RAY TALKIES Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(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 :

(3.) 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.