Leasing of a running cinema business can yield business income, preserving partnership registration and defeating surcharge.

Where a running cinema business is leased with its commercial apparatus, goodwill, licence-linked obligations, inspection rights, insurance duties and a restraint on competing business, the receipts are treated as business income rather than mere property income. On that footing, the assessee remained entitled to renewal of the partnership registration. Because the surcharge claim depended on treating the receipts as income from other sources, that basis failed once the income was characterised as business income, and the special surcharge levy was held unlawful.

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Issues: (i) Whether the income from letting out the cinema concern constituted business income so as to entitle the assessee to renewal of registration of the partnership; (ii) Whether the special surcharge levied on the income was lawful.

Issue (i): Whether the income from letting out the cinema concern constituted business income so as to entitle the assessee to renewal of registration of the partnership.

Analysis: The lease deed and the connected partnership deeds showed that what was let out was not a bare property but a running cinema business with its commercial apparatus, goodwill, licence-related obligations, inspection rights, insurance obligations, and restraint against competing business. On those terms, the assessee retained an interest in the business and exploited its commercial assets through the lessee. The letting was, therefore, not a mere realisation of property income but a mode of business exploitation.

Conclusion: The income constituted business income and the assessee was entitled to renewal of registration.

Issue (ii): Whether the special surcharge levied on the income was lawful.

Analysis: The surcharge dispute depended on the character of the income. Once the income was held to be business income and not income from other sources, the basis for levying special surcharge at the higher rate did not survive.

Conclusion: The levy of special surcharge was not lawful.

Final Conclusion: The reference was answered in favour of the assessee on both questions, and the connected levy based on treatment of the receipts as income from other sources was rejected.

Ratio Decidendi: Where a running business is leased as a commercial undertaking with its essential business assets, goodwill, and operational incidents intact, the income derived from such exploitation remains business income.

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