Commissioner Of Income-Tax, Tamil Nadu-V v. Lakshmi Company.

Sethuraman, J.:— The Appellate Tribunal has referred the following three questions for the opinion of this court under s. 256(1) of the Act:

“(1) Whether, on the facts and in the circumstances of the case, the activities of the assessee constituted “business” as per section 2(b) of the Indian Partnership Act?

(3) Whether, on the facts and in the circumstances of the case, the assessee was entitled to registration for the assessment year 1969–70?

(3) Whether, on the facts and in the circumstances of the case, the income returned by the assessee should be assessed as income under the head ‘Business’ or under the head ‘Other sources’?”

2. The assessee-firm was originally constituted under a partnership deed dated 8th March, 1965. There were changes in the constitution, and, therefore, another deed was drawn up on 22nd December, 1967. The firm was registered for the assessment year 1967–68 and the registration was continued for 1968–69. For the assessment year 1969–70, the assessee filed the application for registration in Form No. 11 and Form No. 11A before the ITO on October 15, 1968. The ITO was of the view that under para. 2 of the partnership deed dated 22nd December, 1967, the main business of the assessee was only to take building;s on lease and let them as warehouses and godowns and realise the rent therefrom.

3. The above activity was not in his view a business activity. There were also some realisation of interest from five debtors. Even this realisation was not considered to be any receipt in the course of business in money-lending. In the view of the ITO, the activity of the assessee was nothing more than what an ordinary property owner would do. Since there was no business, in his view, there could be no partnership and, therefore, refused the registration.

4. Against the refusal to register the firm and also against the order making the assessment under the head “Other sources”, the assessee preferred an appeal to the AAC. The AAC observed that a firm could be constituted only for the purpose of carrying on business, that an “association of person” owning properties or collecting rents could not be taken to be a firm as understood under the Partnership Act and that, therefore, the ITO was right in holding that there was only an association of persons and not a firm. The income was also considered to be assessable only under the head “Other sources”. Against the orders of the AAC in both the appeals, there were appeals to the Tribunal. The Tribunal was of the view that in order to arrive at a conclusion whether there was any legal firm in existence during the year of accounting, it would be necessary to go into the provisions of the Partnership Act and ascertain whether there was any business carried on by the assessee-firm as provided under that Act. In the Tribunal's view, the letting of the leasehold property could be considered an occupation within the meaning of s. 2(b), and it was, therefore, held that the assessee was carrying on business as contemplated by the Partnership Act during the 1 year. With regard to the objection of the assessee to the assessment of the income realised from the tenants, under the head “Other sources”, the Tribunal rejected it and confirmed the order of the AAC. According to the Tribunal, the activity of subletting the premises would not come within the scope of s. 2(13) of the I.T Act, 1961. Against the order of the Tribunal, there were two reference applications, one by the Commissioner and the other by the assessee. The Commissioner has objected to the registration being granted to the assessee and the assessee has objected to the assessment of the income being made under the head “Other sources”; that is how the three questions are before us.

5. We shall first consider whether the assessee was carrying on any business so as to constitute a firm which would be eligible for registration under the provisions of the I.T Act, 1961. There is a definition of the word “business” in s. 2(13) of the I.T Act running as follows: “‘Business’ includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture.” However, in order to find out whether a firm could come into existence, it is necessary only to look into the provisions of the Partnership Act. It is that Act which regulates the constitution or creation of a firm. We had occasion to consii der a similar question of registration and assessment under the head “Other sources” in Commissioner Of Income-Tax, Tamil Nadu-Iv v. Admiralty Flats Motel. No. 232 of 1975) in the judgment dated 3rd July, 1979 (since reported in [1982] 133 ITR 895 (Mad) (supra). In that case, certain buildings were put up by the persons belonging to an HUF out of their separate resources. They entered into a partnership for the purpose of carrying on the business of lodging of house keepers. The question was whether the firm could be registered and whether the income from running the lodging house could be assessed under the head “Business”. In the course of the judgment, it was observed (p. 900 supra):

“The I.T Act divides income under separate heads for the purpose of enabling assessment being made after giving the particular deduction available under the respective provisions. The classification of various heads of income under the I.T Act is only for the purpose of convenience of administration of that statute. The concept of business as envisaged under the I.T Act cannot be imported into the determination of the question as to whether a group of individuals do, by agreement, carry on business as a firm.

Under s. 2(23) of the I.T Act, the expressions ‘firm’, ‘partner’ and ‘partnership’ have the meanings respectively assigned to them in the Indian Partnership Act. Section 4 of the Partnership Act defines ‘partnership’ as the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. While as a result of s. 2(23) of the I.T Act, the concept of the Partnership Act has been imported into the I.T Act, there is no provision in the Partnership Act which imports into it the concept of income-tax law. Therefore, because of the classification of the income under several heads under the I.T Act, it cannot be stated that whatever is classified under the head ‘Business’ under the I.T Act alone could constitute business in the sense of the Partnership Act. So, the result is whatever may be the head of the assessment under the I.T Act, so long as what was carried on by the firm could be classified as business in the sense of the Partnership Act, the firm would be entitled to registration.”

6. In that case, the activity of lodging house keepers was examined and it was found that the intention of the parties in running the lodging house was to run a business. Running a hotel has been considered to be business and that is how companies as well as partnerships carrying on such a business have come into existence. Similarly, running the lodging house in that particular case was considered to be only a business as running a lodging house was only in the nature of running a hotel.

7. In the present case, what the assessee did was to take on lease a building in 22, Errabalu Chetty Street, and put up constructions as annexe to the old building and let them out to various tenants. Under the terms of the agreement of lease, the building newly put up by the assessee would also have to be surrendered to the lessor after the expiry of the lease period. The assessee had no manner of right over the building at the termination of the lease. The total amount realised as and by way of rent came to Rs. 95,785 and there were also receipts towards amenities to the extent of Rs. 1,800. Taking into account these features of the present case, it is clear that the assessee conceived of taking the building on lease and subletting it only as a business activity. It is not a case where a house owner is letting out the flats or rooms or houses, for earning income. This is a case where there is an activity in the sense of putting up some fresh construction and letting out the old as well as the new property to various tenants. The activity, in the present case, cannot, therefore, be dismissed as if it was only in the nature of what any house owner would have done as a property owner. It is not necessary that in order to constitute a business activity there must be a continuous or ceaseless activity, so to say.

8. There may be passivity also in the sense that after the tenants were inducted into the property, the assessee need not take any further steps except realising rents from them, and giving them the agreed amenities. Having regard to the facts of the present case, as found by the Tribunal, we are satisfied that there was business activity and that there was a partnership firm within the meaning of the Indian Partnership Act and that the persons, therefore, constituted a firm.

9. It is not in dispute that if it was a firm under the Indian Partnership Act there was no further infirmity in the application for registration so as to deny the registration to the firm. In the circumstances, the order of the Tribunal confirming the grant of registration to the firm is proper.

10. This leads us to the other question as to how the income of the firm is to be assessed, whether under the head “Business” or under the head “Other sources”.

11. We have also extracted the definition of the word “business” in s. 2(13) of the I.T Act. It is an inclusive definition. There-must be some trade, commerce or manufacture or any adventure in the nature of trade, commerce or manufacture. There is no manufacture in the present case and subletting a property cannot be considered to be a trade in its popular or commercial sense. There is not much of a discussion in the Tribunal's order as to the nature of the activity that was carried on by the assessee. The assessee's activity is not like that of a mere property owner because the assessee did not own the property. Hence it cannot be property income. In order to constitute business, as already seen, there must be something in the nature of trade, commerce or adventure or something akin to it. In the present case, we are unable to hold that merely subletting, the property could be taken to be a business. If the assessee had taken a number of premises on the same basis and had let them out to the tenants, possibly the question would have to be considered in the larger context. Even a firm could earn income from “Other sources”. On the facts here, we do not consider that the Tribunal had committed any error in holding that the activity of the assessee could be brought only within the scope of the head “Other sources”. The result is that questions Nos. 1 and 2 referred to are answered in the affirmative and in favour of the assessee and question No. 3 is answered in the sense that the assessee was not carrying on any business, profession or vocation but only deriving income under the head “Other sources”. There will be no order as to costs.