1973 (8) TMI 21 - HC - Income Tax

Partnership firm leased out the building and equipment - Whether, on the facts and circumstances of the case, the income from the letting out of the property constitutes business income and thus entitled the applicant to claim registration of the partnership? - held that assessee was entitled to claim renewal of registration

Summary

Issues Involved:
1. Whether the income from the letting out of the property constitutes business income and thus entitles the applicant to claim a renewal of the registration of the partnership.
2. Whether the levy of special surcharge on the income is legal and valid in law.

Issue-Wise Detailed Analysis:

1. Whether the income from the letting out of the property constitutes business income and thus entitles the applicant to claim a renewal of the registration of the partnership:

The assessee-firm filed applications for renewal of registration for the assessment years 1961-62 and 1962-63 under Section 26A of the Income-tax Act, 1922, and Section 184(7) of the Income-tax Act, 1961, respectively. The firm had leased out its cinema premises, including all apparatus, machinery, and furniture, to another company. The Income-tax Officer denied the renewal, stating that the income from the lease was not business income but income from other sources. The Tribunal upheld this decision, noting that the lease did not include the commercial assets of the firm but merely the property.

Upon examining the lease deed and partnership agreements, the court found several clauses indicating that the lease included commercial assets. For instance, the lease included the cinema house, machinery, fittings, furniture, and the cinema license. The lessors retained responsibilities such as renewing the cinema license and insuring the assets, and they imposed a restriction on starting any competing cinema business within a certain radius. These factors indicated that the lease was of commercial assets, not merely property.

The court referenced various case laws, including the Supreme Court's decision in Commissioner of Excess Profits Tax v. Shri Lakshmi Silk Mills Ltd., which held that income from letting out commercial assets constitutes business income. The court concluded that the income from the lease was indeed business income, entitling the assessee to a renewal of the registration of the partnership.

2. Whether the levy of special surcharge on the income is legal and valid in law:

The second issue was whether the levy of a special surcharge at the rate of 15% on the income was legal and valid. The court noted that if the income was classified as business income, the special surcharge would be illegal. Since the court had already determined that the income from the lease was business income, it followed that the levy of the special surcharge was illegal and not valid in law.

Conclusion:

The court held that the income from the letting out of the property constituted business income and entitled the assessee to a renewal of the registration of the partnership. Consequently, the levy of the special surcharge on the income was deemed illegal and invalid. The questions referred to the court were answered in favor of the assessee, and the assessee was entitled to costs.