M.C. Agarwal, J.
1. The Income-tax Appellate Tribunal, Allahabad, under Section 256(1) of the Income-tax Act, 1961, has referred the following questions stated to be of law and to arise out of the Tribunal's order dated April 29,1981, passed in I.TA No. 192 (Alld) of 1980 for the opinion of this court:
'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the assessee's claim of registration was rightly allowed by the Income-tax Officer and in that view cancelling the order of the Commissioner of Income-tax under Section 263 ?'
2. We have heard Sri Prakash Krishna, learned standing counsel for the Commissioner, and Sri Shambhu Chopra learned counsel for the assessee-respondent.
3. The respondent claimed to be a partnership firm constituted under a deed dated June 18, 1974. The firm was constituted by four persons named below :
1. Ratan Kumar,
2. Lav Kumar,
3. Rewati Raman,
4. Madan Mohan.
4. They constructed a cinema hall named Jai Bharat Theatre at Lucknow, and furnished it with furniture, machinery, equipment, etc. By an agreement dated November 1,1975, the theatre was leased out to a partnership firm, Jai Santoshi Maa Exhibitors for a period of three years on a monthly rent of Rs. 2,500 for the building, Rs. 1,500 for the furniture and fixtures and Rs. 1,000 for machinery and equipment. For the assessment year 1976-77 to which these proceedings relate, the assessee claimed the status of registered partnership firm. The Assessing Officer granted registration to the firm by an order under Section 185 passed separately and assessed the aforesaid four persons in the name of the firm, Jai Bharat Theatre, as a registered firm. The assessment order was passed on February 24, 1981. The Commissioner of Income-tax, Lucknow, thought that the so called firm, Jai Bharat Theatre, did not carry on any business and, therefore, there was no valid partnership. He, therefore, took the view that the assessee could not be assessed as a registered firm. He, therefore, cancelled the assessment order under Section 263 and directed the Assessing Officer to make a fresh assessment according to law. The assessee appealed to the Tribunal who did not agree with the Commissioner and held that the activity of letting out amounted to business and, therefore, registration was rightly allowed, The Tribunal, therefore, quashed the order passed by the Commissioner and restored the order passed by the Assessing Officer.
5. As 'is evident the controversy in this case is whether the so-called firm, Jai Bharat Theatre, carried on business and was, therefore, a valid partnership firm.
6. Partnership has been defined in the Indian Partnership Act to mean 'the relationship of persons who have agreed to share the profits of a business carried on by all or any of them acting for all'. The word 'business' has also been defined to include every trade, occupation and profession. Therefore, the question is whether the activity of construction of a cinema hall and letting it out to another person for actual operation is a business, i.e., a trade, occupation and profession. A similar question came for discussion before the Supreme Court in Sultan Brothers Pvt. Ltd. v. CIT : 51ITR353(SC) . In that case, the assessee, Sultan Brothers, had constructed a building fitted it up with furniture and fixtures and let it out on lease fully equipped and furnished for the purpose of running a hotel. The lease provided for a monthly rent of Rs. 5,950 for the building and a hire of Rs. 5,000 for the furniture and fixtures. The assessee never carried on any business of a hotel in the premises or otherwise at all, and there was nothing to show that it intended to carry on a hotel business in the same building. The Supreme Court held that the income from rent cannot be taxed under Section 9 of the 1922 Act, i.e., as income from house property and had to betaxed as income from other sources. It held that whether a particular letting amounts to business has to be decided in the circumstances of each case and each case has to be looked at from a businessman's point of view to find out whether the letting was the doing of a business or the exploitation of his property by an owner. The Supreme Court further observed that the object of the appellant-company no doubt was to acquire land and buildings and to turn the same into account by construction and reconstruction, decoration, furnishing and maintenance of them and by leasing and selling the same and that the activity contemplated in the aforesaid object of the company, assuming it to be a business activity, would not by itself turn the lease into a business activity. In other words, the Supreme Court held that it is the actual activity carried on by the assessee that has to be seen and not the object for which the company or the partnership firm was formed. In S. G. Mercantile Corporation P. Ltd. v. CIT : 83ITR700(SC) , the appellant-company was incorporated for taking over on lease or otherwise to acquire and to hold, improve, lease or otherwise dispose of land, houses and other real and personal property and to deal with the same commercially. Since after the incorporation of the company it took on lease a market place for an initial term of 50 years, undertaking to spend Rs. 5 lakhs for the purpose of remodelling and repairing the structure on the site. It was also given the right to sublet the different portions. The activity of the company during the assessment years 1956-57 to 1958-59 consisted of developing the property and letting out portions thereof as shops, stalls and ground spaces to shopkeepers, stallholders and daily casual market vendors. The Supreme Court held that the entire activity amounted to business. The Supreme Court observed as under (page 706):
'The definition of the word 'business', as given in Section 2(4) and . reproduced above shows its wide amplitude and we agree with Mr. Chagla that it can embrace within itself dealing in real property as also the activity of taking a property on lease, setting up a market thereon and letting out the shops and stalls in the market. The important question which arises in the latter case is whether the acquisition of the property on lease and letting out of the shops and stalls was in the course of investment or whether it was essentially a part of the business and trading operation of the assessee.'
7. The Supreme Court also referred to its own observation reproduced below in Karanpura Development Co. Ltd. v. CIT : 44ITR362(SC) :
'As has been already pointed out in connection with the other two cases where there is a letting out of premises and collection of rents the assessment on property basis may be correct but not so, where the letting or sub-letting is part of a trading operation. The dividing line is difficult to find ; but in the case of a company with its professed objects and the manner of its activities and the nature of its dealings with its property, it ispossible to say on which side the operations fall and to what head the income is to be assigned.
Ownership of property and leasing it out may be done as a part of business, or it may be done as land owner. Whether it is the one or the other must necessarily depend upon the object with which the act is done. It is not that no company can own property and enjoy it as property, whether by itself or by giving the use of it to another on rent. Where this happens, the appropriate head to apply is 'income from property' (Section 9), even though the company may be doing extensive business otherwise. But a company formed with the specific object of acquiring properties not with the view to leasing them as property but to selling them or turning them to account even by way of leasing them out as an integral part of its business, cannot be said to treat them as landowner but'as trader.'
8. On behalf of the respondent, reliance is placed on CIT v. Sri Venkates-warn Talkies : 155ITR73(AP) . In that case the assessee-firm was carrying on cinema business for several years till April, 1969, and had leased out the theatre for a short period up to August, 1971. There was no material on the basis of which it could be said that the assessee intended to stop carrying on business and converting the commercial asset into a capital asset. On these facts the High Court held that the Tribunal was right in holding that the income was assessable under the head 'Business'.
9. In Ramniktal Sunderlal v. CIT : 36ITR464(Bom) a person with his wife and two sons entered into an agreement of partnership whereby they agreed to divide in equal shares the income derived from certain properties and certain leases. The only dealing by the said partnership was recovery of rent of the properties and the expenditure incurred was in respect of maintenance of a motor car and telephone charges. The Income tax Officer declined to grant registration to the firm on the ground that it was not a valid partnership because there was no business. The Bombay High Court held that although there was an agreement and the element of agency and authority was also present, the third necessary element, viz., a business which must be carried on by all or one of the partners was not present and that the assessee could not be said to be carrying on business and was consequently not entitled to registration. In Sudarshan and Co. v. CIT : 89ITR85(KAR) though a partnership deed was executed no business was set up during the accounting period. The Mysore High Court held that the firm was not entitled to registration. Joshi and Varma v. CIT : 119ITR262(Bom) is a converse case in which it was held that after the business ceased the firm cannot be said to carry on business in the subsequent year merely because it was selling materials left over and settling bills. In that case the assessee-firm was specifically formed for the purpose of executing a contract for the construction'of an aqueduct across a river. The construction was completed in March/April, 1961. The assessee's accounting year ended on March 31,1962, relevant to the assessment year 1962-63. In the assessment year 1963-64, certain stock of material was sold and certain other expenses were incurred by the assessee. It was held that there was no business carried on in the assessment year 1963-64. Thus, in order that there may be a valid partnership entitled to registration under the Income-tax Act, 1961, it has to be engaged in business, i.e., trade, occupation or profession. It is in this light that it had to be examined whether this so-called firm Jai Bharat Theatre was engaged in a business.
10. The fact remains that the assessee had no other property than the aforesaid cinema house which has been let out by a lease deed dated November 1, 1975. The copy of the lease deed shows that when the lease agreement was executed the cinema house was still under construction, meaning thereby that the assessee never carried on any business of exhibition of films. Recitals in the lease deed nowhere mentioned that the aforesaid four persons, viz., Ratan Kumar, Lav Kumar, Rewati Raman and Madan Mohan, had entered into any partnership and it was that partnership that was letting out the cinema under construction. The lease deed mentions the aforesaid persons as owners of Jai Bharat Theatre. The said owners were to install furniture, machinery and equipment and thereafter as per Clause (6) of the agreement the lessees were to maintain the asset in perfect order at their cost. The lessees were to enrol themselves with the Motion Pictures Association, Delhi, to enable it to book pictures for screening the picture. The lease was for an initial period of three years. The lessee was to carry out all outside and inside repairs. Thus the lease deed shows that it was a case of letting out an asset and using the same as property and there was no element of business, trade or occupation in that activity. The Tribunal has observed that the overall control on the running of the business and of ensuring that the business is being run in conformity with the terms of the licence and in case of failure of the agreement to enter upon the premises and to run the business had been retained by the firm. We have referred to the terms of the lease deed and we find nothing in the terms thereof which may support the Tribunal's observation that Jai Bharat Theatre, an alleged firm, had overall control over the business. There is no finding that it was Jai Bharat Theatre that obtained a licence to run the said cinema and without a licence the question of taking over the business did not arise. Further, there is nothing in the lease deed which may show that Jai Bharat Theatre could take over the business as such. Admittedly, the assessee did not carry on any cinema exhibition business and even the lease deed did not mention that the lease property was owned by the aforesaid persons as partners of the firm. In our view, therefore, it was a simple case of deriving rental income from immovable property and this activity did not amount to a business. Consequently, there was no valid firm for the purposes of the Income-tax Act which could be granted registration and assessed as such. We, therefore, answer the aforesaid question in the negative, i.e., in favour of the Commissioner and against the assessee-respondent.
11. An authenticated copy of this judgment be transmitted to the Appellate Tribunal in accordance with law.