Patna High Court
Ray Talkies vs Commissioner Of Income-Tax on 2 August, 1973
Equivalent citations: [1974]96ITR499(PATNA)
Author: N.L. Untwalia
Bench: N.L. Untwalia
JUDGMENT S.K. Jha, J.
1. In all these four reference cases under Section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as "the 1961 Act"), a common set of facts is involved. On those facts, in Tax Cases Nos. 13 and 14 a common question of law has been referred by the Income-tax Appellate Tribunal, Patna Bench, for our answer, whereas in Tax Cases Nos. 11 and 12, on the same set of facts, another common question of law has been referred. In the aforesaid circumstances, I propose to deal with Tax Cases Nos. 13 14 and before dealing with the question referred in Tax Cases Nos. 11 and 12 of 1968.
2. Tax Case No. 13 relates to the assessment of the assessee 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 ?"
3. 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 fresh partnership was entered into between the two persons abovenamed by an indenture dated February 21, 1953 (annexure "B"). with retrospective effect from July 1, 1952. The respective share of the two partners aforesaid was, Shivji Khetshi Thacker to the extent of 12 annas and Madanlal Agarwalla to the extent of the remaining 4 annas. The aforesaid two partners executed a need of lease dated June 27, 1952 (annexure "C"), letting out the cinema premises along with all the appratus, machineries, furniture land and building appurtenant to it to Messrs. Jharia Talkies and Cold Storage Ltd. Prior to the execution of the deed of lease aforesaid the then partners of the firm were themselves carrying on the cinema business in the name and style of Messrs. Ray Talkies, Dhanbad. The consideration under the deed of lease aforesaid was an annual rent of Rs. 55,000 and the lease was effective for a period of ten years. The assessee claimed that letting out of the cinema was a part of its business activity, entitling it to a renewal of its registration. The Income-tax Officer, however, negatived the contention of the assessee and held that by the aforesaid deed of lease it was merely the property which had been let out and not the commercial assets of the firm, and that, therefore, the firm was not entitled to any renewal of its registration. The assessing officer further held that the income from the letting out of the dismissed premises not being an income from business falling under Section 10. of the 1922 Act, it must be taken to be income from other sources within the meaning of Section 12 of the 1922 Act. The Income-tax Officer, therefore, as an ancillary and consequential action ordered the assessee to pay special surcharge at the rate of 15 per cent. Although, originally, a surcharge was assessed only at 5 per cent., this being an obvious mistake for the 15 per cent., the figure was rectified by resorting to the provisions under Section 154 of the 1961 Act, giving rise to Tax Cases Nos. 11 and 12 of 1968.
4. Although it is not quite necessary to give some subsequent facts, yet it is desirable that they should be taken notice of, since they have been incorporated in the statement of case as submitted by the Tribunal. The partnership deed dated February 21, 1953, was subsequently amended by a deed dated March 19, 1955 (annexure "D"), by including in the partnership 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").
5. 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 percent., 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 separte 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 Tribunal was whether in view of the leasing out of the property the assessee ceased to carry on the business and the income arising out of the said demised property in the shape of annual rent could be treated as income from "other sources" or "business". On a construction of the deed of lease (annexure "C"), the Tribunal observed that there was no clinching evidence to support the case of the assessee that in fact the assessee was still carrying on the business. In other words, the Tribunal found that in view of the absence of anything in the deed of lease to show that the commercial assets of the firm had been leased out, it must be held that what was let out was merely the property simplicitor and not the commercial assets. There is absolutely no dispute that if under the deed of lease what was let out was merely the property and not the commercial asset, the income will have to fall under the head "income from other sources". For the purposes of the present case, it is not necessary for me to go into the matters of distinction between the conditions for registration and renewal thereof, as provided in Section 26A of the 1922 Act, and the Rules framed thereunder on the one hand and the procedure prescribed for such applications for registration or renewal in Section 184 of the 1961 Act, read with the 1962 Rules on the other. All the authorities below have proceeded on the assumption that registration would have been renewed if the assessee was still carrying on its business. Even before this court there has been no controversy raised with regard to any such distinction at the Bar. In view of this, I propose to deal with this case on the footing as to whether renewal of registration under Section 26A of the 1922 Act was warranted in the circumstances or not. In other words, I shall examine the question whether the assessee was carrying on its business even after letting out so as to entitled it to renewal of registration during the two years in question.
6. Numerous cases have been cited at the Bar to which I shall presently refer. But, before adverting to the case law on the subject, it would be more useful to see as to what were the terms of the deed of tease and other documents on record for the purpose of finding out whether any or all throw sufficient light on the question with regard to the nature of the lease. This is for the simple reason that 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 annas interest in the cinema house known as the Ray Talkies together with all lands, premises, buildings, etc., used in connection therewith along with all existing machineries, fittings and furniture and other paraphernalia thereof together with all other rights, benefits, advantages, etc., in connection therewith and also the advantage of the licence obtained from the Goverment in connection with the running of the said cinema house....."
7. Having thus, more or less, summed up all that was sought to be transferred under this deed of lease, the different clauses do give strong indications in support of what has been said to be let out or desired to be let out, as recited in the preamble. Clause (1) of the deed of lease stipulates the lease of the sixteen annas interest of the said running cinema house known as the Ray Talkies along with all appurtenances, paraphernalia, etc., thereof. Clause (2) of the deed fixes the liability and responsibility for the renewal of the licence for running the cinema during the period of the lease and the payment of the licence fee for renewal thereof on the lessors, that is, the assessee. Part 2, Clause (9), further reserves a right to the lessors (assessee) for weekly inspection of the premises, the machinery and apparatus for the purpose of examining their condition either with or without the aid of experts. Clause 10 further fixes the responsibility for the purpose of getting the assets insured on the lessors, subject only to this condition that the premium of a policy to a maximum of two lakhs of rupees will be paid by the lessee. Clause (15) prescribed a restraint on the lessors from starting any cinema business within a radius of 12 miles from the boundaries of the limits of the Dhanbad municipality, either directly or indirectly, either in their own name or in the name of their benamidars. This restriction which the lessors had agreed to put up on themselves was, in my opinion, for the simple reason that it was a business, the commercial assets of the lessors, namely, the running of the cinema business which was being let out to the lessee and for which a consolidated sum of Rs.55,000 per year had been agreed to be paid by the lessee. The lessee having taken on lease the commercial assets of the assessee was naturally interested in having an assurance and a guarantee from the assessee that it would not either openly 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, as envisaged in Clause (7) of the partnership deed. Clause (26) of the deed of lease gives a strong indication as to how the lessors, namely, the assessee, were very much interested in and alive to the continuance of the business even at the hands of the lessee for it stipulates that the lessee must get the quarterly certificate of the electric installations from a licensed contractor and send one copy thereof to the electric inspector, Bihar, Patna, and one copy to the lessors. This clearly indicates that the assessee was very much keen on seeing that on account of any laches on the part of the lessee there should not be a forfeiture of the licence for electricity under the Indian Electricity Act and as a consequence there should be no obstacle in the way of the renewal of the cinema licence under the Cinematograph Act. The assessee was thus very much interested in seeing that the business of exhibition of cinema of the assessee should be continued and perpetuated without any break. The last but not the least is another important clause. In Clause (28) of the deed of lease it is stipulated that the lessee shall be entitled to carry on the business in the name of the Ray Talkies which shows that the goodwill of the business was also let out under this indenture, there is, thus, intrinsic evidence in the document itself showing that not only the building, the machinery and the apparatus were let out but the goodwill of the business was also let out, and the lessors still held to themselves the obligation of keeping the licence up-to-date and of getting it renewed from time to time in accordance with law. The lessors were equally anxious to see that the business was fully covered against risks by insurance and that the requisite certificate of fitness was available at all times. To these pieces of intrinsic evidence, if I merely add the intention of the partners themselves in so far as the nature of the assets that were leased out, to be inferred from the three partnership deeds of 1953, 1955 and 1956 already mentioned above, it will be pertinent to note that in spite of this indenture of lease having been already executed, all along the partners of the assessee-firm have been treating as if they are still carrying on the business of cinema running, though not by themselves but through the instrumentality of their lessee. The preamble to the partnership deed dated February 21, 1953, read with Clause (I) 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.
8. 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 Mills Ltd., [1951] 20 I.T.R. 451 (S.C.), Narain Swadeshi Weaving Mitts v. Commissioner of Excess Profits Tax, [1954] 26 I.T.R. 765 (S.C.), Commissioner of Income-tax v. Calcutta National Bank Ltd., [1959] 37 I.T.R. 171 (S.C.), Commissioner of Income-tax v. Cocanada Radhaswami Bank Ltd., [1965] 57 I.T.R. 306 (S.C.), Commissioner of Income-tax v. National Mills Co. Ltd., [1958] 34 I.T.R. 155 (Bom.), C. P. Pictures Ltd. v. Commissioner of Income-tax, [1962] 46 I.T.R. 1181 (Bom.), Dalchand & Sons v. Commissioner of Income-tax, [1968] 69 I.T.R. 247 (Punj), G.R. Narasimier & Co. v. Commissioner of Income-tax, [1969] 73 I.T.R. 257 (Mad.) and that of Nauharchand Chananram v. Commissioner of Income-tax, [1971] 82 I.T.R. 189 (Punj.). Four of these decisions, mentioned first, are decisions of the Supreme Court, whereas the remaining decisions are those of different High Courts. At the outset, I may point out that the case of G. R. Narasimier & Co., [1969] 73 I.T.R. 257 (Mad.) and that of Nauharchand Chananram are not at all relevant nor applicable to the point in question. In the case of G. R. Narasimier & Co. the question before the Madras High Court was one of relationship of principal and agent, and the question was whether the business carried on by the agent could be deemed to be business carried on by the principal. That is not the point at issue in the present case. In the case of Nauharchand Chananram, [1971] 82 I.T.R. 189 (Punj.) the Punjab High Court was dealing with a different point altogether. The facts of that case were that there was a partnership firm which, as a part of its business, was carrying on acquisition or construction of assets and then leasing them out. In those circumstances, it was held that such a business of leasing out was by itself a business within the meaning of the 1922 Act.
9. The cases to which I shall now refer do go to support the contention of Mr. Tarkeshwar Prasad. In the case of Commissioner of Excess Profits Tax v. Shri Lakshmi Silk Mills Ltd., [1951] 20 I.T.R. 451 (S.C.) the question mooted before the Supreme Court was whether a sum of Rs. 20,005 received by the assessee from its lessee, Messrs. Parakh & Co., by way of rent for the dyeing plant let out to them during the chargeable accounting period would be termed as profits from business within the meaning of Section 2(5) of the Excess Profits Tax Act and, therefore, liable to excess profits tax. It is relevant to point out here that "business" is defined in Section 2(5) of the Excess Profits Tax Act and includes, amongst others, any trade, commerce or manufacture. The first part of this definition of a business in the Excess Profits Tax Act is the same as the definition of a business in Section 2(4) of the 1922 Act. 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 assessee himself or by its being used by someone else. The High Court repelled this argument by observing that if its use as a commercial asset had been discontinued then, if the assessee lets it out, he is not putting to use something which is a commercial asset at the time. It was argued before the Supreme Court that, (1) the nature of a commercial asset is not changed because a particular person was unable to use it, (2) the inability of the assessee to make use of it in certain circumstances does not in any way affect the nature of the asset, nor causes an infirmity in the asset itself, (3) all the assets of the assessee including the dyeing plant were the assets of his business, and (4) whatever income was derived by the use of these assets including the income that an asset fetched by its being let out was the business income of the assessee. These contentions found favour with the Supreme Court, and it was held that there was no warrant in law for the proposition that a commercial asset which yields income must be used as an asset by the assessee himself before his income becomes chargeable to tax. It was further held that a commercial asset susceptible of being put to a variety of different uses in which gain might be acquired, and whichever of these uses it may be put to by the assessee, the profit earned would be a user of the asset of the same business. The yield of income by a commercial asset is the profit of the business irrespective of the manner in which that asset is exploited by the owner of the business. In other words, a mere substitutional use of the commercial asset does not change or alter the nature of the asset. And the assessee is entitled to exploit such asset to his best advantage which he may do either by using it himself personally or by letting it out to somebody else. Of course, the Supreme Court did hold in this case that if the commercial asset is not at all capable of being used as such, then its being let out to others does not result in an income from business. It is nobody's case in the matter before us that the cinema business was not capable of any use as such; rather, the admitted position is that since the then partnership-firm on account of its inefficient management was incurring loss year after year, it put the business or the commercial asset to its best advantage by letting it out to somebody else, namely, the lessee, which was more efficient in management and willing to give a fixed profit from the business to the assessee.
10. 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., [1959] 37 I.T.R. 171 (S.C.) 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 far there is not much in common between the case before the Supreme Court and the present case, but reliance has been placed, and I think correctly, on the observations of the Supreme Court in that case to the effect that though ordinarily "business" implies a continuous activity in carrying on a particular trade or avocation, it may also include a quiescent activity.
11. Another case of the Supreme Court in Narain Swadeshi Weaving Mills v. Commissioner of Excess Profits Tax, [1954] 26 I.T.R. 765 (S.C.) relied upon by Mr. Tarkeshwar Prasad is again not very relevant for the purposes of the present case. In that case, the Supreme Court was concerned with a different principle of law altogether. The company in question in that case had purchased only the buildings and the leasehold rights from the assessee-firm but took over from it on lease at an annual rent the plant and the machinery. The assessee-firm thereafter ceased to manufacture anything and it had accordingly no further trading or commercial activity. The question was whether on those facts and circumstances of the case the letting out of the plant and the machinery by the assessee-firm to the company could not be held to fall within the definition of "business", and it was held by the Supreme Court that it could not be treated as profits from business. As a matter of fact, the learned standing counsel for the department himself laid great stress on this decision of the Supreme Court in so far as it had been held in that case that the letting out of the plant and the machinery could not be said to be a lease of the commercial assets but merely of the movable properties. On a close scrutiny of the judgment of the Supreme Court it is at once discernible that the factors which weighed with their Lordships in coming to a conclusion that it was merely a lease of property were the following :
(1) After the formation of the company the assessee-firm was left with no business at all.
(2) The company purchased the leasehold rights in the lands and buildings where the plant, machinery, etc., were installed.
(3) The firm as such ceased to manufacture any ribbons and laces.
(4) It was left with the plant, machinery, etc., which it did not require and which ceased to be a commercial asset in its hands, for it had no longer any manufacturing business at all.
(5) The assessee-firm had put it out of its power to use the plant, machinery, 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.
12. 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., [1965] 57 I.T.R. 306 (S.C.) is not at all in point.
13. The case of Commissioner of Income-tax v. National Mills Co, Ltd., [1958] 34 I.T.R. 155, 160 (Bom.) a decision of the Bombay High Court, is, in my view, very near to the circumstances as well as the question of law with which we are concerned. In the case before the Bombay High Court, a company which was carrying on a business of manufacture of textiles got into financial difficulties and ceased manufacturing textiles in April, 1949, was finally ordered to be wound up by the court in February, 1950. In October, 1950, the liquidator let out the plant and machinery of the company at a monthly rent for a period of three years, the lessees having an option to renew the lease for a further period of three years. The lessees had a further option to purchase the plant and machinery at a price fixed, on the expiration of the lease, while the lessors covenanted with the lessees to assist them in the running of the mills and securing quotas, licences, permits, etc. It was held in such circumstances that the income by way of rent was income from business. Chagla C.J., at page 160, observed as follows :
"It is true that you have a different situation under certain circum stances. The assessee may stop doing business altogether, and these assets may cease to have the character of business or commercial assets.
Then, they take on an entirely different character. They become capital assets, and qua those assets the assessee is not carrying on any business, but qua those assets the assessee has become their owner. As an owner the assessee may also exploit those assets and receive income. But the income which it receives is no longer business income because no business is being carried on and the assets are not business assets. In such a case, the income would be an income derived by the owner from his capital assets, and the head of income under which such income would fall for the purpose of the Income-tax Act would be Section 12 and not Section 10, Whether a business is carried on or not and whether assets of an assessee are business assets or not.........must be decided............on the evidence........"
14. I think, in the case before us, the assessee stands on a rather stronger footing than in the case before the Bombay High Court. In the last noted case, the lease given stipulated that the option will be of the lessee to purchase the plant and machinery outright at the expiration of the period of the lease. Even so, the Bombay High Court 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.
15. Another decision of the Bombay High Court in the case of C.P. Pictures Ltd., [1962] 46 I.T.R. 1181 (Bom.) 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 while covenanting that the lessors shall have the right of weekly inspection. They shall have to be satisfied with regard to the periodical check up of the electrical and cinematographic apparatus from time to time with or without the aid of experts and as certified by the Inspector of Electricity of the State of Bihar.
16. In view of the decisions referred to above and on the facts and circumstances already mentioned, I must hold that what was let out by the assessee by the indenture of lease dated June 27, 1952, was merely an exploitation of the commercial assets by the assessee through the instrumentality of its lessee.
17. The decision of the Punjab High Court in the case of Dalchand & Sons, [19681 69 I.T.R. 247 (Punj.) referred to by the learned counsel, though not directly in point, deserves reference for certain observations at pages 252 and 253. At page 252 it has been observed that the assessee itself was running the ginning factory, after having invested considerable amounts in making additions to it till 1948, when it leased it out as a running business to the lessee on a lease from year to year. This indicated that the assessee continued to remain in a position to take back the factory at the end of that year so as to be able to resume its running itself. It has further been observed that it made no difference that after a while the assessee decided to and it did succeed in disposing of the factory. In such circumstances, the Punjab High Court held that the income from the letting out was profit from business. In my view, the crux of the matter is not as to in what manner the property may be disposed of after the efflux of the lease period but as to what was the nature of the assets at the time of its being leased out by the lessor to the lessee and as to what amount of interest or control the lessor retained in order to assure itself to see that the running business which it had let out was still being run, so that after the period of the lease was over it could be in a position to run the same business by itself or through the instrumentality of others.
18. The learned standing counsel for the department, apart from having placed reliance on one of the Supreme Court decisions referred to above, has strongly relied on the decision of the Supreme Court in Sultan Brothers (Private) Ltd. v. Commissioner of Income-tax, [1964] 51 I.T.R. 353 (S.C.). In that case, the assessee, which was a limited company, was the owner 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., [1973] 88 I.T.R. 298 (Mad.) This case, again, is clearly distinguishable. In this case before the Madras High Court, a film studio had been leased out by the assessee to a lessee who was using it as a cotton godown. At the time when the building in which the film studio was being run by the assessee was let out, the commercial activity of the assessee of running the film studio had already ceased ; the lessee having taken the property on lease had complete option to use it in any manner as it thought fit within, of course, legal bounds. The lessee, accordingly, turned it to his best advantage. By no stretch of imagination it can be said that the assessee had let out a commercial asset.
19. In view of the discussion of law aforesaid and on the facts and circumstances already discussed, I have no hesitation in coming to the conclusion that in the present case the income from the letting out of the property by the assessee constituted business income since its commercial assets had been let out and not merely the property and, thus, the assessee was entitled to claim a renewal of the registration of its partnership. There seems to be a little inaccuracy in framing the question by the Tribunal in so far as instead of "applicant to claim renewal of registration", what has been mentioned is "applicant to claim registration". I would, accordingly, reframe the question as referred by the Tribunal in the following terms:
"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 a renewal of the registration of the partnership ?"
20. The question thus reframed has to be answered in favour of the assessee, in the affirmative ; and it is held that on the facts and circumstances of this case the income from the letting out of the property constitutes business income and entitles the assessee to claim a renewal of registration of the partnership.
21. In Tax Cases Nos. 11 and 12, the question, which is merely a necessary corollary or ancillary to the main question already disposed of, referred by the Tribunal is:
"Whether, on the facts and circumstances of the case, the levy of surcharge on the income is legal and valid in law ?"
22. It is admitted on all sides that if the income of the assessee was income from business and not under the head "other sources", the levy of special surcharge will be illegal. The question as framed by the Tribunal does not appear to be quite accurate, because the question which arises on the decision of the Tribunal is whether 5 per cent. surcharge on income from the business was liable to be levied or special surcharge of 15 per cent. on income from other sources ought to have been levied. I will reframe the question thus :
"Whether, on the facts and circumstances of the case, the levy of special surcharge on the income is legal and the valid in law ?"
23. The question regarding the nature pf the income having already been decided in favour of the assessee, it follows as a necessary corollary that the question referred to in Tax Cases, Nos. 11 and 12 must be answered in the negative, and, I, accordingly, hold that, on the facts and in the circumstances of this case, the levy of special surcharge on income is illegal and not valid in law. The questions referred in both sets of cases having been answered in favour of the assessee, the assessee will be entitled to costs. Consolidated hearing fee, Rs. 100.
Untwalia, C.J.
24. I agree.