ORDER
T.N.C. Rangarajan, Judicial Member
1. This appeal by the revenue is directed against the order of the Commissioner of Income-tax (Appeals) granting registration to the assessee-firm for the assessment year 1981-82.
2. The admitted facts are as follows : There was in existence a partnership firm constituted by a deed dated 8-6-1979 with five partners carrying on the business of trading in cotton, kappas, ginning, building construction, etc. That firm had been granted registration and assessed up to the assessment year 1980-81. In the previous year, being the period from 19-11-1979 to 7-11-1980, corresponding to the assessment year 1981-82, there was a reconstitution of the firm on 1-4-1980, by the admission of a private limited company called ‘Tirumalai Hotels & Builders Pvt. Ltd.’, as a partner with 60% share. The partnership deed dated 1-4-1980 also provided that the business of the partnership shall be that of carrying on the business of trading in cotton, kappas, etc. However, that document also recited in the preamble that the incoming partner had been incorporated with the object of taking over the business assets and liabilities of the partnership firm carried on under the name and style of Tirumalai Traders. The firm had been assessed on income from cotton business amounting to Rs. 1,66,333, rental income of Rs. 27,903 and miscellaneous receipts of Rs. 34,670, for the assessment year 1980-81. But, for the present assessment year 1981-82, the assessee had no income from business and had only income from rental receipts of Rs. 27,903 and the assessee had declared a net loss of Rs. 37,635. Even the closing stock for the previous year relevant to the preceding assessment year 1980-81, was ‘nil’. This reconstituted firm was dissolved by a deed dated 11-11-1980 by which the entire business was taken over by the private limited company and the erstwhile partners were given equity shares. It is not in dispute that thereafter the private limited company carried on the same business which was earlier carried on by the firm.
3. On these facts, the Inspecting Asst. Commissioner, who made the assessment, was of the view that the firm was not genuine because it was not constituted for carrying on any business but for only transferring the business to the private limited company, and hence, could not be granted registration. On appeal, the Commissioner (Appeals) was of the view that there was only a lull in the business and since the business was actually carried on before and after the previous year relevant to the present assessment year, the genuineness of the firm could not be disputed and the firm was entitled to registration.
4. In appeal before us, it was contended on behalf of the revenue, relying on the decision of the Andhra Pradesh High Court in the case of CIT v. Phabiomal & Sons [1986] 158 ITR 773 that since no business was actually carried on in the present assessment year and that the receipt of rental income alone could not constitute business, the firm had not satisfied the criteria required for being recognised as a genuine firm. It was submitted that, in the circumstances, the registration granted by the Commissioner (Appeals) should be cancelled.
On the other hand, it was pointed out, on behalf of the assessee, that the Tribunal by its order in ITO v. Tirumalai Hotels & Builders (P.) Ltd. [1986] 17 ITD 109 (Hyd.), has recognised the fact that the private limited company has taken over the business originally carried on by the firm and continued it and hence it could not be said that there was no genuine firm in existence.
5. On a consideration of the rival submissions, we are of the opinion that there are no merits in this appeal. The revenue does not dispute the fact that a firm was constituted, in accordance with the partnership deed, to carry on the business already carried on by the same firm. It is not a case where the firm itself is constituted only for earning income by way of rent in which case the question whether the letting out of property could be considered as carrying on a business for the purpose of recognising the existence of the firm would become relevant. This is a case where a business in cotton had already been carried on by the firm and that business has also been taken over by one of the partners and continued after the dissolution of the firm. The fact that in the previous year relevant to their assessment year alone that business was kept in abeyance to facilitate the transfer of the business from the firm to the private limited company by itself would not mean that the firm was not constituted for carrying on the business. No doubt, the existence of the business is a sine qua non of a partnership firm. But, in this case, the existence of the business has not been denied by the revenue. What is pointed out is that there is no business activity during the previous year giving rise to income from business. That, in our opinion, is not vital because Section 4 of the Partnership Act only requires that there shall be an agreement to share the profits of a business carried on by all or any of the partners and the carrying on of the business does not require that there must be constant business activity. As long as it is shown that the partners were pursuing the business in such a manner that it can apparently be seen that they are prosecuting or promoting the business, it would be difficult to assert that the partners were not carrying on any business and, therefore, did not constitute a genuine firm. In the present case, the existence of the business, which had been carried on by the firm before the reconstitution as well as the continued carrying on of the business by the private limited company after the dissolution coupled with the fact that the partners themselves became the shareholders of the private limited company, indicate that obviously the partners were engaged in the promotion of the business even though the continuous business activity in the aense of earning income from business was suspended during the previous year. In the circumstances, we agree with the Commissioner (Appeals) that there was, in existence, a genuine firm with the constitution as specified in the partnership deed and it was, therefore, entitled to registration. His order is confirmed.
6. The appeal is dismissed.