Commissioner Of Income-Tax, Tamil Nadu-Iv v. Admiralty Flats Motel.

The Judgment of the Court was delivered by

Sethuraman, J.:— In this reference under s. 256(1) of the I.T Act, 1961, the following two questions have been referred:

“1. Whether, on the facts and in the circumstances of the case, the assessee is entitled to registration for the assessment years 1969–70 and 1970–71?

2. Whether, on the facts and in the circumstances of the case, the income derived by the assessee by letting out articles/furniture provided in Admiralty Flats Motel should be assessed under the head ‘Business’?”

There was an HUF consisting of P.V Gajapathi Raju, his wife, Radha, and his two daughters, Vidya and Urmila. P.V Gajapathi Raju was the karta of this family. In the partition of a larger HUF, of which Gajapathi Raju was a coparcener, he obtained certain properties, movable and immovable, as and for his share. These properties belong to the HUF of which Gajapathi Raju was the karta.

On December 2, 1965, he gifted Rs. 25,000 to each of his two daughters. On April 25, 1966, he gifted a like amount to each of his two daughters. On December 31, 1969, he executed a settlement deed under which he gifted to his wife and his two daughters immovable properties worth Rs. 50,000 each and also cash of Rs. 1,13,000 each. There were further gifts to his wife and two daughters on March 30, 1968, of Rs. 1,50,000 each. Again on February 23, 1969, similar amounts were gifted by him to each of them.

Certain constructions were put up on the properties belonging to them including the gifted properties and the monies gifted to the wife and two daughters were utilised in such constructions. The buildings are known as “Admiralty Flats Motel”.

2. On January 1, 1968, Gajapathi Raju and his wife entered into a partnership for the purpose of carrying on the business of “Lodging housekeepers” and executed a deed therefor on January 30, 1968. The two minor daughters were admitted to the benefits of the partnership with 25% share each. In the event of loss, the same had to be borne by the two adult partners. The partnership was for a period of five years with effect from January 1, 1968, and it could be continued thereafter at will. The accounts were to be drawn up as on 31st March, each year, and the first account was to end on 31st March, 1969. For the assessment year 1969–70, the firm constituted as mentioned above filed an application for registration. The ITO declined to grant registration on the ground that the gifts made by Gajapathi Raju to his wife and two daughters were invalid since they were of ancestral properties. In his view, the gifted properties continued to belong to the HUF and, therefore, the income had to be assessed in the hands of the assessee as the karta of the family.

3. Similarly, for the assessment year 1970–71, there was an application for registration and the ITO refused to grant registration for two reasons. The first was that he had declined to grant registration for 1969–70, and the second was that the income derived by the assessee by letting out flats was assessable only under the head “Property” under the I.T Act, 1961. In other words, there was no business with reference to which there could be a firm.

4. Aggrieved by such assessment, the assessee appealed to the AAC. He held that the gifts by Gajapathi Raju to his wife and two daughters, though of ancestral properties, were valid, because he was the sole coparcener and that the income derived by the assessee by carrying on the business of “lodging house keepers” was assessable under the head “Business” and that, consequently, the assessee was entitled to registration. He directed the ITO to re-do the assessment according to law and for this purpose he set aside the assessment.

5. The department filed appeals before the Tribunal and the Tribunal went into the question whether the gifts were valid or not and came to the conclusion that the gifts were valid as Gajapathi Raju was the sole surviving member of the coparcenary, who had an absolute power of alienation over the properties belonging to him. It was, therefore, held that the income was not assessable in the hands of the family. Thereafter, it went into the question as to under what heads the income from those properties was liable to be assessed in the hands of the firm. As far as the buildings were concerned, the Tribunal took the view that; the income therefrom was assessable under the head “Property”. With reference to the furniture and other items let out to the tenants in the said properties, the Tribunal's view was that the income was assessable under the head “Business”. The result was that the firm was granted registration and it was directed to be assessed with reference to the income from “property” and “business” in the manner mentioned above.

6. The revenue, aggrieved by this order of the Tribunal, has brought up the matter on reference with reference to the two questions extracted already.

7. The first question may now be taken up for consideration. With reference to this question, the matter has to be considered only in the light of the validity of the gifts effected by Gajapathi Raju. If the gifts are valid then there is no dispute that the firm is a genuine one which is entitled to registration. As regards the validity of the gifts, the Tribunal has proceeded on the basis that Gajapathi Raju was the sole surviving coparcener and that as such he was in a position to alienate the properties obtained by him on partition as if they were his separate properties. There is a distinction between a case where a coparcenary is reduced to a single coparcener by the other coparceners leaving the family as such either by death or otherwise and a coparcenary which has only one male coparcener. But the present case is not one where the family is reduced to a single coparcener by reason of death or otherwise. To a case like this, the legal position has been set out in Mulla's Hindu Law, 13th Edn., at pp. 249-250, as follows:

“The share which a coparcener obtains on partition of ancestral property is ancestral property as regards his male issue. They take an interest in it by birth, whether they are in existence at the time of partition or are born subsequently. Such share, however, is ancestral property only as regards his male issue. As regards other relations, it is separate property and if the coparcener dies without leaving male issue, it passes to his heirs by succession.” (The portion italicised* in the passage is underlined above).

8. At p. 390, again, the following passage occurs:

“The effect of a partition is to dissolve the coparcenary, with the result that the separating members thenceforth hold their respective shares as their separate property, and the share of each member will pass on his death to his heirs. But if a member while separating from his other coparceners, continues joint with his own male issue, the share allotted to him on partition will in his hands retain the character of coparcenary property as regards the male issue.”

(Italicised portion in the passage is underlined above).

9. Thus, so along as Gajapathi Raju did not have any male issue, the property could be dealt with by him as if it were his separate property. There is no restriction under the law on his power of alienation with reference to such separate property. Therefore, the several gifts effected by him in favour of his wife and two minor daughters are all valid and the partnership would be entitled to registration.

10. One of the reasons given by the ITO in support of his conclusion that the firm was not entitled to registration was that the firm was not carrying on any business as such. In the view of the ITO, the ownership of the property and its being let out cannot constitute “business”. According to the ITO, if there is no business, there can be no firm. The AAC did not deal with this aspect. However, the Tribunal pointed out in para. 8 of its order that the question as to whether the income derived by the firm from letting out the flats was assessable under the head “Property” or under the head “Business” was not relevant, but that the running of a lodging house was certainly a business activity so far as the Partnership Act was concerned.

11. Mr. Jayaraman, learned counsel for the revenue, submitted that in view of the finding of the Tribunal that the income from the buildings was assessable under the head “Property”, in the present case, it would follow that there was no business as such. His further submission was that the income from letting out the furniture, etc., would only come under “Other sources” and that as there was no business income left, there could be no firm in existence which could be granted registration. We are unable to accept this submission. 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.

12. 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 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.

13. This now leads to the consideration of the question as to whether in the present case the partnership is entitled to registration under the I.T Act. In the recital portion of the partnership deed dated January 30, 1968, it is mentioned that the parties have put up constructions on the property belonging to them for the purpose of carrying on the business of “lodging house keepers” with the intention of administering the entire property including the land and buildings as a common business for the benefit of all of them. Clause (3) of the partnership deed states that the partnership shall carry on the business of “lodging house keepers” and any other business as the partners may from time to time desire. The intention is, therefore, clear that what the parties wanted to do was to run a business of “lodging house keepers”. Running a hotel has been considered to be a business and that is how companies as well as partnerships have come into existence. It would be pedantic to cite authorities for the proposition that running a hotel is business. In the light of the partnership deed, it would, therefore, be clear that the parties intended to start a business and they have been carrying on such business. Thus, the present is a case where there is a business run by the firm which is entitled to registration.

14. It is now settled law that even if a company owns a property, it is liable to be assessed under the respective heads as provided under the I.T Act and not necessarily as business income. Therefore, the fact that the income from this business in the sense of the Partnership Act has been bifurcated and brought to tax under two heads, namely, “Property” and “Business”, cannot in any manner affect the question of jurisdiction.

15. The result is, the Tribunal has acted properly in granting registration to the firm. The first question, therefore, has to be and is answered in the affirmative and in favour of the assessee.

16. As far as the second question is concerned, it is limited to the assessment of income from letting out articles/furniture provided in the Admira-lity Flats Motel. The learned counsel for the revenue pointed out that in view of the finding of the Tribunal that there was no composite letting out of the building with furniture, the letting out of the furniture and other articles could be income assessable only under the head “Other sources”. His point was that the amount was invested on the articles and furniture and the income derived as a result of the articles or furniture being let out would constitute realisation of income from investments and not business activity. Here also, in view of the fact that it has been held that the assessee carried on the business of running a hotel, the conclusion, that the letting out of furniture and other articles was only in the course of business, would have to follow, as letting out such furniture is incidental to this business. In the present case, the amount realised by letting out flats came to Rs. 1,00,516 and the income earned by way of hire of articles came to Rs. 1,49,840. From a comparison of the amount realised by way of hire of articles with the amount realised by letting out flats, it is clear that the hire of articles constituted a bigger activity on the part of the assessee. There is no question of any investment and realisation of income from investment in the letting out of these articles and furniture. Furniture is intended to be utilised only in the building. There is provision for letting out the building separately, because some of the tenants who occupy the building may not need furniture or other articles that are available for letting out. The Tribunal apparently did not consider that there was any composite business in this case only because there was a possibility of a particular individual not needing any particular item of furniture or other article available to be let out by the assessee. Therefore, from the absence of a finding that there was a composite business, it does not necessarily follow that the letting out of other articles or furniture cannot constitute “business”.

17. “Business” is a word of wide import and represents some organised activity. In several cases courts have gone into the question as to whether an element of profit is a necessary ingredient for “business” and it has been held that it is not. Therefore, so long as there is some real, substantive, systematic and organised course of activity or conduct with a set purpose, it would constitute “business”. In the present case, letting out of furniture and other articles has been conceived only as a substantive and systematic and organised course of activity and it would, therefore, constitute “business”. It is linked with and incidental to the carrying on of the business of running a lodging house. Therefore, the income from the letting out of furniture and other articles would only be of a business nature.

18. Our attention was drawn to three decisions of the Supreme Court considering the question of business in the context of the assessee being a company.

19. In East India Housing and Land Development Trust Ltd. v. CIT, [1961] 42 ITR 49 (SC), the assessee was incorporated as a company with the objects of buying and developing landed properties. It purchased 10 bighas of land in the town of Calcutta and set up a market therein. The question was, whether the income realised from the tenants of the shops and stalls was liable to be taxed as “Business income” or as “Income from property”. The Supreme Court held that the income was liable to be assessed under the head “Income from property” and it was pointed out that the character of the income was not altered because it was received by a company formed with the object of developing and setting up markets. This case was decided on the footing that the income from property owned by a company need not be assessed under the head “Business”. It did not purport to decide that even in a case where a particular asset was utilised as a business asset, the income therefrom could not be assessed under the head “Business”.

20. In Sultan Brothers P. Ltd. v. CIT, [1964] 51 ITR 353 (SC), a private company constructed a building, fitted it up with furniture and fixtures and let it out on lease fully equipped and furnished for the purpose of running a hotel. The lease deed provided for a monthly rent of Rs. 5,950 for the building and a hire of Rs. 5,000 for the furniture and fixtures. It was held that the income from the hire of furniture and fixtures was assessable under s. 12 of the Indian I.T Act, 1922, after giving the allowances mentioned in sub-s. (3) of that section. As far as the building was concerned, it was held that the letting out of the building did not amount to carrying on of business, as the assessee merely let out the building for the purpose of some one else running a hotel. This case would be relevant, if the entire property as such in the present case had been let out to a third party and such third party carried on the activity of letting out the flats and letting out the other items of furniture and fittings. In such a case, the owner of the property would be deriving income as such owner and would not be carrying on any business. We are, therefore, unable to derive any assistance from this decision and we do not find any proposition laid down therein to the effect that in all cases where a person carries on a business of letting out flats and hiring furniture, the income derived therefrom could be assessed only under the heads “Property” and “Other sources”. In Karnani Properties Ltd. v. Commissioner Of Income Tax, West Bengal, [1971] 82 ITR 547 (SC), the assesse had constructed numerous residential flats and a number of shops and they were let out to tenants on monthly payments which included charges for electricity, for the use of lifts, for the supply of hot and cold water, for the arrangement for scavenging and for providing watch and ward facilities, etc. The company claimed that the entire receipts from the tenants should be treated as income from business. The ITO split up the income into two parts, one part being treated as rent and the other as income from other sources. The Appellate Tribunal also considered that the receipts in part alone were assessable as income from business under s. 10 of the Indian I.T Act, 1922. The High Court, on a reference, held that the entire income was liable to be assessed only under s. 9 of the Indian I.T Act, 1922, as income from property. The Supreme Court reversed the decision of the High Court and held that the services rendered by the assessee to its tenants were the result of its activities carried on continuously in an organised manner, with a set purpose and also with a view to earn profits and that those activities were business activities. It was also held that the income arising therefrom was assessable under s. 10 of the Indian I.T Act, 1922, as business income. In a way this decision would appear to support the case of the assessee that in the present case there was a continuous, and organised activity with a set purpose with a view to earn profits, in the matter of letting out the furniture and other articles.

21. Under these circumstances, the second question also is answered in the affirmative and in favour of the assessee. The assessee will be entitled to its costs from the revenue. Counsel's fee Rs. 500 (rupees five hundred only).