the property or a portion of it, owned by an assessee, is occupied by him for the purpose of his own business or profession, or a property owned by a firm is used for its business, such assessee is entitled to exemption under Section 22."
6. Counsel on behalf of the respondent-assessee relied on the decision of the Gujarat High Court in CIT v. Rasiklal Balabhai [1979] 119 ITR 303. In that case also, a similar question arose for consideration wherein it was held that an individual assessee owning a godown used by the partnership in which he is partner was assessed, including the annual value of the godown in the total income for the assessee. The Appellate Assistant Commissioner deleted the inclusion and the deletion was upheld by the Tribunal. The question that arose before the Gujarat High Court was whether the Tribunal was justified in holding that the annual letting value of the godown owned by the assessee and used for the business carried on by him in partnership was not liable to be included in his total income under Section 22 of the Income-tax Act, 1961. In answering the question in favour of the assessee, the Division Bench held that when a partnership carries on a business, each partner thereof carries on that business and the exemption in Section 22 will apply in such cases. A partner of the firm can be said to be carrying on his business when he carries on business in partnership. Section 2(23) of the Income-tax Act says "firm", "partner" and "partnership" have the meaning respectively assigned to them in the Indian Partnership Act, 1932, and Section 4 of the Indian Partnership Act defines "partnership" as the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. Referring to the concept of partnership, the Supreme Court in CIT v, R.M. Chidambaram Pillai [1977] 106 ITR 292, observed that a firm is not an entity or "person" in law, but is merely an association of individuals and a firm name is only a collective name of those individuals who constitute the firm and in the decision in Sitaram Motif am Jain v. CIT [1961] 43 ITR 405, the Gujarat High Court held that when a partnership carries on a business, each partner thereof carries on that business. Section 22 exempts the annual value of the property consisting of any building or lands appurtenant thereto of which the assessee is the owner, other than such portions of such property as he may occupy for the purpose of any business carried on by him. The interpretation canvassed by counsel for the Revenue is that the occupation must be exclusive, in the sense that no other person should be considered to be occupying that premises. Factually, in the case in question, the assessee as the managing partner is occupying the house property for the purpose of his business and the business is done in partnership with his sons. There may be occupation of the premises by other partners also, even though the licence issued by the excise authority for carrying on business in gold was only in the name of the assessee. We are, therefore, of the view that the assessee is carrying on business in the premises. When a partnership carries on a business, each partner thereof carries on that business and if the business is carried on in the premises, it must be held, as a necessary implication, that the partner is occupying the premises. It cannot be stated that the managing partner is not occupying the premises. In fact, all the partners are occupying the premises including the managing partner, the assessee, herein. There is no case that the income from the business is not subjected to tax. On a perusal of the decision of the Karnataka High Court in K.N. Guruswamy's case [1984] 146 ITR 34, we find that the position has not been considered in the light of the partnership law in that case. The reasoning of the Gujarat High Court is more acceptable to us. We also find that the decision of the Gujarat High Court in Rasiklal Balabhai's case [1979] 119 ITR 303, has been accepted by the Madras High Court in CIT v. K.M. Jagannathan [1989] 180 ITR 191, where also a similar question arose for consideration. It was held in that case that when a partnership carries on business, each partner also carries on that business and, in the eye of law, a firm is a compendious expression used to indicate the several persons constituting the firm. When the firm is carrying on business, it can be said that the business is being carried on by all the partners. This aspect has been lost sight of in the decision reported in CIT v. K.N. Guruswamy [1984] 146 ITR 34 (Kar), and, therefore, their Lordships of the Madras High Court were not able to subspribe to the view expressed therein. In that case, an assessee-partner "owned the house property which was occupied by the firm for its money-lending business. The Income-tax Officer included the annual value of the property in the assessment of the assessee. But the Appellate Assistant Commissioner accepted the assessee's contention that the assessee is carrying on business in the premises though as a partner. On further appeal by the Revenue, the Tribunal upheld the view expressed by the Appellate Assistant Commissioner. At the instance of the Revenue, the question whether the Appellate Tribunal was right in excluding the annual letting value of the property in respect of the portion under the occupation of the firm and whether the Tribunal's view that for the purpose of Section 22, the business carried on by the firm should be taken as the business carried on by the partner are correct was referred to the opinion of the High Court. It was contended on behalf of the Revenue that even though the assessee is the owner of the property, he was not in occupation of such property for the purpose of a business carried on by him and, therefore, the benefit of exclusion provided under Section 22 could not be available to the assessee. Reliance was placed by the Revenue on the decision aforementioned, viz., CIT v. K. N. Guruswamy [1984] 146 ITR 34 (Kar). It was contended on behalf of the assessee that carrying on the business by the assessee though as a partner of the firm, would be sufficient to enable the assessee to claim the benefit. The assessee relied on the decision in CIT v. Rasiklal Balabhai [1979] 119 ITR 303 (Guj) and an unreported decision in Addl. CIT v. N. Vaidyanathan--since reported in [1989] 180 ITR 198 (Mad) (T.C. No. 307 of 1977, judgment dated 17-1-1983). The Division Bench of the Madras High Court referred to Section 4 of the Partnership Act and the scheme of the Income-tax Act especially Section 67(2) which recognised the basis of partnership law according to which the partnership business was nothing but the business carried on by every partner acting for all the partners and concluded that (at p. 195) "as per the legal as well as fiscal theory, a partner may be appropriately regarded as carrying on business, even if the other partners look after the business of the firm and the user and occupation by the firm, in which the assessee is a partner, of portions pf the property belonging to the assessee, has to be regarded as occupation of the property owned by the assessee for the purposes of a business carried on by him." In Addl. CIT v. N. Vaidyanathan [1989] 180 ITR 198 (Mad), the question arose whether a practising chartered accountant exercising his profession in partnership with another and in occupation of one-half of the house owned by him could claim the benefit under Section 22 of the Act. It was held that the portion of the assessee's house, occupied by the assessee's auditor firm can be held to be user by the assessee and, therefore, the assessee would be entitled to the benefit, of Section 22 of the Act. The assessee in this case was the managing partner of the firm. Counsel for the Revenue also brought to our notice the decision reported in R.B. Jodha Mal Kuthiala v. CIT [1971] 82 ITR 570 (SC) which deals with the question as to who can be considered the owner of the property. In this case, there is no dispute relating to the ownership and, therefore, we are not referring to that decision in detail.
7. There is no dispute that the assessee is the owner of the ground floor of the building. The assessee is carrying on business in partnership the profits of which are chargeable to income-tax. It cannot be stated that the assessee is not occupying the building for the purpose of his business. The business is done in partnership, the other partners also occupying the ground floor along with the assessee and the partnership business is carried on by him along with the other partners. Therefore, we are of the view that the annual letting value of the ground floor of the building belonging to the assessee which is in occupation of a firm in which the assessee is a partner is not includible in the income of assessee under Section 22 of the Act and, consequently, the reopening of the assessment was not sustainable.
8. In the light of the above discussion, we answer the question referred to us in the affirmative, i.e., in favour of the assessee and against the Revenue.
9. A copy of this judgment under the seal of this court and the signature of the Registrar will be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.