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TMI Blog2004 (5) TMI 234X X X X Extracts X X X X X X X X Extracts X X X X ..... ies. It was held that interest receipt cannot lose the character of interest merely because it arises to the firm from its partners. The Assessing Officer found that the assessee filed return in the status of firm. Accordingly the stains was taken as 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-objection supporting the order of CIT(A) to the extent of favouring the order to each of them in part. 3. Learned Counsel for assessee Shri K.S. Nagesh, C.A. relying heavily on the decision of Hon'ble A.P. High Court in CIT v. Natraj Finance Corpn. [1988] 169 ITR 732 submitted that where the partnership concern gets income only from its partners, such a firm is a mutual benefit of persons and such firm is not liable to be taxed. From the various decisions it is very clear that in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clear when one reads section 28(iii) of the Income-tax Act. Section 28(iii) reads as 'the following income shall be chargeable to income tax under the head profit and gains of business or profession, income derived by a trade, professional 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. Any other mutual income the legislature is not interested to levy tax. This being the case, the Assessing Officer should not levy tax on the mutual income of the firm i.e., M/s. Govindraj Ganesh Enterprises. 3.2 Shri Nagesh further submitted" that for assessment years 1995-96 and 1996-97, the status of assessee is taken as AOP. The Assessing Officer is not justified in taking the status of AOP for assessment year 1995-96. Learned CIT(A) has rightly treated the status as AOP for assessment year 1996-97. Since the assessee is merely an AOP deriving only from its members the principle of mutuality will apply and interest from its own partners will not be chargeable to tax. 4. Learned D.R. Sri Lakshminarayana ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... they have all been realized 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 D.R. also filed before us the copy of Demand Promissory Note signed by one of the partner 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 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 Corpn. will not apply to the present set of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt a company from making a profit out of its own members. Thus a railway company which earns profits by carrying passengers may also make a profit by carrying its shareholders or a trading company may make a profit out of its trading with its members besides the profit it makes from the general public which deals with it but that profit belongs to the members as shareholders and does not come back to them as persons who had contributed them. Where a company collects money from its members and applies it for their benefit not as shareholders but as persons who put up the fund the company makes no profit. In such cases where there is identity in the character of those who contribute and of those who participate in the surplus, the fact of incorporation may be immaterial and the incorporated company may well be regarded as a mere instrument, a convenient agent for carrying out what the members might more laboriously do for themselves. But it cannot be said that incorporation which brings into being a legal entity separate from its constituent members is to be disregarded always and that the legal entity can never make a profit out of its own members. What kinds of business other than ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urchasers or customers. It comes back to them as shareholders upon their shares. Where all that a company does is to collect money from a certain number of people - it does not matter whether they are called members of the company, or participating policyholders- and apply it for the benefit of those same people, not as shareholders in the company, but as the people who subscribed it, then, as I understand the New York case [1889] 2 Tax Cas. 460, there is no profit. If the people were to do the thing for themselves, there would be no profit, and the fact that they incorporated a legal entity to do it for them makes no difference, there is still no profit. This is not because the entity of the company is to be disregarded, it is because there is no profit, the money being simply collected from those people and handed back to them, not in the character of shareholders, but in the character of those who have paid it. That, as I understand it, is the effect of the decision of the New York Case [1889] 2 Tax Cas. 460. It seems to us that the test applied by the High Court is not sound. It is not consistent with the true decision in Style's case [1889] 2 Tax Cas. 460, as understood by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iation being club or a co-operative housing society which are set up not with an intention of carrying on any business. Thus the ratio laid down therein cannot be made applicable to the present set of facts. When the club is rendering some service to its members, the intention is not to earn the profit but intention is to carry out the object by the club being to foster the relations between the members. Any incidental income arising cannot be considered as business profit. In the case of co-operative housing society, the intention is to foster the relations among the members, to maintain the building. Thus the member contributing for common development and maintenance of society cannot be considered as business income of the society so as to charge the same as taxable income. Thus we hold that those decisions shall not apply to the present set of facts. The decision of Hon'ble A.P. High Court in Natraj Finance Corpn. s case will also not help the case of assessee. In the said case Hon'ble Tribunal has given a finding that the firm has not carried on any business and accordingly there was no firm existing. In the present case we find that there is a valid firm constituted by duly e ..... X X X X Extracts X X X X X X X X Extracts X X X X
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