1. We find it convenient to dispose of these 9 matters together. In all these appeals, the only issue is whether the assessee, a group of persons could be considered to be carrying on a business so that they could be treated as a firm. One Shri Rami Reddy on behalf of his family entered into an agreement on 31-12-1986 with the Food Corporation of India (FCI for short) for construction of godowns upon the land owned by the family. Sri Rami Reddy and his sons should construct godowns according to the specifications of FCI and give it on lease to them.
The specifications were regarding the capacity of the godowns and construction of approach roads. FCI has also given specifications regarding the strength of the walls, flooring, doors and roofing.
2. On 20-1-1977 a deed of partnership was drawn up between Rami Reddy and his three sons and three ladies who are his close relatives.
According to this partnership deed Shri Rami Reddy had entered into the agreement with FCI on behalf of himself and his sons for construction of godowns and lease them out to FCI for at least 5 years. The preamble narrates that the first four parties were members of HUF and there was an oral partition by which their agricultural lands have been divided and after the division the 4 parties had decided to form a partnership to construct godowns to lease them out to FCI. The partnership is at will. The land of 10 acres belonging to the parties were brought into the firm. The construction was completed and it was let out to FCI.3. The assessee filed a return before the Income-tax Officer for the asst. year 1978-79 claiming that they are a firm and entitled to registration. They had only income from letting out of godowns, but according to them it should be assessed as business income. The ITO treated it as income from 'house property'. With regard to the claim for registration, he first pointed out that the application for registration was delayed by 4 years and 5 months. The application was received only on 31-8-1982. It ought to have been filed before the end of the previous year in which their activities commenced. The explanation for the delay in filing of application in time was that the original partnership deed was in the custody of the Bank and in spite of efforts on the part of the assessee, they were unable to get back the original in time. The ITO was not satisfied with this explanation for the delay. He also pointed out that the assessee's income assessable only under the head 'house property' and therefore there was no business activity. Without any business activity, no firm can come into existence. He, therefore, rejected the application for registration.
4. For subsequent asst. years 1979-80 to 1982-83 also be treated the assessee as an unregistered firm.
5. The assessee appealed. The appeals for the asst. years 1978-79 to 1980-81 were heard by the Commissioner (Appeals) Sri Govinda Rajan together. He straightaway condoned the delay of 4 years in filing the application for registration and accepted the explanation given by the assessee. On the basis of a certificate given by the Bank, he accepted the assessee's submission that the original partnership deed was in the custody of the Bank. Thus, nonavailability of the partnership deed amounted to a reasonable cause for the delay in filing the application.
With regard to the question whether the assessee was carrying on business or not, he held that merely because the income is assessed under the head "House Property". The existence of the firm cannot be denied. He referred to the decision of the Madras High Court in the case of CIT v. Admiralty Flats Motel [1982] 133 ITR 895 and held that the concept of business as envisaged in the Income-tax Act cannot be imported in determining a question whether a group of individuals by an agreement carried on business as a firm. He then referred to the decision of the Hyderabad Bench of the Tribunal in the case of Raja Rajeswari Warehousing Complex wherein a similar issue was considered and held in favour of the assessee. He, therefore, held that the assessee should be granted registration. For the same reasons he accepted the assessee's appeal for the subsequent asst. years up to 1980-81.
5A. For the asst. year 1982-83, the story was slightly different. The assessee had filed a declaration in form No. 12. The Income-tax Officer following his findings for the earlier assessment years, held that the assessee is not entitled to continuance of registration. The appeal was heard by a different Commissioner (Smt. Vijayalaxmi). She came to a different finding. She referred to two decisions reported subsequent to the disposal of the appeals by the previous Commissioner. One of these was the decision of the Andhra Pradesh High Court in the case of CIT v.Phabiomal & Sons [1986] 158 ITR 773. The other decision was that of the Patna High Court in the case of CIT v. Kuya & Khas Kuya Colliery Co.
[1985] 156 ITR 206. In these two cases, the High Courts have held that letting out of property would not constitute a business and therefore the agreement entered into by the parties would not give rise to a firm entitling it to registration. The appeal was dismissed.
6. Thus, we have before us the departmental appeals for asst. years 1978-79 to 1981-82 and the assessee is in appeal for the asst. year 1982-83. The issue however is whether the activity of the assessee could be considered as business for the purpose of Partnership Act and therefore they could be treated as a registered firm. Sri Ranga Rao, learned counsel for the assessee had submitted that the assessee's activity was not merely letting out of property. They were bound by an agreement with the FCI to construct godowns according to their specifications given. The activity of construction should be considered along with activity of letting out. Both have to be taken together.
This would show that there is an activity for business. He further submitted that heavy capital has been contributed which show the risk of the partners in this venture. He also submitted that as per requirements of FCI, the assessee had to spend heavy amounts on repairs of the godowns. Such heavy expenditure could not be found in case of ordinary house property owners. He also submitted that the assessee was bound to provide further services to PCI. All these would amount to business. He then referred to the decision of the Income-tax Appellate Tribunal in the case of Raja Rajeswari Warehousing Complex which was referred by both the Commissioner as well as in another case of the Tribunal in Yelisetty Bhadrayya Setty v. ITO [1982] 1 ITD 644 (Hyd.), wherein on identical facts the Tribunal has held that the assessees are entitled to registration. With references to the two decisions referred to by the Commissioner (Appeals) in the 1982-83 appellate order he submitted that in the case of Phabiomal & Sons (supra) there was no construction activity and they were merely letting out a property which was already in existence. So, that case can be distinguished. He also submitted that the Patna High Court's decision in the case of Kuya & Khas Kuya Colliery Co. (supra), depended on the facts found that the assessee had stopped doing business.
7. Sri Santhanam for the department submitted that the activities of the assessee had been considered by the Tribunal while disposing of the appeal regarding the head of income under which the rent receipts are to be assessed. In that order which is reported in K. Rami Reddy & Sons v. ITO [1985] 14 ITD 108 (Hyd.), the Tribunal has held that the assessee was merely letting out properties only. In this case, he submitted there were a group of persons who had come together to get an assured income of rent. No other services were rendered to FCI other than letting out the premises. On these facts, he submitted that the principle laid down by the Andhra Pradesh High Court in the case of Phabiomal & Sons (supra) would clearly be applicable.
8. We have considered the submission. It is an accepted position that where the assessee merely lets out his property and renders no further services other than these services associated with letting out the house property, the income has to be assessed under 'house property' and the activity could not be considered as an activity for the purpose of business. Situations might arise wherein the letting out of the house property is intimately connected with certain other services to be rendered and depending upon the complexity of the services, the income might be considered as income from 'house property'. The Andhra Pradesh High Court in the case of Phabiomal & [Sons (supra) had held "the expression 'business' is defined under Section 2(b) as 'including every trade, occupation and profession'. This is an inclusive definition. Letting out of a house does not accord with the general concept of business. It is one mode of enjoyment of a property owned".
Now the facts found are that the assessee had constructed a godown to let out the godowns in its entirety to FCI. It was submitted that the assessee had also to render some services but we do not find any material to show that the assessee had to render any further services.
The agreement entered into does not show that any services to be done other than those expected from property owners who let out their property. The services mentioned are for providing electricity, water supply, inner approach roads and fencing. This normally goes with letting out of property and there is nothing special about it.
9. So the only point to be considered is whether the assessee had first to construct godowns according to the specification of the FCI and then let out to them, it makes any difference In our opinion, it makes no difference. The property may either be owned by the assessee or constructed by them. The fact that the property was constructed to conform to the specifications of FCI does not make any difference. The property constructed belongs to the assessee only. They are the owners.
It only means that the construction have been made to suit the convenience of the tenant. Nothing more can be read into it. Therefore, we are unable to find any activity which could be treated as business activity. We of course agree with the assessee that merely because the income has assessed under any other head other than Income tax other than business, it does not mean that for purposes of Partnership Act, the assessee is not carrying on business. It is quite possible to hold that an assessee carries on business even if the income for the purpose of computation of tax is treated as income under 'other sources' or 'house property'. But that does not clinch the issue here. We have to further see whether what the assessee done could be treated as business activity.
10. The assessee had relied heavily on the decisions of the Hyderabad Bench in the cases of Yeliselty Bhadrayya Setty (supra) and Raja Rajeswari Warehousing Complex. In the former case, the Tribunal accepts that the existence of a business in a prerequisite of a partnership.
However, they held that such a business existed on the basis of the decision of the Allahabad High Court in the case of. Edulji Meharbanji Boyce v. Lala Shyam Sunder Lal AIR 1943 All. 192. The Andhra Pradesh High Court in Phabiomal & Sons' case (supra) had dissented from this decision. Therefore, the Tribunal's decision based on Edulji Meharbanji Boyce's case (supra) cannot be said to lay down good law. Besides the Tribunal's order he has also relied on the decision of Orissa High Court in the case of Narasingha Kar & Co. v. CIT [1978] 113 ITR 712.
This decision has also been noticed by the Andhra Pradesh High Court.
At page 777 of the reported decision in 158 ITR, they pointed out that the activity of the assessee involved outlay of capital, attention and all appropriate which go with the concept of business. It was therefore held to be a business undertaking. In the case before us, there was no such activity. After the construction was over, the only activity of the partners are to sit back and realise the rentals.
11. In the case of Raja Rajeswari Warehousing Complex reliance has been placed in the earlier decision of the Tribunal which has already been considered. They have also relied on the Madras High Court in the case of Admiralty Flats Motel (supra). They had straightaway accepted that there was such an activity in this case also ; but the Andhra Pradesh High Court in Phabiomal & Sons' case (supra) considering the Madras High Court's decision had pointed out "On the facts, the court held that the intention of the parties was to ruin a business of lodging house-keepers, that the letting out of furniture and other articles had been conceived by the firm as a substantive, systematic and organised course of activity and that it was linked with and incidental to the carrying of business of a lodging house and hence the income from the letting out of furniture and other articles would be of a business nature. Thus, this is a case where the partnership was formed for the purpose of running a lodging house and the letting out of furniture was linked with that business". No such finding of a close link with business can be given on the facts of the case before us.
12. We therefore, consider that the assessee had not entered into any activity which could be considered as business activity. Therefore, they are not entitled to registration as a firm.
13. The assessee had filed cross-objection for three years namely 1978-79 to 1980-81 for which the department has come on appeals. No fresh relief is claimed in these cross-objections.
14. We therefore dismiss the assessee's appeals and cross-objections.
We allow the departmental appeal.