Bombay H.C : The assessee-firm was constituted in 1979. It consisted of five partners.

JUDGMENT

BY THE COURT :

The short point which arises for consideration in the present matter is whether the Department erred in treating the rental income as the income of the firm and not as the income of the partners (co-owners) in their individual capacity.

2. The facts giving rise to this appeal are as follows : The assessee-firm was constituted in 1979. It consisted of five partners. It purchased certain premises in Poonam Chambers vide agreement of sale dt. 25th July, 1978. With effect from 1st April, 1979, the partnership firm gave the said premises on lease to NABARD on a monthly rent of Rs. 29,580. This was subsequently increased to Rs. 1,23,350, per month w.e.f. 1st Oct., 1992. Up to the asst. yr. 1992-93, the rental income derived from the premises was duly disclosed by the assessee-firm in its hands. However, from the asst. yr. 1993-94, no such rental income was shown. The return for the asst. yr. 1993-94 was processed by the AO under s. 143(1)(a) of the IT Act, 1961. While framing the assessment for the asst. yr. 1995- 96, the AO noticed the absence of rental income from the said premises in the return of the assessee and when query was raised in this regard, it was explained by the assessee-firm that the partnership deed has been amended from 1st April, 1992, under which the income accruing and/or arising from the property leased to NABARD was not to belong to the firm, but it was to belong to the partners directly in the profit-sharing ratio. It was further contended that in the light of the above amendment to the partnership deed, the book entries were also passed in the accounts of the partners in the books of the assessee-firm. It was contended that the asset was transferred by book entries to the debit of the capital account of the partners. However, the lease deed with NABARD could not be changed in favour of the partners as NABARD did not agree to such a change. The AO rejected the contention of the assessee that there was diversion of income received from NABARD from the hands of the firm by overriding title into the hands of the partners. The AO came to the conclusion on the facts that this was a case of application of income and not diversion of income received from NABARD (lessees). The decision of the AO was upheld by the appellate authority as well as by the Tribunal. All the authorities have come to the conclusion that taking over of the property by the partners was a subterfuge in order to reduce the income of the firm in view of the change in the law of taxation of the partnership firm w.e.f. the asst. yr. 1993-94. All the authorities below found that NABARD did not accept the change. All the authorities below found that rent was paid by NABARD to the assessee-firm. All the authorities found that NABARD, in its capacity as the lessee, had not agreed to the above-mentioned new arrangement. The AO further found that the assessee had received the rent through cheques which was credited in its account and thereafter, the amount was diverted to the partners subsequently and, therefore, the assessee has only appropriated the rental income received from the lessee. Accordingly, all the authorities have come to the conclusion that the change in the partnership deed cannot change the nature of the income received.

It was urged on behalf of the appellant that assuming that legal ownership was not transferred, still for the purposes of s. 22 of the IT Act, what is important is the beneficial ownership and not the legal ownership. He relied upon the judgment of the Supreme Court in the case of CIT vs. Podar Cement (P) Ltd. (1997) 141 CTR (SC) 67 : (1997) 226 ITR 625 (SC) : TC S40.3564. He contended that in the context of s. 22, the word ‘owner’ is a person who is entitled to receive income in his own right and s. 22 does not require registration of a sale deed. It was urged, therefore, that once the asset stood withdrawn from the partnership firm, there was a transfer from the firm to the partners even if there was no registration. He emphasised the concept of beneficial ownership vis-a-vis legal ownership. He contended that even depreciation can be granted to a person in whose favour there is no registered deed and if that be the case, assuming that the legal ownership was not transferred, still for the purposes of s. 22 what is important is the beneficial ownership and not the legal ownership. He contended that even if the transfer in favour of the individual partners remains incomplete, still the income which accrued was diverted by overriding title and, in the circumstances, the Department erred in treating the rental income as the income of the assessee-firm. As stated hereinabove all the authorities below, after examining the facts of the present case, have come to the conclusion that the property has been distributed between the partners in the normal course and not on the occasion of retirement or dissolution of the firm. The facts clearly indicate application of income and not diversion of income. The AO has also found that the firm received the rent from NABARD. That, the said rent was credited in its account and thereafter it was diverted to the partners. Therefore, the present case is of appropriation of income. All the authorities below, on facts, have found that NABARD continued to be the lessee of the firm. That NABARD did not accept the individual partners as lessors and that the abovementioned amendment to the partnership deed was only a ruse to reduce the income of the firm. All the authorities found that the rent was being paid by NABARD to the assessee-firm. All the authorities have found that no change iseffected in favour of the partners even in the record of the co-operative society. That, even the firm continues to be the member of the society. In the circumstances, the present appeal does not involve a substantial question of law.

The finding of the Tribunal is a finding of fact. The judgment of the Supreme Court in the case of CIT vs. Podar Cement (P) Ltd. (supra) has no application to the facts of the present case. In that matter, Podar Cements (P) Ltd. owned four flats. All the four flats were let out to various persons. The rental income was included in the return. It was the case of the assessee Podar Cements (P) Ltd. that the rental income from the flats was assessable as income from other sources under s. 56 of the Act as the assessee-company was not the legal owner of the property. Such a claim was put forward on the ground that the title to the four flats had not been conveyed to the co-operative society by the builder and that as long as the ownership was not transferred in the name of the assessee, the rental income from the flats could not be assessed as income from house property under s. 22 of the Act. This argument of the assessee was rejected by the Supreme Court. It was held that s. 22 brings to tax, the income from property and not the interest of a person in the property. That, though under common law, owner means a person who has valid title conveyed to him, in the context of s. 22 of the IT Act, 1961, the owner is a person who is entitled to receive income from the property in his own right. Accordingly, it was held that the liability is on the person who receives the rent from the property in his own right. Therefore, in the context of s. 22 of the Act, it was held by the Supreme Court that when a person is in actual physical control of the property realising the entire income and usufructs of the property for his own use having actual power of disposal of the income so received, he cannot be held not liable to tax merely because a vestige of legal ownership or a husk of title may clothe another person with the power of a residual ownership. It is interesting to note that at p. 646, the Supreme Court considered the matter from a different angle. It observed that under the IT Act, the AO has the power to assess the income in the hands of the real owner. That, if “A” purchases the property in the name of “X”, simply because the property isregistered in the name of “X”, “A” cannot escape his liability. It has further observed that if the registered owner alone is liable to pay tax while the income is received by the transferee, the transferee would enjoy the income but the tax will be levied from the registered owner who may not be in a position to make payment of tax and that similarly a diversion of income by overriding title may also be pleaded. The said judgment has no application to the facts of the present case. In the present case, the property has been leased out by a partnership firm to NABARD.

NABARD continues to be the lessee. NABARD has not recognised the partners as lessors. The rent has been received by the partnership-firm in the first instance, as stated hereinabove. Hence, the AO was right in rejecting the contention of the assessee that there was diversion of income received from NABARD from the hands of the firm by overriding title into the hands of the partners. Hence, the judgment of the Supreme Court in the case of CIT vs. Podar Cement (P) Ltd. (supra), has no application to the facts of the present case. Hence, the appeal stands dismissed with no order as to costs.

[Citation : 246 ITR 520]