1993 (12) TMI 103 - AT - Income Tax

A Partner, Additions To Income, Application For Registration, Assessing Officer, Assessment Order, Assessment Year, Business Income, Firm Consisting, Income From Business, Income From House Property, Let Out, Partnership Firm, Rental Income, Two Partners

Issues Involved:
1. Status of the assessee as an association of persons (AOP) and the applicability of the maximum marginal rate under section 167B of the Income-tax Act, 1961.
2. Rejection of the application for registration under section 185 of the Income-tax Act.
3. Classification of income derived from real estate development and provision of amenities.
4. Application of section 26 of the Income-tax Act for separate assessment of property income.
5. Aggregation of income of M/s. Ramaiah & Co. with the appellant firm.

Detailed Analysis:

1. Status of the Assessee as an Association of Persons (AOP) and Maximum Marginal Rate:
The primary issue was whether the assessee should be treated as an AOP liable to tax at the maximum marginal rate under section 167B. The Tribunal upheld the Commissioner's decision that the assessee was an AOP. The Tribunal agreed that the assessee did not carry on any business activity and merely derived rental income from letting out portions of an office complex. This rental income could not be considered as business income, even if amenities were provided. The Tribunal referenced the Supreme Court's judgment in *East India Housing & Land Development Trust Ltd. v. CIT* to support this conclusion, emphasizing that such rental income is property income, not business income.

2. Rejection of Application for Registration under Section 185:
The Tribunal dismissed the ground related to the rejection of the application for registration under section 185, noting that this issue was not raised before the lower authorities and no material facts were presented to substantiate this ground. The Tribunal also held that the assessee was not entitled to registration because it did not carry on any business.

3. Classification of Income from Real Estate Development and Provision of Amenities:
The Tribunal concurred with the Revenue's view that the income derived from the development of real estate and provision of amenities did not constitute business income. The activities of providing amenities like lifts, staircases, sewerage, parking spaces, drinking water, and watch and ward staff were considered ancillary to the ownership of property and not business activities.

4. Application of Section 26 for Separate Assessment:
The Tribunal examined whether section 26 of the Income-tax Act, which allows for separate assessment of co-owners with definite and ascertainable shares, was applicable. The Tribunal found that the shares of the members of the AOP were definite and ascertainable. It referenced the Rajasthan High Court's decision in *Saiffuddin v. CIT*, which held that co-owners who bore the cost of construction were joint owners. The Tribunal concluded that the members of the AOP were co-owners of the property and their shares were definite and ascertainable, thus qualifying for the benefits of section 26.

5. Aggregation of Income of M/s. Ramaiah & Co. with the Appellant Firm:
The Tribunal addressed whether the income of M/s. Ramaiah & Co. should be aggregated with the income of the appellant firm. It noted that M/s. Ramaiah & Co. was a separate partnership firm providing amenities to the tenants of the building owned by the appellant. The Tribunal found that the arrangement between the appellant and M/s. Ramaiah & Co. was a tax-saving device and that the income from amenities should be considered as property income of the appellant. The Tribunal upheld the inclusion of the income of M/s. Ramaiah & Co. in the hands of the appellant, citing the Supreme Court's decision in *McDowell & Co. Ltd. v. CTO* and the principle that the substance of the transaction should prevail over its form.

Conclusion:
The Tribunal partly allowed the appeal, affirming the status of the assessee as an AOP and the inclusion of the income from amenities provided by M/s. Ramaiah & Co. in the hands of the appellant. The Tribunal also held that the assessee's shares were definite and ascertainable, thereby entitling it to the benefits of section 26 for separate assessment of property income.

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