Income Tax Appellate Tribunal - Hyderabad
P. Venkata Subbarao And Sons vs Income-Tax Officer on 31 March, 1993
Equivalent citations: [1993]46ITD514(HYD)
ORDER
T.V. Rajagopala Rao, Judicial Member
1. This is an assessee's appeal for assessment year 1984-85. Two questions are involved in this appeal. The first is that the income from theatre should not have been taken as income from other sources but should have been considered as business income and depreciation should have been allowed to the assessee. The second ground is that the interest income should have been considered as having been derived during the course of the assessee's money-lending business and the loss claimed in that business should have been allowed since it should have been considered as business loss. The assessee is a specified HUF. It was a co-owner in Kumari Picture Palace, Rajahmundry having 95% interest therein. The other 5 per cent interest in the cinema hall comprising of both building and machinery belonged to Smt. Kumari. The cinema hall was not run by the co-owners but was leased out by them and they were deriving lease rent. It is contended that the lease rent should have been considered as business income of the assessee. It was also contended that the assessee should be allowed depreciation of Rs. 1,31,595. The lease amount derived was Rs. 79,315 towards 95 per cent share. On the ground that the record with regard to this amount always revealed that it was always leased out and was never run by the assessee, the Income-tax Officer took the view that the lease amount has to be considered under the head 'other sources' and not business income. It was contended before the Income-tax Officer that the theatre leased out was only for a period of five years under the term of the said lease and all contracts which the co-owners of the cinema hall had entered into with the film distributors had to be taken over by the assessee and that the lease had to observe all conditions of licence granted to the lessor. The fact that the co-onwners had already entered into contracts with film distributors, that they were grantees of licences for running a cinema theatre were all facts showing an intention on the part of the lessor to maintain the theatre and the equipment in perfect condition and running order and the lease is only a stopgap arrangement showing a lull period during which the co-owners wanted to show restraint in carrying on the business with a view to take over exhibition of motion pictures after the lease period is over and therefore, having regard to the above, it should be taken that the lease amount received should be considered only as part of business income. However these contentions were negatived by the Income-tax Officer and he held that there was no business activity and the income from lease has to be considered as income from other sources. The assessee also claimed depreciation of Rs. 1,31,595 towards this 95 per cent share in the assets of cinema hall building, plant as well as furniture. The claim of the assessee for depreciation was negatived on the ground that the assessee was only part owner and not full owner of the cinema theatre, plant and furniture fitted therein which constituted demised property under the lease. Therefore, applying the Supreme Court's decision in the case of Seth Banarsi Dass Gupta v. CIT [1987] 166 ITR 783 : 32 Taxman 112A, the Income-tax Officer negatived the claim of the assessee for depreciation, held that he is only a fractional owner and he cannot claim such depreciation.
2. The assessee has disclosed Rs. 6,025 as business loss sustained by it while doing money-lending business. The Income-tax Officer ascertained the parties from whom interest receipts were derived by the assessee. As per the particulars furnished the assessee derived only interest income from the following two parties :
(a) Sri Art Movies ... Rs. 9,848.00
(b) Andhra Bank Ltd. ... Rs. 22.70
------------
Rs. 9,87070
------------
As against this the assessee claimed interest payment of Rs. 2,779 and expenditure of about Rs. 13,500. The Income-tax Officer refused to recognise the loss holding that the assessee is not carrying on any regular money-lending business and the interest received is assessable only under the head 'other sources'. The assessee objected stating that in earlier years, the interest income was treated as business income. The Income-tax Officer did not accept this contention holding that a mistake committed in earlier years need not be repeated by him and, therefore, he had construed the interest income as income from other sources. The income thus considered was Rs. 5,620 and he refused to consider the loss claimed by the assessee under the head 'money-lending business. Having been aggrieved by the assessment dated 29-9-1987, the assessee went in appeal before the Appellate Asstt. Commissioner, Vijayawada.
3. Firstly, the Appellate Asstt. Commissioner took up for consideration the loss said to be sustained by the assessee while carrying on the money-lending business. He noticed that the assessee claimed Rs. 4,755 towards salaries, Rs. 1,102 towards travelling, Rs. 1454 towards motor car expenses and Rs. 4,704 towards telephone expenses out of the interest income. At the same time he found that the assessee had advanced money only to one party, namely, Sri Art Movies. He held that he did not find any reason for incurring substantial expenditure on salary, travelling, telephone etc. for the purpose of earning interest from only one party. He recorded his finding that the expenses claimed as mentioned above have not been incurred wholly and exclusively for the purpose of earning interest income. A substantial part of the said expenses represented assessee's personal expenses which had nothing to do with earning of interest. Therefore, he allowed only Rs. 1,000 out of the interest income towards expenses. Not having been satisfied with the relief obtained in the hands of the. Appellate Asstt. Commissioner, the assessee came up in second appeal before the Tribunal.
4. Before this Tribunal, the assessee was not able to furnish any evidence whatsoever to establish the rational link between the earning of interest on the one hand and incurring items of expenditure already noted above. Shri Manmohan was not able to persuade this Tribunal to believe that these expenses were necessary to earn the interest income. Since there is no rational nexus between the income and expenditure, this Tribunal is of the opinion that the assessee is not entitled to any further relief in this regard except relief of Rs. 1,000 granted by the Appellate Asstt. Commissioner.
5. The next question before us is whether the lease amount derived from the cinema hall was business income as contended by the assessee or income from other sources as contended by the Department. Firstly, this Tribunal wants to point out that the lease comprises of not only cinema hall building but also plants like projector, etc., as well as furniture, chairs, screen and cabin equipment. From the contentions raised at the ITO's level it can be seen that the co-owners obtained licence under the Cinematographic Act & Rules to exhibit motion picture in the cinema hall. Further, having entered into some contracts with the distributors undertaking to exhibit films of those distributors in the cinema hall, the assessee has to do accordingly. The lease agreement under which the cinema hall, equipment and plant and machinery, furniture, etc., were leased out was only for 5 years. A specific contention was also raised that the co-owners wanted to treat the period as lull period and that they wanted to take over the right to continue its busines soon after this assessment year is over. According to them this is only a lull period during which they never wanted to do business but wanted to lease out the theatre to some others; whichever way they want to exploit the resultant income from a commercial asset like cinema hall could always be treated as business income and should not have been considered as under the head 'other sources'. However, the assessee lost on this point before both the lower authorities. Before this Tribunal, it was contended by the learned counsel for the assessee that in this year they purchased an A.C. plant. and fitted it to the cinema hall and because of the new A.C. plant the claim for depreciation stood at Rs. 1,31,595 towards 95 per cent share of the assessee.
6. Taking into consideration all the above, the Tribunal is of the opinion that treating the lease amount as income from other sources is not quite correct for the following reasons. Firstly, the Tribunal is of the view that cinema hall, comprising of building, projector, screen, plant and machinery found in the cabin room, electrical fittings and other furniture in the auditorium together constitute 'commercial asset' and whichever way the said asset is exploited the resultant income derived therefrom in the opinion of this Tribunal should always be considered as business income. In this case, there is sufficient indicia to disclose that prior to the lease, the cinema hall was run for some time by the lessors and they have obtained the cinematographic licence to run the cinema hall in that premises and also entered into several advance contracts with the distributors of the films agreeing to exhibit their films in their theatre in the coming days, weeks or months. However, for the reasons best known to themselves, the co-owners of the cinema hall felt that the said asset would be exploited more profitably when it is leased out. They felt that the period of lease should be considered to be a lull period in their business activity and they wanted to wait till such time another good opportunity would dawn upon their business. The lease was executed only for five years. The lessees were asked to take over all the contracts which the lessors entered into with the distributors and they were also called upon to meticulously follow all cinematographic rules which entitle continuance of the certificate in the coming years. Thus, the said clause in the lease deed exhibit a desire on the part of the lessors to continue the business after the lease period is over. Further, in the accounting year in question the co-owners added an A.C. apparatus to the cinema hall and that resulted in higher claim of depreciation. The effect of these factors would enable this Tribunal to hold that the lease period should be taken only as a lull period during the business tenure of the co-owners. They also lead the Tribunal to hold that previous to the lease, they carried on business of running a cinema hall for some time and subsequent to the lease they expressed a desire to continue the same business and simply because in the lull period they happen to lease out the cinema hall the income derived therefrom cannot be anything other than business income. In this connection the Tribunal wanted to rely upon the following decisions :
(1) G.R. Narasimier and Co. v. CIT [1969] 73 ITR 257 (Mad.).
(2) CIT v. Northern India Theatres (P.) Ltd. [1981) 128 ITR 497 : 6 Taxman 227 (Delhi).
(3) CIT v. Sri Venkateswara Talkies [1985] 155 ITR 73 (AP).
(4) CIT v. Laxmi Rice Mills [1987] 164 ITR 571 (MP).
7. In G.R. Narasimier and Co.'s case [supra) the Madras High Court held that the term 'Business' is of wide import and may include a variety of activities from or through income is derived. The expression 'carried on by him suggests that the activities which constitute business should be those of the assessee. Commercial asset can be exploited in many ways which in the process may be of the wasting character or subject to wear and tear and irrespective of the particular mode or means of working the activity is of commercial character and will fall within the wide ambit of business. In the facts of that case, the assessee carried on the business of running of a powerloom factory by manufacturing handloom cloth in partnership up to 12-4-1954. Thereafter manufacturing was stopped and the machinery and buildings were lying idle. However, from 1-11-1956, the powerlooms were leased out under agreement dated 13-6-1957 which was renewed on 16-4-1958. Under the lease agreement though the lessee was at liberty to shift the looms and accessories to a new premises and work them there, their ownership continued with the assessee. The assessee was also to be paid a sum of Rs. 650 per month as and by way of share of the net profits. Up to the Tribunal stage the authorities held that the lease income is assessable from other sources. However, the Madras High Court held that the income was assessable as income from business. In Northern India Theatres (P.) Ltd.'s case (supra), a private limited company was incorporated in 1955 which is the assessee with intention to carry on business of cinema and allied businesses, constructed a cinema house during the accounting period ending 31-10-1959 on a plot taken on sub-lease. Subsequently, one H came forward to give an interest-free loan of Rs. 1 lakh to the assessee to meet the cost of construction of the cinema house. According to the stipulation, the amount was to be refunded in monthly instalments. A lease agreement was entered into with H under which the premises together with the equipment was let to him at a rent of Rs. 10,000 per month for a period of 10 years commencing one week after it had obtained licence for running the cinema. The High Court of Delhi held on facts that the lease coupled with interest-free loan was an arrangement made by the assessee-company for both financing as well as setting up of the cinema and exploitation of the same in a commercial manner. It was the assessee which had got permission to run the cinema and it was for the assessee to decide how to run it whether by itself or through the agency of another. The legal position would be that the cinema was being run by the assessee. Therefore, the assessee was carrying on business using the cinema as commercial asset and hence the assessee's income from letting out the cinema was assessable under the head 'business' and not under the head 'other sources'. In Sri Venkateswara Talkies' case (supra) the assessee derived income from lease of cinema theatre. The Income-tax Officer treated the income derived from the lease of the theatre as income from other sources. Since, according to him the assessee could not be considered to be carrying on business while the theatre was let out on lease, he also made the assessment in the status of an AOP. The Appellate Asstt. Commissioner confirmed the order of the Income-tax Officer. The Tribunal dealt with only the question of refusal to grant registration. While dealing with the appeal, the Tribunal found that the assessee was carrying on business in the exhibition of films till April 1969 and the theatre till August 1971 did not indicate that the assessee had abandoned the idea of carrying on business, that the theatre continued to be a commercial asset producing income, that the income derived from the lease of the theatre was assessable under the head business under Section 28 and hence it allowed registration to the assessee-firm. On reference, the High Court held that there was no material to show that the assessee intended to stop carrying on business and converted the commercial asset into a capital asset. Therefore, their Lordships held that the Tribunal was right in holding that the assessee must be held to be carrying on business even after the lease of the theatre for a temporary period and the income derived by the assessee from the lease was assessable under the head business. In Laxmi Rice Mills' case (supra), the Madhya Pradesh High Court considered a case where the rice mill as well as cinema theatre after being run by the assessee were leased out. The question whether the lease income should be treated as business income or as income from other sources. In that connection, as per the head note of the decision, the following is what is held at page 571:
In order to be business income, there should be evidence of exploitation of commercial assets. Exploitation of commercial assets, does not necessarily mean exploitation by the assessee himself at all material times. The assessee may cause it temporarily to be exploited by another person against payment of consideration and for this purpose may also execute a lease for a fixed period even with clauses of option to renew. It must, however, be shown that the lessor's intention was that during the period of lease, the asset leased out must remain and be treated as a commercial asset and be exploited as such. This intention has to be ascertained from the cumulative effect of all the terms of the lease and other material circumstances.
8. This Tribunal had taken into consideration all the relevant material and circumstances of the case into consideration while deciding the issue whether income derived from lease of the cinema theatre is to be considered as business income or as income from other sources. Firstly, the licence to run the cinema theatre always stood in the name of the assessee and one of the stipulations of the lease deed is that the licence is utilised for showing the cinema theatre. Secondly, even before the lease, the co-owners entered into contracts with several distributors for exhibiting their films in the cinema hall belonging to the co-owners and the co-owners did not want to lose such business connection with the distributors but passed on the liability arising under the forward contracts to the lessees. A specific stipulation was made in the lease about contracts which the lessors entered into with the distributors. It is stipulated in the lease that the obligation under the contract should be scrupulously applied to the lessees also during the lease period. Further in the year of account, the A.C. machinery at great cost was added to the cinema theatre by the lessors. That would only show their inclination to improve the conditions of the cinema theatre so that they may use it as a commercial asset themselves after the lease period is over. All the above circumstances would make the Tribunal feel that the co-owners did not abandon the idea of resuming their business of exhibiting cinematographic films in the cinema hall by themselves and the lease which they have entered into is only a sort of exploitation of a business asset and therefore, the lease amount derived by the assessee is nothing but business income and the finding of the lower authorities that it is only income from other sources cannot be accepted as correct under law.
9. The next question is about allowing depreciation in the hands of the assessee. Admittedly the assessee which is a specified H.U.F. is only a co-owner of the cinema hall having 95% interest therein. The question is whether the assessee is entitled to the claim of Rs. 1,31,595. The Income-tax Officer applied the Supreme Court's decision in the case of Seth Banarsi Dass Gupta's case (supra) in which it is categorically held that depreciation cannot be allowed to a fractional claimant of the property. At page 786, the Hon'ble Supreme Court had extracted the order of the High Court found reported at page 177 of 81 ITR which is as follows :
In order to qualify for an allowance under Clause (vi), the claimant must make out that the machinery is the property of the assessee. That test is not satisfied by the present assessee. The assessee does not claim to be the full owner of the machinery in question. All that is claimed for the assessee is 1/6th share in the machinery. Such a fractional share will not suffice for granting an allowance for depreciation under Section 10(2)(vi) of the Act.
Approving the disallowance of depreciation to the assessee who was only a fractional owner, the Supreme Court categorically held as follows at page 787:
There is hardly any scope for doubt that the benefit of Section 10(2)(vi) of the Act would be admissible only where the assessee is the owner of the property. It too is not admissible in respect of a fractional claim.
The above decision of the Supreme Court does not leave any doubt that depreciation can be claimed by a full owner and not a fractional owner. Therefore, in view of the said categorical decision, the rejection of the depreciation claimed by the assessee is perfectly in order which does not call for any interference from this Tribunal.
10. The assessee had filed an additional ground of appeal. This was filed on 21-3-1993. The said additional ground was admitted by this Tribunal which is as follows :
The Assessing Officer ought to have appreciated that the lease income from Kumari Picture Palace, Rajahmundry constitutes the income of an Association of Persons consisting of the appellant-HUF and Smt. Kumari as members as held by the Wealth-tax Officer.
11. The contention of the assessee is that in the wealth-tax assessment, the status of the lessors was found to be that of A.O.P. In support of that contention Shri D. Manmohan filed an order of the Tribunal dated 14-10-1986 passed in W.T.A. Nos. 410 to 414/Hyd/85 which, inter alia, includes the order for assessment year' 1984-85 also. A reading of the order would disclose that the agreed premise on which the parties proceeded before them was that Kumari Picture Palace is an association of persons. In answer to the first ground we have already held that the lease amount should be assessed under the head 'business' and not under the head 'other sources'. Business can be carried on by A.O.P. as well as by a firm etc. Simply because the status of the assessee viz., Kumari Picture Palace was held to be that of AOP does not have any material effect on any other issue decided in this appeal. We hold accordingly in this appeal on this issue.
12. In the result, this appeal by the assessee is allowed in part.