COMMISSIONER OF INCOME TAX Vs. KALPANA THEATRES

JUDGEMENT

(1.) THE assessee-firm, M/s. Kalpana THEatres, was originally constituted under a deed of partnership dated March 21, 1962. Its four partners were Sarvashri M. S. Hussain, K. C. Sampathkumar, K. C. Rajagopal and Abdul Shukkoor. THE business of the firm was the exhibition of films in a cinema theatre constructed by the first three partners, the fourth partner being the working partner. THE first assessment year for the firm was the assessment year 1963-64 and the accounts of the firm were closed on the 31st of March each year. THEre was a reconstitution of the firm by a deed dated April 1, 1969, under which the partnership consisted of only the first three partners, Abdul Shukkoor having left the firm on March 31, 1969. On December 24, 1969, the movable properties of the firm were sold to one K. S. Santhana Devi and one Sukumaran for Rs. 1,25,000. THE immovable properties of the firm were agreed to be sold for a sum of Rs. 3,50,000 to one Krishnaswami Chettiar, Santha Devi, Sulochana and Sukumaran. THE sale deed in relation to immovable properties was executed on July 29, 1974, by the three partners on production of a certificate under s. 230A of the I.T. Act, hereinafter referred to as "the Act", and registered on October 10, 1974. Earlier, the theatre had been mortgaged to M/s. Kapur Investments Private Limited under a mortgage deed dated December 24, 1962.

(2.) FOR the assessment year 1975-76, corresponding to the accounting period ending October 10, 1974, the ITO, while making the assessment under s. 143(3) read with s. 41(2) profits arising out of the sales referred to earlier treating the assessee as an association of persons consisting of Hussain, Sampathkumar and Rajagopal ignoring the assessee's return filed on August 23, 1974, declaring "nil" income and stating that there was no association of persons in existence. However, the assessee later filed a revised return showing a loss of Rs. 1,900. Before the ITO, the assessee's case was that after the dissolution, the assets of the firm belonged to nine persons, namely, three persons of Hussain's family, two persons of Sampathkumar's family and four persons of Rajagopal's family and that the profit from the assets accrued to the nine members individually and that as there was no business done nor was there any concerted action, there was no association of persons. It was thus contended that the theatre was not the property of the firm, but the property of the 9 individuals referred to above. The ITO, however, rejected these contentions holding that the firm originally conducted a business, that when it leased it out, the rental receipts were assessed as business income all along, that for running the theatre the licence was obtained in the name of the firm and not in the name of the individuals, that the business of running the theatre was continued under the same licence up to the date of sale of the theatre in October, 1974, and that the firm had all along been assessed as an association of individuals after the registration of the firm had been refused and that, therefore, the firm is to be assessed in the name of an association of persons. He determined the total taxable income at Rs. 3,24,170 consisting of (1) capital gains of Rs. 2,18,060, (2) s. 41(2) profits - Rs. 91,713, and (3) rental receipts - Rs. 14,400.

(3.) REFERENCE also has been made to a decision in CIT v. Deghamwala Estates , in support of his submission that the execution of a document of sale by two or more persons owning the property jointly cannot bring the co-owners together as a body of individuals. In that case, the question arose as to whether the two persons who were tenants-in-common in respect of the shares inherited from their father but did not constitute an association of persons could be assessed as a body of individuals. The court pointed out the distinction between an association of persons and a body of individuals by observing that in order to constitute an association of persons, they must be joining together in a common purpose, or in a common action, the object of which is to produce income, profits and gains, that though a body of individuals is not identical with an association of persons, they have common similarities, that an association of persons may consist of non-individuals also but a body of individuals has to consist only of individuals or human beings and that the word "body" would require an association for some common tie or occupation and in the absence of such a common purpose or common cause, a mere collection of individuals without a common purpose or common aim cannot be taken to be a body of individuals fallin within s. 2(31) of the Act. This decision also cannot help the assessee for the decision mainly delas with the concept of body of individuals as against an association of persons and merely restates the well-known test that to determine whether there is an association of persons or not is to see whether there is a joining together in a common purpose of producing income, profits and gains.