TaxTMI 
TaxTMI 
1993 (12) TMI 103
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....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 specified shares. Application of maximum marginal rate on the assumption of unspecified shares is not correct. (5) The Commissioner of Income-tax (Appeals) was not justified in aggregating the income of M/s Ramaiah and Co....
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....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 the partnership firm. He walked out of the firm after accepting the amounts standing to his credit in his capital account and nothing more. After Shri P.V. Krishna Rao made the exit from the firm, the remaining four pa....
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....ities 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, fans, lift, generator, furniture and air conditioner in the said building. However, this investment was made without entering into any contract with the owner of the building. There was no formal contract and no written ....
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.... 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 deal with a block of buildings. The said company had let out the rooms in the block of buildings as unfurnished offices to tenants. Under the tenancy agreements entered into with the tenants, the assessee company had und....
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.... 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 benefits of section 26 of the Income-tax Act whereas it is the case of Revenue that the assessee is not entitled to the benefits given under section 26 of the Act. In the impugned order passed by the learned Commissioner of Inc....
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....ding 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 should be co-owners. There are cases where firms are attempted to be formed but due to infirmity partnerships were not valid. In such a case the question is whether the persons who came together to form a partnership can be consi....
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.... 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. While considering whether all the persons in the association can be considered to be co-owners, the decision of the Rajasthan High Court in the case of Saiffuddin v. CIT [1985] 156 ITR 127 may be kept in view. In that case the assessee ....
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....hip 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 ------------------------------------------------------------------------------------------------------------------------------------------------- Rs Rs. Rs. Rs. 1. Sri B.B. Ramaiah (HUF) 20% (1.5 25% (1.5 20% (1.5 20% (1.5 lacs) lacs) lacs) lacs) 2. Smt. B.V. Ramanamma 20% "....
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....ds 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 out of the partnership firm, he had taken away only what remained in his capital account without demanding his share in the value of the property. Therefore, at the time of his exit from the partnership firm, the remaining 4 co-owners only began enjoying the co....
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....nd 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 distributed amongst the partners. viz., the assessees --- Saiffuddin, Allah Bux and Abid Ali. In these circumstances, the Hon'ble High Court held that there was no basis for the Tribunal to hold that the amount of cost of construction of Park View Hotel was spent by the assessee. ....
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....heet 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) Shri B.B. Ramaiah (HUF) .. Rs. 1,50,000 (2) Shri B.B. Ramaiah (Ind.) .. Rs. 75,000 (3) Shri BVVS Ramesh Kumar .. Rs. 1,50,000 (4) Smt. P.J. Jayalakshmi .. Rs. 1,50,000 (5) M/s. Jayalakshmi Estates Ltd. .. Rs. 8,00,000 (6) Smt. S.B. Ranganayaki .. Rs. 75,000 ----------------....
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....re 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 income was according to the capital contribution and on a legal basis. When a person acquires any right by will in an immovable property there is no question of registration also." 10. Another legal contention was also raised before the Assessing Officer. That was under section 27(iii) where t....
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....at 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 : "I have considered the submissions of the assessee. In view of section 27(iiib) read with section 269VA(b)(ii) the assessee consisting of 6 members are in enjoyment of the property. The shares of the members are definite and ascertainable under section 26. The share is in proportion to the capital contribution.....
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....ting 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 assessee. We have already seen that the assessee comprised of six members. M/s. Ramaiah & Co. is stated to be a partnership firm formed by three persons, namely, Shri B. B. Ramaiah with 25% interest, Smt. P. Jansi Jayalakshmi with 25% and Smt. B. Rama Devi with 50% interest. If we compare the constitution of this partne....
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....ayment 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 the hands of M/s. Ramaiah & Co. as income from service charges should not be assessed in its hands. The assessee AOP contended that the amenities were provided for by another concern and therefore, the income is not assessable in its hands. The Assessing Officer rejected the claim for the following reasons : (1) The p....
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....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 the amenities, as well as accommodation agreements provided for exclusive possession and use of covered parking space for one car and open parking space for three cars. M/s. Ramaiah & Co. definitely is not the owner of any part of the building. If so, how is it entitled to provide parking spaces either covered or open to the lessees an....
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....intenance 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 show that amenities agreement entered into with M/s. Ramaiah & Co. was a ruse for diversion of income. For assessment year 1987-88, the rent received on hiring out of accommodation was Rs. 10,86,000 which gives a rate of 25.2% return approximately on investment in land and superstructure. M/s. Ramaiah & Co. purported to have received service charges ....
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.... 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, contrary to a case where the two persons concerned may be an association of persons and the members of that association or a firm and its partners. That two completely unconnected persons can be proceeded against in respect of the same income has been ruled in a later Division Bench case of this court in Moti Chandra v. Income-tax Officer, Kanpur (AIR 1962....
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....ld 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-conditioner etc. were all provided in the building with the consent or permission of the assessee AOP on agreed terms, M/s. Ramaiah & Co. cannot claim that the income under the amenities agreement belonged to it. How Ramaiah & Co. is able to recover Rs. 8.39 lakhs which it had invested is quite a different matter and beside the point, which need not be d....