1. This appeal is directed against the order of the CIT(A) dated 15-7-1998 for the assessment year 1995-96.
2. The main ground is that the CIT(A) erred in confirming the addition of Rs. 24,15,200 (i.e., Rs. 30,19,000 Rent, less Rs. 6,03,800 being deductions under section 24(1)) being rental income as the income of the assessee-firm and not as the income of the partners (co-owners) in their individual capacity. Vide its letter dated 24-5-1999, the assessee-firm has also raised three Additional Grounds, which read as follows :- 5. The learned CIT(A) failed to appreciate that the rent received pertained to rent for the Assessment Years 1993-94, 1994-95 and 1995-96 and hence the entire amount in any case could not be taxed as Income from House Property of this year.
6. Without prejudice to the above, if at all it is held that this income belongs to the appellant firm then accordingly directions should be given so that the taxes paid by the co-owners are refunded." 3. The assessee-firm was constituted in 1979 and consists of five partners. It purchased certain premises in the building known as "Poonam Chambers" vide an agreement of sale dated 25-7-1979 from Miss Sonu Govindram Samtani. The building was purchased in the name of the partnership firm and all the five partners who constituted the firm at that point of time were shown as Transferees in the said agreement. The Vendor, Miss Sonu G. Samtani, purchased the said premises from M/s.
Poonam & Patel Constructions Co. vide an agreement dated 3-3-1978.
Neither of these two agreements have been lodged for registration and the property still stands in the name of M/s. Poonam & Patel Constructions Co. in the records of Rights as the Co-operative Society intended to have been formed is not yet formed. With effect from 1-9-1979, the partnership firm gave the said premises on lease to the National Bank of the Agricultural & Rural Development (NABARD) on a monthly rent of Rs. 29,580. This was raised to Rs. 1,23,350 per month with effect from 1-10-1992. Upto the assessment year 1992-93 the rental income derived from the said premises was duly disclosed by the assessee-firm in its hands. However, from the assessment year 1993-94, no such rental income was shown and the return for the assessment year 1993-94 was processed by the Assessing Officer only under the provisions of section 143(1)(a) and no regular assessment under section 143(3) had been made. While framing the assessment for the assessment year 1995-96, the Assessing Officer noticed the absence of rental income was from the said premises in the return of the assessee and when a query was raised in this regard, it was explained by the assessee-firm that the partnership deed had been amended with effect from 1-4-1992 and clause 7 of the deed, which has a direct bearing on the question in issue, reads as follows :- "It is hereby agreed by and among the parties hereto that with effect from 1st April 1992, the income accruing and/or arising from the property leased to the Agricultural Refinance and Development Corporation/National Bank of Agricultural & Rural Development shall not belong to the firm, but shall belong to the partners directly in the profit sharing ratio, after the Deed of Partnership dated 22nd August, 1986. Accordingly, the necessary adjustments, in respect of the building, loan and deposit from Agricultural Refinance and Development Corporation have been carried out in the books of the firm with effect from 1st April, 1992, by the transferring them to the partners accounts as agreed upon by the parties hereto." 4. It was also explained that in the light of the above clause in the partnership deed, relevant book entries were passed in the accounts of the partners in the books of the assessee-firm and the asset was transferred by book entries to the debit of the capital accounts of the partners. By these entries, the said premises which were shown at a figure of Rs. 7,84,117 as on 31-3-1992 in the balance sheet of the firm was removed from the balance sheet as on 31-3-1993. It was of course conceded that the lease deed with NABARD could not be changed in favour of the partners or co-owners in their individual capacity as there was some reluctance on the part of NABARD, even though the said agency was approached for effecting the change in the favour of the co-owners. In pursuance of the altered position, i.e., that the erstwhile property of the partnership firm had been transferred in the individual names of the partners who held it in equal shares as co-owners, the rental incomes though received by the partnership firm from NABARD and reflected in its books initially were transferred to the accounts of the partners in the books of the firm and were offered to tax in the individual returns of the co-owners. It was pleaded before the revenue authorities that the said amendment of the partnership deed along with the book entries was of sufficient legal force to transfer the ownership of the property from the partnership firm into the hands of the co-owners and as such the firm was justified in not returning any rental income in its own hands for the assessment year 1993-94 and onwards. It was also explained that the assessment in the hands of the firm's partners including their respective shares of the rental income from the said premises in their individual hands had been completed and even the taxes had been paid by the partners. These contentions did not find any favour with the revenue authorities. The Assessing Officer held that there was no legal transfer of the property from the hands of the partnership firm into the bands of the individual partners and accordingly he completed the assessment making an addition of Rs. 24,15,200 [Rent received Rs. 30,19,000 Less, Rs. 6,03,800, being deductions under section 24(1) of the Income-tax Act for repairs] in the hands of the firm. He rejected the contention of the assessee that there was a diversion of income received from NABARD from the hands of the firm by overriding title into the hands of the partners or co-owners by relying on the decisions of the Supreme Court in the case of Motilal Chadamilal Jain v. CIT [1991] 190 ITR 1/56 Taxman 4A. The CIT(A) upheld the order of the Assessing Officer on the ground that a partnership firm cannot divest itself of its ownership rights in a property owned by it in favour of its partners by simple book entries without the execution of a registered deed, as required under the Transfer of Property Act. For this proposition, he relied upon the decisions of the Madras High Court in the case of CIT v. Dadha & Co.
[1983] 142 ITR 792/14 Taxman 219 and also a catena of the other decisions which are given in page 8 of his order and are cited below :- (1) Abdul Kareemia & Bros. v. CIT [1984] 145 ITR 442/[1983] 15 Taxman (AP); (2) CIT v. Palaniappa Enterprises [1984] 150 ITR 237/19 Taxman 417 (Mad.); (4) CIT v. Bharati Engg. Corpn. [1989] 180 ITR 32/46 Taxman 80 (Punj. & Har.); 5. The assessee pleaded before us that this is not a case where the property in question has been transferred in favour of the partners by simple book entries. In other words, the contentions is that the book entries are supported by the amendment of the partnership deed, to which we have adverted hereinbefore. It is also pleaded that from 1992 onwards, there has been a change in section 27 of the Income-tax Act by virtue of which it is the beneficial owner of the house property that has to be assessed in respect of the income from house property under section 22 of the Income-tax Act and not the legal owner. It is also claimed that the amendment introduced by the Finance Act, 1987 relating to sections 27(iiia) and 27(iiib) are of a clarificatory nature and so have a retrospective operation. It is also claimed that the decisions of the Supreme Court in the case of CIT v. Podar Cement (P.) Ltd. [1997] 226 ITR 625/92 Taxman 541 dispels all doubts in the matter and in the light of this decision, it is only the beneficial owner that has to be brought to tax. The learned counsel for the assessee has also invited our attention to his written submissions which are at pages 172 to 180 of the Assessee's Paper Book (APB) and in the light of these submissions it is contended that it is only the partners who are the beneficial owner of the property and it is only they who can be taxed.
In support of this proposition, the learned counsel for the assessee relied on the following decisions :- (6) Addl. CIT v. Manjeet Engg. Industries [1985] 154 ITR 509 (Delhi); 6. It is also contended that as the assessments of the partners including the incomes have already been completed, there is no reason to bring to tax the same incomes in the hands of the assessee-firm, which would amount to double taxation of the same income. It is in this context that the learned counsel for the assessee has raised additional grounds which we have reproduced hereinbefore. It is also pleaded that the Hon'ble Bombay High Court has held in the context of allowing depreciation that the owner of an asset and not the person in whose name the assets stood would be entitled to depreciation and in this context, reference is made to the following decisions :- (1) CIT v. Mirza Atalluaha Baig [1993] 202 ITR 291/[1994] 76 Taxman 495 (Bom.); (3) Addl. CIT v. U.P. State Agro Industrial Corpn. Ltd. [1981] 127 ITR 97/5 Taxman 211 (All.) ; 7. The crux of the argument taken by the learned counsel for the assessee is that the decisions of the Apex Court in the case of the Podar Cement (P.) Ltd. (supra) overrides all the decisions relied on by the CIT(A) to hold that the property in question cannot be taxed in the hands of the co-owners. The learned counsel for the assessee has also argued that a partnership firm is not a separate legal entity, though it is assessed under the Income-tax Act separately, and the business of the firm is the business of the partners and as such no particular formalities need be observed when an asset of the firm is taken over by the partners in their individual capacity. In this context, he had relied upon the decisions of the Hon'ble Gujarat High Court in the case of CIT v. Rasiklal Balabhai [1979] 119 ITR 303, Hon'ble Madras High Court in the case of the CIT v. K. M. Jagannathan [1989] 180 ITR 191/44 Taxman 224 and the Hon'ble Patna High Court in the case of CIT v. Syed Anwar Hussain [1990] 186 ITR 749/[1991] 55 Taxman 83. In the above decisions, income from property owned by a partner but used in the business of the firm in which he is a partner is held to be exempt under the provisions of the section 22 and so it is pleaded that the business of the firm is the business of the partner and so no artificial distinction should be made between the partners on the one hand and the firm on the other. It is conceded that the decisions of the Hon'ble Karnataka High Court in the case of CIT v. K. N. Guruswamy [1984] 46 ITR 34/17 Taxman 87 is against the assessee on this issue, but it is mentioned that the preponderance of judicial opinion is in favour of the assessee. It is also stressed that in the present case the property is taken out by the partners as co-owners in the same ratio as they held in the partner hip firm. So it is only the nature of the user that has changed and not their relative interest in the firm.
It is also mentioned that the building has collapsed two years after it was taken over by the partners.
8. The learned Departmental Representative on the other hand mentioned that the taking over of the property by the partners is only a ruse to reduce the income of the firm in view of the change in the method of taxation of the firm with effect from the assessment year 1993-94. He also stressed that the rent is being paid by NABARD to the assessee-firm and NABARD in its capacity as lessee has not agreed to the new arrangement. It is also mentioned that the assessee-firm continues to be a member of the concerned co-operative society as an allottee of the premises and no change is effected in favour of the partners of the firm as co-owners. He has reiterated the considerations that weighed with the CIT(A) and also relief on the case law cited by the CIT(A).
9. We are of the view that the order of the CIT(A) has considerable merit. The decisions of the Apex Court in the case of Podar Cement (P.) Ltd. (supra) is only in the context of deciding who is the owner for the purpose section 22 of the Income-tax Act, i.e., whether it is the allottee of a flat in a co-operative society or the co-operative society itself in whose name the property stands. The Apex Court held, as per the headnote, as follows :- "Hence, though under the common law "owner" means a person who has got valid title legally conveyed to him after complying with the requirements of the law such as the Transfer of Property Act, the Registration Act, etc., in the context of section 22 of the Income-tax Act, 1961, having regard to the ground realities and further having regard to the object of the Income-tax Act, namely, to tax the income, "owner" is a person who is entitled to receive income from a property in his own right. The requirement of registration of the sale deed in the context of section 22 is not warranted." 10. The above observations were made in the context of the allottee of a co-operative society. In the case of a co-operative society allottee, all the legal requirements are performed and if the allottee is not held to be the owner for the purposes of levy of tax under section 22, the Co-operative Society which has only a "husk" of title may have to be taxed on the aggregate incomes received by all the members/allottees of the society, which is a somewhat odd situation and considering the ground realities as mentioned by the Apex Court in the above headnote which we have extracted, the Apex Court came to the conclusion that the requirement of compliance with the requirements of the Transfer of the Property Act and Registration Act in the context of section 22 is not warranted. There are no such ground realities which lead to the conclusion that the requirements of the compliance with the Transfer of Property Act and Registration Act has to be dispensed with in the case of the transfer of property from a partnership firm to its partners in their individual capacities. In the present case, the property has been distributed between the partners in the normal course and not on the occasion of the retirement of a partner or dissolution of the firm. If the position advocated by the learned counsel for the assessee is accepted, there can be mini-dissolution of the firm on any occasion an assessee chooses and it can be lead to be multiple transfer of immovable property between the partners and the firm endlessly. We are of the view that the ratio of the decisions of the Apex Court in the case of Podar Cement (P.) Ltd. (supra) is not applicable in the case of transfer of property from a firm to its partners and it does not overrule the decisions of the Madras High Court in the case of Dadha & Co. (supra) and the catena of other decisions on the same lines cited by the CIT(A). We are of the view that the ratio of the said decision of the Hon'ble Madras High Court and all the other decisions on this issue hold good and is good law even after the decisions of the Apex Court in the case of Podar Cement (P.) Ltd. (supra). We are also of the view that the other decisions cited by the learned counsel for the assessee to the effect that the business of the firm has to be held to be the business of the partners are also of no avail to the assessee as those decisions do not involve transfer of property from the firm to the partners and the consequent consideration of the provisions of the Transfer of Property Act and the Registration Act.
11. Similarly, the decision cited by the counsel for the assessee in respect of the grant of depreciation to a person in whose favour there is no registered deed should also not be of much avail as in those cases there are two separate parties and the courts dealt with the transactions which are at arm's length and not an internal affair like the transactions between the firm and its partners. Similarly, the provisions of section 27(iiia) and 27(iiib) provide for specific situations and we do not see how they give a blanket permission to the assessee to override the registration requirement laid down under the Transfer of Property Act and the Registration Act.
12. In view of the above, we have to reject the main ground taken by the assessee regarding the taxation of the rental income of Rs. 24,15,200 after deductions under section 24(1) in the hands of the assessee-firm. Subject to the remarks given hereinbelow in respect of the additional grounds, the main ground taken by the assessee regarding the assessability of the rental income of Rs. 24,15,200 in the hands of the assessee-firm is hereby rejected.
13. We have already reproduced the three additional grounds taken by the learned counsel for the assessee. We are of the view that the above additional grounds, except one, have to be admitted as they do not require any further enquiry and throw up only legal points. We are afraid that the additional ground relating to the taxation of the entire income in one year, i.e., Additional Ground No. 1 cannot be entertained, as no such ground was taken before the CIT(A). It requires an enquiry into the method of accounting followed by the assessee and also an enquiry into the quantum of rental income relating to each year. So we decline to admit additional ground No. 1. We are of the view that additional grounds 2 and 3 deserve to be admitted as it has all along been the case of the assessee that what is taxed in the hands of the co-owners should not again be taxed in the hands of the assessee-firm as it leads to double taxation. While the revenue is entitled to the tax the income in the hands of the correct owner, it cannot tax the same income in two hands, as it has done in the present case i.e., once in the hands of the partners and a second time in the hands of the assessee-firm. While we hold, as we have already done before, that the income of Rs. 24,15,200 has to be, included in the hands of the assessee-firm, we have also to hold that this decision is subject to the rider that the incomes included in the hands of the partners or co-owners by way of rental income from the premises in the question are deleted from their respective assessments and the taxes paid by them, if any, are refunded. In case that is not done, the addition of Rs. 24,15,200 or any other amount already taxed in the hands of all the partners for the assessment years 1993-94 to 1995-96 has to be excluded from the hands of the assessee-firm.