The principle of mutuality is satisfied when an association of persons confines its money-lending activity only to its members and the interest received by the association is distributed among the members.

Y. V. ANJANEYULU, J.

( 1 ) THIS is a reference under section 256 (1) of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), by the Income-tax Appellate Tribunal in connection with the assessment year 1977-78. The following question of law is referred for the consideration of this court :"whether, on the facts and in the circumstances of the case, 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 of Rs. 48,310 is not taxable for the assessment year 1977-78 ?"

( 2 ) 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 partnership was executed on 15/04/1976, among 19 partners. This firm filed a return declaring an income of Rs. 48,310. It is said to represent interest received on loans advanced by the firm to its partners. It would also appear that this amount included interest received on out-standings due from a former partner and also on moneys deposited in a saving account with the Canara Bank. The record does not indicate that the interest of Rs. 48,310 included interest from any person other than the above. In connection with its income-tax assessment for the assessment year 1977-78, the assessee set up a claim that it is a mutual benefit association or society and its income is derived wholly from members and, consequently, the principle of mutuality is applicable and the income cannot be taxed. The Income-tax Officer rejected this contention on the short ground that in clause 1 (b) of the partnership deed there is a provision to carry on the business in advancing loans to outsiders also and this provision militated against the assessees claim of mutuality. The assessees contention was accordingly rejected and the income returned was subjected to tax. An appeal was filed before the Appellate Assistant Commissioner of income-tax, who upheld the claim of the assessee and allowed the appeal. The Revenue filed an appeal before the Tribunal against the order of the Appellate Assistant Commissioner. The Tribunal upheld the order of the Appellate Assistant Commissioner and rejected the Revenues 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) (at p. 733) supra.

( 3 ) WE have heard learned counsel for the Revenue and also learned counsel for the assessee. From the facts on 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 description by the assessee of itself as a "partnership" is a mis-description. It looks as if the deed of partnership is a memorandum of association in truth and reality. The mere fact that the firm is described as a partnership firm need not necessarily be considered as decisive for determining the character of the assessee before us.

( 4 ) THE provisions of the deed of partnership extracted by the Tribunal in its order show that each partner contributes Rs. 25 per month to the partnership firm. The contributions so made by the partners are accumu

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