1997 (2) TMI 91 - HC - Income Tax

Association Of Persons, Business Income Or Income From Property, Carrying On Business, Partnership Deed

Issues Involved:

1. Whether the letting out of the shops by the assessee concern amounts to business activities.
2. Whether the assessee is entitled to be assessed in the status of an association of persons under section 26 of the Income-tax Act in respect of the rental income.

Detailed Analysis:

Issue 1: Whether the letting out of the shops by the assessee concern amounts to business activities

The primary issue is whether the activity of letting out shops by the assessee constitutes business activities. The assessee is a firm that took a property on lease, developed it by constructing buildings, and then leased these buildings to various tenants. The Income-tax Appellate Tribunal (ITAT) held that this activity is a business activity, not merely earning rental income from property ownership.

The Supreme Court's decision in S. G. Mercantile Corporation P. Ltd. v. CIT [1972] 83 ITR 700 was cited, where it was held that if the assessee is not the owner of the property but engages in leasing as part of its business, the income should be classified as business income under section 10 of the Indian Income-tax Act, 1922 (corresponding to section 28 of the Income-tax Act, 1961).

The Tribunal found no evidence that the assessee was the owner of the property. Instead, the firm's activities of taking properties on lease, developing them, and leasing them out were integral to its business. The partnership deed confirmed that the firm's objective was to engage in real estate and develop commercial complexes, indicating that the leasing activity was part of its business operations.

The court concluded that the letting out of the shops was indeed part of the business activities of the assessee-firm. Therefore, the income from these activities should be treated as business income, not as rental income from property ownership. Consequently, question No. 1 was answered in the affirmative and against the assessee.

Issue 2: Whether the assessee is entitled to be assessed in the status of an association of persons under section 26 of the Income-tax Act in respect of the rental income

The second issue concerns whether the assessee should be assessed as an association of persons (AOP) under section 26 of the Income-tax Act. The assessee argued that the income should be shared among four different groups, making them liable to be assessed as co-owners under section 26.

The court noted that the assessee is a partnership firm constituted under a partnership deed dated January 1, 1984. The partnership deed outlined the share of income among various partners. For section 26 to apply, the property must be owned by two or more persons with definite and ascertainable shares. However, it is well established that partners in a firm do not have definite and ascertainable shares in the firm's properties during its subsistence.

The Supreme Court's rulings in Addanki Narayanappa v. Bhaskara Krishnappa, AIR 1966 SC 1300, and Sunil Siddharthbhai v. CIT [1985] 156 ITR 509 (SC) were cited. These rulings clarified that partners do not have exclusive rights over partnership property during the firm's subsistence. Their rights are limited to their share of profits and the value of their share in the net partnership assets upon dissolution or retirement.

The court found that the assessee-firm's partners did not have definite or ascertainable shares in the partnership properties. The partnership deed's provision for allotting certain properties to certain groups on dissolution or the share of income from specific portions of the property did not change this fact.

The court also distinguished this case from the unreported Division Bench decision in CIT v. Poornima Enterprises, where the Tribunal found no firm existed, leading to individuals being assessed as co-owners. In contrast, the present case involved a valid partnership firm engaged in business activities.

Therefore, the court concluded that the assessee-firm could not claim the status of an association of persons under section 26 of the Income-tax Act for the rental income. Question No. 2 was answered in the negative and against the assessee.

Conclusion:

The court held that the letting out of shops by the assessee-firm constituted business activities, and the income should be treated as business income. Additionally, the assessee-firm could not be assessed as an association of persons under section 26 of the Income-tax Act for the rental income. Both questions were answered against the assessee, and there was no order as to costs.

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