1994 (7) TMI 130 - AT - Income Tax

Assessing Officer, Business Income, Income From House Property, Let Out, Partnership Firm, Previous Year, Profits And Gains Of Business, Rental Income

Issues Involved:
1. Nature of rental income (business income vs. income from house property)
2. Assessment of rental income in the hands of the firm vs. individual partners

Issue-Wise Detailed Analysis:

1. Nature of Rental Income (Business Income vs. Income from House Property):

The primary issue was whether the rental income received by the assessee should be classified under the head 'Profits and gains of business' or 'Income from house property'. The assessee, a firm that previously ran a lodging business, discontinued this activity and began letting rooms and additional units to various parties, including small shop owners and government departments. The assessee argued that the rental income should be taxed as business income due to the provision of services such as water, sanitation, electricity, and security.

The Assessing Officer rejected this argument, citing the principle that an asset must be part of a running business to be considered a commercial asset. The rental income was thus classified under 'Income from house property', referencing the case of Seth Banarsi Das Gupta v. CIT [1977] 106 ITR 559.

The CIT(A) concurred, stating that the provision of basic amenities did not constitute a business activity. The CIT(A) referenced the jurisdictional High Court decision in Anaikar Traders & Estates (P) Ltd, No. 1 v. CIT [1990] 186 ITR 175 (Mad) and the ITAT Hyderabad Bench decision in K. Rami Reddy & Sons v. ITO [1985] 14 ITD 108, to support this view.

The Tribunal reaffirmed this position, emphasizing that the general rule is that rental income from property is classified under 'Income from house property'. They referenced several cases, including Commercial Properties Ltd In re 3 ITC 23 and Salisbury House Estate Ltd v. Fry [1930] 15 TC 266, which support the view that rental income derived from property ownership, even with some management or incidental services, remains 'Income from house property'.

The Tribunal also considered the case of Karnani Properties Ltd v. CIT [1971] 82 ITR 547 but found it distinguishable on facts, noting that the Supreme Court's judgment in that case does not lay down a universal rule.

2. Assessment of Rental Income in the Hands of the Firm vs. Individual Partners:

The CIT(A) observed that the firm was not carrying on any business and held that the rental income should be assessed in the hands of the individual partners. This decision was based on the principle that a partnership implies the carrying on of a business through mutual agency among partners. Since the firm was not engaged in any business activities, the partners were deemed co-owners of the property, and the rental income was to be assessed in their hands in their profit-sharing ratio.

The Tribunal supported this view, referencing the Bombay High Court case of Ramniklal Sunderlal v. CIT [1989] 36 ITR 464, which held that if a firm is not carrying on any business, the property income should be assessed in the hands of the partners. The Tribunal also noted that the powers of the first appellate authority are broad enough to address the issue as the CIT(A) did.

Conclusion:

The Tribunal dismissed the assessee's appeals, affirming that the rental income should be classified under 'Income from house property' and assessed in the hands of the individual partners rather than the firm. The Tribunal emphasized the legal principles distinguishing business income from property income and upheld the CIT(A)'s decision based on the absence of business activities by the firm.

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