THE issue before the Bench is - Whether rental income derived by a partnership firm from its regular business of leasing out of properties, can be treated as 'income from house property'. NO is the answer.
Facts of the case
The assessee is a partnership firm consisting three partners, namely Smt. Madhu Gupta, Smt. Manju Gupta and Sri S.C. Lal Agarwal. During the A.Y 1986-87, one of the partners Sri Sheo Charan Lal Agarwal retired from the firm, as a result whereof, the firm was reconstituted by executing another partnership deed. The requisite formalities under the Partnership Act, 1932 were completed. Thereafter the firm applied for registration with I-T Authorities and the AO accepted registration of firm under I-T Act. One property known as Auto Sales Building, was the business assets of M/s. Auto Sales. This firm was dissolved on 31st Oct, 1978. The firm property situated at 18- P.D. Tandon Road, Allahabad was alloted to Sri B M Gupta and Sri Anil Gupta having 1/3 share each. The income from house-property situated at 18-P.D. Tandon Road, Allahabad belongs to B.M. Gupta and Anil Gupta. Thereafter, firm M/s. Auto Sales Property was constituted consisting of three partners. The property owned by B.M. Gupta and Anil Gupta was let out to the partnership firm on a rent of Rs. 48,000/- per annum. The annual rent receivable from various tenants in the aforesaid property was Rs. 90,180/-.
The AO observed that out of three partners, one Smt. Madhu Gupta was wife of B.M. Gupta and Smt. Manju Gupta was wife of Anil Gupta and they were having share to the extent of 47% each and 3rd partner i.e., S.C. Lal Agarwal having share of only 6%. According to the AO, this was a clandestine attempt to evade tax in the garb of forming a firm. He took a view that consideration of the aforesaid firm only for the purpose of earning rental income was nothing but an attempt to evade tax. No genuine firm for undertaking any 'business activity' was constituted. He further observed that as per partnership deed, only business activity mentioned was for collecting rent, which would not constitute 'business'. House income therefrom, is not liable to be treated as an income for business or profession. It is to be treated as income from property. In this view of the mater, he subsequently held that the registration of firm was not justified and cancelled the same u/s 186. On appeal, the DCIT concurred with the view taken by AO. On further appeal, the Tribunal however, had taken a different view and observed that firm was actually in existence. Looking to the purpose mentioned in partnership-deed, it also took a view that taking property on lease and carrying on business of collection rent, would constitute a 'business' activity and there was no proposition that such activity could not be treated a business activity in any circumstance.
Having heard the parties, the High Court held that,
++ the term 'business' has been defined u/s 2(13) as "business includes any trade commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture". In the present case, the Tribunal as a last court finding of fact has recored that the activities of the firm were very much there though such activities related only to leasing out the property and realization of rent etc. As per the partnership deed, the firm was constituted for carrying out certain business, the main of which was to purchase, to take on lease/or otherwise and to dispose of the land or to let it out. For the purposes of carrying out the business, the firm took on lease immovable property situated at 18- P.D. Tondaon Road, Allahabad and was managing the same. The assessee firm was preparing and submitting balance sheet, including the receipts of rent, which clears that a deed which was executed between Auto Sales properties through its partners Madhu Gupta with the New India Assurance Co. Ltd. All these documents go to show that the firm really existed and was managing the Estate and rendering services to the tenants. In fact all these documents relate to realization of rent only but the assessee firm filed return on the basis of the rent alone. The aforesaid findings have not been shown to be incorrect. More so, the Tribunal has also found that AO has cancelled registration of firm on the ground that firm had no existence in reality and was not carrying on business, specified in the Deed of Partnership, though, a genuine firm was in existence, and it was engaged in business activities in accordance with the partnership deed. As proposition, it cannot be said that there would not be any business activity in leasing out a building and collecting rent therefrom so as to bring the profits within the ambit of income from business in profession. In the present case, the Tribunal as a last court of fact has recorded a specific finding in favour of assessee and in the absence of anything to show that the same is perverse or contrary to record or based on misreading, there seems no reason to take a different view. It is also clear that when property from which income has been derived was used as a business property and exploitation of property was in the nature of business of the assessee, the rental income so derived will be treated as 'income from business and profession' and not 'income from house property'.
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