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TMI Blog2010 (2) TMI 413X X X X Extracts X X X X X X X X Extracts X X X X ..... rs. The partnership deed and the supplementary partnership deed are annexed as annexures B and B1 to the memorandum of the appeal. 3. The assessee furnished the return of income for the assessment year 1996-97 up to 1999-2000 respectively. The Assessing Officer scrutinised the assessment and disallowed the claim of exemption of payment of income under section 4 of the Income-tax Act by not accepting the plea of mutuality of receipt. The Assessing Officer, after examining the case of the assessee, held that the firm and the partners being two distinct taxable entities under the Income-tax Act, the income arising to each is taxable in the hands of the recipient unless specifically exempted under the Act and the question of mutuality of receipt does not arise with regard to the partnership firm's activities as the same was done with a profit motive. Accordingly, for the years 1996-97 and 1997-98, the Assessing Officer assessed the rental income under the head of income from house property and for the years 1998-1999 and 1999-2000, the Assessing Officer passed the orders following the order passed by the Commissioner (Appeals) for the assessment years 1996-97 and 1997-98 rejecting the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re the principle of mutuality would apply and therefore, the Tribunal ought to have granted the benefit of the said principle under section 4 of the Income-tax Act and exempted the income of the firm from taxation. 7. Per contra, counsel for the Revenue has stated that, a perusal of the various terms and conditions of the partnership firm would clearly indicate that this is not a case where the doctrine of mutuality would apply ; that in similar matters, this court has rejected the said principle and has brought the income of such firms to tax and has relied upon the decision of this court in Anupam Enterprises v. ITO [2010] 322 ITR 230 (Karn) in I. T. A. 600 of 2004 decided on July 28, 2008, which judgment is delivered by this Bench, in support of his submission. 8. Having heard the counsel on both sides and on perusal of the matter, we note that the nature of business of the partnership firm is as given in clause (3) of the instrument of partnership dated August 1, 1986, which reads as follows : "The business of the firm shall be that of property developers, traders in general merchandise, commission and real estate agents and also the activity of pooling their resources and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m in a good condition subject to normal wear and tear. D3. Subject to the above two amendments, all the terms and conditions of the partnership dated April 1, 1992, to the extent not in conflict with the terms incorporated in this supplementary instrument of partnership shall mutatis mutandis apply to govern the relationship among the partners." 9. On a reading of the various clauses of the aforesaid agreements, it is clear that the nature of business activities of the assessee-firm is not restricted to the partners only. The assessee is engaged in the business of property development, commission agency and other allied activities which implies dealing with third parties. It also has the intention of pooling resource of the partners and the funds of the partnership firm not immediately required by the firm, can be made use of by the partners. In the supplementary agreement, only with regard to the schedule building put up at King Street, Civil Station, Bangalore, two of the partners are entitled to make use of it and pay rents to the firm. This is only a device to pool in resources for the firm to utilise the same in its other activities. The other clauses of the initial partners ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s money both from members and from non-members for the same consideration, namely, the giving of same or similar facilities to all alike in the course of one and the same business carried on by it, cannot be regarded as a mutual concern. 14. On the other hand, in the case of CIT v. Bankipur Club Ltd. [1997] 226 ITR 97 (SC) followed in Chelmsford Club v. CIT [2000] 243 ITR 89 (SC), the hon'ble Supreme Court summed up that where a number of persons combined together and contributed to the common fund for the financing of some venture or object and in this respect have no dealings or relations with any outside body, then any surplus returned to those persons cannot be regarded in any sense as profit. 15. Hence, where an association or company trades with its members only and the surplus out of the common fund is distributable among the members there is mutuality and the surplus is not assessable to tax as profit, the reason being that there is complete identity between the contributors and the participators for only those members would be entitled to participate in the surplus who have contributed to it as customers. 16. The question whether the doctrine of mutuality applies to a p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest earned on the money advanced to its members. The deposits in the banks were made for earning interest by way of income. The principle that no person can trade with himself does not arise in this case as the monies had been invested by the assessee with the bank to earn income to enable the assessee to discharge its obligations created under the trust. It is clear that income earned from outside agency on interest or securities from the bank would not be covered on the principles of mutuality for claiming exemption from tax and, therefore, it could not be excluded from the arena of taxation. For the reasons stated, it is held that the assessee was not entitled to exemption from tax on the principle of mutuality." (underlining by us) 20. In the case of CIT v. Nataraj Finance Corporation [1988] 169 ITR 732 (AP), the question arose as to whether the assessee which was described as a partnership firm and had been carrying out the business activities of lending out money to its members was not liable for tax on the principle of mutuality. In the said case, after looking into the memorandum of association, the High Court of Andhra Pradesh held that it was an association of pers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve principle is applicable. In the above case, this court quoted with approval the three conditions stipulated by the Judicial Committee in the case of English and Scottish Joint Co-operative Wholesale Society Ltd. v. Commr. of Agrl I. T. [1948] 16 ITR 270 (PC) existence of which establishes the doctrine of mutuality. They are as follows (page 559) : '(1) The identity of the contributors to the fund and the recipients from the fund, (2) the treatment of the company though incorporated as a mere entity for the convenience of the members and policy holders, in other words, as an instrument obedient to their mandate, and (3) the impossibility that contributors should derive profits from contributions made by themselves to a fund which could only be expended or returned to themselves'." 23. A comparison of the facts and circumstances of the above noted three decisions has enabled us to conclude that the facts and circumstances of the instant case is not covered by the decision of the Andhra Pradesh High Court in Nataraj Finance Corporation case [1988] 169 ITR 732 (AP) and we are supported in our view by the principles laid down by the hon'ble Supreme Court and this court referred t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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