2002-VIL-196-ITAT-HYD
Equivalent Citation: ITD 083, 372, TTJ 086, 963,
Income Tax Appellate Tribunal HYDERABAD
Date: 23.01.2002
INCOME-TAX OFFICER.
Vs
SUSEELARAM ENTERPRISES.
BENCH
Member(s) : M. V. R. PRASAD.
JUDGMENT
1. This appeal by the Revenue and the Cross-objection by the assessee are directed against the order of the CIT(A)-II, Hyderabad, dated 30-4-1997 for the assessment year 1992-93.
2. Effective grounds of the Revenue in its appeal read as under
"1. ..........
2. The CIT(A) ought not to have entertained the appeal against the assessment order passed by the Assessing Officer in pursuance with an order of revision passed by the CIT under section 263 of the Income-tax Act as held by the Bombay High Court in the case of Hardillia Chemicals Ltd. v. CIT [1996] 221 ITR 194.
3. Without prejudice to the above, the CIT(A) ought to have upheld the computation of income of the assessee under the head income from House Property as, on facts, the decision of Supreme Court in the case of S.G. Mercantile Corpn. (P.) Ltd v. CIT [1972] 83 ITR 700 is distinguishable.
4. The CIT(A) ought to have upheld the refusal of registration under section 185(1) (b) of the Income-tax Act as the income derived by the assessee cannot be said to be from any business carried on by the assessee.
5. The CIT(A) ought not to have allowed different appeals viz, the head of income and the status in the same appeal as the order passed by the Assessing Officer under section 185(1)(b) is an independent proceeding against which a separate appeal ought to have been filed.
6. ............... By its cross-objections in the appeal of the Revenue, the assessee merely supported the order of the CIT(A), and countered the above grounds of the Revenue.
3. The appellant-firm came into existence by a deed dated 1-4-1991. Clause 3 of the partnership deed, relating to the business of the assessee-firm, reads as under
"3. The partnership shall be of constructing and letting out or leasing out temporary or permanent buildings, godowns or vacant spaces on daily or monthly basis, and to undertake transport operations and Agricultural farming and any other line of trade or business with the consent of the partners in future."
The assessee-firm consists of three partners. The three partners of the assessee-firm were carrying on the same business with effect from 1982 along-with another partner, Shri K. Janardhan Choudhury, who retired with effect from 31-3-1991, and so, the firm was reconstituted with surviving three partners with effect from 1-4-1991.
4. The assessee-firm has taken on lease some land belonging to the Endowments Department of the State Government, and constructed some property, which was leased out to a distillery firm and to a transport firm. Some open land obtained on lease was also leased out. The assessee-firm also derived some interest income on the advances made. So, the credit side of the P&L Account of the assessee-firm for the year ended 31-3-1992 reflected the following receipts:
Rents received
(1) O.R. Distilleries Ltd., Tirupati (Office) Rs. 48,000.00
(2) Attur Land : Lease Rent Rs. 48,000.00
(3) S.R.M.T. Ltd. Rent Rs. 60,000.00
(4) Interest from OR. Distilleries Ltd., Tirupati Rs. 9,101.44
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Total Rs. 1,65,101.44
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After claiming various expenses, assessee's net profit as per the said P&L Account stood at Rs. 79,451.08.
5. The Assessing Officer completed the assessment, accepting the income returned after adding back interest paid to partners, income-tax, etc. of Rs. 99,750. The Commissioner of Income-tax, Vijayawada in exercise of his powers under section 263, set aside the said assessment, on the ground that the assessee derived only rental and interest incomes, and there was no business carried on by the assessee, and that the said rental income has to be assessed under the head 'property' and not under the head 'business'. In support of this stand, the CIT relied upon the following decisions:
(1) New Savan Sugar & Gur Refining Co. Ltd. v. CIT [1962] 74 ITR 7 (SC).
(2) Narain Swadeshi Weaving Mills v. CEPT [1954] 26 ITR 765 (SC).
(3) Guntur Merchants Cotton Press Co. Ltd. v. CIT [1985] 154 ITR 861 (AP).
The concluding remarks of the Commissioner in his order under section 263 are as under :
"Considering all the above case laws and the facts of the present case, I hold that the rental income of the assessee shall be treated as Income from house property but not under the head "Income from business". Further as there is no activity of business the status of the assessee firm is to be treated as U.R.F. It is also to be pointed out that the Assessing Officer has failed to consider the assessee's application under sections 11 and 11A stated to have been filed on 30-3-1992. In the circumstances stated above, the order under section 143(3), dated 4-6-1993 for the assessment year 1992-93 is erroneous on facts and circumstances of the case and prejudicial to the interests of the revenue. The said assessment is therefore set aside with a direction to redo the same after giving necessary opportunity of being heard to the assessee. The Assessing Officer should also determine the status accordingly."
6. Pursuant to the above order of the CIT, the Assessing Officer passed an order under section 143(3), dated 8-1-1997 and another order dated 9-1-1997 under section 185(l)(b). By the former order, the Assessing Officer has computed the rental income of the assessee under the head 'property' as per the directions of the Commissioner in his order under section 263, and thus, restricted the allowance of deductions to those admissible under the head 'property'. He computed the income as under
"Property: Rental income received from:
(i) O.R. Distilleries Ltd. TPT Rs. 48,000.00
(ii) Lease rent from Attur Land Rs. 48,000.00
(iii) Rent from SRMT Ltd. Rs. 60,000.00
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Total Rs. 1,56,000.00
Less: Municipal Taxes Less: 1/5th for repairs Rs. 31,200.00
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Rs. 1,24,800.00
Less: Ground rent paid Rs. 5,664.00
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Rs. 1,18,136.00
Other Sources: Int. from O.R. Distilleries Rs. 9,101.00
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Rs. 1,27,237 or
1,27,240."
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By his order dated 9-1-1997 passed under section 185(1)(b), the Assessing Officer also treated the status of the assessee as 'unregistered firm' on the ground that the assessee did not carry on any business, and so, it cannot be treated as a registered firm. His remarks in that behalf are as under
"...For claiming registration under section 185(1)(a) of the Act, the assessee should have carried on business. In the absence of any business activity carried on by the assessee, the assessee's request for grant of registration is rejected and the status of the firm is treated as Un registered Firm."
7. The CIT(A), on appeal, was of the view that the Commissioner, in his order under section 263, had only set aside the assessment and did not give any specific directions, and so, the appeal before him was only against the consequential orders passed by the Assessing Officer, and as such the appeal was maintainable. He also considered the validity of the single appeal against separate orders passed by the Assessing Officer under section 143(3) and under section 185(l)(b), and held that a single appeal against two separate orders in the specified context was valid. For this proposition, he relied upon the following decisions-
(1) CIT v. Rupa Traders [1979] 118 ITR 412 (Cal.)
(2) CIT v. Hansa Agencies [1980] 121 ITR 147 (Bom.)
(3) Patel & Co. v. CIT [1986] 161 ITR 568 (Guj.)
(4) Ansari Jewellers v. CIT [1987] 167 ITR 380(Raj.)
(5) CIT v. K.H. Pandeya [1993] 202 ITR 705 (Pat.).
On the merits of the case, the CIT(A) took the view that the rental income of the assessee should be assessed under the head 'business'. For this proposition, he relied upon clause (3) of the partnership deed dated 1-4-1994, which we have extracted hereinabove. According to him, the assessee's business itself was to commercially exploit the properties. He was of the view that the facts of the case before him are similar to those considered by the Apex Court in the case of S.G. Mercantile Corpn. (P.) Ltd. v. CIT [1972] 83 ITR 700. The CIT(A) also directed the Assessing Officer to grant registration to the assessee, as according to him, the rental income is assessable as business income.
8. Before me, the learned Departmental Representative reiterated the contentions made out in the grounds taken by the Revenue in this appeal.
9. As for the first effective ground taken by the Revenue, viz, the one against Sl. No. 2 extracted above, regarding the jurisdiction of the CIT(A) in the context of the order under section 263, I entirely agree with the view taken by the CIT(A), that in the order under section 263 in question, the Commissioner has only set aside the assessment with a direction to the Assessing Officer to reframe the assessment, after giving opportunity of being heard to the assessee. I have already reproduced the relevant remarks of the Commissioner hereinabove. I am of the view that the said remarks tantamount only to setting aside the assessment with direction to reframe the same, without giving any specific directions to the Assessing Officer. So, I agree with the CIT(A) that the appeal before him was maintainable. This ground of the Revenue is hence rejected.
10. As for the last effective ground, viz, the ground against Sl. No. 5, regarding maintainability of one appeal against separate orders passed by the Assessing Officer under section 143(3) and under section 185(1)(b). I again agree with the CIT(A). I am of the view that the case-law relied on by the CIT(A) clearly support his stand. So, this ground is also rejected.
11. As for the second effective ground, viz. the ground against Sl. No. 3, regarding question whether the rental income is assessable under the head 'business' or 'property', I am of the view that the order of the CIT(A) cannot be sustained. It has been claimed before me by the learned counsel for the assessee that the assessee had only constructed certain properties on lease-hold lands, and as such the income from the said property is to be assessed under the head 'business'. He also relied upon the clause (3) of the partnership deed, which we have extracted hereinabove, and on the basis of the said clause, it was emphatically pleaded that the activity of the assessee itself was constructing and letting out the buildings - temporary or permanent - on lands taken on lease or to let out vacant lands taken on lease; and so, it is claimed that the activities of taking on lease some lands, putting up some constructions thereon and letting them out clearly fell within the objects of the firm, and so, the said activity of letting out was in the nature of business activity. As such, it is pleaded that the rental income has to be assessed as business income. In this context, he filed before us written submissions, which are identical to the grounds taken in the cross-objections, wherein reliance was placed on the decisions of the Apex Court in the case of S.G. Mercantile Corpn. (P.) Ltd.; and of the Madhya Pradesh High Court in the case of CIT v. Laxmi Rice Mills [1987] 164 ITR 571; and of the Hon'ble A.P. High Court in the case of CIT v. A.P Small Scale Industrial Development Corpn. [1989] 175 ITR 352.
12. in reply, the learned Departmental Representative countered by stating that the rental income of the assessee was Assessable under the head 'property' in the light of the decision of the Hon'ble Bombay High Court in the case of Parekh Traders v. CIT [1984] 150 ITR 310 and the decision of the Hon'ble A.P. High Court in the case of Guntur Merchants Cotton Press Co. Ltd.
13. The learned counsel for the assessee sought to distinguish the above cases relied upon by the learned Departmental Representative by stating that the land on which the assessee put up the construction, were taken on lease in 1982 only for a short-term of five years, even though the said lease had been renewed from time to time.
14. I am of the view that the case of the assessee falls squarely within the ratio of the decision of the Hon'ble Karnataka High Court in the case of D.R. Puttanna Sons (P.) Ltd. v. CIT [1986] 162 ITR 468. The head-note of this decision reads as follows
"So long as the title and ownership of a structure built by an assessee remained vested in the lessee (assessee), the income derived from the property has to be assessed as 'Income from property'. Therefore, where the assessee took on lease a site for a period of 30 years and constructed a building on it at its own cost and let out the building, the assessee has to be treated as the owner of the building during the period of the lease and the income derived by way of rent from the building had to be assessed under the head 'Income from property' and not under the head 'Income from business'."
It may be observed from the above head-note that in the case considered by the Hon'ble Karnataka High Court also, the land on which constructions had been put up was taken on lease, though in that case the lease was for a period of 30 years, whereas the lease in the case of the assessee before us is only for a period of five years. The question is not whether the lease is for short-term or long-term, but the question is whether the assessee is the owner of the property during the term of lease, of the construction put on the lease-hold land. The Hon'ble Karnataka High Court, while delivering the above judgment relied upon the following decisions--
(a) CIT v. Y.V. Srinivasamurthy [1967] 64 ITR 292 (Mys.),
(b) Tinsukia Development Corpn. Ltd. v. CIT [1979] 120 ITR 476 (Cal.).
The relevant portion of the head-note of the Hon'ble Calcutta High Court in the case of Tinsukia Development Corpn. Ltd. v. CIT [1979] 120 ITR 466 reads as under:
"Whatever be the nature of the activity or the nature of the income, the income of an assessee has to be classified and computed under the specific heads under section 6 of the Indian Income-tax Act, 1922, or under section 14 of the Income-tax Act, 1961. Even if such income arose in the course of the assessee's business, if the same fell clearly under some other head or satisfied the tests of any specific head, then such income has to be classified and computed under that head. Where the term of a lease, being a building lease, provided that the ownership of the structure to be built remained vested in the lessee while the ownership of the site remained in the lessor, and the structures put up on the land were not seasoned structures but could be let out at least for five to six years, then the lease would still be assessed in respect of the income from such structures under section 9 of the Indian Income-tax Act, 1922 (corresponding to section 22 of the Income tax Act, 1961), as an income from property; Tinsukia Development Corpn. Ltd v. CIT (Appx.) applied."
I am of the view that the assessee in the present case, is clearly the owner of the constructions put up on the lease-hold lands, and as such the rental income is assessable under the head 'property'.
15. The learned counsel for the assessee sought to argue that along with the lease of the construction, an air-conditioner was also let out and the agreement in respect of the lease of the building and the air-conditioner is a composite one, and the lease income in respect of these two properties cannot be separated. So, he tried to argue that the assessee has rendered some air-conditioning services, and so, the income is assessable under the head 'business'. The air-conditioner is reflected at an amount of Rs. 17,100 in the Balance Sheet as on 31-3-1992. I find that the so-called airconditioning service rendered by the assessee is insignificant. In the case of CIT v. National Storage (P.) Ltd. [1963] 48 ITR 577 (Bom.), which has been subsequently been confirmed by the Apex Court in the decision in CIT v. National Storage (P.) Ltd. [1967] 66 ITR 596, the Hon'ble Bombay High Court held that the character of the income, as assessable under the head 'property' does not change simply because the hiring out of the property is inclusive of certain additional services, such as lighting, cleaning, sanitation, etc. which are relatively insignificant and are only incidental to the occupation by the tenants. In the present case, I find that the air-conditioning service is, as already mentioned, is somewhat insignificant, and so, the provision of this service does not change the character of the rental income, and the said rental income is assessable under the head 'property'. I find that the decision of the Apex Court in the case of S.G. Mercantile Corpn. (P.) Ltd., relied on by the CIT(A) is distinguishable inasmuch as in that case the property in question itself was taken on lease, and the property was sub-let. In other words, the property was not owned by the assessee in that case, and the question of assessing a particular item of income under the head 'property' arises only if the assessee is the owner of the property, from which income is received. In the case before us, the constructions have been put up on leasehold lands by the assessee, and the constructions as such were not taken on lease. In other words, the assessee is the owner of the constructions in question, which were let out and from which rental income was derived. So, I am of the view that the decision of the Apex Court in the case of S.G. Mercantile Corpn. (P.) Ltd., is distinguishable. Similar is the position with regard to the other decisions relied upon by the learned counsel for the assessee. So, I hold that the rental income derived by the assessee has to be assessed under the head 'house property' and not under the head 'business' but that does not mean that the assessee-firm can be refused registration.
16. In the case of CIT v. Admiralty Flats Motel [1982] 133 ITR 895, Hon'ble Madras High Court held that the meaning of the word 'business' in the Partnership Act is not restricted to the concept as envisaged under the Income-tax Act. The relevant comments of the Hon'ble High Court in the said decision, as per the head-note arc as under:
"The classification of various heads of income under the Income-tax Act is only for the purpose of convenience of administration of the Act and the concept of 'business' as envisaged under the Income-tax Act cannot be imported into the determination of the question as to whether a group of individuals, by agreement, carry on business as a firm. While as a result of section 2(23) of the Income-tax Act, the concept of the Partnership Act has been imported into the Income-tax Act, there is no provision in the Partnership Act which imports into it the concept of the Income-tax law. Accordingly, because of the classification of income under several heads under the Income-tax Act, it cannot be stated that whatever is classified under the head 'Business' under the Income-tax Act alone could constitute business in the sense of the Partnership Act. Whatever may be the head of assessment under the Income-tax Act, so long as what was carried on by the firm could be classified as business in the sense of the Partnership Act, the firm could be entitled to registration if the other conditions are satisfied."
In the light of the above, I am of the view that for the purposes of the Partnership Act, the activities of the assessee-firm before me, have to be considered as carrying on business. So, notwithstanding the fact that the rental income of the assessee is assessable as income under the head 'house property', as held hereinabove, assessee has to be held to be carrying on business. At any rate, the Assessing Officer himself adopted the status of the assessee, as an unregistered firm. In other words, even according to the Assessing Officer, the status of the assessee is a firm. Once the status is adopted as a firm, it is self-contradictory to refuse registration on the ground that the assessee did not carry on business. Implicit in the adoption of the status of the assessee as firm, is the concession that the assessee had carried on business. So, I am of the view that the assessee is entitled to the grant of registration.
17. In the light of the above, impugned order of the CIT(A) is set aside, but the Assessing Officer is directed to modify the assessment adopting the status of the assessee as registered firm. No argument or ground has been raised before me, disputing the determination of income of the assessee at Rs. 1,27,640 as done by the Assessing Officer. So, the total income determined by the Assessing Officer at Rs. 1,27,640 may be assessed in the hands of the assessee, in the status as a registered firm. To this extent, the order of the CIT(A) is set aside and the assessment is restored.
18. In the light of the above findings in the context of the appeal of the Revenue, the cross-objections of the assessee do not warrant separate consideration. They are accordingly rejected as infructuous.
19. In the result, Revenue's appeal is allowed and the assessee's cross objections are dismissed.
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