Madras H.C : Whether it is a prerequisite or a condition precedent for a firm to own or hold property to get assessed under the Act in the capacity of a registered or unregistered firm ?

High Court Of Madras (Full Bench)

Warwick Estate Syndicate vs. State Of Tamil Nadu

Sections TN Agrl. 2(q), TN Agrl. 17, TN Agrl. 27

Asst. Years 1980-81, 1981-82, 1982-83, 1983-84, 1984-85

N.K. Jain, Actg. C.J. ; N.V. Balasubramanian & K. Raviraja Pandian, JJ.

Tax Case Revision Nos. 892, 1090 to 1092 & 1305 of 1990

26th July, 2000

Counsel Appeared

P.P.S. Janardhana Raja, for the Petitioners : Haza Nazimuddin, for the Respondent

ORDER

N.K. JAIN, ACTG. C.J.:

These cases have been placed before us on a reference made by the Division Bench of this Court vide order dt. 3rd Dec., 1997. The question under reference was as follows : “Whether it is a prerequisite or a condition precedent for a firm to own or hold property to get assessed under the Act in the capacity of a registered or unregistered firm ?”

2. The brief facts which gave rise to these Tax Cases are as follows : Two firms, Warwick Estates Syndicate and Kasaria Nilgiri Hills Tea Plantations are the assessees. The facts and law involved are identical. The impugned orders is also common order passed by the Commr. of Agrl. IT. For the convenience, we deal with the facts of the case in T.C. (R) No. 893 of 1990, Kasaria Nilgiri Hills Tea Plantations case. The Agrl. ITO, Coonoor, finalised the assessment for the years from 1980-81 to 1983-84 on 24th Feb., 1986, and for the asst. yr. 1984-85 on 29th Aug., 1989, respectively, and assigned the status of ‘registered firm’ to the assessees. The net income computed has been allocated among the partners of the assessee-firm as per the assessment order. Thereafter, it was found that the partnership came into effect on 1st July, 1980, with the capital of the partnership consisting only of cash contribution and there is no schedule of property to the partnership deed to indicate that the lands from which agricultural income is derived has become partnership property. The Commr. of Agrl. IT found that the firm does not hold the land within the meaning of s. 2(nn) of the Tamilnadu Agrl. IT Act. The matter was taken on suo motu revision under s. 34 of the Act by the Commr. of Agrl. IT. Show-cause notices in S.M.R.P. 8 and 9 to 12 of 1989, dt. 20th Feb., 1989, were issued to the partners of the firms to explain as to why the assessment made for the asst. yrs. 1980-81 to 1984-85 assigning the status as ‘registered firm’ should not be cancelled. The Commr. of Agrl. IT after hearing the parties cancelled the assessment in suo motu proceedings vide order, dt. 21st Sept., 1989, and 16th Oct., 1989. The Agrl. ITO was further directed to assess the case assigning the status as “unregistered firm”.

3. Against the above orders, T.C. (Revisions) are filed before this Court. While considering the legality and correctness of the orders, dt. 21st Sept., 1989, and 16th Oct., 1989, the Division Bench referred to the unreported decision in the case of Kairbetta Estate Syndicate & Anr. vide order dt. 18th Sept., 1997, wherein it was held that the Commissioner has erred in holding that it is only the firm which owns land and that can be registered under the Act and set aside the order of the Commissioner cancelling the registration and the Bench laid down the rule that it is not necessary for a firm to own or hold property to get assessed under the Act and receipt of agricultural income is only material. The Division Bench, after taking note of the various definitions in the Act and the various decisions, found that the decision by the Division Bench in the case of Kairbetta Estate Syndicate (supra) is not reflecting the real legal position of law in issue and referred the cases to the Full Bench. Thus, these matters are before us.

4. We have heard the learned counsel for the parties and perused the materials on record. The learned counsel appearing for the assessee Mr. Janardhana Raja took us through the provisions of the Tamil Nadu Agrl. IT Act, 1955, with particular reference to s. 2(g) where the word ‘person’ has been defined, and s. 17 (as it stood during the relevant period in question), which provides for assessment of income, s. 27 (subsequently substituted in the year 1992) which provides for procedure to be followed while registering a firm, and the relevant rulesparticularly rr. 17, 18, 20 and 21 of the Tamil Nadu Agrl. IT Rules, 1958, and certain forms prescribed under the provisions of the Act. He reiterated that for registration, it is not necessary that the firm should own properties because, he submits that s.27 of the Act provides the procedure to be followed while registering the firm and, therefore, the firm cannot be debarred for want of holding of the land. He submitted that the two decisions of the Division Bench of this Court have laid down the correct proposition of law, particularly, the law laid down in A. Graham & Bros. vs. State of Madras (1973) 91 ITR 412 (Mad) is very much in consonance with the provisions contained in the Act and is holding the field for more than a quarter century and hence it requires no reconsideration. The decisions relied on by the referring Division Bench for coming to the conclusion that the decision of the earlier two Division Benches are not reflecting the correct legal position, are all decisions rendered under the Indian IT Act, while considering the provisions contained in the said Act and as such, they are not of any assistance in deciding the issue.

5. Mr. Haza Nazeeruddeen, the learned Special Government Pleader (Taxes) appearing on behalf of the Revenue, strongly supported the view expressed by the Division Bench in the reference order and submits that in the absence of any holding of the land by the firm, he is not entitled for any registration.

6. In rejoinder, Mr. Janardhana Raja, appearing for the assessee, has submitted that in the instant case, the partnership was entered into for joint management with a view to ensure efficiency, economy and convenience and with a view to expand and improve the agricultural production and carry on and continue the agricultural business in partnership on the terms and conditions set out in the deed. He also submitted that the partners associated themselves together and have decided upon common exploitation of the land for their common benefit. The common object is to carry on the agricultural operation and earn agricultural income. Owning of property by the partnership firm is not a condition precedent for the existence of a firm. The definition of the word ‘person’ which is a taxable entity under the Act has been defined in s. 2(g) of the Act which is an inclusive definition and it has not made holding or owning or possessing of property by a firm a condition for treating the firm as an assessable entity under the Act, in contradistinction with the main part of the definition in which owning and holding of the property either as owner, trustee, receiver, common manager, administrator or executor or in any capacity recognised by law is essential. Owning of property by a partnership is not a prerequisite for existence of the firm and hence a firm is liable to be assessed in respect of the agricultural income derived by it.

7. The further argument of the learned counsel is that the assessees have strictly complied with the provisions of s. 27 of the Act which provides for the procedure relating to registration of the firm. According to him, sub-s. (1) of s. 27 provides that application may be made to the Agrl. ITO on behalf of the firm constituted under an instrument of partnership specifying the individual share of the partners for registration. Sub-s. (2) thereof provides that the application shall be made by such person or persons and at such time, and shall contain such particulars and shall be in such form and be verified in such manner, and rr. 16 to 24 contain the relevant provisions for the registration of the firm, issuance of certificate of registration and the cancellation of the registration so made under certain contingencies. Since the assessees have complied with the requirements under s. 27 and the relevant Rules, the approach of the Commissioner is wrong as stated above.

8. He also brought to the notice of this Court that by amendment Act 36 of 1992, the legislature deleted the old s. 27 which provided for registration of firm and the Schedule to the Act was also suitably substituted by Act 40 of 1991. Hence, as on date, the question to be resolved in this revision is only academic.

9. The learned counsel also referred to r. 17 and Form IV with particular reference to the particulars to be stated in the form as to the constitution of the firm at the date of filing of the application, and he drew our attention to the prescriptions contained as A and B and note (i) and (ii) embedded to the Schedule to Form IV and submits that the relevant provisions, rules and the form prescribed thereunder as stated above do not prescribe a condition precedent to own or hold property for getting the firm registered. If that be so, there is no reason to differ from the statutory prescription to get the firm assessed as a registered firm. To support this submission, the learned counsel strongly relied on the definition contained in the last part of s. 2(g). This section says that ‘person’ means any individual or association of individuals owning or holding property for himself or for any other or partly for his own behalf and partly for another, either as owner, trustee, receiver, common manager, administrator or executor or in any capacity recognised by law and include an undivided Hindu Mitakshara family or Aliyasanthana family or branch or Marumakkattayam, Tarward or Tavazhi possessing separate properties, or a Nambudiri or other family to which the rule of impartibility applies, a firm or a company, an association of individuals, whether incorporated or not, and any institution capable of holding property. In the main part, owning and holding property either as owner, trustee, receiver, or common manager, administrator or executor or any capacity recognised by law is essential. However, the definition is an inclusive definition and includes a firm or a company or an association of individuals whether incorporated or not and any institution capable of holding property. Holding or owning of property by the firm itself has not been made a condition for treating the firm as an assessable entity. It is so clear from the fact that an association of individuals comes both in the main part and the inclusive definition in the latter part.

The main question to be resolved is as to whether a firm has to hold a property or own land to get assessed under the Act, in the capacity of a registered or unregistered firm. Sec. 3 of the Act is the charging section which is to the effect that agricultural income-tax at the rate or rates specified in Part I of the Schedule to this Act shall be charged on the total agricultural income of the year of every person. Sec. 17 of the Act provides for theassessment of income. Sec. 17(5) is to the effect that notwithstanding anything contained in the earlier sub-sections, when the assessee is a firm and the total income of the firm has been assessed, in the case of a registered firm, the sum payable by the firm itself shall not be determined but the total income of each partner of the firm, including therein his share of income, profits and gains of the previous year, shall be assessed and in the case of an unregistered firm, the AO shall proceed in the manner as above if the aggregate amount of the tax payable by the partners under such procedure would be greater than the aggregate amount payable by the firm and the partners of the firm individually if the firm were assessed as an unregistered firm. There are also provisions for set off in the case of loss by any partner and assessment of income on the firm, if any partner is a person not resident in the State. What is emphasised in s. 17(5) is that whether the firm own the property of its own or hold property on behalf of any one or all, the total income of each partner of the firm has to be assessed. Then comes s. 27 of the Act, which provides the procedure for registration of firms. There are two sub-sections to this section. As per sub- s. (1), application may be made to the Agrl. ITO on behalf of a firm constituted under an instrument of partnership specifying the individual shares of the partners, for registration and sub-s. (2) provides for the procedure and details which the application made by the firm shall contain. Rules have also been framed under the Act for making the application for registration. If the conditions in the above two sub-sections are fulfilled, the firm is entitled to get registration. In the instant case, the instrument of partnership specifying individual shares is filed and an application to that effect has been made. The argument of the learned counsel has some substance as nothing has been mentioned in the section that the firm should own land or hold property for getting registration.

That apart, in our view, the shares of the partners specified in the instrument are also properties of the firm. Under the circumstances, we are of the view that registration under the Act is independent of the assessment. Now, let us come to the definition of ‘person’. Sec. 2(q) of the Act defines ‘person’. As per that section, person also means an AOP owning or holding property in any capacity including a firm and any institution entitled by law to hold property. ‘Person’ defined in this section is very wide and it means any individual or association of individuals, who may own or hold property for his or their own benefits or that of others or partly for themselves and partly for others and such owning or holding may be as owner or trustee or receiver, etc. Any one falling within the definition of ‘person’ who receives income from land within the State, which income is taxable under s. 3 of the Act is a person whose total agricultural income is required to be computed in accordance with s. 4 of the Act. So, in view of the above, what is required is receipt of agricultural income from land within the State and it is not necessary to hold or own land. From the above discussion, it is clear that the requirement for registration is a valid instrument of partnership specifying shares of the partners which is sufficient for registration and holding of a property or owning a land is not required. Hence, the Commr. of Agrl. IT is in error in holding that the firm should own land or hold property for being assessed as a registered firm. As per s. 17(5) of the Act, in the case of registered firm, the sum payable by the firm shall not be determined but the total income of each partner of the firm shall be determined and in the case of unregistered firm also, the sum shall be determined as above if in the opinion of the AO the aggregate amount of tax payable by the partners under such procedure would be greater than the aggregate amount which would be payable by the firm and the partners individually. Further, our view gets support from the fact that the legislature also thought it fit to delete s. 27, which provides for registration, by Act 36 of 1992 and substitute the Schedule to the Act by Act 40 of 1991. Therefore, after the above amendments, the registration will have no effect. The cases on hand are pertaining to the assessment years prior to the amendment Act. Thus, in our opinion, holding of property or owning a land is not a prerequisite condition for registration of the firm under the Act.

13. An earlier Division Bench of this Court in A. Graham & Bros. vs. State of Madras (supra) wherein four brothers were divided in status and also partitioned, while answering the question whether a firm is liable to be assessed to agricultural income-tax in respect of the agricultural income derived by it, held as follows : “…..The definition of ‘person’ in s. 2(1) of the Madras Agrl. IT Act, 1955, which is an inclusive one, has not made holding or owning of property by a firm as a condition for treating the firm as an assessable entity under the Act, in contra- distinction with the main part of the definition in which owning and holding property either as owner, trustee, receiver or common manager, administrator or executor or in any capacity recognised by law is essential. Owning of property by the partnership is not a condition precedent for the existence of the firm and hence a firm is liable to be assessed to agricultural income-tax in respect of the agricultural income derived by it.”

14. Following the above decision, the Commr. for Agrl. IT, by his proceedings, dt. 5th March, 1991, has directed the Agrl. ITO to grant renewal of registration of this firm for the asst. yrs. 1989-90 and 1990-91 and assign the status of registered firm and proceed with the assessment accordingly.

15. Considering the question with this aspect, as already stated for subsequent years, status of registered firmunder the Act was given by the authority and thereafter it was not necessary to get registration in view of the subsequent amendment made by Act 36 of 1992. Under these circumstances, it will not be proper to unsettle the settled position as per the decision of Graham’s case (supra) decided in the year 1973, for the relevant year. A reference can be made to the decision in CTO (Int) No. IV, Enforcement Wing, Hyderabad & Ors. vs. Ki-Hi-Tech Secure Print Ltd. Jt. 2000 (7) SC 432 wherein while considering the notification issued under the Andhra Pradesh General Sales-tax Act, 1957, and the contention for the appellant that the expression “all books” should be read along with the expression “periodicals” and that would make it clear that “all books” would only mean reading material, their Lordships of the apex Court observed that it would be unreasonable to upset the meaning given to the expression used in the enactment which was in force for nearly three decades and that in fact, the Government subsequently had taken note of this decision and has restricted the exemption only to periodicals and books for reading and no justification to interfere with the order.

16. Learned counsel for the Revenue relied upon various decisions of the apex Court and this Court to support his contentions. The decisions, in our view, are not helpful to the Revenue. In Tea Estate India vs. CIT, 1976 CTR (SC) 256 : AIR 1976 SC 1790 : TC 20R.498, it was held that agricultural income as defined in the IT Act was intended to refer to revenue received by direct association with the land which is used for agricultural purposes and not by indirectly extending it to cases where that revenue or part thereof changes hands either by way of distribution of dividend or otherwise. This case does not apply to the facts of the case on hand. Another decision Commr. of Agrl. IT vs. M.L. Bagla (1971) 80 ITR 173 (All), wherein the question was whether lessees can be assessed as association of individuals, is also not applicable to the present case. The other decision Bihari Lal Jaiswal & Ors. vs. CIT (1996) 130 CTR (SC) 143: (1996) 217 ITR 746 (SC) : TC S33.3180 wherein registration was refused for having formed the partnership by the licensee violating the condition, is also not relevant to the instant case.

17. In the result, as discussed above, we are in full agreement with the decisions rendered by this Court in Graham’s case (supra) and Kairbetta Estate Syndicate’s case (supra), which hold good and we affirm the same.

Accordingly, we answer the question referred to us in negative against the Revenue. In view of the same, the T.C. (Revisions) are allowed.

[Citation : 246 ITR 319]

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