JUDGMENT
V.K. Singhal, J.
1. All these ITRCS are disposed of by this common judgment. The dispute is in respect of the assessment years 1980-81 to 1990-91. A common statement of case has been forwarded by the Income-tax Appellate Tribunal referring the following question of law, arising out of its order :
“Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding” that the assessee-firm is required to be considered as a genuine firm and also entitled to business activity which gives rise to business income ?”
2. The facts as stated by the Tribunal are that a piece of land admeasuring 11,578.80 sq. ft. situated in the cantonment area of Belgaum City was originally taken on lease for a period of about 90 years by Sutaria Automobiles Pvt. Ltd., after making an agreement with the Governor-General of India on February 24, 1948. This property was sub-leased in favour of the assessee, Shah Brothers, as per lease deed dated July 30, 1979. The assessee is a firm whose main business activity was that of leasing out of land, putting up a structure thereon and to let them on hire. It has been collecting the annual rent from the properties and apportioning it to the signatories of the partnership as per agreement entered into by it. The assessee claimed registration under Section 185 of the Income-tax Act, 1961, which was rejected by the assessing authority on the ground that no business activity was there. Aggrieved by this, the assessee-firm appealed before the first appellate authority who allowed the appeal thereby cancelling the order under Section 186 in which the Assessing Officer had cancelled registration.
3. The assessee filed an application for registration in Form No. 11 on June 16, 1980, which was granted for the year 1980-81 on March 5, 1983. The application for renewal in Form No. 12 was filed for the subsequent years. According to the Assessing Officer, it was considered that the firm is not genuine and that the income earned pertained to Sutaria Automobiles Pvt. Ltd. Sutaria Automobiles Pvt. Ltd., have taken the land on lease on February 24, 1948, for a period of 90 years from the Governor-General of India. There was construction of building over the said land by Sutaria Automobiles Pvt. Ltd. The land and building was sub-leased to the assessee on July 30, 1979. The rent payable to the Government by Sutaria Automobiles Pvt, Ltd., was at Rs. 643 per annum, whereas the assessee leased out the property to Ceat Tyre India Ltd, and to Vega Helmets at Rs. 9,000 per month. The assessee-firm was constituted by the partnership deed dated July 30, 1979, and according to the sub-lease agreement a sum of Rs. 6,000 per annum was payable. According to the Assessing Officer, the directors of Sutaria Automobiles Pvt. Ltd. were either the partners of the firm or were closely related to the partners. It was found that the assessee-firm has not carried on any activity and no business was done. The deduction towards interest, salary and wages were claimed. It was considered to be a case of diversion of income and accordingly the registration which was granted was cancelled. The status was adopted as an unregistered firm and the income was directed to be taxed under the head of “Property income”.
4. The appeal preferred before the Deputy Commissioner of Income-tax (Appeals) was allowed. Before the Tribunal, the Revenue contended that it was a colourable planning by Sutaria Automobiles for creating the firm. The application for sanction of construction over the building was submitted by Sutaria Automobiles Pvt. Ltd., on December 7, 1979. The capital of the firm, according to the partnership deed, was only Rs. 25,000 or for such sum as the partners may mutually agree upon. Reliance was placed on the judgment given by this court in the case of D. R. Puttanna Sons Pvt. Ltd. [1986] 162 ITR 468, wherein it was observed that so long as the title and ownership of a structure built by an assessee remained vested in the lessee (assessee), the income derived from the property has to be assessed as “income from property”, and not as “income from business”. Reliance was also placed on the judgment given in the case of CIT v. Phabiomal and Sons , where the dispute was whether it is a co-ownership or a partnership for which the firm could be entitled for registration. The building was owned by P and three sons who entered into the partnership agreement to let out the building and share rental income. Letting out building and collecting rent was considered that it does not amount to carrying on business but are only incidental to ownership and no valid partnership existed entitling it for registration. In the partnership deed dated July 30, 1979, the business of the assessee firm was stated as under:
“Business : The business of the partnership shall be to take on lease plots, or building and erect building on vacant plot taken on lease, and hire it out to prospective customers and to carry on other business or businesses, including agency business and to act as agents, dealers, etc. It shall be further open for all the parties hereto to carry on such other business or businesses as may be mutually agreed upon from time to time.”
5. The Tribunal observed that for the purpose of granting registration under the Income-tax Act, the validity of the partnership has to be decided independent of the source of the income of the firm. Taking into consideration the object with which the firm was constituted, that is the nature of the business, directions were given to grant the registration.
6. In this regard it is observed that the Deputy Commissioner of Income-tax (Appeals) while deciding the appeal for 1986-87, has given the facts as under:
Sutaria Automobiles Pvt. Ltd., had taken on lease some vacant land from the then Governor-General of India in 1947. It had constructed a shed measuring 33′ x 84′ with three walls and ACC sheet roof at a cost of about Rs. 39,000 in 1951-52. The appellant had taken on sub-lease from Sutaria Automobiles Pvt. Ltd., the land and building mentioned above and constructed a permanent structure at a cost of Rs. 2,13,571 in the same plot. The appellant had paid a sum of Rs. 6,000 as lease rent to the company, The appellant firm had again leased out the land and building to two concerns for a total sum of Rs. 1,15,449 during this year.
7. The findings given by the Tribunal are as under :
“We have heard the rival submissions and considered the facts. As is evident from Clause (3) of the partnership deed dated July 30, 1979, the assessee firm was formed to carry on business of taking on lease plots, or building and erecting building on vacant plot taken on lease, and hiring it out to the prospective customers, etc. It is receiving rental income. Merely because the income received was assessed under the head ‘Income from property’ does not itself mean that the existence of the firm has to be doubted. The heads of income alone by themselves do not decide the nature or status of the assessee. Deriving income from house property will not invalidate the existence of the firm. For the purpose of granting registration under the Income-tax Act, the validity of the partnership has to be decided independent of the sources of income of the firm. The Deputy Commissioner of Income-tax (Appeals) found that the assessee wanted to do business and somehow it could not do the same and, therefore, ‘we cannot treat the appellant as an unregistered firm because of the only reason that it did not do any business. As submitted by the appellant’s representative, if we cannot treat a firm for not doing any business then an unregistered firm also cannot remain without doing any business’. The decisions cited by the learned Departmental Representative are not exactly on the point. On the other hand, the decision of the Tribunal in ITA No. 788/ Bang. of 1987, dated June 27, 1991, is clearly on the point. Hence, we do not find any reason to interfere with the orders of the Deputy Commissioner of Income-tax (Appeals) on this point. Therefore, we hold that the assessee is entitled to continuation of registration in the assessment year 1986-87.”
8. Arguments of both the parties heard.
9. From the facts which have come on record, it is established that the object of the firm was to carry on the business of leasing of plots or buildings and erecting buildings on vacant plots taken on lease and hiring them out. The mere activity of constructing the building over a plot cannot constitute business activity but if the said activity is taken as a business then it would constitute a business. The land may be owned by one person and the superstructure by another. Letting out of such superstructure as a business activity is not prohibited under any Act. In order to see whether the firm is genuine or not, it has to be seen that the firm must in reality be in existence and the partners are carrying on the business of the firm in accordance with the instrument of partnership. It may not be that in the first year the constructions were made by the asscssee-firm over the property taken on sub-lease but sufficient evidence has come on record that subsequently the assessee-firm has made the constructions over and above the property which was taken on sub-lease. It was not the case of the Revenue that the firm is not in existence altogether or it was a bogus or nonexistent firm or the income belongs to Sutaria Automobiles Pvt. Ltd., and not to the assessee-firm. Had that been the position, the Department would have assessed that income as an association of persons and in view of Section 26 the co-owner could have been assessed in proportion of their share in the income from such rental income.
10. The various considerations for genuineness of the firm which are germane to the issue are as to : (1) whether the partners are non-existent; (2) whether constitution of such firm is forbidden by any statute ; (3) whether a minor has been made as full-fledged partner ; and (4) whether division of the profits is not in accordance with the instrument of the partnership ; (5) existence of agency against partners.
11. There may be other like reasons by which the firm can be said to be not genuine. If the firm is in existence then the source of income cannot determine the genuineness of the firm. Letting out of property can be undertaken as a business and in such a situation the income derived therefrom has to be assessed as income from business. The two sources of income, namely, income from business and income from property, which have been treated separately under the Income-tax Act have to be examined in the light of the instrument of partnership and the activities carried on by the firm/partners.
12. In the case of CIT v. Phabivmal and Sons , it was considered that letting out of a building and realising rent therefrom did not amount to carrying on of business and was incidental to ownership. It was found that there was no business in the act of letting out of a building of which one is an owner. In that case, the co-owners agree to divide the rents by letting out a building. That is not the case over here, Letting out could be a business, if letting out was done for exploitation of the property commercially. In this regard, the decisions given by the apex court in Sultan Brothers Pvt. Ltd. v. CIT [1964] 51 ITR 353 and S. G. Mercantile Corporation P. Ltd. v. CIT [1972] 83 ITR 700 are relevant.
13. The question which has been referred by the Tribunal was on the appli
cation of the Revenue that there was no business activity in letting out of
the property. As stated above, letting can also be a business. A firm is not
in existence if it is bogus or not genuine. A finding has been recorded by
the Tribunal that the firm is genuine. The assessee has made further constructions in furtherance of its object to carry on business as per deed of
partnership. The income received therefrom may be by way of rent but
was for commercial consideration. As such we are of the view that the
Appellate Tribunal was right in law in holding that the assessee-firm is
required to be considered as a genuine firm and also entitled to registration.
14.
In S.G. Mercantile Corporation P. Ltd. v. CIT [1972] 83 ITR 700, it was considered that the activity of taking a property on lease, setting up a market thereon and letting out shops and stalls in the market is a business activity. It was further observed that the residuary head of income can be resorted to only if none of the specific heads is applicable to the income in question ; it comes into operation only after the preceding heads are excluded.
15. The Supreme Court in Nalinikant Ambalal Mody v. S.A.L. Narayan Row, CIT [1966] 61 ITR 428 observed (headnote): “Whether an income falls under one head or another has to be decided according to the common notions of practical men, for the Act does not provide any guidance in the matter”. If the intention of the partners was to take the property on sublease and then let it out, the object for which the firm was constituted is achieved.
16. Reference is accordingly answered in favour of the assessee and against the Revenue.