ORDER
Per Shri A. Satyanarayana, A. M. – This appeal filed by the revenue is against order of the CIT (A) dated 3-8-1987 for the assessment yea 1984-85 for which the previous year ended on 31-3-1984.
2. In the assessment made under section 143(3), the ITO added Rs. 10,903 towards the accrued interest on fixed deposits of Rs. 1,20,000 standing in the names of the partners on behalf of the firm by observing as under :
“Balance sheet deposits of Rs. 1,20,000 on the names of partners. All the four partners had Rs. 30,000 each. In assessment year 1983-84 also total fixed deposits in the names of partners was Rs. 1,20,000. However break up of such deposit was different. For Uttam Kr. Paul there was no such fixed deposit a/c. and for Prasanta Kr. Paul it was for Rs. 60,000 and the other two partners held Rs. 30,000 each. Assessment year 1982-83 reflected the same pattern as in assessment year 1983-84. In assessment year 1981-82 Prasanta Kr. Paul only had fixed deposit a/c and it was Rs. 30,000. This is the first year where the assessee firm had investment in fixed deposit in the mane of a partner. Subsequently the amount of fixed deposit was enhanced and investments stood in the names or other partners also. Pattern of this a/c. shows that it was purely an internal arrangement of the firm to invest in fixed deposit in the name of its partners in the way it appeared to be prudent from time to time. The A/R also filed one clarificatory petition regarding this a/c. This too states “The above fixed deposits are in the names of the partners and the partners and the interest receivable will be shown in the names of individual partners. The total deposit are divided among the four partners having Rs. 30,000 in the name of each partner. As regards the nature of investment, please not that the above deposits were made in the names of partners and not the investments made by the firm before the customers, bank authority etc. As the above interest are earned by the partners there is nothing wrong or contravention to exclude it from the firm Revenue Account”
From the findings noted above and also from the submission of the A/R in the italicised portion in the extract of the clarificatory petition recorded above it is seen that deposits in the names of its partners in the fixed deposit a/c. are actually assessee of the firm. Hence accrued interest on this a/c. would be treated as a revenue receipt in the hands of the assessee-firm.
Aggrieved by the said addition, the assessee filed an appeal an before the CIT (A).
3. Before the CIT (A), the assessees counsel stated that the capital mounting to Rs. 42,472 in the assessment year 1981-82, Rs. 1,31,546 in the assessment year 1982-83, Rs. 1,86,470 in the assessment year 1983-84 and Rs. 2,27,561 in the assessment year 1984-85 while the fixed deposits in the corresponding period were Rs. 30,000 in the assessment year 1981-82, and Rs. 1,20,000 each in the assessment years 1982-83, 1983-84 and 1984-85. The said fixed deposits were in the names of the partners and the interest receivable shown in the names of individual partners. The total deposits were divided amongst four partners having Rs. 30,000 each. Thus, the fixed deposits were not the investments made by the firm. The said deposits were shown in the Balance Sheet to empress the customers and the bank authorities with whom the assessee had to deal with. As the above interest was earned by the partners, the same should not be added again in the from of deemed interest in the income of the assessee firm. The CIT (A) deleted the addition of Rs. 10,093 by observing as under :
“I am of the opinion that the ITO never tried to find out whether these fixed deposits were utilised by the firm in the course of its business. There was nothing on record to show that the firm used these fixed deposits in addition to the sufficient capital of the individual partners. Since the partners had more capital employed in the firm, i. e. the fixed deposits, it was difficult to believe that these fixed deposits were used by the appellant-firm. Since the commercial exploitation of the fixed deposit was not recorded by the ITO, the addition in the form of accrued interest appears to be unjustified to me. Therefore, the addition in the form of accrued interest appears to be unjustified to me. Therefore, the addition of Rs. 10,903 is deleted.”
Against the said deletion the revenue filed the present appeal before the Tribunal.
4. The departmental representative contended that the assessee followed mercantile system of accounting, that debit was not given in the accounts of the partners for making fixed deposits of Rs. 30,000 each in the bank in the names of the four partners, that the fixed deposit of Rs. 1,20,000 constituted an asset of the firm and, accordingly, the interest has rightly been included in the income of the firm by the ITO. The CIT (A) erred in deleting the addition of Rs. 10,903 on account of accrued interest on fixed deposits standing in the names of the partners on behalf of the firm.
5. The assessees counsel filed a copy of order of the Tribunal dated 4-7-1989 in the assessees case for the assessment year 1981-92, 1982-83 and 1983-84. He urged that the interest amount of Rs. 10,903 is not includible in the income of the firm as per said Tribunals order and that the fixed deposit of Rs. 1,20,000 was in the Balance Sheet of the firm to boost up the image of the assessee-firm.
6. We have considered the rival submissions. At the time of hearing of the appeal, we asked the assessees counsel whether debits were given in the accounts of the partners in whose names the fixed deposits were made. The assessees counsel replied that debits were not made in the respective partners accounts for the fixed deposits made in the Bank. The fixed deposits were made by the assessee firm by using its own funds. According to the Indian Partnership Act, 1932, section 14 reads as under :
“14. The property of the firm. – Subject to contract between the partners, the property of the firm includes all property and rights and interests in property originally brought into the stock of the firm, or acquired, by purchase or otherwise, by or for the firm, or for the purposes and in the course of the course of business of the firm, and includes also the goodwill of the business.
Unless the contrary intention appears, property and rights and interests in property acquired with money belonging to the firm are deemed to have been acquired for the firm”.
From the above section, it is clear that unless the contrary intention appears, property bought with money belonging to the firm is deemed to have been bought on account of the firm. Then it becomes property of the firm. As an ordinary rule, property bought with money belonging to the firm is deemed to have been bought on account of the firm. (Appaya v. Subrao ILR [1938] (Bom.) 102). For instance, the money payable under a Life Insurance Policy of a partner effected with partnership funds has been held to be the partnership property (Adarji Mancherji, In re [1931] 55 (Bom.) 795). In this case, the fixed deposits were made in the bank by utilising the money of the assessee firm. The ultimate test determining whether the property is the intention of the parties or the agreement between the partners. In the absence of such an agreement, the property would be deemed to be the property of the firm, i. e. partnership property, the following case :
(a) if it is originally brought into the stock of the firm; or
(b) if it is acquired, by purchase or otherwise by or for the firm; or
(c) if it is acquired, by purchase or otherwise, for the purpose and in the course of the business of the firm; or
(d) in the absence of a contrary intention, if it is acquired with money belonging to the firm.”
In the present case, the assessees counsel has not brought any material on record as to the intention of the partners or the agreement between the partners that the fixed deposits should be treated as the individual properties of partners. In such a situation, the fixed deposits have to be taken as the properties of the firm and the interest thereon has to be assessed in the hands of the firm. The ITO was wholly justified in his action in bringing Rs. 10,903 to tax in the hands of the assessee-firm. The decision the Tribunal dated 4-7-1989 in the assessees case for the assessment years 1981-82, 1982-83 and 1983-84 is not helpful to the assessee. In those years, the ITO made the additions towards the interest on the fixed deposits by resorting to orders u/s 154. In the assessees appeals before the CIT (A), he deleted the additions. Thereupon the revenue filed appeals before the Tribunal, wherein the Tribunal held that the issue involved was a debatable issue and so the additions cannot be made through orders u/s 154. But in the assessment year under consideration, the addition has been made in the regular assessment made u/s 143(3).
7. In the result, the appeal is allowed.