ORDER
R.L. Sangani, Judicial Member
1. This appeal by the department for assessment year 1982-83 is directed against the order dated 26-11-1987 by which the AAC directed the ITO to grant registration to the assessee-firm and also directed the ITO to assess the income of the assessee under the head “profits and gains of business” as against the head “income from house property” under which the income had been assessed by the ITO.
2. The assessee-firm came into existence with effect from 8-11-1980 under a partnership deed dated 13-11-1980. There are three partners in the assessee firm one of whom is Smt. Preeti Rameshchandra Patel. She was earlier a partner in the firm of M/s. Shree Satyanarayan Estate. She retired from the said firm on 7-11-1980. The said firm of Shree Satyanarayan Estate was carrying on business of letting godowns to several parties and earning rent therefrom. After retirement of Smt. Preetiben the said firm continued the same business and had been granted registration. When Smt. Preetiben retired from the said firm, she received certain godowns on taking account of the said firm. The said godowns Were introduced by Smt. Preetiben in the assessee firm as her capital contribution. The business of the assessee-firm as stated in the partnership deed was to purchase land and construct buildings thereon and to give the buildings on rent. The partnership deed empowered the partners to carry on any business with the consent of all the partners. In the relevant accounting year no new construction had taken place. The godowns which had been received by Smt. Preetiben from the firm of M/s. Shree Satyanarayan Estate and which had been introduced as capital contribution in the assessee firm had been given on rent and rental income was received. In the next accounting year certain constructions were made by the assessee firm. As far as the year under consideration was concerned, the ITO held that the only activity which had been carried on by the assessee firm was that of giving godowns on hire and that it could not be said that the assessee had carried on any business and as such registration could not be granted. He also held that the income from the godowns was assessable under the head “income from house property”. He rejected the submission of the assessee that the said income was assessable under the head “profits and gains of the business”.
3. The assessee filed appeal before the AAC. It was submitted that a valid partnership had come into effect under the partnership deed dated 13-11-1980 and that the activities of the assessee amounted to carrying on the business and that the fact that no new construction had been made in the relevant accounting year, was irrelevant. It was submitted that since the firm was genuine the registration ought to have been granted. It was further submitted that the income was liable to be assessed as business income. Both these submissions were accepted by the AAC, The department is now in appeal and both the findings have been challenged in the grounds of appeal.
4. As regards the grant of registration it is admitted fact that for assessment year 1982-83 Smt. Preetiben, one of the partners of the assessee firm, has been assessed to income-tax by order dated 16-3-1984. In this assessment the share of profits of Smt. Preetiben amounting to Rs. 12,927 had been included. The assessment of the firm had taken place on 8-3-1985. Thus the partner of the assessee firm has been assessed prior to the assessment of the assessee firm in respect of her share in the profits and gains of the business of the firm. The assessment is no doubt under Section 143(1). However that fact is immaterial. It has been held in the case of Laxmichand Hirjibhai v. CIT [1981] 128 ITR 747 by the Gujarat High Court that if a partner of a firm is assessed in respect of share income from the said firm, registration to the firm cannot be refused because in such a case assessment of the firm as unregistered firm would amount to double taxation of the same income. In this connection CBDT Circular No. 75/19/62-II-J dated 24-8-1966 is also relevant. In that circular the ITOs have been informed that they should take care that assessment of the partner did not take place prior to the assessment of the firm if there was any doubt about the genuineness of the firm. In view of the decision of the Gujarat High Court and in view of the CBDT Circular referred to above, registration for assessment year 1982-83 cannot be denied to the firm. On this technical ground alone the assessee firm is entitled to obtain registration.
5. Besides, it cannot be said that purpose for which the assessee firm came into existence, was not that of carrying on business. As already stated the activity which is envisaged in the partnership deed is that of purchasing or otherwise acquiring land and then making construction on these lands and then derive income by various means including letting out. An activity of this nature in general, would be regarded as business activity. The fact that the income in a particular year is assessable under the head other than the head of profits and gains of business would be irrelevant. The head under which the income is assessable under the IT Act is not material. What is material is the nature of activity of the firm. Under Section 2(23) of the IT Act the words “firm”, “partner” and “partnership” have the meanings respectively assigned to them in the Indian Partnership Act, 1932. Section 4 of the said Act defines expression “partnership” as a relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. The definition in the Partnership Act indicates that what all that was necessary was that the business should be carried on. It was immaterial as to under what head the particular income in a particular year was assessable under the IT Act. What is necessary to be seen is whether the entire activity could be termed as business activity. If such activity could be termed as business activity, the firm could be regarded to be carrying on business and such a firm would be valid both under the Partnership Act, 1932 and under the IT Act, 1961. In the present case the activity for which the assessee firm has been constituted would amount to business activity and as such the assessee-firm was valid under both the Acts. Consequently there was no justification for refusing registration. The AAC was right in directing the ITO to grant registration.
6. As already stated, in the year under consideration there was no activity other than the activities of giving the godowns on rent. The income by way of rent was derived by letting out of godowns and evidently the godowns belonged to the assessee firm. Consequently the income by way of rent was assessable under the head of “income from house property”. The said rental income was not assessable as income by way of profits and gains of business. I am supported in this view of the matter by decisions in the cases of Indian City Properties Ltd. v. CIT [1965] 55 ITR 262 (Cal.), East India Housing & Land Development Trust Ltd. v. CIT’ [1961 ] 42 ITR 49 (SC) and United Commercial Bank Ltd. v. CIT [ 1957] 32 ITR 688 (SC).
7. In the case of United Commercial BatiK Ltd. (supra) it was held after an exhaustive review of the authorities, that under the scheme of the Income-tax Act, 1922, the heads of income, profits and gains enumerated in the different clauses of Section 6 are mutually exclusive, each specific head covering items of income arising from a particular source and that even though the securities were part of the trading assets of the company doing business, the income therefrom had to be assessed under Section 8 of the Act. In the case of East India Housing & Land Development Trust Ltd. (supra) a company which was incorporated with the objects of buying and developing landed properties and promoting and developing markets, purchased certain land in the town of Calcutta and set up a market therein and the question was whether the income realised from the tenants of the shops and stalls was liable to be taxed as “business income” under Section 10 of the IT Act, 1922 or as income from property under Section 9 thereof and the Supreme Court held that the said income fell under the specific head mentioned in Section 9 of the Act. Thus it is well established that where the income was derived by way of rent by an assessee who was an owner of the house property, said income would be assessable under the head “income from house property” although the said income had been derived in the course of business of the assessee. Consequently in the present case the rental income would be assessable as income from house properly and not as income by way of profits and gains of business.
8. The learned counsel for the assessee has relied on decision of the Supreme Court in the case of CITv. Cocanada Radhaswami Bank Ltd. [1965] 57 ITR 306. In that case the question involved was not as to under which head a particular income was assessable under the provisions of the Act. The question was whether the loss of the earlier year could be set off against the income from securities when” the securities were trading assets. The Supreme Court emphasized the fact that while in Section 24(1) of the 1922 Act there is reference to heads of income mentioned in Section 6 there was no reference to heads of income in Section 24(2) of the Act under which set off was required to be made. What all that was necessary under Sub-section (2) of Section 24 of the 1922 Act was that there was a business income in the commercial sense in the subsequent year although the said income would be assessable under a head other than the profits and gains of business, and that the loss of the earlier year could be set off against such income. This decision does not lay down that the income by way of interest from securities would be computed in accordance with the provisions for computation of income by way of profits and gains of business. What all this decision lays down is that the loss of earlier year would be liable to be set off against the income by way of interest from securities. This decision is therefore of no assistance. The same comment would apply to another decision to which our attemption was drawn by the assessee’s counsel viz. Shan Progetti S.P.A. v. Addl. CIT [ 1981] 132 ITR 70 (Delhi). No decision has been cited on behalf of the assessee in which rental income in the above circumstances has been held to be liable to be computed in accordance with the provisions pertaining to computation of income of profits and gains of business. I accordingly hold that the ITO was justified in assessing the rental income in accordance with the provisions relating to assessment of income from house property and allowing only such deduction as are admissible in computation of such profits. It may be mentioned here that in the case of Indian City Properties Ltd. (supra) all other deductions which were inadmissible in the computation of income under the above head were disallowed. I accordingly set aside the order of the AAC on this point and restore the order of the ITO.
9. The appeal is partly allowed.