High Court Karnataka High Court

Prabhashankar Plaza vs The Income Tax Officer on 16 February, 2010

Karnataka High Court
Prabhashankar Plaza vs The Income Tax Officer on 16 February, 2010
Author: K.L.Manjunath & B.V.Nagarathna
 THE HIGH COURT OF KARNAT:*\KA AT B,5\NGAi..0RE
Daied this the 16"' day of February, 2019

Present

93'

THE HON'BLI:' MR JUSTICE K L MANJUNA  .  "'2 

THE H()N’BLE Mrs JUSTICE B v;k?AG;;;’zm’7’HNA’~

Income Tax Appeal / ;2″(}{}5x V

Between:

M/54 P1’abh.:1shunkau’ Phtm
# 11. : Cross. 4*” Block
Basavcshwarulmgztr
Bangakore 560 079 _
Rep by Sri K S G:1r1csh_, 333
S/0 K V S Seny ”

Appellant

(B y Sri S 1’z11″tE1L1Swz1:I;–t. Ac§x;) ‘ ‘. ..

And:

I;1″<§0'1m_: "i":».w'___(.}*i"i"i.j:-r;r
Ward Bmlgztkorsz Rcespolldc :11
( By Sh' S954§a2iCl1;1l2-;§'AdV.}

'Thi$.44"Ahp;3E;L1l .1S v!.3led under S.?,6() A of the En<:mnc-3 Tax Act prayE.ng ti)

~ . ;'s:;£..;1Si£jc the o1'dg:r E_~Jf1he ETAT, Bangalore iiaied 4.2.2()()5, em.

._ ' 'E"ihis }§.p}')e;zl cotningf. 0:1 for Elcaling this' day. 8 V .7\';1gL11';1I1111:1 }.
(i=¢'l_iv<_:1'eé:_i tE'1c" fblfawing:

/3,’.

«£3»

The Assessing Officer. after examining the ease of the 35565568-, held that the

firm and the partners being two distinei taxable entities tinder the lI1C()1T}s3..il'”~;1X

Act. the income 2-arising to each is taxable in the ll£E]lCl.\’ of the reeipj.e_r1′;.iiii’le’ss
specifically exempted under the Act and the qtéestioh of 1iiL1tuz1’i’i%__y 0f*ree’ei,r5t*
does not arise with regard to the partnership 2’ii’1e1;’is aéet.ivitieis es,th_e”s:-:i_n1e’wits

done with a profit motive. Aeet)t’di11gly, fer the 35eai’s’-_l996–‘)7′ ;t11d.Vl99″f.-;93.,

the Assessing Officer assessed the reniul iiaebme L1nde:_v\lEin§g thevil .:’;i’ld»:2i* passed by the
Commissioner of Appea%si’fQ1* theWzissevssihe11.t:7ye2irI l.§):9i6l«97 and 1997-98

rejecting the claim of’ ‘.’fiL44Itt’iAtV1v.lv_l{“},-‘ zind

as:.;esse.d the mutual income of the firm

and rental received fromlii1«»i’meii1 iil1e<l3at'::.1ls't')l' the firm.

Being aggrie"ved 'wiVth'theA~-ordei's of zEfs'SCS$mCn[._ the appellant zissessee

:_l"1led_appe§;ls~ be_ft)1'3__ the (:()iP,.!.11l':§Sl()l1CF of Appeals lbr the assessment year

l.9i9'-6-97 '£1l:'€§ Tl'4)v9'i7'–9:E§vtr3i1'ee again urging the plea of mutuality by relying upon

eertain.'dee'isi0ns <;£'ijvu_E:ous High Courts as well as of the Apes Court". The

CCl}l11'llSSl()£l€§" €)~ft Appeals. howevei; dismissed the appeals of the assessee by

.-w''"' i

t)At{l..t’3’1T.(nlz1’i{‘fl’ 21.5.2(3{l2. As against the said order, the essessee p:”€-fCt’t’Cd

a’tp.;§e21¥s;Vbel’t)1-e the Income Tax Appellate Tribunal. The TFll)Lll1’dl’ by ibllev,»-‘ing

A

/3»

It is submitted on beli21lE’0t”tl1e appellant that iii the instant case. the
§)’cll’Il1Cl’f~§hip deed which is uniiexed dis’ aiiinexure B as weii as the SLlppiC1l}Cl1Ial1′}”
deed, eieztriy indieatte. the nature. of business which is undertaken by the iirm:

that the partners LIFO ail related to one another: that the pL’tl'[l]Cl’S’,’h’&’l’¥”C

contributed to the business oi the firm and the gatefits 21i’isii’ig etit,et7._sL T’

business are divided in the respective shares ai’iio:igst the })dl’ll]{’31″S”‘._’~EVi’1£lIiiiilfity dd

not deal with any outsiders; there is no third p’c1l’:i:sf wliiehisze0n’neete:_i inthe

business of the firm and therei’0re. this iswa fit case where them t5i’i:ie’~ipie:_ tiitf

mittuality would apply and therefore, the Tt=i.biireal ought .te’%i;i:\?e g”r;.tnted the
benefit of the said principle uiiderfiyal of tlir:t”i’rie0_tiie: Tax Act 21’tt{i”t’3}{‘L’il11p[ the

income of the firm from {‘dX&1ll011.

Per cc)itt1’zt. [has stated thait. it §3Cl’LlSdi of the
various terms and e’,_(l’i’1(.i’l[l(‘)l’1S. :;43lii<t':riei"shi;) firni wcmld eleeirly indicate that
this is not 'd.(3CI1'il".C inuttlality would appiy: that in similar
li"-as said principle and has bl'()U§_._{hE the income

of stieli Eirms ad'-.t_i1§t'ziitcS._}has relied upon the decision of this court in M/s

Eirtzzpar-rzi1§izterpr'ise$"§'..-Vs Income Tax Officer in {TA 60!}/2()()4 decided on

i..:':«ii"3,7;2(}08 W'hzit;il':'}tlC'§§'_3l11Ci1¥ is delivered by this Bench. in support of his

8

On ti reading of the various elatrses; oi’ the aforesziicl agreernents. it is

clear that the nature of bLiSllit3S:~§ activities of the assessee lirm is not rext.;’ihC’ted

to the pi11′[I’t’L31’S only. The tissesxee is engagecl in the bLISinCS.\’ ti.Ef_;firt’i;5ei”e_\=

development. commission ugeiiey and other allied activities ¥’y’]}lCi’t”i:i1f5lltfS’

tieztling with third parties. 1%. also has the intentioj.’i oi’ ‘p’t:t.iliiig i’eso_{ti’ee:4.: ot’–t.he

pz11′[I’i€t’S and the funds; of the partitership firm not i’i”Y}IT1:C~dl.1l[Cl_\«’ i’et1it’i:’.ed«. iayjtlttzfi

firm, can be made use of by the partners. *.._[n”~t_l1e SL1{5l)l¢n1E?{1IilSy’iViigl;iéCI11tf[}[‘,
only with regard to the schedule buildirtg pAi.it—–titpet Féitig Stre’et.~C.’.i\:iil: Station,

Bangaiore. two of the [)L’t1’tI]t’31’H are €iI’1t”ll,1Cd”i0′ i:?<1tiix'C i.oi"–§t_ and pay tents to

the firm. This is only at deviee to tpioiol' lItx'1't3S'L')i,'1.lVi'£..'.v:_.'S my the firm to atilise the

S'c11"l"lC in its other ae–tiviti V__–.'_Tl1-:4'ratliie_i' cl_z:t.é§t:t.s of the initial pzirtnersliip

agreetnciit are to be 'i'c::idiiaie<i:"ptu1i't .att{i.p'£i'it«;el oi" the .~;upplen1enttii'y agreeineitt.
So long as there is"n;_.i isonflict. the elt1i':'::.e..s' in no way indicate that the business
of the tissessee firm is re§tt'i_eted to only the partners. Tiiei'el'oi'e.. the doctrine of

in:it.tialit.y. does not in the instant case.

FL1_i7′,l](‘3″1}._ii}§2ellIf);’}l§ii~1}”lCI1[&1i’y agrieeineitt which has been executed on

l l.l995»._ius by y\.e’»’:t’_\,-‘n{:).e~i”A;clI”¥1t3ndI”l1CF1[ so the earlier p£l1’I116l’Sl”lip deed and tliough

.:’:v$i’.«t§ ‘,t=.z,ii’ious tét’.tfri§~ of the supplementary agreeinent are in order to give the

icolot-ir_ oi’_iiiGj:Li:tlity in the business of the p2l1’E:”lt3-1’5;l1ip firm, we find that taking

£4.

‘pa*1’iieipa{(5r__%.

Hence, where am Axs0ei;1i’io11 or Cothpahy l1’d(.lC.\’ with its n’1e.1’11be1’s 01115;

and the surplus out of the eonmton fund is dismbtstztble attntmg the I”‘lf’;L3!1_:1″l3’1;:”V.S:._

{here is mtttttatlity and the >;il1’p]L13~; is not ussessublt-3 to iztx as pr01’i.’.- me’ ‘ft; ~st__.i1’r3′.

being; that there is complete identity between ilk’ 4:011?.’1″i%fitt=tdt’>;. ting! the

partieipzttorx for only those members would be e_.ntit1ec!ztio §>:;1:’it«;i{3*aate’ =ir’:-,_tl1e;V-

surplus who have contribute-d ta it as cL1st()me:!i_$.

The question whether the Doctrine ()fV”\[‘:f'[[LI'[L1E1]i{y aipgnlit-rs’t’Ln e1V’pa1*tieula1’
activity is iargely :1 question of ‘f’ae’t.’__ A’

Therefore. under the [)t>ei'(_it1é or vE\/1tttt1til’it.y.’that E’0H0wi11g three

conditions’ sho’t.11d exist. beikit’-e’ 4″t1_;t4ett.iVv’i’t’–}«’ could be brought. unéer the concept
of mL1[L1alH[yI (E) Thatt no perscfiat e»:1;i”et;.1rn froth himself”; £2) That there is no

ptfofit mo:tvéfitihntttttl {3} Tltat there is no sharing tat’ profits.

A W’1th reg;{:*t1_ttS«t]1e first condition i.e.. no person cam earn froth himself

t1’1e;11is.t11a’t, t’here'”–:z]1Vou.hJhe £1 Ct)1nph:i’t3 identity between the C()1Et1″ihti%(.)l’S and

ff’/’J

In the ca..~;e ofC1zel:ns_f?)r(l Club – 243 ITR 89, the nieaiiings of ‘mutual

concern’ and ‘principle of aiitituaility’ were explained by stating that S.2{Zr=sl_:)i’ot’

the Act shows; that the Act. recognized the principles of 11’1L1tL1ttlit~},..;,1i’1cl __ili.tfs, ii

excluded all business; involving SLlL’.ll principle from the pil[“»{VlQ\?\:”‘-“:).l.’ Act._3

except those memioraed at clause (vii) of the Section. i;~”,.fter i’e’I’citrii”lg. toiiizi;

earlier decision in CIT Vs Royal l/l*’ester:z India Tlllf;’:C;Ii~;,b Ltd _’fp9i53 24

551 (SC). the Supreme Court stated that «n
It is crystal clear that the law recognises the’prihie’i-ple-»o’E” 1nt1tE1é2″.vit.§.,-rekcltidihg
the levy of income tax from the inc’t)irie_t)f–.suci,h ivbukiiieeatto which the above

principle is applicable. in the aboveAcaae,thisi__Court;”t;tipei’¢Itii’*;e’Wliit3–lteS’a–le’ Society Ltd Vs CToininissioner of
Agricultural I T itiv.9<§3Zl i6*lTl{~.27lli.i'§C.)i'iexistei1ce of which establishes the
doctrine of 1]v1L1l_u'dlilyiii"TllCy~ are a§l_'t)ll()'ws (page 559)

('_if_t ii 'Fheiii(le1ii'tity ol"«t._he contribtitors to the fund and the recipients from the

fund'tgliitheit'reatn}eri~:of the company though incorporated as a mere entity for

the c()nifet1iicr1ce ()§"*i'l.LlCA,::lllt3lTEb(3l'S and policy holders, in other wortis. as an

"3

ll3SIl'Llll}CllI.""€)bCfllllCl'¥t"J10 their niaiidete. and in} the iii1P<.)ssibilit.}' that

-« :.L’,’Q’1-1__{1;l”§£”Lll()I’S szltoailil cferive profits from contributions made by [llL’2n1SCl\=’t3I’§ to a

‘.__i”fu_nd«whipcliiieould only be expended or returned to themselves. /5;

_’ no

l{)

A comparison of the facts and circumstances of the above noted J.-htee

decisions hats enabled us to conclude that the liissts Lllld cii”ett1t1sta:’1L’es»o'{7.thei’

éiistaiit case is not covered by the decision of the Andltra Prades-i’i_ l:ilgl1_C0ttil’it..

in Nataraj Finance Corporation ease and we are .supported in our il’i’.’:\;5′ biyvt_l§1e

principles laid down by the Hotfble Supreme Cotirt. aitd this eo–u_rt :tef’et’1’e::_i”t«o

supra. Taking into C0l1Sl(lBi’EtIl0§t the objeCtioiis..ol’ tl1e”asse:«;see.g its”._sot:t?r:c’°of

funds during the relevant years an__d the app.l.ieitbilit’y_» of sz1i’cE.,l’t1nds5tbr the

benefit of its members and keepiiigf’-E111 ntinrii the’Vir1t’e:?est ‘ti-it investments. the

decision of this Court in Ill”! l5122;;’i()y’e€.§’I)ea£t’i_& ii.SLl’flt£’rt1ilI1’1’1’-t'(lIi()11 Relief

Fund is applicable to t.he_fe. zi_i1d~.eitretimstanecsol;tlteiiiistztm case.

In this context. it wotiid_i:l>e 05 Ite’lt:vt11tCt? to rel’er to the decision of this
Court E'(‘3E1Ll€1’Vt”..{.l.l}’y’ us ll’. the ~1.Z§ti'”}C o&’.M/it Amipam iifnterprises. In the sztid ease
zijlsomhe zt’:_:isesse_e.Awe.is it 1’egist’e’i’ed’ipz-trtttersltip firm consisting of four brothers

and theii” respeeit-Eyed iigietises. The nature of the business as indicated in the said

vpVa%rt11ersl’1Aip ‘deed w’;t:~:.”j_to’:ea:’ry on the business oi money lending and trade in

V”-«_l:vi’1l)i’lCS and gilI’I’1«tBI][.\’. tn the said case also the contention i*eg;:1rdii1g

i”‘t3}(Cl”ii§3¥l()t1i”(Mt the principles of mutuality was raised by the said partnersliip

~.s’l’i.1’m’. pliiteirzg reliance on the decision rendered in the ease ot’Cr3nzmissio1:er of

Iinioirae Tax ‘Vs Bankipm’ Club I.-rd and Conm-iissioizer of 1:-icmne Tax Vs

E’/3;

Acccardiitgéy, ‘E})E1()w’i11g.g uur decision in Mfs Amzpam I1-‘F1t€i'[3f£’S£1S;,”:.'{r’¥’Cf
ctmfimt the orciirr passed by the Tribunal and dismiss the appeal ”
the qucstiott against the 1-ip;)CH;il1I assesses . ‘ ‘ 4 K

An