1984 (12) TMI 28 - HC - Income Tax

Court rules assessee entitled to registration benefit despite income classification.

The High Court ruled in favor of the assessee, holding that they were entitled to the benefit of continuation of registration under section 185 during the ... Business, Firm, Question Of Law Arising Out Of Order Of Tribunal Issues Involved:1. Whether the assessee was entitled to the benefit of continuation of registration under section 185 during the assessment year 1971-72.2. Whether the income derived by the assessee during the assessment year 1971-72, assessed as income from other sources, affects the continuation of registration.Detailed Analysis:Issue 1: Continuation of Registration under Section 185The Income-tax Appellate Tribunal referred the question to the High Court to determine if the assessee was entitled to the benefit of continuation of registration under section 185 during the assessment year 1971-72, despite the income being assessed as income from other sources.The relevant facts are that the assessee, a partnership firm registered under the Income-tax Act, 1961, was engaged in manufacturing milk powder and other dairy products. For the assessment year 1971-72, the Income-tax Officer found that the assessee derived income solely from leasing out its milk spray plant and did no business. Consequently, the Income-tax Officer canceled the registration, asserting that the firm ceased to be genuine. This decision was upheld by the Appellate Assistant Commissioner but reversed by the Tribunal, which found the firm continued to be genuine despite the income being from other sources.Issue 2: Income from Other Sources and Partnership ValidityThe Tribunal's decision was challenged by the Commissioner of Income-tax, who argued that the absence of business activities invalidated the firm's registration. The Revenue's counsel relied on section 2(6B) of the old Act and section 4 of the Partnership Act, emphasizing that carrying on business is a prerequisite for a partnership's existence. Additionally, reliance was placed on Explanation I to section 6 of the Partnership Act, which states that sharing profits from property does not constitute a partnership.The High Court, however, found that the question referred by the Tribunal did not encompass the complexity suggested by the Revenue. The court emphasized that the jurisdiction hinges on the specific question of law referred, which in this case was whether the assessee, a genuine firm, was entitled to continued registration despite its income being from other sources.The High Court referred to the Supreme Court's decision in CIT v. Scindia Steam Navigation Co. Ltd. [1961] 42 ITR 589, which clarified that a question of law must arise out of the Tribunal's order and can include various aspects of the issue. However, the High Court found that the question referred was not complex and did not involve the validity of the Tribunal's finding that the assessee was a genuine firm.Legal Precedents and PrinciplesThe High Court considered several precedents, including:- Nauharchand Chananram v. CIT [1971] 82 ITR 189 (P & H): The court held that the nature of income (rental or business) is irrelevant for determining the validity of a partnership for registration purposes.- CIT v. Lakshmi Company [1982] 133 ITR 904 (Mad): It was held that the classification of income under the Income-tax Act does not affect the determination of a firm's existence under the Partnership Act.The High Court agreed with these principles, concluding that the assessee was entitled to continued registration under section 185, even though its income was assessed as income from other sources. The court emphasized that the classification of income for tax purposes does not impact the legal status of a partnership under the Partnership Act.ConclusionThe High Court answered the question in the affirmative, in favor of the assessee, holding that the assessee was entitled to the benefit of continuation of registration under section 185 during the assessment year 1971-72, despite the income being assessed as income from other sources. The assessee was awarded costs of Rs. 200.