1. ITR No. 53 of 1969, which is being dealt with in this judgment, concerns assessment year 1961-62. This reference has been heard along with a number of other reference concerning the same assessed for subsequent years. Those reference are ITR Nos. 23, 24, 25, of 1974 concerning which there is a consolidated reference, ITR No. 59 of 1974, ITR No. 62 of 1974 and ITR No. 153 of 1975. The main question is common to all the years, so this judgment will substantially cover the subject matter of the other references also.
2. The assessed is a private limited company incorporated on 20th December, 1955, for carrying on the business of cinema and allied business. The cinema house known as 'Naaz Cinema' was constructed during the accounting years ending 31st October, 1959, on a plot sub-leased from M/s. Raisina Cold Storage and Ice Co. Ltd., New Delhi. Sub-sequently, one Shri Hari Singh Dabra gave an interest-free loan of Rs. 1,00,000 to the assessed to meet the cost of completion of construction of the cinema. This amount was to be refunded in monthly installments. A lease agreement was also entered into with Shri Hari Singh in accordance with which the premises together with equipment were leased for ten years commencing one week after the license necessary for running the cinema was obtained. The monthly rent was Rs. 10,000.
3. The question arose whether the rent received from the said Shri Hari Singh was to be assessed as 'business income' or as 'income from other sources'.
4. For the year 1960-61, the ITO determined a loss of Rs. 43,915, but no carry forward was allowed as the return was filed beyond the statutory period prescribed under s. 22(2A) of the Indian I.T. Act, 1922. In the assessment year 1961-62 (which is the year under consideration), a loss return for Rs. 12,278 was filed. The ITO held that the income of Rs. 10,000 as rent from Shri Hari Singh was to be assessed under the head 'Other sources' ; the assessed's claim for development rebate and carry forward loss was disallowed. On appeal, the AAC held that the letting out was before the business was set up, and, hence, the income from lease was not a business income. The assessed-company filed a further appeal to the Income-tax Appellate Tribunal which determined that the asset was a commercial asset, and, hence, the rental income was a business income within s. 10 of the Indian I.T. Act, 1922. On these facts, the following question of law has been referred to this court :
'Whether, on the facts and in the circumstances of the case, the lease money received by the assessed for letting out 'Naaz Cinema' is assessable under section 10 or section 12 of the Indian I.T. Act, 1922 ?'
5. Mr. Verma, learned counsel for the revenue, urges that this case is more or less covered by a recent decision of this court decided on 19th September, 1980, viz., Addl. CIT v. Rajindra Flour & Allied Industries P. Ltd., delivered in ITR No. 50 of 1974, : 128ITR402(Delhi) , in which most of the case-law on the subject has been referred to.
6. The question we have to determine is whether, in the circumstances of the present case, the income from letting out the cinema has to be treated as a 'business income' or as income from 'other sources'. It was observed in the aforementioned judgment that the factory had been let out because the assessed in that case was unable to run the business of the factory itself. There was an intention to run the factory which, for reasons outside its control, it was unable to do so. It is pointed out that in the present case, there was no impediment in the assessed operating the cinema itself and the fact that it gave the business including the equipment and the building on lease to another showed that there was abandonment of the commercial object. Hence, it is submitted that the leasing of the cinema together with all equipment and fittings, etc., amounted to a mere lease and not a commercial exploitation of the cinema. Taken by itself, the plea raised by learned counsel is a strong one. But there are certain features of this case which distinguish it from other cases. Several reasons have been set out by the Income-tax Appellate Tribunal to come to the conclusion that in this particular case leasing out of the cinema was in the circumstances of the case a commercial exploitation and not a mere letting out. Also, a number of cases not referred to in the aforementioned judgments, viz., Rajindra Flour and Allied Industries P. Ltd. : 128ITR402(Delhi) , have been referred to. Before dealing with the law point, it is appropriate to set out in more detail of the facts which have been summarised above as the facts have some bearing on the answer to the legal question.
7. It may be noted that the board of directors of the assessed-company passed a resolution on 5th May, 1958, accepting the offer of Shri Hari Singh to give an interest-free loan of Rs. 1,00,000 to completed the building. At the same meeting, it was decided that the cinema premises duly furnished and decorated along with restaurant, cycle stand, car park and with all equipment, furniture, etc., should be leased out for a period of ten years with an option to renew for a further period of ten years at a monthly rent of Rs. 10,000. The lease commenced from a date one week after the obtaining of the license necessary for running the cinema. Thus, the loan of Rs. 1,00,000 and the lease was an inter-related transaction. It would appear that probably the assessed-company was short of funds necessary for completion of the building and had entered into the agreement to get the interest-free loan to complete the building and probably the loan was given because Shri Hair Singh wanted to take the cinema building on lease at Rs. 10,000 monthly. It is noteworthy that the cinema license was to be taken by the assessed-company. Only two days after this resolution was passed, the lease was executed on 7th May, 1958. The license for running the cinema was granted on 4th May, 1959, to the assessed-company through Shri Devinder Singh, a director of the company. It is also the common case before us that the cinema license has continued ever since in the name of the assessed-company and not in dealing in the name of the lessee.
8. The Income-tax Appellate Tribunal in dealing with the case of the assessed came to the conclusion that the assessed intended to carry on the cinema business and making profits out of the same. It had constructed the cinema hall and equipped it with all the necessary machinery and had also obtained a license. The lease deed also showed that the cinema was complete and, thereforee, it could be said that the assessed did contemplate carrying on the business. The reasons given by the Tribunal for holding that the lease was a business of the assessed are summed up in para. No. 20 of the order. It is there stated that, firstly, the memorandum and articles of the assessed-company showed that it was entitled to lease out its property and its rights as part of its business. Secondly, the lease deed as well as the license showed that it was the assessed-company which had to obtain the necessary permission under the Cinematograph Act, 1952, for running the cinema. Thirdly, clauses 3, 5, 7, 10, 11, 12 and 14 of the lease deed showed that the assessed intended to use the property for business purposes. These clauses may be shortly referred to for convenience here. Clause 3 shows that the rent of Rs. 10,000 included a license for the use of cycle stand, car parking area and furnished restaurant. Clause 5 shows that the ground rent, insurance charges and other taxes have to be met by the Lessers. Clause 7 that ordinary were and tear has to be paid for by the lessee but replacement of equipment is the responsibility of the assessed-company. Clause 10 shows that no alteration can be made in the building and equipment by the lessee, it can only be done with the written consent of the Lesser. Clause 11 shows that the Lessers have a right to examine the premises as well as the equipment. Clause 12 shows that the lessee has to use the cinema in such a way that the insurance charges for the premises and equipment are not increased, and if any increase is made, the additional premium is to be made over to the Lessers by the lessee. Clause 14 shows that any damage to the equipment has to be met by the lessee.
9. The sum and substance of the lease deed would, thereforee, indicate that the cinema and equipment of the assessed-company is to be utilised by Shri Hari Singh to run the cinema on payment of Rs. 10,000 monthly. The license is to be with the assessed-company. Virtually, the arrangement is to run the cinema through another.
10. In the case of New Savan Sugar and Gur Refining Co. Ltd. v. CIT : 74ITR7(SC) , the Supreme Court held that the leasing out of the factory was abandonment of the commercial project. In the present case, it would appear that the lease coupled with the interest-free loan was an arrangement made by the assessed-company for both financing the setting up to the cinema and the exploitation of the same in a commercial manner. The case is quite distinguished from the case of other business like factories or hotels, wherein the exploitation depends on the manners in which the machinery is used or the business is run. In the case of the cinema, the business consists only in screening the film for a charge. The return from running the cinema comes from the charges paid by the customers for seeing the film. Even if the assessed-company ran the cinema itself, it would have nothing more to do than to screen the film and collect the charges. Generally, in such cases, a fixed weekly or monthly return is paid to the cinema owner. Virtually, the same position is achieved by the assessed-company by letting the same to another on a fixed income basis. This is general way in which cinemas are usually run except when a cinema is given for a short period to various distributors or producers of cinematograph films on return basis. It cannot be said that any special expertise is necessary for operating the cinema machine. All that a cinema requires is a person to run the projector and another person or set of persons to collect the charges from the customers. This can be done by various assessed in different ways. It must, thereforee, appear that running a cinema is somewhat distinct from doing other business like running a factory or commercial establishment where the expertise consists in the manner in which the business is run. In fact, in the case of the cinema, once you have the equipment and you have the seats, all that is required is advertisements and no special expertise seems to be necessary to run the cinema itself. In any case, even if the assessed was to run the cinema, the only expert it might need is the operator of the projector.
11. In Ray Talkies v. CIT : 96ITR499(Patna) , an exactly similar case was decided by the Patna High Court. A large number of cases were referred to and it was held as follows (p. 512) :
'In view of the decisions referred to above and on the facts and circumstances already mentioned, I must hold that what was let out by the assessed by the indenture of lease dated June 27, 1952, was merely an exploitation of the commercial assets by the assessed through the instrumentality of its lessee.'
12. In a similar case, the Bombay High Court in C. P. Pictures Ltd. v. CIT : 46ITR1181(Bom) , held that a cinema theatre used for exploiting motion pictures which was leased out for five years with an option for renewal up to eight years was still being used for business. This judgment was also based on the terms of the lease deed and the nature of the exploitation. It would appear that these judgments would support the assessed in present case.
13. The main judgment against the contention of the assessed and supporting the Commissioner is the Supreme Court's decision in Sultan Brothers P. Ltd. v. CIT : 51ITR353(SC) , in which case a hotel which had been set up by the assessed was let out on a monthly rent. On a consideration of the lease in that particular case, it was held that the intention of the lessee was to enjoy the rent from the building. The assessed was not running the business through the agency of another, but the merely enjoying the rent from the building and furniture. This case is clearly distinguishable by the very fact that under the terms of the present lease, the license for running the cinema is in the name of the assessed-company. It is the assessed which has got the permission to run the cinema. It is for the assessed to decide how to run the cinema, whether by itself or through the agency of another. But, nevertheless, the legal position would be that the cinema is being run by the assessed. Then, it must not be forgotten that the wear and tear of the furniture, equipment, etc., is the were and tear of the assessed-company's property. Under the terms of the lease, the replacement is to be done by the assessed and not by the Lesser except in exceptional cases. thereforee, the assessed is carrying on the business.
14. It would, thereforee, appear that the Tribunal was right in holding that the assessed was using the cinema as a commercial asset, and hence, was assessable under s. 10 and not under s. 12 of the Indian I.T. Act, 1922.
15. Consequently, we would answer the question referred to us by holding that the assessed's income from letting out the cinema is assessable under s. 10 and not under s. 12 of the Indian I.T. Act 1922. The assessed will get it costs. Counsel's fee consolidated in all the references, Rs. 500.
16. Reference answered accordingly.