1. These appeals arise from the assessments in respect of the assessment years 1975-76 and 1976-77. The assessee is a public charitable trust registered under Section 12A of the Income-tax Act, 1961 ("the Act"). The assessee is in appeal for the assessment year 1975-76 whereas the appeal for the assessment year 1976-77 is preferred by the revenue. In both the appeals the ground relates to the forfeiture of exemption from tax under Section 13(1)(c)(ii) and Section 13(2)(3) read with Section 13(3) of the Act.
2. The assessee-trust was created under the deed of 15-3-1972 executed by Shri C.R. Kesavan Vaidyar, his two sons and wife. The declared objects of the trust are education, medical relief and relief of the poor.
3. The trust is a partner of the firm Beena Enterprises, Coimbatore ("the firm") constituted under a deed of partnership dated 1-4-1972 with three partners. Out of the capital contribution of Rs. 30,000, the share of the assessee is Rs. 5,000. The trust is entitled to 30 per cent of the profits of the firm. The other partners, holding substantial interest in the firm, are the relatives of the authors of the trust.
4. The main source of income of the trust is the share of profits received from the firm. The previous year of the assessee is the year ending 31st March. The income of the trust was exempted under Section 11 of the Act in the assessments up to the assessment year 1974-75. The share of the profits of the trust in the firm for the assessment year 1975-76 as finally determined after audit was Rs. 1,49,782.70. This was intimated by the firm to the trust on 20-7-1975 and the amount was debited to the current account of the firm on 31-3-1975 and brought forward in the account of the subsequent year. The trust received this amount in two instalments of Rs. 35,000 on 26-7-1975 and the balance of Rs. 1,14,782.70 on 29-8-1975. The ITO completed the assessment in respect of the assessment year 1975-76 on 26-11-1977 giving the assessee the exemption under Section 11.
5. The Commissioner considered the assessment order passed by the ITO on 26-11-1977, allowing such exemption under Section 11 for the assessment year 1975-76, as erroneous and prejudicial to the interest of the revenue. He felt that the assessee had violated the provisions of Section 13(1)(c), in view of the fact that the charitable trust was a partner in a firm in which relatives of the managing trustee had substantial interest and in view of the fact that the profits of Rs. 1,49,782.70, which accrued as share income of the assessee for the period ending 31-3-1975, were withdrawn from the firm only on 26-7-1975 and 29-8-1975. Such withdrawal of the profits after the end of the previous year, according to the Commissioner, amounted to the funds of the trust remaining invested, during the previous year, in a concern in which persons referred to in Sub-section (3) of Section 13 had a substantial interest .This is deemed to be used and application of the income of the trust as illustrated under-section 13(2)(3) entailing forfeiture of the exemption under Section 11. Accordingly, the Commissioner, by his order under Section 263 of the Act, dated 17-11-1979, set aside the assessment and remitted the case back to the ITO for fresh disposal.
6. Aggrieved by the order of the Commissioner, the assessee has filed IT Appeal No. 2 (Coch.) of 1980, contending that the provisions of Section 13(1)(c)(3) and Section 13(2)(3) read with Section 13(3) are totally inapplicable in the case and there is no basis for denying the exemption under Section 11 to the assessee.
7. The share of profits of the trust from the firm for the accounting period ended 31-3-1976, relevant for the assessment year 1976-77, was Rs. 94,365.17. This amount was credited to the accounts of the trust as on 31 -3-1976 and the amount was received by the trust from the firm in lump sum on 31-8-1976. The ITO, in completing the assessment in respect of the assessment year 1976-77, noticed that the capital investment of Rs. 5,000 of the assessee in the firm itself exceeded 5 per cent of the total capital of the firm and, in addition, the current account opened with a credit balance of Rs. 1,49,782.70 and closed with a credit balance of Rs. 94,365.17. The ITO was, therefore, of the view that the assessee has allowed its funds to remain invested with the firm for some time in the previous year and has thus violated the provisions of Section 13(1)(c)(ii) and Section 13(2)(A) read with Section 13(3). He held that the trust forfeited the exemption from tax under Section 11 in respect of the entire income, including donations, without being entitled to the immunity provided in Section 13(4). Accordingly, by the assessment order dated 28-7-79, the ITO assessed the entire income of the assessee, denying the exemption for the assessment year 1976-77.
8. The assessee appealed against the assessment. The Commissioner (Appeals) upheld the claim of the assessee for exemption under Section 11 and allowed the appeal. The Commissioner (Appeals) referred to the order of the Commissioner, dated 22-12-1970, in the case of Chandrika Educational Trust, to the effect that the contribution of the share capital in the firm, by the trust, will not be an investment for the purposes of Section 13. He concluded, therefrom, that the concept of "investment" envisaged under Section 13 was different from the word as used in the ordinary parlance and that, merely because certain funds had been suffered to be retained in a partnership or other concern, it would not follow that there was investment. The Commissioner (Appeals), on an independent scrutiny, also found that the contribution of capital or the retention of funds in the partnership firm by the assessee could not be construed as investment. He referred, for the purpose, to the observations of the Supreme Court in Malabar Fisheries Co. v. CIT  120 ITR 49 that a firm is not a distinct legal entity apart from the partners constituting it. The Commissioner (Appeals), after examining the concept of partnership, held that when a partner advances the funds to a firm he is not making an act of investment but is merely conducting business as a partner. He noticed the provision under Clause 4(d) of the trust deed to the effect that the trust shall have power to join partnership ventures with a view to augment the income of the trust and held that the trust had conducted the business in the capacity of a partner without making any investment or attempt to make investment and so there is no contravention of Section 13(1)(c).
9. Regarding the non-withdrawal of profits before the end of the previous year, the Commissioner (Appeals) accepted the contention of the assessee that there was no conscious act or investment; that, owing merely to the delay in finalising accounts and completing the audit, the amount could not be withdrawn. On such a reasoning, the Commissioner (Appeals) allowed the appeal and directed the ITO to recompute the income, allowing legitimate deduction for outgoings, while treating the assessee as a charitable trust entitled to the exemption under Section 11. The revenue being aggrieved by the order of the Commissioner (Appeals), has filed IT Appeal No. 329 (Coch.) of 1980 on the ground that the assessee's income is not exempt under Section 11 and the provisions of Section 13 apply in the case.
10. With a view that the exemption granted under Section 11 may not be employed as a smoke-screen to evade tax, Section 13 makes certain overriding provisions, the contravention of any one of which entails forfeiture of the exemption. Thus, under Section 13(1)(c)(ii). if any part of the income or property of the charitable trust is during the previous year applied or used directly or indirectly for the benefit of persons referred to in Sub-section (3) of Section 13, the exemption is forfeited. Such interested persons mentioned include the authors of the trust and their relatives. Section 13(2) provides that, without prejudice to the generality of the provisions of Sub-clause (ii) of Clause (c) of Sub-section (1), the income or property of the trust shall, for purposes of that clause, be deemed to have been so used or applied in the circumstances enumerated in Clauses (a) to (h). Clause (h) reads thus : (h) if any funds of the trust or institution are, or continue to remain, invested for any period during the previous year (not being a period before the first day of January, 1971) in any concern in which any person referred to in Sub-section (3) has a substantial interest.
Section 13(4) further provides that in case the investment does not exceed 5 per cent of the capital of the concern, the exemption can be denied only in respect of the income arising to the trust from such investment.
11. The question which is common for the two assessment years 1975-76 and 1976-77 is whether the non-withdrawal of the profits by the assessee from the firm before the end of the previous year, is a circumstance falling under Clause (h) of Sub-section (2) of Section 13.
According to the revenue, share income that accrued to the assessee for the previous year remained invested in the firm for some time during the previous year and such income is deemed to have been "used" or "applied" during the previous year for the benefit of the interested persons. It is argued that the trust is not eligible for the exemption if the income is or remains invested in such a concern even for a day during the previous year.
12. The contention of the assessee is that there is no positive act of putting the money or investment at all and the passive act of delayed withdrawal, due to reasons beyond control, is insufficient to attract Section l3(2)(3). According to the assessee's learned counsel, the expression "invested" occurring in this clause postulates a physical, voluntary and positive act of investment and that the undistributed share income earned by the assessee could not have been so invested during the previous year. It was submitted that normally in a firm the income accrues only when the accounts are made up after the audit is completed and a reasonable time is taken for such activities. In the instant case, at no point of time the funds of the trust had been allowed to remain with the firm in order that there could be a laying out of money for interest or profit. It is, therefore, submitted that the trust cannot be deprived of the benefit of exemption under Section 13. We have considered these contentions of either side and we agree with the assessee that the non-withdrawal of the profits from the firm by the assessee, before the end of the previous year, does not amount to investment for the purposes of Clause (h) of Section 13(2). In the case of the firm, the profits do not accrue to the partners from day to day but accrue only on the last day of the previous year as per accounts made up to the date. They merely remain embedded in the transactions of the firm, until the accounts are finalised and the profits determined after audit and share ascertained and made available to the partner. It only remains in the books of the firm until these activities are completed. It is pointed out by the assessee's learned counsel that the accounts of the firm could be finally closed, audit completed of the balance sheets prepared only after 3 or 4 months from the last day of the accounting year. So in the balance sheets of the trust the share of profits of the trust in the firm could be shown only as a debit against the firm. But such amounts are disbursed to the trust soon after the accounts are finalised. The delay is unavoidable in the very nature of the making up of the accounts of the firm and regard being had to the usual course of the events and the time consumed in the various stages. Thus, it can be seen that during the intervening period between the close of the accounting year, in which the share of profits arose, and the date on which the entire share of profit was paid off to the trust by the firm, there had been no conscious, deliberate act or volition on the part of the assessee but only a bare, passive retention of funds. Thus, profits had not been laid out with a view to obtaining a revenue. The term "invest" in the context means laying out of money for interest or profit. Mere deposit of money will not be investment. We do not, therefore, consider that the assessee, on receiving the share income for the periods ending 31-3-1975 and 31-3-1976 after the end of the previous year, caused the funds of the trust to be invested in the firm during the relevant previous year so as to disentitle the assessee to the exemption under Section 11.' Accordingly, we hold that there had been no forfeiture of the exemption on account of the delayed withdrawal of profits in the assessment years 1975-76 and 1976-77. The Commissioner considered the order of the ITO, allowing exemption under Section 11, erroneous on the sole ground that by the delayed withdrawal of profits the assessee contravened the provisions of Section 13(1)(c)(3). This view is clearly wrong and the order of the Commissioner, in revision, for the assessment year 1975-76, on the basis of that finding, is not sustainable. As held in CIT v. Jagadhri Electric Supply & Industrial Co., the Tribunal cannot uphold the revisional order appealed from on grounds other than those taken by the Commissioner in his order. The assessee's appeal has, therefore, to be allowed.
14. The position is not, however, the same for the assessment year 1976-77. The revenue has specifically advanced the contention that, by the contribution of share capital of Rs. 5,000, the funds of the trust are invested in the firm, the funds continued to remain invested during the previous year, and the firm is a concern in which the relatives of the authors have a substantial interest and thus funds of the trust are "used" or "applied" for the benefit of interested persons and the trust thereby forfeited the exemption from tax. It is also submitted that the funds thus invested exceed 5 per cent of the capital of the concern and, therefore, no portion of the income is to be excluded in the computation of the total income for the assessment year 1976-77'.
15. In reply to these contentions, the assessee have maintained that the introduction of capital by the trust in the firm, of which the trust is a partner, is not investment in a "concern". Adopting the reasoning of the Commissioner (Appeals), it is submitted, that it is only a case of utilisation of funds for one's own purposes and the firm not being a legal entity there cannot be any investment by a partner in the firm. It is also said that the firm is not a concern. The share of profits is not an income arising out of the capital contribution but is an income derived as a partner. The general principles under the Partnership Law, as enunciated by the Supreme Court in the case of Addanki Narayanappa v. Bhaskara Krishnappa AIR 1966 SC 1300 and Malabar Fisheries Co. v. CIT (supra), the decision reported in CIT v. R.M.Chidambaram Pillai  106 ITR 292 (SC) and Lindley on Partnership (p. 442) were referred to in support of these contentions.
16. Having considered these arguments, we are not persuaded to accept the contentions of the assessee. The whole concept of a partnership is to embark upon a joint venture and, for that purpose, to bring in as capital money or even property. The trust deed in the case of this assessee empowers the trustees to join partnership ventures to augment the income of the trust. The contribution of capital by the trust in the firm is, thus, a positive act by which money is laid out in business for the purpose of obtaining income or profit. Clause (h) of Sub-section (2) of Section 13 is an illustration of how the income or property of a charitable trust is used or applied for the benefit of interested persons for the purpose of Section 13(1)(c)(ii). The term "invest", occurring in the clause, in the context, ought to be understood in the ordinary popular sense in which it is used by a businessman, meaning, laying out of money with a view to earn income regularly. In clarifying what shall be substantial interest in a concern for purposes of Sub-section (3) of Section 13, Explanation 3 refers to shares in the case of a company and profits in other cases.
It is, therefore, clear that the expression "invested in a concern" in Clause (h) means laid out in such a manner that it, may produce a revenue. The introduction of capital in a partnership firm for purposes of carrying on a business is, thus, an investment of funds in a concern.
17. It is not correct to say that, because the firm has no legal personality of its own apart from the partners constituting it, the capital contribution is not the investment of funds of a partner in a concern and that it is only conducting business as a partner. A partnership firm is different from the members composing it for income-tax purposes and is recognised as a separate assessable unit.
The firm is regarded as having a separate status and existence and as distinct entity apart from the individual partners, who carry on the business of the firm. The dictionary meaning of the word "concern" is a business establishment, firm or enterprise. In the context of Clause (h) the expression includes companies, firms and such other enterprises. That a partnership firm is a concern, for purposes of Clause (h) of Sub-section (2) of Section 13, is also clear from the decision in Sharda Trust v. CIT  127 ITR 236 (Punj. & Har.). In that case, donations by partners of a firm to a, charitable trust remained with the firm for some time. It was held that Section 13(2)(i) applied and the assessee was not entitled to the exemption under Section 11. The question has to be decided independently of the view expressed by the Commissioner in the order dated 22-12-1970 in the case of another charitable trust. In the light of what has been stated above, we hold that the contribution of capital by the assessee-trust in the firm is an investment of the funds of the trust in a concern referred to in Clause (h).
18. The contribution had been made when the firm was constituted in 1972. The provisions of Section 13(2)(h) apply not only in a case where the funds of the trust are invested, during the relevant previous year, in any concern in which the author or other persons referred to in Section 13(3) have substantial interest ; but also in a case where such funds, having been invested in a concern before the beginning of the relevant previous year, continue to remain so invested for any period during that previous year. In Sampath Iyengar's Law of Income-tax, Seventh edition, page 920, it is pointed out that a trust will forfeit exemption from tax if it continues to hold after 31-12-1970 shares in a company in which it as an author or other connected persons are substantially interested, regardless of whether the shares form part of the original corpus of the trust or were subsequently acquired by it.
The same consideration will apply to investment towards the capital of any concern other than a company. In other words, if the trust which has invested its funds in any concern in which its author, etc., are substantially interested, does not divest itself of such investment, it will forfeit the exemption from tax on its entire income if the investment in such concern exceeds 5 per cent of the capital of the concern.
19. It may be said that the capital contribution as a partner by the trust in the firm at the time of the constitution of the firm ceased to be the exclusive property of the trust on the principles stated by the Supreme Court in Addanki Narayanappa v. Bhaskara Knshnappa (supra). The Supreme Court held that whatever may be the character of the property which was brought in by the partner when the partnership was formed, it becomes the property of the firm, the capital would be the trading asset of the partnership and it would cease to be the exclusive property of the person who brought it in. It is also stated that the property would vest in all the partners and in that sense every partner has an interest in the property of the partnership ; even though the person who brought it in would not be able to claim or exercise any exclusive right over that property. The decision laid down that the partners' interest in a running partnership is not specific and is not also confined to a specific item of partnership property but that does not mean that a partner has no interest in an individual asset of the firm. His interest obviously extends to each and every item of partnership asset. What is understood as partnership property is the property in which the partners are jointly interested. The interest of the partner in the partnership assets including the capital contribution by each partner is, therefore, property. During the subsistence of the partnership such property of the partner continues to remain invested in the firm.
20. Accordingly, we hold that the funds of the assessee-trust are invested and continue to remain invested in the firm during the previous year relevant for the assessment year 1976-77. It follows that the property of the charitable trust had been used and applied for the benefit of persons referred to in Sub-section (3) of Section 13 during the relevant previous year. Now, it is necessary to consider whether the assessee is entitled to the immunity provided under Section 13(4).
If funds of the trust invested in the firm do not exceed 5 per cent of the capital of the firm, the exemption shall not be denied to any income other than the income arising to the trust from such investment.
The claim of the assessee is that the contribution of Rs. 5,000 in the firm does not exceed the limit of 5 per cent. A working of the capital employed in the firm is given in the paper book to illustrate the claim. We find, in the partnership deed, the capital of the firm stated as Rs. 30,000. There had been no variation on this behalf. Obviously, the share of Rs. 5,000 contributed by the trust exceeds 5 per cent of that capital. It is, therefore, unnecessary for us to consider the further contention that the share of profits due to the assessee from the firm is not income arising from the investment but is income attributable to the membership in the partnership firm. The exemption under Section 11 is to be denied to the entire income including that arising from such investment. We, therefore, find that the assessee has forfeited the exemption from tax on its entire income in contravention of Section 13(1)(c)(ii) and Section 13(2)(h) read with Section 13(3) for the assessment year 1976-77. The order of the Commissioner (Appeals) allowing such claim is modified.
21. The Commissioner (Appeals) by his order has directed the ITO to recompute the income. In doing so, he has not considered the claim of the assessee that the voluntary contribution received during the accounting period is not the income of the assessee and that it is only a capital receipt. We, therefore, direct the ITO to consider this question also in recomputing the income of the assessee, subject to the directions of the Commissioner (Appeals) other than the one for allowing exemption under Section 11.
22. In the result, the appeal filed by the assessee for the assessment year 1975-76 is allowed. The order of the Commissoner is set aside and that of the ITO is restored. For the assessment year 1976-77 the appeal filed by the revenue is partly allowed and the ITO is directed to recompute the income as stated above.