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TMI Blog1993 (12) TMI 103X X X X Extracts X X X X X X X X Extracts X X X X ..... ation for registration under section 185 and without giving the appellant an opportunity to agitate the matter of registration in accordance with law. (3) The learned Commissioner of Income-tax (Appeals) erred in holding that income derived on development of real estate by providing amenities in pursuance of the object of partnership does not constitute business and further he erred in holding that the status of the assessee should not be treated as registered firm. (4) Without prejudice to the above ground, in the event of the income being treated as property income, the Assessing Officer should have applied section 26 and made separate assessment. For application of section 26 there is no need of any agreement to declare and the alleged overdrawings of some partners are not relevant for the purpose. He should have held that the partnership deed should at least serve the purpose of specification of shares. Even if the partnership deed was ignored, section 15 of the T.P. Act will apply and the shares get divided on the basis of proportion of capital contribution or in the absence of proof, the shares are presumed equal. Hence there can be no co-owned property without specifie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... them along with Shri BVVS Ramesh Kumar representing the HUF constituted into a partnership for the purpose of constructing buildings/office complex and deriving rental income by letting out to several parties. They entered into a partnership by means of a partnership deed dated 17-5-1978. Each of the five partners had equal shares in it. Four co-owners of the land brought their respective extents into the partnership towards their share by valuing each of their shares at Rs. 50,000. Each co-owner brought Rs. 1,00,000 towards their capital contribution. Thus each of the four co-owners of the land brought Rs. 1.50 lakhs towards each of their shares. Shri B.V. Ramaiah representing his HUF brought Rs. 1,50,000 into the partnership towards his share. They constructed multi-storeyed buildings under the name and style of M/s. Jayalaskhmi Estates in the said extent of 2000 sq. yds. The construction started in February 1979 and completed in December 1981. Cost of construction was Rs. 38 lakhs. Apart from the capital contribution as stated above, remaining cost of construction was met out of borrowed funds. While so, on 1-10-1982, Shri P. V. Krishna Rao, one of the co-owners retired from th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his daughter Smt. P. Jansi Jayalakshmi as partners. The business of the partnership was to enter into contract with owners of buildings, factories and to own, lease out, provide, maintain, repair, upkeep service facilities such as water, electricity, drainage, lift, telephones, cleaning, airconditioning equipment, furniture and furnishing etc. to houses shops and other class of buildings in the city of Madras and elsewhere to collect service charges for rendering the same and to carry on any other business as may be decided upon by the partners from time to time. Till 31-3-1981 that firm had no activity. The initial capital contribution of that firm was Rs. 10,000 and it was raised to Rs. 60,000 during the accounting period ending on 31-3-1982 and it was never raised thereafter. During the accounting period relevant to assessment year 1982-83, it made certain investments in the building at No. 8, Haddows Road, Madras belonging to M/s. Jayalakshmi Estates. During the subsequent accounting periods also certain further investments were made. The total investments actually made by this firm upto 31-3-1987 was Rs. 8.39 lakhs. The investment was made in providing electrical fittings, fan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee did not carry on any business in the absence of which it is not entitled to registration. The Income-tax Officer felt that there was no business activity carried on by the assessee and realisation of rentals from out of several portions of the office building constructed by the assessee cannot be considered as business income. We fully agree with this reasoning and hold that the assessee cannot be considered to have carried on business or to have derived business income by merely deriving rental income from portions of office complex let out to several persons. Even providing amenities like lift, staircase, sewerage and providing space for parking cars of the tenants, the provision for drinking water, by providing watch and ward staff and the receipt of service charges for providing these facilities cannot also turn the activities as business activities. In this connection we wish to follow the Supreme Court's judgment in East India Housing Land Development Trust Ltd. v. CIT [1961] 42 ITR 49. Their Lordship had followed the decision of an English case in Fry v. Salisbury House Estates Co. Ltd. [1930] A.C. 432. In that case a company was formed to acquire, manage and d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and ascertainable nature of their shares, and about the individual shares of the members of the AOP in whole or in part was indeterminate or unknown. To put it straight, the assessee and the Revenue are at variance with each other with regard to the application of section 26 of the Income-tax Act to the income earned by the assessee. Section 26 of the Income-tax Act is as follows : "26. Where property consisting of buildings or buildings and lands appurtenant thereto is owned by two or more persons and their respective shares are definite and ascertainable, such persons shall not in respect of such property be assessed as an association of persons, but the shares of each such person in the income from the property as computed in accordance with sections 22 to 25 shall be included in his total income. Explanation : For the purposes of this section in applying the provisions of sub-section (2) of section 23 for computing the share of each such person as is referred to in this section, such share shall be computed, as if each such person is individually entitled to the relief provided in that sub-section. " In fact it is the claim of the assessee that it is entitled to the be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e provisions of section 147 of the Income-tax Act. The learned Commissioner (Appeals) had relied upon the A.P. High Court's decision in CIT v. Phabiomal Sons [1986] 158 ITR 773. In that case it was held that letting out of building and realising rents therefrom did not amount to carrying on of business. It was incidental to ownership. For a partnership firm, the requirement of section 4 of the Indian Partnership Act, 1932 was the existence of business. There was no business in the act of letting out of a building in which one is an owner. We feel, that the decision of the A.P. High Court in Phabiomal Sons' case is distinguishable. Firstly whether the assessee in that case was entitled to registration or not is the only question confronting the Hon'ble High Court. They were not called upon to decide whether the partners of the assessee firm are co-owners and whether they are entitled to benefits of section 26 of the Income-tax Act or not. The existence of a valid partnership is not at all essential for invoking the provisions of section 26 of the Income-tax Act. It is enough if there exists an association of persons and those persons should all be interested in the property and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hin and sometimes very obscure. This was the ratio of the Kerala High Court in CIT v. C. Karunakaran [1988] 170 ITR 426 at pages 429 430. Therefore, having regard to the facts of this case, three had brought their interest in the land apart from capital contributions. Others had brought in the capital contributions and all of them employed their assets in a joint enterprise to put up a massive office complex with a view to make profit. Though all these persons may not be partners as we understand under Partnership law, they certainly formed an association of persons. Therefore, the first objection raised by the learned Commissioner (Appeals) does not appear to be correct under law. 8. Now let us take up the second objection which is that all the persons in the association are not owners in the property and all the persons constituting the AOP cannot become co-owners and unless they are co-owners section 26 cannot come into operation. Here the property in question comprised of not only building but also lands appurtenant thereto. The question is whether all the persons who formed the association in this case can be called as co-owners either in the land or in the buildings. Whil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1990 found at pages 108 to 110, it is clearly stated that in support of its claim for applicability of section 26 of the Act the assessee in its letter dated 11-1-1990 sought to rely upon the undermentioned documents : (a) Partnership deed (b) Account books (c) Income-tax and wealth-tax returns filed by the respective co-owners. In the said assessment itself, at page 109 if the paper book the following particulars were given along with a table by the Asstt. Commissioner of Income-tax : "The first partnership deed dated 17-5-1978 shows the aforesaid five persons as partners. As per subsequent partnership deeds there were three changes in the computation of ownership of the building. The following are the particulars : ------------------------------------------------------------------------------------------------------------------------------------------------- Sl. Name of persons shown Period and shareholding No. to be partners and capital in lacs -------------------------------------------------------------------------------------------- 17-5-1978 1-10-1982 1-7-1984 14-6-1986 to to to to date 30-9-1982 30-6-1984 13-6-1986 --------------------------------- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) Shri B.B. Ramaiah (Individual) (5) Smt. S.B. Ranganayaki. The first three among them held 20% each whereas the last two held 10% share each. It is no doubt that M/s. Jayalakshmi Estates Ltd. had no title to the land but having contributed Rs. 8 lakhs towards its share capital it has acquired title in the building constructed or in the complex which was constructed on the land. So also S. No. 1 having contributed Rs. 1.5 lakhs acquired title in the complex constructed. Rest of the co-owners having held 80% share in the land allowed Jayalakshmi Estates to become one of the co-owners and it was also permitted to enjoy the common property along with them. The objection that there is no relationship whatsoever between the capital contribution made by different co-owners at different points of time to the original cost of the building or the share ascribed to them is not correct. We have already stated how the co-owners in the beginning had contributed equally Rs. 1,50,000. Afterwards every time a fresh deed of partnership was executed the co-owners always equalised their shares with reference to the value of the property. It is already stated that when Shri P.V. Krishna Rao walked ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quently the entries were reversed crediting the accounts of the assessee in the firm by Rs. 53,200 and debiting his account and the two other co-owners, namely, Allah Bux and Abid Ali by Rs. 17,733. Regarding the amounts spent for construction the co-owners Allah Bux and Abid Ali also bore the cost of construction and ultimately Park View Hotel came into being on the said land. The question was whether the income from property shall be taxed in the hands of the assessee exclusively. The findings of the Tribunal were summed up as follows : (1) That the plot in question was purchased by Shri Saiffuddin from the UTI and the sales certificate was issued in his name. The entire payment was made by him. (2) Even the cost of construction of the property was borne by Shri Saiffuddin. (3) It is settled law by now that title to the land and building could not pass to other persons till the conveyance was executed and registered. Regarding the construction it was found that a sum of Rs. 59,760 was spent from October 1967 to September 1968. It was also found that it was the firm which made the payment to the contractor Noor Mohd. from time to time and subsequently the same was distribu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the co-owners were used to be shown. For assessment year 1983-84, the balance-sheet drawn as on 31-3-1983 was found at page 120 of the paper book and the capital account of each of its partners was shown with a credit of Rs. 1,50,000. For assessment year 1984-85, the balance sheet drawn as on 31-3-1984 was furnished at page 98 of the assessee's paper book and each of the partners was credited with capital contribution of Rs. 1,50,000 and the total contribution was thus shown at Rs. 6 lakhs. For assessment year 1985-86, the balance-sheet drawn as on 31-3-1985 was furnished at page 82. There are five partners. The erstwhile partners' contribution was shown at Rs. 1,50,000 each whereas the newly added Jayalakshmi Estates Limited was shown to have contributed Rs. 8 lakhs. Thus the total capital contribution was shown at Rs. 14 lakhs. For assessment year 1986-87 in the balance-sheet drawn on 31-3-1986 same capital was shown. For assessment year 1987-88 in the balance-sheet drawn as on 31-3-1987, the capital contribution was shown at Rs. 14 lakhs and the partners were shown to be six in number instead of four in number. These partners as well as their contribution are as under : (1) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment order for 1990-91 that sharing of the income by the co-owners was according to capital contribution and so on a legal basis. He held the following at paras 7 and 8 : "Another contention raised in this case is that even though no business was carried on by the firm since the share of the members are not indeterminate or unknown it should be assessed as such in accordance with the decision of the A.P. High Court in CIT v. Phabiomal Sons (158 ITR 773), a decision binding on the authorities in A.P. As to the contention that sharing of profit is not according to the capital contribution, the argument is that when the partnership started on 17-5-1978 the sharing was strictly according to the capital contribution and this continued even after retirement of a partner on 1-10-1982. When a partner was inducted on 1-7-1984, its contribution of Rs. 8 lakhs was also according to the value of the building taken at Rs. 40 lakhs and its share was proportionate to the capital at 20%. When one of the partners died on 13-6-1986 the two legatees who stepped into the shoes of the deceased acquired the right of the deceased as per her will in equal proportion. Thus the sharing of the inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther land or buildings. Even according to the Revenue they are members of an association and the partnership deeds, though may be ineffective to evidence partnerships can as well be used for collateral purpose of proving the nature of possession of the partners thereunder in the common property. They disclosed that all the partners under each of the partnership deeds were enjoying the common property or the recitals under each of these deeds were meant to enable such enjoyment to the co-owners or to all the persons constituting the AOP. Therefore, by virtue of section 27(iii) read with section 269UA(d) (f) of the Income-tax Act which came into force from 1-4-1988, all the partners under each of these partnership deeds can be stated to have become owners of the common property. The previous year relevant to assessment year under consideration ended on 31-3-1989 and, therefore, these provisions very much apply to the assessment year in question. This contention which was advanced on behalf of the assessee for assessment year 1989-90 was also accepted by the Assessing Officer while framing the assessment for 1990-91 as can be seen from the following portion of his assessment order : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owners of the property and when their shares were also accepted to be definite and ascertainable and the only income derived by the association was the lease income of the office complex, then provisions of section 26 of the Income-tax Act, automatically follow. Section 26 states as follows : "Where property consisting of buildings or buildings and lands appurtenant thereto is owned by two or more persons and their respective shares are definite and ascertainable, such persons shall not in respect of such property be assessed as an association of persons, but the share of each such person in the income from the property as computed in accordance with sections 22 to 25 shall be included in his total income." On a conspectus view of the whole matter, we hold that the shares of the members of the association are definite and ascertainable in the common property and therefore, the share of each such person is to be assessed in view of the provisions of section 26 of the Income-tax Act and they should not be assessed as an association of persons. 13. Now the question remains how far the Revenue is justifiable to include the income earned by M/s. Ramaiah Co. in the hands of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fixtures and fittings as mentioned above in the building owned by the assessee AOP without any stipulation of mutual rights and obligations of these provisions. Tenants were asked to execute two types of agreements --- one with the assessee AOP for payment of rent whereas another agreement with M/s. Ramaiah Co. for payment of service charges. Agreement for service charges were entered into with M/s. Harita Finance Pvt. Ltd., and M/s. Sundaram Clayton Limited as well as other tenants. While rent for accommodation is paid according to floor space provided for service charges are also paid to M/s. Ramaiah Co. according to floor space occupied and not by taking into consideration the fixtures and fittings actually provided for. Till 1984-85, the only source of income of M/s. Ramaiah Co. was from the above service charges. For assessment years 1985-86, 1986-87 and 1987-88 M/s. Ramaiah Co. had independent business activity also in manufacture of HDPE bags. However that business was wound up during the accounting period relevant to assessment year 1987-88. During the course of assessment proceedings for 1987-88 the assessee AOP was asked to state as to why the income disclosed in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , Sundaram Clayton Ltd. as also M/s. Widia India Ltd. The amenities agreement entered into by M/s. Sundaram Clayton Limited states that two Aluminium Doors 5'x 7' are stated to have been let out. However, the balance-sheet of M/s. Ramaiah Co. does not show any ownership by them of any aluminium door, whereas the assessee AOP had purchased and installed aluminium doors worth Rs. 65,000 approximately. The service charges have no relationship with the fittings and facilities expected to be provided for and are payable according to floor space of accommodation. M/s. National Organic Chemical Industries Ltd. (NOCIL) took on rent 5510 sq. It. of floor space whereas M/s. Sundaram Clayton Ltd. took on lease 11950 of floor space. They paid for accommodation at Rs. 2 per sq. ft. of floor space. Service charges paid by them were Re. 1 per sq. ft. However, the items purported to have been hired out to them are shown in the table below : NOCIL Sundaram Clayton Limited (i) Double Tube light fittings 50 79 (ii) Single Tube light fittings 15 50 (iii) Ceiling fans 3 46 (iv) Exhaust fans 2 4 (v) Pedestal fans 70 --- (vi) Wash Basin mirrors 5 6 (vii) Aluminium doors --- 2 Both t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... carry out all necessary repairs for damages arising from the following : (a) inherent defects in construction, (b) unforeseen calamities, (c) by fire, tempest, leakage or rain, (d) providing water for drinking and flushing purposes, (e) break-down of the plumbing system, (f) fusing of electrical installations and to undertake the maintenance of the exterior portion of the demised premises with sufficient sanitations. (4) Under clause 3(a) of the Agreement with M/s. NOCIL states that the "appellant" will maintain the lift staircase and common passage in a fit and proper manner for which the lessor (appellant) alone will be liable. (5) In the agreement with M/s. Harita Finance Pvt. Ltd. the rent is fixed at Rs. 2.50 per sq. ft. "for the area measuring about 3000 sq. ft. comprising general office reception, toilets, stair case landing, lift, lobby, common passage etc.". It is further declared in that deed that the lessor has not encumbered the said property by mortgage or otherwise in any manner in favour of any person and is competent to grant the lease. A comparison of the stipulations found in the so-called amenities agreement and accommodation agreement would sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the proper entity to be assessed with that income. In this connection we need to quote only the Allahabad High Court's decision in S. Gyani Ram Co. v. ITO [1963] 47 ITR 472. In the headnote of the decision, the following is what is stated : "The mere fact that a particular income has been assessed in the hands of a particular person as his income will not prevent the Income-tax Officer from coming to the conclusion on fresh materials that that income is the income of another person and taking proceedings under section 34 of the Act for reassessment against the latter on the ground that this income had escaped assessment in his assessment." In that case it was contended that the two entities whose incomes were sought to be clubbed are no other than members of an Association of persons. In such a case if one member of an association of persons is assessed with a particular income, the same income cannot be brought to tax in the hands of the AOP in which he is only a member. Repelling the said contention, the Allahabad High Court held at page 476 as follows : "It is, therefore, clear that the two entities are entirely distinct, the one having nothing to do with the other, cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of those space and collect rents for the so-called amenities provided for. To put in a nutshell when the whole building belong to the assessee AOP absolutely, and when it is not subjected to either mortgage, lease or licence, Ramaiah Co. would not be left with any title to erect the so-called conveniences to let the tenants use them over which it could collect monies. However, in this case one cannot deny payment of moneys under amenities agreement. The question is who is the lawful owner entitled to collect such charges for providing amenities. In our opinion, unhesitatingly it is the assessee who is entitled to collect the charges for providing amenities to the tenants and definitely not M/s. Ramaiah Co. In our considered opinion, simply because Ramaiah Co. invested the amount of Rs. 8.39 lakhs in order to provide electrical fittings, fans, lift, generator, furniture and air-conditioner in the said building that by itself would not entitle the said firm to collect rents from the tenants on the ground that it had provided amenities. Unless and until M/s. Ramaiah Co. was able to show that investments were made by it in electrical fittings, fans, generator, furniture, air- ..... X X X X Extracts X X X X X X X X Extracts X X X X
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