TMI Blog1987 (8) TMI 76X X X X Extracts X X X X X X X X Extracts X X X X ..... ciple of mutuality is satisfied in the case of the assessee-firm and consequently the income of Rs. 48,310 is not taxable for the assessment year 1977-78 ? " The assessee describes itself as a firm registered for income-tax purposes. It carries on business in lending money, somewhat unusually, to its partners. Although it is not clear from the record, it is clear that this firm has been carrying on this so-called business for quite some time, because there is an indication that the firm was assessed to tax up to and including the assessment year 1976-77 and tax was paid by the former partners. In the previous year relevant to the assessment year 1977-78, some changes occurred in the constitution of the firm, with the result that a deed of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Revenue's contention that the income derived by the assessee in this case is liable to tax. In other words, the claim regarding mutuality has been accepted by the appellate authorities. The Commissioner of Income-tax applied for and obtained this reference under section 256(1) of the Act to consider the question referred to in paragraph (1). We have heard learned counsel for the Revenue and also learned counsel for the assessee. From the facts oil record it is clear that although the assessee has been carrying on the business activity of lending moneys to its members, it described itself as a partnership firm. Looking into the provisions of the partnership deed, which are extracted by the Tribunal in its order, we are satisfied that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eir identity is established. It is this basic principle that satisfies the test of mutuality. We have already referred to the relevant facts. There is nothing on record to show that the assessee has been carrying on the business activity of lending moneys to any persons other than its 19 members. The two other persons referred to, from whom interest was received, are not really persons to whom moneys were advanced. One person is former partner who is paying interest on the moneys owed by him at the time of his retirement and the other person is the Canara Bank with which moneys are kept in safe deposit. It is not possible to say that any business transactions are carried on by the assessee with the former partner or the Canara Bank. There ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a decision of this court in CIT v. Merchant Navy Club [1974] 96 ITR 261. Dealing with an identical question, this court, at page 273, observed : " The contributors to the common fund and the participators in the surplus must be an identical body. That does not mean that each member should contribute to the common fund or that each member should participate in the surplus or get back from the surplus precisely what he has paid. What is required is that the members as a class should contribute to the common fund and participators as a class must be able to participate in the surplus. It is immaterial whether the surplus is paid back to the members in cash or is put to reserve with the club for its development and for providing better amenit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of mutuality does not apply in relation to transactions with shareholders. The aforesaid distinction has been clearly brought out by this court in Merchant Navy Club's case [1974] 96 ITR 261. We have seen in the present case that the members of the association constituting the assessee carry on the activity among themselves. Unless it is possible to state that a person derives income by trading with himself, it is not possible to consider that the income derived from transactions between members inter se possessed the character of income of a non-mutual benefit concern. It is difficult to subscribe to the view canvassed by learned counsel for the Revenue that the 19 members in the case of the assessee should be held to be carrying on busin ..... X X X X Extracts X X X X X X X X Extracts X X X X
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