T.N.C. Rangarajan, Judicial Member - (1.) THIS appeal by the revenue is directed against the order of the Commissioner of Income-tax (Appeals) granting registration to the assessee-firm for the assessment year 1981-82.
(2.) The admitted facts are as follows : There was in existence a partnership firm constituted by a deed dated 8-6-1979 with five partners carrying on the business of trading in cotton, kappas, ginning, building construction, etc. That firm had been granted registration and assessed up to the assessment year 1980-81. In the previous year, being the period from 19-11-1979 to 7-11-1980, corresponding to the assessment year 1981-82, there was a reconstitution of the firm on 1-4-1980, by the admission of a private limited company called 'Tirumalai Hotels & Builders Pvt. Ltd.', as a partner with 60% share. The partnership deed dated 1-4-1980 also provided that the business of the partnership shall be that of carrying on the business of trading in cotton, kappas, etc. However, that document also recited in the preamble that the incoming partner had been incorporated with the object of taking over the business assets and liabilities of the partnership firm carried on under the name and style of Tirumalai Traders. The firm had been assessed on income from cotton business amounting to Rs. 1,66,333, rental income of Rs. 27,903 and miscellaneous receipts of Rs. 34,670, for the assessment year 1980-81. But, for the present assessment year 1981-82, the assessee had no income from business and had only income from rental receipts of Rs. 27,903 and the assessee had declared a net loss of Rs. 37,635. Even the closing stock for the previous year relevant to the preceding assessment year 1980-81, was 'nil'. This reconstituted firm was dissolved by a deed dated 11-11-1980 by which the entire business was taken over by the private limited company and the erstwhile partners were given equity shares. It is not in dispute that thereafter the private limited company carried on the same business which was earlier carried on by the firm. On these facts, the Inspecting Asst. Commissioner, who made the assessment, was of the view that the firm was not genuine because it was not constituted for carrying on any business but for only transferring the business to the private limited company, and hence, could not be granted registration. On appeal, the Commissioner (Appeals) was of the view that there was only a lull in the business and since the business was actually carried on before and after the previous year relevant to the present assessment year, the genuineness of the firm could not be disputed and the firm was entitled to registration.
(3.) IN appeal before us, it was contended on behalf of the revenue, relying on the decision of the Andhra Pradesh High Court in the case of CIT v. Phabiomal & Sons [1986] 158 ITR 773 that since no business was actually carried on in the present assessment year and that the receipt of rental income alone could not constitute business, the firm had not satisfied the criteria required for being recognised as a genuine firm. It was submitted that, in the circumstances, the registration granted by the Commissioner (Appeals) should be cancelled. On the other hand, it was pointed out, on behalf of the assessee, that the Tribunal by its order in ITO v. Tirumalai Hotels & Builders (P.) Ltd. [1986] 17 ITD 109 (Hyd.), has recognised the fact that the private limited company has taken over the business originally carried on by the firm and continued it and hence it could not be said that there was no genuine firm in existence.;