DHADDA DIAMONDS P.LTD,MUMBAI vs ITO 5(1)(3), MUMBAI

Income Tax Appellate Tribunal, “SMC” BENCH, MUMBAI

For Appellant: Shri Yogesh Thar, Shri Faril Bhatt, ARs

For Respondent: Shri Durga Dutt, Sr. DR

IN THE INCOME TAX APPELLATE TRIBUNAL “SMC” BENCH, MUMBAI BEFORE SRI MAHAVIR SINGH, JUDICIAL MEMBER (A.Y:2011-12) Dhadda Diamonds Pvt. Ltd., Vs. The Income Tax Officer, 1208, Panchratna, Opera House, Ward-5(1)(3),Room No.569, Mumbai 400 004 Aayakar Bhavan, M. K. Road, Mumbai 400 021 PAN:AAACD 0539 L Appellant .. Respondent .. Appellant by Shri Yogesh Thar Shri Faril Bhatt, ARs .. Respondent by Shri Durga Dutt, Sr. DR Date of hearing .. 16-08-2016 Date of pronouncement 16-08-2016 O R D E R PER MAHAVIR SINGH, JM:

This appeal by the assessee is arising out of order of CIT (A)-9, Mumbai in Appeal No. CIT (A)-9/5(1) (3)/603/2013-14 dated 10-10-2014. Assessment was framed by ITO-5(1) (3), Mumbai for the assessment year 2011-12 u/s 143(3) of the Income Tax Act, 1961 (hereinafter „the Act‟) vide his order dated 11th February, 2014.

First two issues in this appeal is regarding disallowance made by the AO u/s 14A read with Rule 8 of the Income Tax Rules, 1962 (hereinafter “the Rule”) and set off of carry forward unabsorbed depreciation pertaining to earlier years. The learned Counsel for the assessee stated that he has instructions from the assessee not to press these two issues. Accordingly, both the issues are dismissed as withdrawn.

The only surviving issues is as regards to the addition made by the AO and confirmed by the CIT (A) in respect to notional rent added as income from house property u/s 22 of the Act amounting to Rs.38,48,380/-.

Brief facts leading to the above issue are that the assessee Company own six units viz. Unit No.1208, 1203, 1207, 1207A, 1601 and 1601A in the building “Opera House”. The assessee claimed before the AO that it is a partner in one Partnership Firm. This Partnership Firm is carrying on business, but no rent is charged by the Assessee Company in respect to these units. According to the AO, the assessee is owner of the said premise and it has not utilized the same for the purpose of its business and accordingly notional rent in terms of the provisions of Section 22 of the Act has to be taxed as income from house property. Accordingly, he charged market rent at Rs.38,48,380/- and taxed accordingly. Aggrieved, the assessee preferred appeal before the CIT (A) who also confirmed the action of the AO relying on earlier decision of ITAT for assessment years 2003-04 and 2004-05. Aggrieved, now the assessee is in second appeal before the Tribunal.

I have heard the rival contentions and gone through the facts and circumstances of the case. Before me, the learned Counsel for the assessee first of all drew my attention to the assessee‟s paper book page 95 wherein a copy of a letter was filed before the Tribunal withdrawing the appeal on the ground that the past unabsorbed losses are sufficient to set off income even after estimation of notional income and as such practically, there is no tax effect suffered by the assessee. Therefore, the assessee withdrew the appeal for these two assessment years. The learned Counsel also drew my attention to pages 96 and 97 whereby the Tribunal in and 5173/Mum/2011 vide order dated 04-10-2012 permitted the withdrawal. The learned Counsel for the assessee further stated that the Assessee Company being a partner in the firm, it is carrying on the business and also carrying on business from the same premises owned by the Assessee Company, there is no need to estimate notional rent. For this argument he took me through the case law of the Hon‟ble Gujarat High Court in the case of CIT Vs Rasiklal Balabhai (1979) 119 ITR 303 (Guj.), wherein the decision of the Hon‟ble Bombay High Court in the case of Shantikumar Narottam Morarji Vs CIT (1955) 27 ITR 69 (Bom) was considered and the same was answered as under:-

“7. Broadly, two points would arise for answering the question referred to us, namely, (i) is the assessee carrying on business? and, (ii) is he occupying the house property for purposes of such business? It is implicit that profits of such business, profession or vocation must be assessable to tax. There cannot be much controversy so far as the first point is concerned. The position is fortunately concluded by the two decisions, one of the High Court of Bombay and another of this court. In Shantikumar Narottam Morarji v. CIT [1955] 27 ITR 69 (Bom), a question arose whether a partner in a registered firm is entitled to claim deduction against the share of the profits included in his total income when the share has been ascertained on the assessment of the firm with regard to its profits. The Division Bench consisting of Chagla C.J. and Tendolkar J., while answering the question in favour of the assessee, addressed itself to the question as to what exactly the rights of a partner in a registered firm are with regard to deductions under s. 10(2) of the Indian I. T. Act, 1922. The revenue contended before the Division Bench of the Bombay High Court that s. 10 had no application at all since it dealt with the profits of a business carried on by the assessee exclusively and solely. Rejecting this contention, Chagla C.J., speaking for the Division Bench, held as under (p. 76): "Mr. Joshi says that a firm under the Indian Income-tax Act is an assessable entity and, therefore, a distinction must be made between a business carried on by a firm and a business carried on by an individual. Although a firm is an assessable entity under the Indian Income-tax Act a firm is not a legal entity. In the eye of the law, a firm is a compendious expression used to indicate that several persons constituting that firm are carrying on a business. But that compendious expression cannot give to the firm a legal entity or a legal existence. In law it is only the partners who exist and who carry on the business. It is equally true that looking to the definition of 'partnership' in section 4 of the Partnership Act, when you have a partnership business, the business is carried on by each of the partners, and the definition of a partnership in the Partnership Act has been incorporated in the Indian Income-tax Act, in section 2(6B). Therefore, the contention that section 10(1) cannot apply to a partner in a registered firm is untenable because he does carry on the business although that business happens to be a partnership business, and, therefore, if any profits and gains are derived by the assessee from the business carried on by him, those profits and gains must be brought to tax only under the head, viz., the head falling under section 10(1) which is the head of business."

Before a Division Bench of this court, consisting of K. T. Desai C.J. and P. N. Bhagwati J. (as they then were), a question arose in Sitaram Motiram Jain v. CIT [1961] 43 ITR 405 (Guj), whether an assessee is entitled to set off his loss in the individual business against the share of the profits of a firm in which he was a partner taking over business as a running concern. The Division Bench, answering the question in favour of the assessee, posed a crucial question, whether a business which has been carried on by a (p. 412): "A 'partnership' is defined by section 4 of the Indian Partnership Act as the relation between persons who have agreed to share the profit of a business carried on by all or any of them acting for all. When a firm carries on business, it is a business carried on by the partners of that firm. One partner is the agent of the other in carrying on that business. When a partnership carries on a business each partner thereof carried on that business. The language used in section 24(2) requires that the business should be continued to be carried on by the individual concerned. The requirements of that section are satisfied when a partner carries on the same business which was carried on previously by him on his sole account. What was urged before us was that the words 'continued to be carried on by him' meant that it was continued to be carried on by him and no other person. There is no warrant for adding the words 'and no other person' having regard to the language used in this sub-section."

In view of these two decisions, the first point does not appear to be doubtful at all as to whether a partner of a firm can be said to be carrying on his business when he carries on that business through partnership. The answer is obviously in the affirmative as has been held by the two decisions above. The learned Government Pleader for the revenue wanted to distinguish these two decisions on the ground that they are pertaining to those assessment years before 1956-57 when a registered firm was not a different entity in the sense that it was not liable to pay firm tax since it was in 1956 that the Indian I. T. Act, 1922, was amended so as to make the firm liable to pay firm tax. We must frankly admit that we are not impressed by this distinction which is without any difference. The question is : can it be said that the partner is carrying on his business when the business is that of a firm in which he is a partner ? The same question came up for decision before this court again in CIT v. Arun Industries [1966] 61 ITR 241 (Guj) in a slightly different context. It involved a question of interpretation of s. 15C of the Indian I. T. Act, 1922, in its application to a registered firm and arose out of the assessment of a registered firm for the assessment year 1961-62. The question was whether exemption under s. 15C was available both to the registered firm and to the partners. In that perspective the Division Bench of this court, consisting of J. M. Shelat C.J. and P. N. Bhagwati J. (as they then were), was faced with a problem whether the benefit under s. 15C(1) is also available to a partner in a firm which engages itself in manufacturing or producing articles in the industrial undertaking. The Division Bench quoted with approval the passage extracted above from Sitaram Motiram Jain's case [1961] 43 ITR 405 (Guj) and held as under (p. 250): "There is, therefore, nothing in sub-section (6) which should compel us to hold that in the case of a registered firm, the assessee contemplated by sub-section (1) can only be the registered firm and not a partner of the registered firm. Where a registered firm manufactures or produces articles in the industrial undertaking, every partner of the registered firm does so and he would, therefore, be an assessee within the meaning of section 15C, sub-section (1), and would be entitled to claim that no tax is payable by him in respect of his share of the exempted profits in his individual assessment."

10.

We, therefore, feel no hesitation in agreeing with the learned advocate for the assessee that the assessee must be held to be carrying on business when that business is a business of a partnership firm since the firm as a partnership firm has no legal entity and, as held by courts, that it is a compendious expression for all the partners”. Finally, the learned Counsel for the assessee also drew my attention to the decision of Co-ordinate Bench of the Tribunal in the case of Indira Jain Vs ITO (Bom) (2012) 52 SOT 270 (Bom.) wherein it has been held that while computing income from house property, the portion of the property used by the Assessee Company in which the assessee is a partner, income cannot be assessed u/s 22 of the Act on notional basis. The learned Counsel for the assessee drew my attention to Para 5.1 of the Tribunal Order which reads as under:- “The Hon’ble High Court of Allahabad in case of Mustafa Khan (supra) and Hon’ble High Court of Gujarat in the case of Rasiklal Balabhai (supra) have taken the view that the property used by the partnership firm in which the assessee is a partner has to be treated as the user for purpose of business of the assessee. The Hon’ble High Courts had followed the view earlier taken by the Hon’ble High Courts of Bombay in the case of Shantikumar Narottam Morarji v. CIT [1955] 27 ITR 69 in which it was held that when partnership carried on business, each partner thereof carried on that business. Following the judgments, we hold that portion of the property used by the partnership firm in which assessee is a partner has to be excluded from the total income. As regard the portion used by the company in which the assessee was share holder and director, the same in our view cannot be considered for exclusion as company has separate and distinct identity and business carried on by the company cannot be considered as business done by share holder or director. Therefore, the portion occupied by the company for its business has to be considered while computing house property”.

I have considered the issue and noticed the fact that the assessee is a Private Limited Company and is a partner in a Partnership Firm which carries on business from the same premises which is owned by the assessee. In such circumstances, whether rent from house property is to be assessed u/s 22 of the Act as notional rent or not, the issue has been answered by the Hon‟ble Bombay

High Court in the case of Shantikumar Narottam Morarji v. CIT [1955] 27 ITR 69. Subsequently, the same has been followed by the Co-ordinate Bench of the Tribunal in the case of Smt. Indira Jain (supra). Respectfully, following the same principle, I am of the view that notional rent u/s 22 of the Act cannot be charged in the given facts and circumstances of the case. Accordingly, I delete the addition and allow the appeal of the assessee.

In the result, the appeal of the assessee is allowed. Order pronounced in the open court on 16-08-2016.

DHADDA DIAMONDS P.LTD,MUMBAI vs. ITO 5(1)(3), MUMBAI