1976-VIL-461-CAL-DT

Equivalent Citation: [1977] 107 ITR 965

CALCUTTA HIGH COURT

Date: 29.01.1976

COMMISSIONER OF INCOME-TAX, WEST BENGAL III

Vs

COSSIPORE PROPERTIES

BENCH

Judge(s)  : S. C. DEB., DIPAK KUMAR SEN 

JUDGMENT

DIPAK KUMAR SEN J.--This is a reference under section 66(1) of the Indian Income-tax Act, 1922, which has been initiated by the Commissioner of Income-tax, West Bengal-III, Calcutta. The facts found and/or admitted as appearing in the statement of the case and the annexures thereto may be shortly noted as follows:

The assessee is one Messrs. Cossipore Properties Ltd., Calcutta. Two individuals, namely, Budhmal Jain and Nirmal Kumar Jain, had entered into a partnership under a deed dated the 17th April, 1959, and constituted the assessee. It has been recited in the deed of partnership and it has also been found as a fact that prior to the constitution of the partnership, Budhmal Jain had been carrying on business under the name and style of Cossipore Properties and was trading by way of taking lease of godowns and letting out the same to various persons on rent. After the partition of India in 1947, the trade in raw jute in India had suffered a set back and a number of concerns which had been carrying on business of storing, packing, pressing and exporting raw jute had to be closed down. Consequently, a number of godowns belonging to the said concerns fell into disuse. Budhmal earned profits by taking lease of such godowns and sub-letting the same to various parties for storage of goods and commodities.

It is recited in the deed that Budhmal had to remain out of Calcutta for long periods due to his indifferent health. Being desirous of extending his business by opening new lines, namely, dealings in jute, hessian, textiles and other similar commodities and with this object Budhmal constituted the partnership with Nirmal Kumar and the partnership took over the earlier activities of Budhmal, namely, letting out of the leased godowns.

The deed of partnership has not been challenged nor has it been found to be a sham document.

For the assessment year 1960-61, the Income-tax Officer refused the application of the assessee for registration on the ground that the assessee was merely deriving income from letting out properties. He found that the assessee was constituted of persons owning in common , large properties producing returns, which were being divided. Accordingly, he held that the activities of the assessee did not constitute any business and the assessee was not entitled to be registered as a partnership. The Appellate Assistant Commissioner, on appeal by the assessee, upheld the order of the Income-tax Officer. The Appellate Assistant Commissioner also noted that, prior to the constitution of the partnership, the income in the hands of Budhmal arising from his activities was being assessed as income from other sources.

There was a further appeal by the assessee to the Tribunal. The Tribunal found as fact the following ;

(a) Budhmal had been taking on lease a large number of godowns and letting the same out to others for storing of goods and commodities ;

(b) The number of such godowns let out each year varied from 30 to 40 ;

(c) The said godowns were let out to a large number of lessees and the basis of hiring differed from case to case. In some cases it was on a daily basis. In one case it was on a weekly basis and in other cases such letting out was on a monthly basis.

(d) The terms of the tenancy and the rates of letting out also varied ;

(e) The assessee had to obtain licences for the purpose of storage of hazardous goods in the said godowns ;

(f) Insurance charges had to be incurred in respect of such godowns ;

(g) Brokers were being engaged by the assessee for procuring customers for the godowns and staff consisting of a clerk, watchmen, sweepers, etc., were engaged to look after the godown, to collect rents, and to write accounts ;

(h) The terms of the tenancy between the assessee and the owners of the godowns varied from year to year.

From these facts the Tribunal concluded as follows :

" But here the nature of the property, the nature of the assessee's lease and the nature of the sub-letting are so as to constitute the activities into a business. The assessee has taken a number of properties on temporary lease. The properties are godowns useful for storage of goods and commodities. They have been let out on varying terms to different tenants from time to time. Some godowns fall vacant for varying periods during a year and definite efforts are required to be made to maintain them and procure tenants from time to time. It seems to us that in this case clearly there is an organised and continuous exercise of activity which is absolutely necessary to enable the assessee to make the most of the godowns earn profits. The above two circumstances, we think, entitle the assessee to say that the activities do amount to the carrying on of a business."

The question which has been referred from the order of the Tribunal is as follows :

Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the activities of the assessee constituted a business so that the assessee had been validly constituted as a partnership ? "

Mr. B. L. Pal, learned counsel for the revenue, submitted that in the facts and circumstances as found the only conclusion which can be drawn is that the assessee consisting of the two persons do nothing but manage their existing property. He relied on section 4 of the Indian Partnership Act which defined a partnership as the relation between persons who have agreed to share the profits of a business. Section 2(b) of the same Act defined "business" to include every trade, occupation and profession. He submitted that the concept of occupation by itself did not conclude the matter in view of Explanation 1 of section 6 of the Act, namely, that the sharing of profits or of gross returns arising from property by persons holding a joint or common interest in that property does not of itself make such persons partners.

In support of his submissions he relied also on the statements of English law as appearing in the well-known treatises of Lindley and Underhill. The concept "business" has been analysed at page 10 of the 13th edition of Lindley on Partnership as follows :

" By section 45 of the Act, 'business' includes 'every trade occupation, or profession'. Thus, virtually any commercial activity or adventure amounts to a business for the purposes of the Act, but it is not every occupation which results in monetary gain that constitutes a business. The management of a landed estate may be profitable but it does not necessarily fall within the above definition of 'business'. Further, it is now provided by section 2(1) of the Act (which embodies the effect of a number of common law decisions) that 'joint tenancy, tenancy-in-common, joint property, common property, or part ownership, does not of itself create a partnership as to anything so held or owned, whether the tenants or owners do or do not share any profits made by the use thereof. "

In the book of Underhill, 9th edition, at pages 4 and 6, the law is stated as follows :

" Co-ownership does not imply a business, or partnership. Thus, joint owners of an estate, or even of a chattel, such as a ship, are not (as such) partners, although they may use their best endeavours to develop the land and let or use the joint property for their mutual profit, unless they go farther and carry on a business with respect to it. On similar principles, the members of a society formed to purchase investments for the common benefit of the members (such as the modern 'fixed trust') are not partners, because, as was pointed out by James L.J. in Smith v. Anderson [1880] 15 ChD 247 (CA), nothing to be done by such societies comes within the ordinary meaning of 'business', any more than what is done by the trustees of a marriage settlement who have large properties vested in them, and who have very extensive powers of disposing of the investments, changing the investments, and selling them and reinvesting in other investments, according to their discretion and judgment. "

Mr. Pal also relied on a decision of this court in the case of Sunil Krishna Paul v. Commissioner of Income-tax [1966] 59 ITR 457 (Cal).

The facts in that case were that under an agreement two persons became entitled to receive from a limited company a commission at the rate of 1 per cent. of the company's sales in perpetuity because of past services rendered in procuring a loan of Rs. 10,00,000. The benefits of this agreement were transferred in favour of two other persons by a deed of assignment. Thereafter, the assignees by an instrument entered into a partnership to share the common receipts.

On such facts it was held that a mere common interest or sharing of profits will not by itself constitute a partnership. The partners must also carry on a common business. It was held that carrying on of business would mean that there should be some contribution by the partners to the growth or enjoyment of business and with this end in view the partners should be pursuing the business and such pursuit should be apparent from their conduct. It was found that there was no volition or activity, on the part of the partners and it was held that mere watching the earnings did not amount to carrying on of a business.

Mr. R. N. Bajoria, learned counsel appearing on behalf of the assessee, contended, on the other hand, that the facts found in this case show that there was sufficient material for the Tribunal to conclude that the activity carried on by the assessee was a business activity. He distinguished the facts of this case from the facts before the court in Sunil Krishna Paul v. Commissioner of Income-tax [1966] 59 ITR 457 (Cal). He submitted that the exposition of English law by Lindley and Underhill, as noted above, in fact supported the case of the assessee. Both the Indian statute and the English law made it clear that persons may be joint or co-owners, but the same would not preclude them from carrying on business with the assets which were originally in joint ownership. He contended that what Explanation 1 to section 6 of the Partnership Act provided was that where the property itself without any further activity on the part of the owners produced profits and the owners qua owners agreed to share such profits without any further activity on their part, then certainly no partnership would arise. He further contended that in the facts of this case there was no joint ownership. The original owner, if any, was Budbmal. The new partner, Nirmal Kumar, did not come in as a co-owner, nor did he by operation of law become the co-owner. The rights of Nirmal Kumar were entirely acquired under the deed of partnership and such rights were not the rights of a co-owner.

It appears to us that the contentions of Mr. Bajoria are not without substance. The facts which have been found by the Tribunal and which have not been challenged before us, sufficiently specify the activities which were being carried on by the assessee in the assessment year in question. The intention of the assessee is also apparent from the deed of partnership. No doubt, the deed would not finally settle the matter one way or the other, but the statements in the deed are also pieces of evidence which cannot be ignored altogether. It appears to us that the persons constituting the assessee are doing something more than management of existing property. The assessee has to continue to obtain godowns on lease from year to year or other varying periods and has to take steps to have the same sublet. This is not a case where the owners after having acquired more or less a permanent right lean back and enjoy the profits thereafter. In our opinion, there was sufficient material before the Tribunal to conclude that the activities carried on by the assessee were business activities.

Mr. Bajoria in support of his contentions has relied on two decisions--one of the Supreme Court and the other of this court. The decision of the Supreme Court is in the case of Karanpura Development Co. Ltd. v. Commissioner of Income-tax [1962] 44 ITR 362 (SC). The facts before the Supreme Court were that the assessee was a company which was formed with the objects, inter alia, of acquiring and disposing of underground coal mining rights in certain coalfields. The company carried on business activities in acquiring coal mine leases over large areas, developing them as coalfields and then sub-leasing them to collieries and other companies. The company never worked the coalfields itself, nor did it acquire or deal with the coal raised by its sub-lessees. The question which was mooted before the Supreme Court was whether the amounts received by the company as salami for granting the sub-leases constituted trading receipts in its hands.

It was held by the Supreme Court that the transactions of acquiring leases and granting sub-leases were in the nature of trading within the objects of the company and were not mere enjoyment of property as land owner. The Supreme Court laid down the law in its judgment at page 377 of the report as follows :

" As has been already pointed out in connection with the other two cases where there is a letting out of premises and collection of rents the assessment on property basis may be correct but not so, where the letting or sub-letting is part of a trading operation. The dividing line is difficult to find ; but in the case of a company with its professed objects and the manner of its activities and the nature of its dealings with its property, it is possible to say on which side the operations fall and to what head the income is to be assigned.

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. The cases which have been cited in this case both for and against the assessee-company must be applied with this distinction properly borne in mind. In deciding whether a company dealt with its properties as owner, one must see not to the form which it gave to the transaction but to the substance of the matter. The Californian Copper Syndicate case [1904] 5 TC 159 (C Exchq) illustrates vividly dealings with mineral rights and concessions by a company as part of the objects of its business, or, in other words, in the holding of the business. The Calcutta cases and the case of Fry v. Salisbury House Estates Ltd. [1930] AC 432 (HL) illustrate the contrary proposition. There, the property, though dealt with by a company intending to do business, was dealt with as landowner. The intention in those cases was not to derive profit by business done with those properties but to derive income by renting them out. Where a company acquires properties which it sells or leases out with a view to acquiring other properties to be dealt with in the same manner, the company is not treating them as properties to be enjoyed in the shape of rents which they yield but as a kind of circulating capital leading to profits of business, which profits may be either enjoyed or put back into the business to acquire more properties for further profitable exploitation."

This decision has been followed in the subsequent decision of this court in the case of Commissioner of Income-tax v. Ukhara Estates Zamindaries (P.) Ltd. [1971] 82 ITR 103 (Cal).

It appears to us that the law, on the point at issue, i.e., the English law, the Indian statute and the exposition thereof by the Supreme Court is well settled and clear. We note in particular that the facts in Karanpura Development Co. Ltd.'s case [1962] 44 ITR 362 (SC) before the Supreme Court are more or less similar to the facts before us in the instant case.

For the reasons mentioned above we answer the question in favour of the assessee and in the affirmative. There will be no order as to costs.

DEB J.--I agree.

 

 

 

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