Deepak R. Shah, A.M. - (1.) THE appeals by assessee and Revenue as well as cross-objections by assessee and Revenue for asst. yr. 1998-99 are arising out of the order of learned CIT(A)-IV, dt. 9th Nov., 2000. Since certain common issues are involved in all these appeals and cross-objections they are disposed of by a common order.
(2.) The facts of the case are that, the assessee is a duly constituted partnership firm. It has written partnership deed and also registered with Registrar of Firms. Though the copy of partnership deed is not furnished, from the assessment order it is seen that nature of business is that of money lending. During the relevant year out of the capital contribution from various partners, the assessee-firm has lent money to the partners and earned interest thereon. The interest received was claimed to be exempt from tax on the principle of mutuality. The AO held that the firm and partners are two different entities/It was held that interest receipt cannot lose the character of interest merely because it arises to the firm from its partners. The AO found that the assessee filed return in the status of firm. Accordingly, the status was taken as a registered firm. For the year under appeal, learned CIT(A) doubted the status of the assessee as AOP but upheld the chargeability of income. The assessee is in appeal against that part of the order whereby principle of mutuality is made not applicable and income by way of interest from partners is held taxable. The Revenue is in appeal against the order of learned CIT(A) treating the assessee as. AOP and not as firm. The assessee and Revenue have filed cross-objections supporting the order of CIT(A) to the extent of favouring the order to each of them in part. Learned counsel for assessee, Sri K.S. Nagesh, CA, relying heavily on the decision of Hon'ble AP High Court in CIT v. Nataraj Finance Corporation (1988) 169 JTR 732 (AP), submitted that where the partnership concern gets income only from its partners, such a firm is for a mutual benefit of persons and such firm is not liable to be taxed. From the various decisions it is very clear that in case of any entity if the income of the entity is derived only from its members and not from public, then such income is not liable for tax. Here the entity may be anything be it a company, firm, society, AOP, association, etc. If the entity were to deal and derive income not only from its members but also from public at large without making any distinction between the members and non-members, then such income is liable for tax. The firm is formed to carry on the activity of pooling their resources and making them available to the partners inter se on mutual fund and association basis so that the income from such activity ensures to the benefit of the partners of the firm for the time being who shall be the contributors and the participants of the fund. (Since the formation of the firm, i.e., Govindraj Ganesh Enterprises, has derived income only from its partners). This income is then shared by the partners in their profit sharing ratio. Therefore, the partners as a class have contributed the income and partners as a class have participated in the surplus/income. Therefore, there is identity in the character of those who participate in the surplus. Therefore, firm is a mutual concern and its income is mutual income. Going by the decisions of various High Courts' as below the mutual income is not liable to tax. Reliance was placed on following decisions : (i) CIT v. Nataraj Finance Corporation (supra) (ii) CIT v. Bankipur Club Ltd. (1997) 226 ITR 97 (SC) (iii) CIT v. Kumbakonam Mutual Benefit Fund Ltd. (1964) 53 ITR 241 (SC) (iv) CIT v. Royal Western India Turf Club Ltd. (1953) 24 JTR 551 (SC) (v) CIT v. Darjeeling Club Ltd. (1985) 163 JTR 676 (Cal) (vi) CIT v. Cochin Oil Merchants Association (1987) 168 ITR 240 (Ker) (vii) CIT v. Madras Race Club (1976) 105 ITR 433 (Mad) (viii) CIT v. Cawnpore Club Ltd. (1984) 146 ITR 181 (All) (ix) CIT v. Apsara Co-op. Housing Society Ltd. (1993) 204 ITR 662 (Cal) (x) CIT v. Adarsh Co-op. Housing Society Ltd. (1995) 213 ITR 677 (Guj) (xi) Sports Club of Gujarat Ltd. v. CIT (1988) 171 ITR 504 (Guj) (xii) CIT v. Northern India Motion Picture Association (1989) 180 ITR 160 (P&H). 3.1 Shri Nagesh submitted that after going through the abovereferred decisions it is clear that mutual income is not liable to income-tax. Even the legislature does not intend to tax a mutual income. This is very clear when one reads Section 28(iii) of the IT Act. Section 28(iii) reads as the following income shall be chargeable to income tax under the head profits and gains of business or profession, income derived by a trade, profession or similar association from specific services performed for its members.' Therefore, it is clear that the legislature intends to tax only mutual income that is derived by rendering specific services to its members by a trade association only. On any other mutual income the legislature is not interested to levy tax. This being the case, the AO should not levy tax on the mutual income of the firm, i.e., M/s Govindaraj Ganesh Enterprises. 3.2 Sri Nagesh further submitted that for asst. yrs. 1995-96 and 1996-97, the status of assessee is taken as AOP. The AO is not justified in taking the status of AOP for asst. yr. 1995-96. Learned CIT(A) has rightly treated the status as AOP for asst. yr. 1996-97. Since the assessee is merely an AOP deriving income only from its members the principle of mutuality will apply and interest from its own partners will not be chargeable to tax.
(3.) LEARNED Departmental Representative, Sri Lakshminarayana, submitted that the firm is a body conceptually distinct from its partners. In keeping partnership accounts, the firm is made debtor to each partner for what the partner brings into the common stock. A partner is made a debtor to the firm for all that he takes out of that stock. The partners are not indebted to each other. The partner is a debtor or creditor only to the firm. The partners are the agents and sureties of the firm, its agent for the transaction of its business, its sureties for the liquidation of its liabilities. The liabilities of the firm are regarded as the liabilities of the partners only in case they cannot be met by the firm and discharged out of its assets. Under the Partnership Act, 1932, property brought by the partners or property acquired by the firm in the course of its business is in law considered the property of the partnership. A partner is entitled upon dissolution to a share in the accretions along with the property brought by him. This is recognised in Sections 14 and 15 of that Act. From a conjoint reading of Sections 14, 15, 22, 29, 30, 48 and 49 of the Partnership Act, 1932, it is clear that regardless of the character of the property brought in by the partners on the constitution of the partnership firm or that which is acquired in the course of business of the partnership, such property shall become the property of the firm and an individual partner shall only be entitled to his share of profits, if any, accruing to the partnership from the realisation of this property, and upon dissolution of the partnership, to a share in the money representing the value of the property. The property of the firm is the "joint estate" of the partners as distinguished from the "separate estate" of partners. The expressions partnership property, partnership stock, partnership assets, Joint stock and joint estate convey that property is owned by all the partners collectively and every partner is entitled, as against all other partners, to have the property of the firm applied in payment of the debts and liabilities of the firm, and to have the surplus distributed among the partners or their representatives according to their rights (Section 46 of that Act). Section 48 of that Act prescribes the mode of settlement of accounts of the firm after dissolution. What is meant by the share of a partner is his proportion of the partnership assets after they have all been realised and converted into money, and all the partnership debts and liabilities have been paid or discharged. After debts are paid the residue remaining of property is to be divided among the partners. No partner has a right to take any portion of the partnership property and asset that property is his property exclusively. No such right can be asserted either during the existence of the partnership or after its dissolution. 4.1 LEARNED Departmental Representative also filed before us the copy of demand promissory note signed by one of the partners for having received loan from the firm and also for payment of interest on such loan. Thus, transaction by the firm with the partner is a commercial transaction and entered in the regular course of its business of financing. Such income cannot be treated as exempt on the principle of mutuality. It was further submitted that since the assessee itself has filed the return in the status of "firm" and since the assessee has carried on business of advancing loans as per the terms of partnership deed, the status to be accepted should be firm and not AOP. The decision relied upon in the case of Natraj Finance Corporation (supra) will not apply to the present set of facts. The other decisions relate to the assessees where mutual associations are not carrying on any business. Thus, those cases will also not apply. The decision of Tribunal, Bangalore, in Smt. Meera Govind, Bangalore v. ITO, Ward 6(3), Bangalore (ITA Nos. 19 and 20/Bang/2001, dt. 6th July, 2001), relied by learned counsel is the case of one of the partners and not the firm itself. The share from the firm is exempt under Section 10(2A). The issue before Hon'ble Tribunal was not whether the firm is a mutual association but whether income of such firm is exempt or not.;