Kerala H.C : Whether, on the facts and in the circumstances of the case, investing money and earning interest therefrom and letting out of building and earning rental income therefrom would constitute an activity of business carried on by the assessee-firm?

High Court Of Kerala

CIT vs. George Oommen & Co.

Section 185(1)

Asst. Year 1989-90, 1990-91, 1991-92, 1992-93

S. Sankarasubban & G. Sivarajan, JJ.

IT Ref. Nos. 3 to 6 of 1998

10th July, 2000

Counsel Appeared

P.K. Ravindranatha Menon & George K. George, for the Applicant : None, for the Respondent

JUDGMENT

S. SANKARASUBBAN, J. :

The above IT references arise out of ITA Nos. 324(Coch)/1991, 55(Coch)/1992, 521(Coch)/1994 and 446(Coch)/1994. Questions referred for the opinion of this Court, under s. 256(1) of the IT Act, are as follows :

“(1) Whether, on the facts and in the circumstances of the case, investing money and earning interest therefrom and letting out of building and earning rental income therefrom would constitute an activity of business carried on by the assessee-firm?

(2) Whether, on the facts and circumstances of the case, the Tribunal is right in holding that the assessee is entitled to renewal of registration ?”

Facts of these cases are as follows : Assessee in these cases is M/s George Oommen & Co., Kottayam. For the asst. yr. 1989-90, the assessee filed an application for registration in Form No. 11 on 30th March, 1989, along with a copy of the partnership deed dt. 15th Jan., 1982. The assessing authority found that the income earned during the year is the income from house property and interest received from M/s Asian Investments. The assessing authority refused to grant registration for the year 1989-90. The assessing authority took into account the fact that in the returns for the years 1982-83 to 1988-89, the assessee had declared the status as an AOP since the only receipt during the years were the income from house property and interest received from M/s Asian Investments. The assessing authority was of the view that “carrying on a business” is a must for the existence of a firm. As per Expln. (1) to s. 6 of the Indian Partnership Act, sharing of profits or gross returns arising from property by persons holding a joint or common interest in that property does not make such persons partners. Thus, the application for registration for the asst. yr. 1989-90 was dismissed. By Annexure B2, for the same reason, application for registration for the asst. yr. 1990-91 was also dismissed.

For the asst. yrs. 1991-92 and 1992-93, the assessee was assessed as unregistered firm. The assessee took the matter in appeal before the CIT(A). The CIT(A) also agreed with the assessing authority. Against that appeals were preferred before the Tribunal. The Tribunal held as follows : “The appellant-firm was originally engaged in the execution of construction work. For sometime they diverted their activities into other areas like money-lending and real estate development. The appellant-firm adopted financing and ownership of real estates as its business. The absence of construction activity in the assessment years under appeal does not mean that the partnership firm was not genuine.” Then, it went on to consider the decisions on this aspect. Thereafter, it is held as follows : “Apart from this, we are not inclined to agree with the learned Departmental Representative that the activity of financing and earning interest income therefrom and the activity of letting out the premises and earning rental income therefrom would not constitute the activity of business carried on by the assessee. These activities very well amount to business activities and they have been carried on by the assessee in the relevant assessment years in question. Considering all these facts and the case law relied on by the representative of the assessee, we are satisfied to hold that the appellant-firm has been carrying on a business activity and is entitled to renewal of registration.”

After hearing the parties and after verifying the records, the following facts emerge : The partnership was constituted originally in 1960 and later it was amended by a supplemental agreement, dt. 15th Jan., 1982. Thus, the amended agreement was entered on 15th Jan., 1982, by which new partners were introduced. In para 4 of the conditions, it is stated that the objects of the partnership shall be to continue the existing business and other dealings of the partnership and to carry on the business of contractors, builders, financiers, owners of buildings and real estate, etc. The firm may take up and carry on any other business, adventure or manufacture, which in the unanimous opinion of the partners can be carried on in addition to or in extension of the abovesaid objects. It is admitted that even though the partnership was originally entered into in 1960, application for registration was made only for the asst. yr. 1989-90. It is also seen from the records that from 1982, the assessee has been filing returns, as AOP and the annual income, which the assessee was having is the income from the house property and the income received from Asian investments. It is not discernible from the paper book nor is it argued that the firm as constituted was granted registration at any point of time earlier. However, the second question referred to is as to whether the Tribunal is right in holding that the assessee is entitled to renewal of registration. Hence, we have to take it that the question for the first year, i.e., 1989-90 is regarding the grant of registration and in the subsequent years regarding renewal of registration.

It is true that for the purpose of registration of the firm, under the IT Act, what is to be looked into is whether the partnership has come into force as per the Indian Partnership Act. Whatever may be the head of assessment under the IT Act, so long as what was carried on by the firm could be classified as business in the sense of the Partnership Act, the firm would be entitled to registration, provided the other conditions necessary are satisfied. Even if the income obtained from the partnership do not come under the head of business under the IT Act, if it is partnership under the Partnership Act, then the firm is entitled to registration. Under the Rules, the assessing authority is entitled to find out whether the partnership is genuine or not. Under s. 4 of the Indian Partnership Act, ‘partnership’ is the relation between person who have agreed to share the profit of a business carried on by all or any of them acting for all. So the existence of a business is a prerequisite for grant of registration to a firm. This is a matter to be ascertained by the assessing authority to find out whether the partnership is genuine or not.

It can be seen from various orders that at least from 1982, the assessee has got income only from house property as well as from the investment in Asian Investments. No other activities are seen to be carried on by the firm. The mere income from the house property cannot be said to be an activity of carrying on business. So also, the interest obtained from investment made by the partners will not get the colour of carrying on business. It is true that certain decisions have taken the view that running of lodging home or hotel will amount to business. But so far as this case is concerned, there is nothing to show that letting out was done as a business. There is nothing in this case to show that any activity was carried on by the assessee. In the decision reported as CIT vs. Veerabhadra Industries (1999) 240 ITR 5 (AP), Andhra Pradesh High Court held that a single act of constructing a godown and letting it out cannot be treated as a business. The expression “business” contemplates continuous activity from year to year. There was no evidence that the assessee was continuing the activity of constructing godowns and letting them out from year to year. The decision in CIT vs. Lakshmi Company (1982) 133 ITR 904 (Mad) : TC

41R.483 is distinguishable. In that case, the assessee put up additional constructions and let it out to various tenants.

7. In view of the above facts, we answer the first question in the negative and against the assessee. The second question is also answered in the negative and against the assessee.

[Citation : 247 ITR 574]

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