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. Aggrieved by the said assessment order, the assessee went before the AAC in appeal but outthought success. Thereafter, the assessee appealed to the Tribunal. The Tribunal found the following facts : The firm was running the cinema theatre originally. Later, the theatre was leased out and the lease amount was assessed in the hands of the firm. The theatre was the property of the firm. However, by virtue of the dissolution deed dated April 1, 1974, it ceased to be the property of the firm and it belonged to nine individuals as shares were given to them as members of the respective family because of the decision by the panchayatdars. This shows that after the dissolution, the three partners did not combine themselves for any purpose. Though they were in receipt of the lease income from the theatre, there was no agreement to associate themselves again for earning any income after they agreed to dissolve. The receipt of lease amount would not constitute a business activity. After the dissolution, the erstwhile partners were co-owners and it is only as co-owners they sold the property. The ITO assessed and the rental receipts not as a business income but under the head 'Other sources'. On these facts, the Tribunal held that the material on record did not justify a conclusion that there was an association of persons from April 1, 1974, for the purpose of earning any business income. In that view, the Tribunal allowed the assessee's appeal. Since the Tribunal set aside the assessment on the ground that the assessment cannot be made as an association of persons, the other questions, viz., whether s. 176 applies and whether s. 41(2) profits are assessable in the hands of the association of persons, were not gone into. Aggrieved by the decision of the Tribunal, the Revenue has sought and obtained a reference to this court on the following question :
'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that M/s. Hussain Sahib, K. C. Sampth Kumar and K. C. Rajagopal did not constitute an association of persons for the assessment year 1975-76 and, accordingly, was not liable to tax as an association of persons ?'
4. In this case, before the year 1970-71, the assessee was assessed as a registered firm. However, in the year 1970-71, registration was refused and the firm was being assessed thereafter as an association of persons. As already stated, the theatre was sold on October 10, 1974, and the assessment relates to the period April 1, 1974, to October 14, 1974, falling within the assessment year 1975-76. Though the firm was dissolved on April 1, 1974, the movable properties of the firm were sold only on July 24, 1974, and the theatre was sold only on October 10, 1974, when the sale deed was actually registered. It is not in dispute that notwithstanding the dissolution of the firm on April 1, 1974, the partners were in receipt of the lease income from the theatre till October 10, 1974, when the theatre was sold by the three quondam partners executing a sale deed. For the purpose of registration of the sale deed, the quondam partners applied for income-tax clearance certificate under s. 230A of the Act on August 1, 1974. Though in pursuance of a panchayat, the cinema theatre is said to have been allotment to nine persons, persons other than the original partners have not been shown to have received the lease income from the theatre, nor did they join in the execution of the sale deed. Though there is a recital in the dissolution deed dated July 14, 1974, that the theatre has ceased to be the property of the firm and it had been handed over to the respective members of the family of the partners as a result of the decision of the panchayatdars, the members of the family of the family of the three partners have not shown to the have exercised any right of ownership over the theatre. The Tribunal has very much relied on the recital in the deed of dissolution that the cinema theatre has been handed over to the respective members of the family of the three partners in accordance with the decision of the panchayatdars. There is actually no other document conveying title to the members of the family of the partners. It is true, in the course of dissolution, the immovable property belonging to the firm could be distributed as amongest the partners without a registered document. But where the property is said to be divided in the course of dissolution not only between the partners but between the partners and others, a registered document is necessary to confer title on others who are not partners of the firm. Therefore, it should be taken that except the partners, the family members of the respective partners did not acquire any legal right or title to any share in the theatre. Even otherwise, notwithstanding the recital in the deed of dissolution that the property has been handed over to the members of the respective families, the quondam partners have been in receipt of the lease income from the theatre and they have ultimately sold the property by executing a sale deed in which the other members of the family of the quondam partners had not been added as vendors.
5. On a due consideration of the matter and on the fact referred to above, we are not inclined to agree with the conclusion arrived at by the Tribunal that there has been no association of persons. According to the Tribunal, there is no evidence of any agreement to associate for earning income after they agreed to dissolve the firm and the mere receipt of lease amount will not constitute a 'business activity'. It is no doubt true the question whether the lease income in received as members of an association of persons or as co-owners has to be decided on the facts of each case. It is also true that there is no specific document between the quondam partners to join together in a business activity after the dissolution. But the fact remains that both before and after the dissolution deed came into existence, the quondam partners had received the lease amounts in pursuance of the lease days under which the theatre was leased. The lease deed contemplates several obligations on the part of the lessors and, therefore, the quodam partners should be taken to have acted as an association of persons irrespective of the terms of the dissolution deed. A perusal of the order of the Tribunal indicates that the Tribunal was of the view that the assessee has been treated as an association of persons only during the year of assessment and not before. It is in this view, the Tribunal says that there is no agreement to join together to earn business income after the deed of dissolution. However, we find that from the assessment year 1970-71, the assessee has been assessed as an association of persons and that the same association of persons continued to exist even in the year of assessment, i.e., 1975-76, when the theatre came to be sold by the same persons who constituted an association of persons in the earlier years. Thus, after 1970-71, the lease income was treated as the business income of the association of persons constituted by the partners of the firm and, therefore, they should be assessed in the same status till the theatre was sold. One of the reasons given by the Tribunal is that the property is not owned by the quondam partners alone but is also owneed by the other members of the family of the respective partners and, therefore, the lease income from the theatre could not be assessed in the hands of the three partners treating them as an association of persons. But as already stated, except the recital in the deed of dissolution, there is no other document conferring title to any portion of the theatre to the respective members of the family of the partners. There is also an additional factor that notwithstanding the recital in the dissolution deed, the quondam partners were in receipt of the lease income and they had in fact sold the property. If really the property has been given not only to the partners but also to the other members of their respective families, then all the other members of the family should have joined in the execution of the sale deed. The fact that only the three quondam partners sold the property indicates that the legal title vested only in them. Thus, on the peculiar facts of this case where the lease income from the theatre was all along treated as business income of the three partners constituting an association of persons from the year 1970-71 and the fact that the assessee has not questioned or disputed suture status, that during the assessment year in question they are in receipt of the same lease income and that the members constituting an association of persons have in fact sold the property during the assessment year, the conclusion is inescapable that the assessee is an association of persons as they have joined together to earn income which has to be treated as business income.
6. Reference has been made to a decision of this court in CIT v. Deghamwala Estates : 109ITR416(Mad) . In that case, after the death of the Mohammedan intestate, three of his heirs released their rights, title and interest in the properties left by him in favour of two remaining heirs pursuant to which the two persons became entitled to a half share each in the properties which included a half share in a land in Baroda State. The two heirs sold the property which came to their share and along with the other owners sold the property in Baroda State as well. The ITO assessed the capital gains arising by reason of the sale in the hands of the two persons as an association of persons. The AAC, on appeal, held that the capital gains could not be assessed in the hands of the two persons as an association of persons, but it had to be assessed in the hands of half each in their individual hands. The Tribunal agreed with the view on the ground that there was no material to show that in effecting the sale the two persons did anything more than what an ordinary owner of property would do to convey title and there was no material to prove that there was a concerted action with a view to earn capital gains. On a reference to this court, it was held that under the Mohammadan law, the two persons succeeded to the property of the deceased father in definite shares and they because tenants-in-common in respect of their respective shares and, hence, they were co-owners in respect of the property and did not constitute an association of persons and that on the facts of that case there was no concerted action with a view to earn capital gains on the part of the two individuals concerned. We do not see how this decision will help the assessee in this case. There, the two individuals came to acquire specific shares in a property by inheritance and thereafter the property was sold by them as a group of persons owning the property and not as an association of persons. Mere co-ownership of the property by a group of persons will not automatically lead to an intention to earn business income in common. In that case, a group of persons owned a property which was not a business asset and, therefore, it was held that there was no concerted action between the members of the group to earn business income. But here, admittedly, the theatre is a business asset and it was held in common and leased out in common and it was sold in common. When, as in this case, a business asset is owned, leased out and disposed of the in common by a group of individuals, an intention to earn business income by the use of the business asset could easily be inferred.
7. Reference also has been made to a decision in CIT v. Deghamwala Estates : 121ITR684(Mad) , 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.
8. In this view of the matter, we have to answer the question in the negative and against the assessee.