Commissioner of Income-tax, Delhi-i Vs. Dewan Chand Dholan Dass - Court Judgment

Leila Seth, J.

1. A common question of law arises in these two income-tax references as to whether occupation by the partners of a firm can be treated as occupation by the firm for its own residence. They are, thereforee, being disposed of together. Though the format of the question referred for our opinion under s. 256(1) of the I.T. Act, 1961 (1961 Act), at the instance of the Commissioner of Income-tax in each of the two cases is not exactly identical, the substance is the same.

2. In Income-tax Reference No. 87 of 1972, the question formulated is :

'Whether, on the facts and in the circumstances of the case, in determining the income from the house property owned by the firm, a portion of which was occupied by its partners for their personal residence, a deduction was permissible under section 23(2) of the Income-tax Act, 1961 ?'

3. Whereas, the question in Income-tax Reference No. 11 of 1974 reads :

'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessed-firm was entitled to the deduction permissible under section 23(2) of the Income-tax Act in the determination of the income from the house property owned by it when a portion thereof was occupied by its partners for their residence ?'

4. In Income-tax Reference No. 87 of 1972, the assessed, a registered firm, was carrying on business in the purchases and sale of herbs and walnuts. The relevant assessment year is 1964-65 and the corresponding previous year is the year ending September 18, 1963. The assessed owned a property at Model Town, Delhi, and some of the partners of the firm occupied a portion of that property as their residence.

5. The ITO determined the annual letting value of the property without providing for any statutory deduction under s. 23(2) of the 1961 Act, though some of the partners of the firm were residing in a portion of the property. The ITO held the annual letting value of the house property to be Rs. 15,000 relying on the assessment for the year immediately preceding. In coming to this conclusion the ITO, for the earlier year, had found as follows :

'The construction of the house has been completed in 1961-62 on a plot of 2,308 sq.yds. The property was being utilized for the purpose of the partners' residence and a 'kirtan hall' therein was being used as a godown for storage of walnuts. A small room was being utilized as an office by the assessed.'

6. As such, he held the monthly rent of the ground floor to be Rs. 450 of the first floor which was wholly occupied by the partners and their families to be Rs. 500 and of the barsati to be Rs. 100. The garages were being utilized as godowns and no rent was estimated with regard to them but as the accommodation above the garages was being utilized for residential purposes by the partners, rent was estimated with regard to this. the annual letting value was, thereforee, taken at Rs. 1,250 x 12 = Rs. 15,000.

7. The assessed appealed to the AAC with regard to the assessment year 1963-64 and contended, (i) that the estimate adopted by the ITO was excessive, and (ii) that it was entitled to the deduction under s. 23(2) of the 1961 Act. The AAC held that in view of the high rents in Delhi, the estimate of the ITO erred, if at all, on the side of leniency. He also felt that as the owner was a partnership firm and it was not clear if all the partners were utilizing the property for their residence, it was difficult to hold that the property was being used by the partnership concern for its residence. In any case, the estimate of Rs. 15,000 as the annual letting value, being lenient, no further relief was called for.

8. For the assessment year 1964-65 also, with which we are concerned, the assessed appealed. The AAC held that as the annual letting value of the residential portion had been taken on the basis of the past year, which estimate had been confirmed in appeal, no interference was called for.

9. On further appeal to the Tribunal, the assessed did not challenge the annual letting value of the portion of the property being Rs. 15,000; but contended that the assessed was entitled to the deduction under s. 23(2) of the 1961 Act on the footing that it was being used by the firm for its own residence. Distinguishing the decision of the Calcutta High Court in Calcutta Stock Exchange Association Ltd. [1935] 3 ITR 105, on which the Tribunal had relied for the previous year, the assessed submitted that inasmuch as, unlike a limited company, a firm does not have a separate legal existence independent of the partners, the said decision was not relevant. The Tribunal accepted the contention and held that since some of the partners were residing in the portion of the building owned by the firm and this was extremely convenient for the business in walnuts, the assessed was entitled to the deduction permissible under s. 23(2) of the 1961 Act.

10. It is not necessary to set out the facts in income-tax Reference No. 11 of 1974 in detail. In brief, the assessed carried on the business of hiring tents, furnitures and daries. It owned a property at Sunder Nagar, New Delhi. The ground floor was let out at Rs. 1,700 per month. The first floor was partly used by the assessed for its business and the rest was occupied by all its six partners, who were closely related and were residing therein.

11. Both the ITO and the AAC held that the assessed was not entitled to the statutory deduction for self-occupied property as the property was not in the occupation of the owner for the purpose of its own residence, the firm being distinct from the partners. However, the AAC felt that the case might have been different if the building was owned by the partners as co-owners.

12. The Tribunal, relying on its earlier decision in the case of M/s. Dewan Chand Dholan Dass, from which Income-tax Reference No. 87 of 1972 arises, directed that the deduction under s. 23(2) of the 1961 Act should be granted to the assessed.

13. In order to examine the point in issue it is necessary to peruse the relevant statutory provision. Section 23(2) of the 1961 Act, as it stood at the relevant time, read :

'Where the property is in the occupation of the owner for the purposes of his own residence, the annual value shall first be determined as in sub-section (1) and further be reduced by one-half of the amount so determined or one thousand and eight hundred rupees, which ever is less.

Provided that where the sum so arrived at exceeds ten per cent. of the total income of the owner, the excess shall be disregarded.'

14. This sub-section postulates that when the property is in the occupation of the owner for the purpose of his own residence, the annual value, after being determined in accordance with s. 23(1) of the 1961 Act, shall be reduced by one-half or rupees one thousand eight hundred, whichever is less; and the annual value shall not be higher than ten per cent. of the total income of the assessed. As is apparent, this statutory deduction is available only if the property is self-occupied.

15. thereforee, the point to be determined in the present case is whether occupation by the partner for their residence is occupation by the owner-firm for its residence.

16. In the general legal concept a firm has no separate legal personality, it being a compendious name for the partners carrying on the business of the firm. As such, at first blush, it appeared to us that the occupation of a building by the partners of a firm for their residence would be occupation by the owner-firm for its residence, especially if all the partners were residing therein. thereforee, we were inclined to accept the contention of learned counsel for the respondent that since a firm was nothing else but a combination of the human beings who composed it and had no separate existence distinct from them and the partners of the firm, or some of them were eating, drinking and sleeping in the premises, the occupation of the group would be deemed to be the occupation of the owner-firm.

17. However, on a close examination, taking into consideration the scheme and other relevant provisions of the I.T. Act, 1961, and the Partnership Act, we feel that the expression 'occupation of the owner for the purposes of his own residence' would only refer to a human owner and not a fictional entity. Though it is true that a firm does not have a legal entity distinct from its partners, yet under the I.T. Act a firm has been regarded as a separate assessable entity.

18. A registered firm is regarded as an entity distinct from its partners, for the purposes of income-tax. Section 4 of the 1961 Act, which is the charging section, refers to every person. Person has been defined in s. 2(31) which enumerates the categories of assesseds. Section 2(31)(iv) includes 'a firm' in the definition of 'person' as distinct from 'an individual' (s. 2(31)(i)), or a body of individuals (s. 2(31)(V)).'Firm', 'partner' and 'partnership' have been defined in s. 2(23), to have the same meaning as assigned to them in the Indian Partnership Act, 1932.

19. Sections 14 and 15 of the Indian Partnership Act, 1932, contemplate the owning of property by a firm. This includes the property originally brought in the partners as also property purchased from money belonging to the firm. This property is to be held and used by the partners exclusively for the purposes of its business. Thus, the partners cannot hold it or use it in their individual capacity.

20. In Addanki Narayanappa v. Bhaskara Krishnappa, : [1966]3SCR400 , the Supreme Court, while dealing with the question whether the interest of a partner in partnership assets comprising of both movable and immovable property required registration under s. 17(1) of the Registration Act, 1908 observed (p. 1303) :

'From a perusal of these provisions it would be abundantly clear that whatever may be the character of the property which is brought in by the partners when the partnership is formed or which may be acquired in the course of the business of the partnership it becomes the property of the firm and what a partner is entitled to is his share of profits, if any, accruing to the partnership from the realisation of this property, and upon dissolution of the partnership to a share in the money representing the value of the property. No doubt, since a firm has no legal existence, the partnership property will vest in all the partners and in that sense every partner has an interest in the property of the partnership. During the substistence of the partnership, however, no partner can deal with any portion of the property as his own. Nor can be assign his interest in a specific item of the partnership property to anyone. His right is to obtain such profits, if any, as fall to his share from time to time and upon the dissolution of the firm to a share in the assets of the firm which remain after satisfying the liabilities set out in clause (a) and sub-cls. (i), (ii) and (iii) of clause (b) of s. 48.'

21. It would, thereforee, be clear that a specific house property belonging to the firm is not owner by the partners, in the true sense. During the existence of the partnership a partner cannot deal with it as his own, nor can he assign his interest in it as a co-owner could do. It is only on dissolution when the firm ceases to exist that a partner, would be entitled to a share in the proceeds of the property after payment of the liabilities of the partnership firm. As such, it is difficult, to contemplate residence by some of the partners or even all of them as self residence by the owner-firm. A firm cannot physically reside and so cannot claim the benefit of the provision, which is available to an assessable entity only.

22. In In re Calcutta stock Exchange Association Ltd. [1935] 3 ITR 105, the Calcutta High Court opined that 'residence', in its ordinary meaning, meant the place where an individual or his family ate, drank or slept and that there was no justification for giving this word an extended meaning in the context of s. 9 of the 1922 Act (a provision similar to s. 22 of the 1961 Act). Speaking for the course Lord Williams J. observed (p. 111) :

'In this connection, it is to be noticed that the word 'own' has been inserted between the words 'his' and 'residence'. I think that the object of inserting that word was to indicate that the phrase applied only to a human person or persons and not to a fictional person, such as a limited liability company.'

23. Section 6 of the 1961 Act deals with the extended meaning given to the word 'residence'. A firm is said to reside in India except where 'the control and management of its affairs' is situated wholly outside India; an individual, however, is resident in India if he is in India for the specified number of days or maintains or causes to be maintained a dwelling place in India for the specified number of days. This is indicative of the fact that in the case of individuals the simple condition of residence as a place where they live, eat, sleep or drink or maintain a place for this purpose is contemplated whereas in the case of a firm, this not being possible, it is the place where the firm carries on business. The idea of a firm dwelling with its family and servants is alien to the concept of a firm as an independent assessable entity. Thus, it is clear that a firm cannot reside or dwell in the ordinary sense and such such is not entitled to the benefit of s. 23(2) of the 1961 Act.

24. In coming to this conclusion, we also derive some support from the decision in New Cotton and Wool Pressing Factory v. CIT , Ram Narain and brothers v. CIT : [1969]73ITR423(All) , Bhai Sunder Dass & Sons v. CIT : [1972]85ITR28(Delhi) , Sarvamangala Properties Ltd. v. CIT : [1973]90ITR267(Cal) and S. N. Syed Mohammed Saheb and Bros. v. CIT : [1968]68ITR791(Ker) . In these cases registered firms with several partners owned, inter alia, house properties. A controversy arose as to whether income from the house property should be included in the total income of the firm under s. 9(1) /22 or in the hands of the members of the firm under s. 9(3) /26 of the 1922 Act/1961 Act. The courts opined that s. 9(1) /22 dealt with a case where the assessed was the owner of the house property whereas s. 9(3) /26 dealt with a case where the assessed was an association of persons and the members of the association held the property in definite and ascertainable shares, e.g., as co-owners. As the assessed was a firm and owner of the house property, it was correctly assessed under s. 9(1)/22 and the income of the house property included.

25. We are unable to accept the plea of Shri G. C. Sharma who, relying on the decision of the Supreme Court in the case of Malabar Fisheries Co. v. CIT : [1979]120ITR49(SC) , went to the length of arguing that the firm as such has no legal personality to own property or earn income. It seems to us clear that while, in regard to some problems that arise in relation to firms under the I.T. Act where a solution has to be sought on general principles, the principle is applied that a firm and its partners are not different persons, but it cannot be applied in all circumstances. CIT v. A. W. Figgies and Co. : [1953]24ITR405(SC) and other cases show that the I.T. Act confers a personality on the firm distinct from the partners composing it. Under the scheme of the Act, a firm is conceived of a person capable of having an income and there is no reason to hold that the firm cannot be taxed on the income from house property, just as it is taxed in respect of its business income. In the context of an assessment on it for the income from property owned by it, the requirement of s. 23(2) is incapable of being fulfillled.

26. Certain decision on s. 54 of the 1961 Act also throw some light on this matter. Section 54 provides for certain exemptions from capital gains on the sale of a house property which was being use 'by the assessed or a parent of his mainly for the purposes of his own or the parents' own residence' and the purchase or construction thereafter during the specified period of 'a house property for the purposes of his own residence.'

27. In K. I. Viswambharan & Brothers v. CIT : [1973]91ITR588(Ker) , a Full Bench of the Kerala High Court, while dealing with the case of a firm that was comprised of two brothers as partners and had purchased a house in 1960 which it sold in 1966, opined (p. 592) :

'In view of the specific provisions of the Partnership Act relating to the property of a firm and the judicial pronouncements on the matter, there cannot be any doubt that a firm is legally competent to own or hold property and also to deal with such property. Any profit or gain derived by a firm in pursuance of the sale of a capital asset owned or held by the firm is, thereforee, exigible to tax in accordance with the relevant provisions of the Income-tax Act.'

28. As one of the partners thereafter bought a residential house, within the time limit specified in s. 54, he claimed a deduction with regard to the capital gain. The court rejected his claim as it observed that the capital gain did not accrue to him but to the firm and became part of its income, the partner being only entitled to get a share in the divisible profits at the end of the year and not a share in each category of income derived by the firm. The court also observed that a firm was not entitled to the benefit as it was not possible to envisage the usage of the building by the firm for its residence within the meaning of s. 54.

29. The case of CIT v. R. M. Chidambaram Pillai : [1977]10ITR292(SC) , relied on by the assessed, is in a different context. The controversy therein was whether the salary paid to a partner was a different label for profits, thus entitling it to be partly exempt as agricultural income. Holding that the salary of a partner represented a special share of profits and retained the same character as the income of the firm, the Supreme Court opined that it was exempt under r. 24 of the Indian I.T. Rules, 1922, to the extent of 60% thereof representing agricultural income. In coming to this conclusion it observed that a contract of employment required two distinct persons, viz., the employer and the employee, and there could be no contract of service between a firm and one of its partners, as a firm was only an expression for the persons who had agreed to carry on business in partnership. Krishna Iyer J., speaking for the court, observed that, though for the purposes of the I.T. Act, a firm had certain attributes simulative of personality, yet it was not a person but a plurality of persons. After quoting from the case of Dulichand Laxminarayan v. CIT : [1956]29ITR535(SC) , the Supreme Court noticed that the view taken therein accorded with the view in Addanki Narayanappa's case, : [1966]3SCR400 . Since we have have already referred to and relied on Addanki Narayanappa's case, we need not pursue this matter further.

30. There is also a practical difficulty in accepting the contention on behalf of the assessed. While the assessed's contention may appear plausible and tenable, where all the partners of the firm, particularly when they are all members of a family and related to each other, reside in the premises, it is not so in the situation where only some and not all the partners of the firm are using the property as their residence. It may perhaps be that, subsequently, when the share income of the partner is sought to be assessed in his hands-the share of property income will be assessable in his hands under the same head, vide s. 67(2) - and any one or all of them occupying the property may claim pro tanto relief; but we are not concerned with that question here. We have, thereforee, come to the conclusion that the context before us is one in which the dichotomy between the firm and its partners should be given effect to and that the nature of the relief under s. 23(2) is such that it is not available in the case of a firm just as it is not available in the case of a company.

31. To sum up, it is well settled that a firm is an independent taxable entity distinct from the partners who compose it. This being the position, it appears to us that the only person entitled to the exemption under s. 23(2) is the taxable entity and not its components. As the firm is not using the property for its own residence, as indeed it cannot in the ordinary sense, it is not entitled to the benefit of the provision.

32. For the reasons outlined above, we answer the question in the negative and in favor of the revenue. The revenue will be entitled to its costs. Counsel's fee Rs. 350.