1987 (8) TMI 76 - HC - Income Tax

Taxability of income: principle of mutuality in association lending limited to members results in non-taxable mutual receipts

Where an association confines its money-lending activity to its members, interest receipts are treated as mutual receipts distributed among members and ... Taxability of income - Principle of mutuality - Mutual Benefit Association or society - Whether, the Appellate Tribunal is correct in law in holding that the principle of mutuality is satisfied in the case of the assessee-firm and consequently the income is not taxable for the assessment year 1977-78 ? - HELD THAT:- 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 is also no indication from the record to the effect that in the past years, the assessee had carried on the activities of lending moneys to any person other than the members constituting the association. We, therefore, proceed on the assumption that the assessee's claim that it confines its money-lending activity only to its members and to no outsiders, has to be accepted. If that be so, it follows automatically that the interest received by the assessee is distributed among the members forming the association and thus the principle of mutuality governs. 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 business with themselves in order to derive income odd. Thus, we are equally of the view that the appellate authorities below were justified in coming to the conclusion that the assessee is a mutual benefit association and its income is not liable to be taxed. We, accordingly, answer the question in the affirmative, i.e., in favour of the assessee and against the Revenue. Issues Involved:The issue involves the application of the principle of mutuality in determining the taxability of income received by an assessee-firm for the assessment year 1977-78.Summary:The High Court of Andhra Pradesh considered a reference under section 256(1) of the Income-tax Act, 1961 regarding the taxability of income amounting to Rs. 48,310 received by an assessee-firm engaged in lending money to its partners. The firm claimed to be a mutual benefit association, arguing that its income was derived solely from members, thus not subject to tax. The Income-tax Officer initially rejected this claim due to a provision in the partnership deed allowing business with outsiders. However, the Appellate Assistant Commissioner and the Tribunal upheld the firm's claim of mutuality, leading to the reference before the High Court.Upon review, the High Court analyzed the partnership deed and concluded that the firm's characterization as a partnership was a mis-description, more fittingly categorized as an association of persons. The Court emphasized the need for all participants to be contributors to the common fund for mutuality to apply. It found that the firm only engaged in lending to its 19 members, with interest received being distributed among them, meeting the mutuality principle.In response to the Revenue's argument on the lack of complete identity between contributors and participators, the Court cited precedent, including the CIT v. Merchant Navy Club case, to support its position that such complete identity was not required. It distinguished cases involving corporate bodies from the present scenario, where members transacted among themselves, affirming the mutual benefit association status of the firm.Ultimately, the High Court ruled in favor of the assessee, holding that the income was not taxable based on the principle of mutuality. The decision was supported by the precedent set in Addl. CIT v. Secunderabad Club.