Godown used for business not part of partner's income under Income Tax Act

The court ruled in favor of the assessee, holding that the annual letting value of a godown used for business by a partnership firm, in which the assessee was a partner, should not be included in the assessee's total income under Section 22 of the Income Tax Act, 1961. The court emphasized that the property must be occupied for business purposes by the assessee, and as a partner in the firm, the assessee was considered to be carrying on business through the partnership. Therefore, the assessee was entitled to the exemption under Section 22, and costs of the reference were awarded to the assessee.

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Issues Involved:
1. Whether the annual letting value of the godown owned by the assessee and used for the business carried on by him in partnership was liable to be included in his total income u/s 22 of the I.T. Act, 1961.

Summary:

Issue 1: Inclusion of Annual Letting Value in Total Income u/s 22 of the I.T. Act, 1961

The primary question was whether the annual letting value of a godown owned by the assessee and used for business by a partnership firm, in which the assessee was a partner, should be included in the assessee's total income u/s 22 of the I.T. Act, 1961. The relevant assessment years were 1967-68 to 1971-72. The Income Tax Officer (ITO) included the annual letting value of the godown in the assessee's total income. The Appellate Assistant Commissioner (AAC) deleted this inclusion, favoring the assessee's contention that the premises were used for business purposes and not as a residence. The Tribunal upheld the AAC's decision, following the Supreme Court's ruling in CIT v. Ramniklal Kothari [1969] 74 ITR 57.

Legal Interpretation of Section 22

Section 22 of the I.T. Act, 1961, states that the annual value of property consisting of buildings or lands appurtenant thereto, of which the assessee is the owner, shall be chargeable to income-tax under the head 'Income from house property,' except for portions occupied for business or profession carried on by the assessee, the profits of which are chargeable to income-tax. The court emphasized that the conditions for exemption under s. 22 must be strictly complied with: (i) the property must be occupied by the assessee for his business, and (ii) the profits of such business must be assessable to tax.

Carrying on Business as a Partner

The court referenced previous decisions, including Shantikumar Narottam Morarji v. CIT [1955] 27 ITR 69 (Bom) and Sitaram Motiram Jain v. CIT [1961] 43 ITR 405 (Guj), which established that a partner in a firm is considered to be carrying on business through the partnership. The court concluded that the assessee was indeed carrying on business as a partner, fulfilling the first condition of s. 22.

Occupation of Property for Business

The court addressed whether the premises were occupied by the assessee for business purposes. The learned Government Pleader argued that the occupation must be by the assessee in his capacity as the owner. The court rejected this argument, stating that if a partner is carrying on business through a partnership, it is implicit that the partner is occupying the premises for business purposes. The court found no basis for the contention that occupation must be in the capacity of the owner.

Relevant Case Law

The court considered various cases, including Addanki Narayanappa v. Bhaskara Krishnappa, AIR 1966 SC 1300, Bhai Sunder Dass & Sons v. CIT [1972] 85 ITR 28 (Delhi), and Sarvamangala Properties Ltd. v. CIT [1973] 90 ITR 267 (Cal), but found them not directly applicable to the issue at hand. The court also referenced CIT v. National Storage Pvt. Ltd. [1967] 66 ITR 596 (SC), which dealt with the nature of occupation for business purposes.

Conclusion

The court concluded that the assessee was entitled to the exemption under s. 22, as the premises were occupied for business purposes carried on by the partnership firm. The question was answered in the affirmative, in favor of the assessee and against the revenue. The Commissioner was directed to pay costs of the reference to the assessee.

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