Anupam Enterprises vs ITO

K.L. Manjunath, J.—These two appeals are filed by the Assessee challenging the concurrent findings of the order passed by the assessing officer which is affirmed by the Commissioner (Appeals), Bangalore and further affirmed by the Income Tax Appellate Tribunal, Bangalore Bench, Bangalore, in I.T.A. Nos. 22 and 23 of 2001 for the assessment years 1998-99 and 1999-2000 dated 28-7-2004.

The facts leading to this case are as hereunder:

The Assessee is a registered partnership firm created under the provisions of the Indian Partnership Act, 1932. Copy of the partnership deed is produced as annexure B to the appeals. It consists of four brothers and their respective spouses. Nature of the business of the firm as enumerated in the partnership deed is to carry on the business of money-lending and trading in fabrics and garments. The partners may by unanimous decision carry on any other business also. The firm came into existence on 4-1-1997. The Assessee-firm filed its return of income for the assessment year 1998-99 on 9-7-1998. The case was taken up for scrutiny. Notices under Sections 143(2) and 142(1) of Income Tax Act, 1961, were issued on 18-6-1999 and 27-7-1999. The chartered accountant of the Assessee appeared before the assessing officer. The assessing officer considering the documents produced before him, passed an order of assessment rejecting the claim made by the Assessee, the benefit of the doctrine of mutuality. Accordingly, the Assessee was called upon to pay total tax of Rs. 4,02,196. Similarly, for the assessment year 1999-2000 return was filed on 26-8-1999 and rejecting the contention of the Assessee about the principles of mutuality, called upon the Assessee to pay tax.

Contending that the Assessee has not carried on any business in terms of the partnership deed, loans were advanced to the partners alone and interest received by the firm from its partners cannot be assessed to tax by applying the principles of mutuality, an appeal was filed before the Commissioner (Appeals), which appeal came to be dismissed on the ground that either the case in Commissioner of Income Tax, Bihar Vs. M/s. Bankipur Club Ltd., or the case of CIT v. Natraj Finance Corporation (1988) 169 ITR 732 (AP) have no application to the facts of the case, the Commissioner (Appeals) dismissed the same. Against which the Assessee filed an appeal before the Income Tax Appellate Tribunal, the Tribunal also dismissed the appeal relying upon the judgment in Govindaraj Ganesh Enterprises in I.T.A. Nos. 24 and 54 of 2001 dated 19-5-2004. Challenging the concurrent findings of all the authorities below, the present appeal is filed.

Though three questions of law are framed in the appeal memo, after hearing Counsel for the parties, we are of the opinion that the questions of law raised are to be reframed, accordingly we have reframed the questions of law as hereunder:

Whether the authorities below were justified in not considering the income derived by the Assessee as an income from its partners only and to apply the doctrine of mutuality?

Mr. Parthasarathi, Counsel for the Assessee, contends that all the authorities did not consider that in terms of the partnership deed, the firm did not carry on the business except lending loans to its partners on interest basis and interest received by the Assessee-firm from its own partners cannot be taxed since the principles of mutuality is attracted. To support hisarguments he has relied upon the judgment of the Andhra Pradesh High Court in CIT v. Natraj Finance Corporation (1988) 169 ITR 732. According to us, the facts in the case of Natraj Finance Corporation (1988) 169 ITR 732 (AP) and the facts in this case are entirely different. Even the facts of Bankipur Club Ltd. Commissioner of Income Tax, Bihar Vs. M/s. Bankipur Club Ltd., have no application to the facts of this case. In Commissioner of Income Tax, Bihar Vs. M/s. Bankipur Club Ltd., the benefit was extended only to its members and not for third parties. Therefore, the said decision cannot be made applicable to the facts of this case. Nataraj Finance Corporation was a firm incorporated only to carry on business in money-lending only for the benefit of its partners and the partnership firm was established only to lend loan to its partners and not to any other persons. Therefore, in the said back ground, the Andhra Pradesh High Court has taken a view that the Assessee M/s. Nataraj Finance Corporation is actually not a firm but it is an association of persons created for mutual benefit. But, in the instant case, partnership deed produced before us would reveal that the partnership firm was constituted to do business in garments and money-lending. Money-lending in terms of the object of the firm is not to lend money only to its partners but to any third parties. In any particular year, if the firm has not done any business and has extended loans only to its partners, for a particular assessment year we cannot hold that, the firm is established or created for the benefit of its partners by applying the principles of mutuality. As could be seen from the order of assessment, four brothers have contributed Rs. 24 lakhs each as their capital and their respective spouses have contributed Rs. 1 lakh each as capital. From looking info the objects of the partnership deed, it is clear to us that the firm is not created only for the benefit of its partners by lending money to its partners but created to do other business, viz., money-lending to all third parties and to do garment business. When the object of the firm is to carry on business incidentally in any one of the assessment years without carrying on any business has advanced loan to its partners, we cannot apply the principles of mutuality as it would be contrary to the aim and object of the firm. Therefore, we are of the opinion that all the authorities have rightly rejected the claim of the Assessee to extend the principles of mutuality.

Accordingly, we answer the question of law against the Assessee and dismiss these two appeals.