Per Shri T. V. Rajagopala Rao, Judicial Member - This is an appeal filed by the assessee against the order of the Commissioner (Appeals) dated 27-9-1984 and it relates to the assessment year 1982-83.
2. The only question that falls for determination in this appeal is whether the assessee-firm can be said to have carried on business when it had constructed godowns on the site belonging to one among the partners and when they formed a partnership only to construct the godown and to lease them out to the Food Corporation of India (FCI) or to any other party.
3. The assessee is a registered firm. The assessment year involved is 1982-83 for which the previous year ended on 31-3-1982. On 4-4-1977 a partnership with six partners was formed. Copy of the partnership deed is filed before us. In the preamble of the partnership deed, it was stated that all the parties to the deed constituted themselves into partnership under the name and style of Nalinidevi Associates having its principal place of business at Himayatnagar for the purpose of constructing godowns on the site at Karmanghat, Hyderabad, belonging to the first party, viz., R. Nalinidevi and for leasing out the godowns to the (FCI) on any other party. Clause 3 of the partnership deed again reiterates the purpose of the partnership as construction of godowns and leasing them out to the FCI or any other party and for any other business or businesses as may be agreed upon mutually from time to time. Clause 4 of the partnership deed states that the firm should be deemed to have commenced from 4-4-1977. Clauses 5 and 6 of the partnership deed state that a portion of land bearing Sl. Nos. 55 and 56 at Karmanghat village, Hyderabad East Taluk, belonging to Smt.
Nalinidevi valuing Rs. 10,000 shall be treated as an asset of the partnership firm and also the value of the said site of Rs. 10,000 should be treated as capital contribution of Smt. Nalinidevi. Clause 7 stat es that the capital required for construction of the saiddodowns shall be invested by parties 3 to 6 in proportion to their profit-sharing ration mentioned in clause 9. Clause 9 says the profit and loss sharing ratio which is not very much germane for us. Clause 16 deals with a retirement of a partner. The partner intending to retire should give one months notice in writing. Thereupon he or she should be entitled to receive the profits up to the date of his or her retirement as shown by the profit and loss account drawn up to that date. He or she shall be paid money actually invested by him/her less his/her proportionate share of loss sustained by the partnership, if any within a period of six months from the date of his/her retirement.
4. The assessee entered into a lease agreement dated 2-3-1978 with FCI.From the preamble to the lease deed, a copy of which is filed before us, it is gathered that the FCI made advertisement in the newspapers calling for offers from persons for construction of godowns upon pieces of land owned by the those persons. According to the capacity and specification indicated by the FCI for the purposes of storing foodgrains, sugar, fertilizer or any other material by it and thereafter to lease the same to the FCI on rent for a period specified.
In pursuance of the said advertisement the assessee appeared to have addressed a letter dated 22-11-1976 whereby it had agreed to construct two godowns of 5,000 mts. capacity at Bahadurguda in Hyderabad District. It had agreed to construct the said godowns according to the specifications laid down by the FCI and also agreed to lease out the same for a initial period of five years at a rent of 48 p. per sq. ft.
per month. The FCI at the request of the assessee recommended the Andhra bank to advance a loan of Rs. 5,90,000 to the assessee to meet the cost of construction of the godowns, etc. Clause II of the lease agreement stipulates that the FCI agreed to pay a rent of Rs. 14,46,40 for the entire godowns fully described in the schedule to the lease deed as rent and it had agreed to remit it straight to the Andhra Bank, Kothi, Hyderabad, towards the loan account which is due from the lessors in terms of the lease agreement. Clause III gives an option to the lessee to extend the terms of lease by one year on the same terms and conditions. Clause IV is the clause on which the assessee wants to rely upon very much. According to its terms, the assessee should keep the godowns fit in all respects for storage of foodgrains. The godowns shall be structurally sound, roden proof/damp proof and shall have pucca damp proof floor and water tight with slanting proofing to allow free flow of rain water so as to prevent damage being done to the stocks due to seepage and leakage of water. The godown walls shall be smoothly plastered and they should be while washed once in a year. The plinth level of hired godowns shall be more than one foot above the road level and the surrounding ground level shall not be in a low lying area allowing accumulation of rain/flood waters. The godowns shall be away from canals, streams and flood water, channels, nallas and shall be well ventilated. There should also be proper road and drainage arrangement. If during the period of lease, the flooring in godown is founding sinking or the roof/walls of the godown is/are found to be damaged resulting in leakage/seepage of water inside the godown or the shutters/ doors of the godown are found to be damaged by rust/months, etc., it will be the liability of the lessors to reconstruct the flooring in godown, repair the roof/walls of the godown as well as the shutters/doors thereof as the case may be to make the place structurally sound and storage worthy. In case the requisite action as above is not taken by the lessors within a period of 15 days of the date of issue of registered letter by the lessee bringing out the necessity for reconstruction/repair, etc., the lessee will ne within s right to have the neccessary reconstruction/repair carried out and the entire expenses involved will be made good from the lessors. In case of any damage to the stocks occur due to the lessors abstinence to carry out the repairs within the stipulated time, the losses if any sustained by FCI shall be borne by the lessors. All internal roads up to the godown should be kept in motorable condition. Water must be made available to the labours and godown staff. Electrical fittings in the godown should allowed to be made use of by the FCI and only consumption charges will be borne by the FCI.5. During the previous year relevant to assessment year 1982-83 the assessee-firm received a rent of Rs. 1,70,956.86 from the FCI. The assessee claimed Rs. 76,832 under various heads of expenses and showed a net profit of Rs. 94,124. The assessee also claimed depreciation on godowns and electrical fittings and declared a net profit of Rs. 81,490. The ITO called upon the assessee to file its objections for computing rental income as income from house property instead of under the head Profits and gains of business or profession. The position was explained on behalf of the assessee by its authorised representative by means of the letter dated 9-2-1984. In its objections it is stated by the assessee that it was having only limited capital of Rs. 2 lakhs and, therefore, it was forced to avail a on of Rs. 5.90 lakhs from Andhra Bank to meet the needs of the FCI. The FCI stood as guarantor on certain terms and conditions. The assessee had dangerously risked in an adventurous business venture agreeing to pay damages even for rodent damage to stored grains, etc., and also for arbitration soley by the officials of FCI. It is also submitted before us that from 1979-80 to 1981-82 the rental income was always considered as business income and as so a changed treatment is not justifiable for the assessment year 1982-83. The assessee also relied upon the CIT v. National Storage (P.) Ltd. [1967] 66 ITR 596 (SC) and Narasingha Kar & Co. v. CIT [1978] 113 ITR 712 (Ori.). The ITO did not accept any of the objections raised by the assessee and following the decision of the Bombay High Court in Maharashtra Fertilizers & Chemicals v. CIT [1983] 37 CTR (Bom) 9 held that income derived from letting out of godowns was income derived from property as the assessee-firm never actually utilised the godowns for its business purposes. He also held that tollowing certain other decisions house-owning, however, profitable cannot be a business or trade under the Income-tax Act, 1961 (the Act) where income is derived from house property by exercise of property rights. It is the nature of operations and not the capacity of the owner that must determine whether the income is from property or from trade. Therefore, he had computed the income as income from house property granted allowable deductions under section 24 of the Act and computed net income from house property at Rs. 1,10,718.
6. Aggrieved against the said assessment dated 19-5-1984 the assessee went in appeal before the Commissioner (Appeals). The learned Commissioner (Appeals) by his impugned orders virtually confirmed the ITOs reasoning. The learned Commissioner followed the Bombay High Court decision in Maharashtra Fertilizers & Chemicals case (supra). In that case the assessee was a registered firm carrying on business in the manufacture and sale of manure mixtures. It constructed a godown outside the municipal limits of Poona for being used in its business. A firm called Parekh Traders approached the assessee-firm and requested them to let out the godowns to them. There was no machinery or plant fixed in the godown. The assessee-firm instead of using the godown for its own business gave the same on rent to Parekh Traders. The question was whether the income so derived by the assessee should be treated as income from house property. The Bombay High Court held that the assessee had never actually utilised the godown for its own business purposes and the income therefrom should be considered as income from property and not business income.
7. Now the assessee came up in second appeal before this Tribunal. The assessee relied upon the decision of the Orissa High Court in Narasingh Kar & Co.s case (supra) of the Bombay High Court in CIT v. National Storage (P.) Ltd. [1963] 48 ITR 577 and of the Supreme Court in National Storage (P.) Ltd.s case (supra) in order to justify its submission that the rental income derived from the FCI should be treated as income from business instead of as income from porperty. It is contended very strongly that the facts of the assessees case are quite similar to the facts in the National Storage (P.) Ltd.s case (supra). According to the assessee agreeing to all the conditions laid down by the FCI regarding the repayment of loan to the banks involved an element of risk and, therefore, it should be treated as business. So also the payment of damages in respect of loss of stored grains owning to the rodent meance and agreeing for arbitration solely with the officials of the FCI also justified the treatment of income derived as business income. The responsibility to pay damages in cse of loss to stored grains, undertaking to provide facilities to store and accepting the risk of paying damage are in the nature of business adventure.
8. We have heard Shri V. Ramakrishna Rao, the learned counsel for the assessee and Shri Kailashnath, the learned departmental representative.
We do not agree when it was submitted that the facts of this case are quite similar to the facts obtained in National Storage (P.) Ltd.s case (supra). The Bombay High Court had disposed of the said case in National Storage (P.) Ltd.s (supra). In that case the assessee purchased a place approved by the Chief Inspector of Explosives, Government of India, and constructed some units on the said plot of land in conformity with the rules and permitted the vaults to be used by the film distributors on payment of monthly charge. Vault-holder was given a key of the vault but the key of the entrance, which permitted access to the vaults, remained in the exclusive possession of the company. The company also rendered services to the vault-holders such as fire services for which it paid an annual amount to the municipality, railway booking officers in the premises free of charge for the convenience of vault-holders for despatch and receipt of film parcels and a canteen and a telephone. It maintained regular staff for running the aforesaid services and the entire staff of the Indian Motion Pictures Distributors Association was also paid Rs. 800 for the part-time services rendered by them. In fact the vault-holders were to be licence holders from the assessee-company by the Bombay High Court.
The said view of the Bombay High Court was confirmed by the Honble Supreme Court in National Storage (P.) Ltd.s case (supra). None of the additional services agreed to be rendered by the assessee-company to the vault-holders were present in the facts before us. Further it is not even argued that the FCI is a licensee but not a lessee. So admittedly the FCI is lessee and the rent realised is the monthly lease amount whereas in the Bombay High Court case what they have realised was not rent but only a licence fee.
9. Narasingha Kar & Co.s case (supra) is also distinguishable. In that case N entered into an agreement with the management of a school on 25-4-1968, undertaking to construct 20 shops on the land belonging to the school. Later N entered into a partnership and this firm undertook the construction and, after the construction was over, let out the shops and collected the rents in terms of the right conferred on N under the agreement. One of the terms under the agreement was that the school had to be paid a monthly sum of Rs. 1,000 out of the rent received from the letting out of the shops. The agreement between the school management and N remains only for 20 years and within that period the assessee-firm has to receive back its investment with such profits as it could make. Under those circumstances, the Orissa High Court held that the activity of N must be taken to be clearly a business undertaking. Similar facts are not available in the case before us and, therefore, the Orissa High Court decision also does apply to the facts on hand.
10. At the time of hearing much reliance was placed upon the decision of the Andhra Pradesh High Court in CIT v. K. Ramaiah, K.Ramakrishnamurthy [1985] 49 CTR (AP) 76. The ratio of that case was that when the assets were commercial in whichever way they were exploited the income derived therefrom should be considered as business premises at least on a single day before it is let out to the FCI. It is not even canvassed before us that the godown is a commercial asset in the hands of the assessee-firm. Therefore, on that simple ground the Andhra Pradesh High Court decision does not help the assessee.
11. In CIT v. Phabiomal & Sons [1986] 158 ITR 773 (AP), P and his three sons who owned a building entered into an agreement of partnership between them to let out the building and share the rental income. The question before the Andhra Pradesh High Court was whether letting out the building and collecting rent amounts to carrying on business. The Division Bench held that the activity does not amount to carrying on business but is incidental only to ownership. Therefore, they held that no partnership existed and also it is not entitled to registration.
12. A case similar to the facts before us is already disposed of by this Tribunal Bench B in K Rama Reddy & Sons v. ITO [1985] 14 ITD 108.
In that case also the assessee-firm was constituted with the object of constructing godowns as per the specifications and plans of the FCI to suit their requirements nd leased them out to them. In pursuance of the agreement the assessee constructed four godowns as per the specifications and plan of the FCI and leased them out to FCI. The terms of the lease agreement provide that the assessee had also to render services by providing electricity, water supply, approach road, fencing, etc., and the assessee also undertook to repair the said godowns. The assessee claimed the activity of letting out the godowns constituted a business activity. The ITO disallowed the claim and computed the income under section 22 of the Act. The Commissioner upheld the ITOs order. The Tribunal ultimately confirmed the order of the Commissioner (Appeals) and treated the income derived by the assessee as income from house property and not as business income. As the said decision applies on all fours to the facts before us we respectfully follows it and hold that the lower authorities have correctly held that the income derived from the godowns let out to the FCI should be considered only as income from house property and not as business income.