1988 (3) TMI 136 - AT - Income Tax

Summary

Issues Involved:
1. Classification of rental income as "income from property" vs. "income from business."
2. Validity of the partnership firm in the absence of business activity.
3. Jurisdiction of the Commissioner(A) to address the continuance of the firm's registration.
4. Application of Section 26 of the IT Act regarding the assessment of income in respect of partners separately.

Detailed Analysis:

1. Classification of Rental Income:
The primary issue in this case is whether the rental income derived from letting out godowns should be assessed as "income from property" under Section 22 or "income from business" under Section 28 of the IT Act. The appellant firm, constituted by 11 persons through partnership deeds, has been filing returns showing rental income as "income from business." However, the Income Tax Officer (ITO) assessed it under Section 22, a decision upheld by the first appellate authority. The Commissioner(A) confirmed this view, holding that the rental income should be assessed as "income from property."

2. Validity of the Partnership Firm:
The Commissioner(A) extended the scope of the appeal to question the validity of the partnership firm, given that it was not engaged in any business activity. The Commissioner(A) cited various legal provisions and case laws, including the Indian Partnership Act, 1932, which defines a partnership as a relationship between persons who have agreed to share the profits of a business. The Commissioner(A) concluded that the firm was not validly constituted since it was not engaged in any business activity, thereby questioning the continuation of its registration.

3. Jurisdiction of the Commissioner(A):
The appellant's counsel argued that the Commissioner(A) exceeded his jurisdiction by considering the continuance of the firm's registration, which was not the subject matter of the appeal. The Tribunal agreed, stating that the Commissioner(A) was not justified in using a passage from the assessment order of a preceding year to open a new ground. The Tribunal emphasized that the Commissioner(A) was exercising quasi-judicial functions and should have confined himself to the issues raised in the appeal.

4. Application of Section 26 of the IT Act:
The appellant contended that if the income is assessed under the head "property," it should be assessed in respect of the partners separately as envisaged by Section 26. The Tribunal noted that the Commissioner(A) had examined whether the shares of the partners were definite and ascertainable, thereby attracting the provisions of Section 26. However, the Tribunal also pointed out that if the firm is not carrying on any business, it raises the question of whether it can be treated as a firm under the Indian Partnership Act.

Conclusion:
The Tribunal found that the Commissioner(A) had erred in addressing the issue of the firm's registration, which was outside the domain of the appeal. The Tribunal set aside the impugned order and quashed the assessment, restoring the case to the file of the ITO. The ITO was directed to redo the assessment in accordance with the provisions of law, without being influenced by the impugned order or the Tribunal's observations. Any consequential orders passed by the ITO in pursuance of the first appellate order were rendered inconsequential. The appeals were treated as allowed for statistical purposes.