KERALA KALAATRE Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) ARIJIT PASAYAT, C.J. : At the instance of the assessee, following question has been referred under S. 256(1) of the IT Act, 1961 (in short 'the Act') by the Income-tax Appellate Tribunal, Cochin Bench (in short the 'Tribunal') for opinion of this Court :

(2.) FACTUAL background needs to be noted in brief. Assessee is a partnership firm consisting of two partners. On 21st Sept., 1977 one of the partners Smt. Hemalatha entered into an agreement with Smt. P.M. Shaheeda, owner of Sangam Theatre, Calicut for taking the theatre on lease on a payment of Rs. 10,000 every month as royalty. The duration of the agreement was for a period of three years. Before the expiry of the term, there was an agreement of sale entered into between Smt. P.M. Shaheeda and Smt. P.V. Hemalatha for the sale of the property along with another theatre by name Pushpa Theatre for a total consideration of Rs. 31 lakhs. Thereafter, on various dates nearly a sum of Rs. 29.69 lakhs was paid to Smt. Saheeda towards the purchase consideration and only about Rs. 1.5 lakhs remained unpaid. Smt. P.V. Hemalatha filed a suit in the Sub-Court of Calicut for specific performance of the contract for transfer of the property. Though the lease agreement and the subsequent agreement for sale were executed by Smt. P.V. Hemalatha, it was claimed that the agreements were entered into on behalf of the firm and that the amount were paid out of the funds belonging to the firm. Assessee-firm was running the theatre during the previous year ending on 31st March, 1988. While considering the claim for deduction of Rs. 1,20,000 as lease rent payable to Smt. Shaheeda, AO was of the view that there was no liability on the part of the assessee to pay lease rent, as for all practical purposes assessee was the owner of the property.

(3.) LEARNED counsel for the assessee submitted that the Tribunal's approach was entirely different from that of the Revenue authorities. The AO proceeded on the basis as if claim was not allowable as assessee was the owner. The first appellate authority held that there was no material to justify such conclusion. In second appeals. Tribunal made out a new case about loss of currency of the agreement. That was not the case of the Revenue. On the other hand, a very relevant clause in the lease agreement was lost sight. Reference has been made to cl. (4) of the agreement which, inter alia, reads as follows :