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TMI Blog1973 (8) TMI 21X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee for the assessment year 1961-62 and would be governed by the Income-tax Act, 1922 (hereinafter referred to as " the 1922 Act "). Tax Case No. 14 relates to the assessment for the assessment year 1962-63 and would be governed by the provisions of the 1961 Act. The common question of law referred by the Tribunal in these two cases is as follows: "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?" For the assessment year 1961-62, the assessee-firm filed an application under section 26A of the 1922 Act claiming renewal of registration of the partnership. Similarly, an application under section 184(7) of the 1961 Act was filed by the assessee for the renewal of the registration for 1962-63. By an indenture dated December 15, 1947 (annexure " A "), a partnership firm was constituted with five members as partners, including Shivji Khetshi Thackar, one of the partners of the present firm, and the predecessor-in-interest of Madanlal Agarwalla, another partner of the present firm. This firm was dissolved on June 20, 1952, and a fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ship a minor son of Khetshi Thacker aforesaid which was ratified by the aforesaid minor on his attaining majority by an indenture dated February 11, 1956 (annexure " J "). The renewal of the registration of the assessee-firm having been refused by the Income-tax Officer for the two years in question as also being aggrieved by the levy of special surcharge at the rate of 15 per cent., the assessee preferred four separate appeals, and the learned Appellate Assistant Commissioner, on appeal, affirmed the decision of the Income-tax Officer. On the assessee's filing four separate appeals before the Tribunal in respect of the two separate proceedings in regard to each of the two assessment years, the Tribunal held that there was neither any dispute nor any doubt with regard to the genuiness of the partnership, but accepting the contention of the revenue, the Tribunal went on to hold that the partnership firm (the assessee) did not carry on any business and hence the income arising out of the leased property had to be treated under the head " other sources ", which disentitled the assessee to claim renewal of registration of the partnership. The vital point for determination before the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at in most of the cases relied upon by learned counsel for either party it has been observed that there cannot be any set formula for fixing the demise under any lease under one category or the other, namely, the category of transfer of commercial assets or that of the transfer of properties simpliciter. In my opinion, it would be useful, for the purpose of appreciating the case law, to notice certain broad and important features which can be culled out from the indenture of lease dated June 27, 1952, read with the partnership deed dated February 21, 1953, effective from July 1, 1952, along with subsequent modifications thereof by indentures of partnership dated March 19, 1955, and February 11, 1956. Though the deed of lease (annexure " C ") is a long document, containing as many as 33 clauses apart from schedules thereto, I need notice here some of the clauses which do go to point out that what was sought to be let out and was actually let out was not merely the property of the assessee but its commercial assets. The very preamble of the deed of lease recites : " ...... whereas the lessors have agreed to give and the lessee has agreed to take a lease of the aforesaid sixteen ann ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or indirectly embark upon any competitive venture in the same sphere. Clause (22) of the deed deserves notice. Under this clause two rooms and the bath-room in the building in balcony, outer houses, etc., etc., as delineated in a map appended to the deed of lease, were reserved for the lessors, namely, the assessee, and it was further stipulated that the said rooms were not the subject-matter of the lease, they would not be let out by the lessors to anyone else, and they shall be liable to be used only for office purposes of the assessee. As already mentioned, this deed of lease was executed on June 27, 1952, before the partnership deed was duly executed in 1953 to be retrospectively effective from July 1, 1952. The partnership deed (annexure " B ") which came into existence later than the deed of lease itself mentions in clause (7) (of annexure " B ") that all account books of the assessee-firm shall be kept in the office at the premises of the cinema house and neither of the partners would be entitled to remove them from the office. Evidently, therefore, what was contemplated to be reserved under clause (22) of the deed of lease was for the purpose of the partnership business, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted February 21, 1953, read with clause (1) thereof contemplates the carrying on of the business by the partnership under the name and style of Ray Talkies and the same has been reiterated in the deed dated March 19, 1955 (annexure " D "), both in the preamble and in the first clause thereof. Clause (7) of this deed is very much correlated with clause (22) of the lease deed already mentioned above. To the same effect are the stipulations in the partnership deed or the deed of rectification, as it was called, dated February 11, 1956 (annexure " J "). I must make it clear that any such stipulations in the different deeds of partnership by themselves could not have carried the assessee's case very far, but taking their aid in construction of the deed of lease in question as contemporaneous documents, no room for doubt is left in coming to the conclusion that what was leased out was not the properties simpliciter but the commercial assets of the business run by the partnership firm as a whole. Coming to the case law on the subject, Mr. Tarkeshwar Prasad, learned counsel for the assessees, had placed reliance on the cases of Commissioner of Excess Profits Tax v. Shri Lakshmi Silk Mill ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Excess Profits Tax Act refers to the imposition of tax on excess profits arising out of certain business. Section 4 which is the charging section and section 5 which lays down the application of the Act to certain businesses postulate the existence of a business carried on by the assessee on the profits of which the excess profits tax can be imposed. Thus, so far as the question before us is concerned, the cases even though they relate to the Excess Profits Tax Act are very much relevant for the purpose of the question that is being considered in the present case. This being the state of the law, the case before the Supreme Court had gone at the instance of the revenue, the Bombay High Court having repelled the contention of the counsel for the Commissioner of Excess Profits Tax. The contention, on behalf of the revenue was that the dyeing plant of the assessee was a commercial asset of the assessee's business for the purpose of earning profit and, if that commercial asset yielded income to the assessee in any particular manner, it was income from the assessee's business. It was further argued that it was immaterial whether a commercial asset yielded income by use by the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which was more efficient in management and willing to give a fixed profit from the business to the assessee. The next case of the Supreme Court relied upon by Mr. Tarkeshwar Prasad is the case of Commissioner of Income-tax v. Calcutta National Bank Ltd. This case, though not very much in point, does in a way support the case of the assessee. The object for which the company (the assessee in that case) had been formed was to purchase or take on lease or in exchange or otherwise acquire any movable or immovable property which the company may think necessary or convenient, maintain and alter any buildings or works necessary or convenient for the purpose of the company. The question was whether the income realised by the assessee by way of rent for the portion of the building let out was liable to excess profits tax and could be included in the profits of the business. The Supreme Court held that the management of property and realisation of rents being the objects of the company, if it found it necessary or convenient for carrying on its business or a part of the business, though not the main part, the income or profits of that firm had to be included in the company's profits. So f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry, etc., for it had no right in the lands and buildings where the plant, machinery, etc., had been installed. (6) It was thenceforth the company which was carrying on the business of manufacturing ribbons and laces and for that purpose the company hired the plant, machinery, etc., from the assessee-firm. The Supreme Court itself has pointed out the distinction very succinctly at page 772 where it has been pointed out that " the assessee-firm was, therefore, left only with some property which at one time was a commercial asset but had ceased to be so ". It cannot be disputed that at the time when the property or an asset is being sought to be let out, if it has lost the character of a commercial asset, then there can never be a question of letting out a commercial asset which is not in existence at the time when the lease is effected. In the present case, it is nobody's case that at the time when the indenture of lease was executed, the assessee-firm had ceased to have a commercial asset in the shape of the running of the cinema business. The case in Commissioner of Income-tax v. Cocanada Radhaswami Bank Ltd. is not at all in point. The case of Commissioner of Income-tax v. N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held that as to what could happen on the determination of the lease was alien to the scope of the enquiry with which the court was concerned in such cases. In the case before us it will be noticed that there is not a single clause anywhere giving any option to the lessee to become the proprietor at any subsequent stage on payment of any price. Another decision of the Bombay High Court in the case of C.P. Pictures Ltd. also supports the submissions made by Mr. Tarkeshwar Prasad. In that case the assessee was carrying on the business of exhibiting motion pictures in its own cinema theatre. In the year 1953 it leased out the theatre for the purpose of exhibiting cinemas to a stranger for five years and there was a further clause stipulating an option for renewal up to eight years. The monthly rent was fixed at Rs. 2,000. Of course, in that case, the lessor did retain some control over the operator of the cinema shows, handling the machinery as also some of the assets. But that, however, in my view, cannot distinguish the present case from that of the case before the Bombay High Court. As has already been mentioned above, certain amount of control has been retained by the assessee w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wner of a certain building, which it had fitted up with furniture and fixtures for being run as a hotel. The assessee, namely, the company, had never carried on any hotel business itself. It merely let out the building and the furniture to the lessee who, in his turn, used it for the purpose of a hotel business, of course, with information to or with the knowledge of the lessor that the property leased out would be used for the purpose of hotel business. It was in such circumstances that the Supreme Court held that, since the assessee itself never carried on any hotel business but it merely built a house and got it furnished so that it may be let out at an advantageous rent from such persons who were desirous of taking it on lease for the purpose of hotel business, then what had been transferred or let out by the assessee was not a running business or a commercial asset in the technical sense, but merely a house property with furniture and fixtures. The learned standing counsel further placed reliance on the case of Commissioner of Income-tax v. Central Studios (P.) Ltd. This case, again, is clearly distinguishable. In this case before the Madras High Court, a film studio had been ..... X X X X Extracts X X X X X X X X Extracts X X X X
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