2011 (7) TMI 31 - HC - Income Tax

Applicability of section 22 - Co-owner in a property - Property is used in a business of partnership firm - Held that partnership firm cannot take advantage of the ownership of a property owned by its partner in his individual capacity for the purpose of getting benefit of taxation and in the same way, a partner also in his individual capacity cannot treat the right of possession exercised by the firm in any property as his own right of possession so as to get benefit of taxation - Held that the exemption under Section 22 of the Act in respect of a property not owned by the partnership firm cannot be availed of by an individual co-owner merely because he happens to be a partner of a firm in occupation of a part of the property - Decided against the assessee

Summary

Issues:
1. Interpretation of Section 22 of the Income-tax Act, 1961 regarding the availability of benefit to a co-owner of a house property occupied by a partnership firm.

Analysis:
The case involved an appeal under Section 260A of the Income-tax Act, 1961, where the appellant, a co-owner of a property occupied by a partnership firm, contested the applicability of Section 22 of the Act. The dispute arose when the Assessing Officer treated the appellant as receiving rental income from the property, leading to subsequent appeals before the Commissioner of Income-tax (Appeal) and the Income-tax Appellate Tribunal. The core issue was whether the benefit under Section 22 of the Act was available to a co-owner of a property occupied by a partnership firm in which the co-owner was a partner. The Tribunal had rejected the appellant's contention, prompting the present appeal. The central question for determination was whether the income from the property occupied by the firm, of which the appellant was a partner, should be included in the appellant's total income under Section 22 of the Act.

The appellant argued that as a co-owner of the property and a partner in the occupying partnership firm, they were entitled to the exemption under Section 22. The appellant cited various High Court decisions in support of their argument. On the contrary, the Revenue contended that for the benefit of Section 22, the property should be owned by the partnership firm itself, and the owner and occupier must be the same person. The Revenue relied on specific court decisions to support their stance. The Court examined the provisions of Section 22, emphasizing that the owner of a house property liable under the head "Income from house property" should be the occupier for business or profession chargeable to income tax. The Court highlighted that a co-owner, even if a partner in the occupying firm, could not claim exemption if the firm was liable for tax on the profit from the business conducted on the property.

The Court emphasized strict interpretation of exemption provisions in tax statutes and rejected the appellant's argument for exemption based on partnership involvement. Referring to partnership law principles, the Court clarified that during a partnership, partners do not have individual rights over partnership properties. The Court disagreed with views from other High Courts allowing partners to utilize firm property possession for tax benefits. The Court aligned with the Karnataka High Court's interpretation, emphasizing that a partnership firm could not benefit from a property owned by its partner. The Court affirmed that exemption under Section 22 could not be claimed by an individual co-owner merely due to partnership firm occupation.

In conclusion, the Court dismissed the appeal, affirming the Tribunal's order and ruling against the appellant. The Court found no merit in the appellant's argument, maintaining that the exemption under Section 22 of the Act could not be availed by an individual co-owner merely because of their partnership in a firm occupying part of the property.