1. IT Appeal No. 481 (Bang.) of 1982 is a registration appeal whereas IT Appeal No. 165 (Bang.) of 1983 is quantum appeal. Now let us take the registration appeal in the first instance. The assessee filed Form No. 11A on 23-6-1980 along with a fresh partnership deed, dated 21-10-1979. The assessee claimed that it was a partnership firm which continued right from 1973 onwards. It is its case that it was first formed with six partners under the terms and conditions of the partnership deed, dated 29-10-1973. Under the said partnership deed, one M.A. Lakshmana, who was minor and who was born on 9-5-1956, was admitted to the benefits of partnership and he was given 12.50 per cent share in the partnership. Subsequently, there was a change in the constitution of the firm. As per the subsequent partnership deed, dated 9-5-1974, the erstwhile partner, M.A. Lakshmana, was admitted as a full-fledged partner on his becoming a major. Subsequently, another reconstitution took place under the deed, dated 13-6-1980, which took effect from 21-10-1979. The registration was sought for on the strength of the partnership deed, dated 13-6-1980. In the enquiry for registration, Shri M.A. Lakshmana Heggade, one of the partners, affirmed that the firm was not having any money lending licence to carry on money-lending business. The firm came into existence for the assessment year 1975-76 with an intention to carry on money-lending business. However, due to the death of M.R. Appana Heggade and M.B.Manjappa, the senior partners and also due to the enactment of Debt Relief Act by the State Government the assessee-firm did not do any money-lending business but had invested the capital contributions of all the partners of the firm in the firm M.R. Appana Heggade and M.B.Manjappa (the debtor firm), who had agreed to give interest at the rate of 18 per cent per annum. Accordingly, the entire amount was deposited with the above firm. This so-called affirmation was recorded by the ITO in the docket. The ITO held that the assessee did not carry on any business and the income returned, according to him, represented only interest received on deposits made. Therefore, according to him, it should be assessed as income from other sources as against the claim of the assessee that it should be assessed as income from business. He wanted to treat the status of the assessee as an 'AOP' and addressed a letter dated 25-9-1981 calling upon the assessee to explain as to why registration should not be refused. The assessee submitted its reply dated 19-9-1981, a copy of which is filed at page 12 of the paper compilation. Inter alia, it was submitted that as per clause 3 of the partnership deed, dated 13-6-1980, the business of the firm is that of banking business and during the accounting year in question interest is paid on deposits received and the assessee advanced the said deposits to the debtor firm and the said activity amounted to carrying on business. The amount advanced to the debtor firm does not amount to a mere deposit. During the course of hearing of this appeal, it was submitted before us that Rs. 48,000 and Rs. 1,25,000 were the two amounts lent in cash to the debtor firm and the rest of the amount due from them represented the accumulated interest. The assessee filed its balance sheet as on 7-11-1980, which is relevant for the assessment year in question, namely, 1981-82, it discloses that there is a capital investment of Rs. 21,000, it also discloses that the assessee had borrowed an amount of Rs. 3,10,428.97 from the partners themselves in order to carry on its business. So also, it discloses that an amount of Rs. 96,311.12 was borrowed for the purposes of business from its own creditors to whom they had paid interest. The copy of the balance sheet and the profit and loss account as on 7-11-1980 were furnished at pages 5 and 6, respectively, of the paper compilation filed before us. It is submitted before us that Shri M. Chidambara and Shri M. Ramachandra, who are shown under the head 'Sundry creditors' in the balance sheet were ex-partners. They have lent amounts of Rs. 52,314.49 and Rs. 12,937.60, respectively. Shri M. Mahabaleswara, though a partner of the firm, as karta of his HUF lent an amount of Rs. 29,829.03 in his individual capacity. The amounts under the capital accounts, current accounts and sundry creditors were all lent to the debtor firm. It is the assessee's case that it had derived gross interest of Rs. 1,01,698 and net profit of Rs. 60,519.32. According to the department, no business is carried on by the assessee and even according to the affirmation of one of the partners, the assessee simply deposited all its capital contributions, borrowings, etc., with the debtor firm and, therefore, the assessee did not carry on any business. Mere deposit of monies does not amount to doing money-lending business and on this premise the ITO holds that the assessee earned income only under the head 'Income from other sources' and it should be assessed in the status of an 'AOP'. Further, one of the strong grounds on which the revenue seeks to justify refusal of registration to the assessee-firm was that it did not obtain money-lending licence under the Karnataka Money Lenders Act, 1961. According to the learned departmental representative, under the Karnataka Money Lenders Rules, 1965, a money-lender has to obtain a licence from the requisite authority before carrying on money-lending business. In the absence of any such licence being obtained, the learned departmental representative contended that the money-lending business would become illegal and the activity carried on by the assessee would be opposed to public policy and illegal under Section 23 of the Indian Contract Act, 1872. This argument was countered by the learned Counsel for the assessee by drawing our attention to the wording of Section 11 of the Karnataka Money Lenders Act and the Explanation thereunder, the purport of which is that a money-lender even without obtaining a licence can institute a suit for realisation of the money from his debtor. But the Court can give time for obtaining a licence from the requisite authority and make it a condition to obtain it before numbering the suit. Therefore, in view of the wording of the said section, lending money or doing money-lending business without obtaining licence in the first instance does not amount to carrying on an illegal business and on that ground, the registration to the firm cannot be refused. The learned Counsel for the assessee also admitted that there is distinction between deposit and loan. He admits that if the assessee merely deposits the amount with the debtor firm, it does not amount to the assessee doing any business. But, however, by lending amounts, the assessee should be considered to have given loan to the debtor firm and then the assessee should be deemed to have carried on business. The learned Counsel for the assessee submitted that whether the assessee merely deposited the amount or gave a loan to the debtor firm should be determined taking all the facts and circumstances obtaining on record instead of taking isolated facts and judging each of the circumstances for arriving at the conclusion. He submitted that firstly, there was a partnership deed dated 13-6-1980. Clause 3 of the said partnership deed provided that the business of the assessee is that of a banking business and any other business as may be decided upon by the partners. According to him, this clause bears out the intention of the partners of the firm.
Secondly, the capital contributed by the partners and the borrowings made by the partners for the purposes of the firm would also amply bear out that they were all made with a view to land the money and with a view to earn interest income. The learned Counsel also argued that the purpose of borrowing monies from the creditors and paying interest to them is proof positive that the intention of the assessee is only to earn interest income. The learned Counsel further argued that the so-called affirmation said to have been made by Shri M.A. Lakshmana Heggade before the ITO that due to the death of Shri M.R. Appanna Heggade and M.B. Manjappa, they were not able to carry on any money-lending business and, therefore, they had decided to keep the money in deposit with the debtor firm was wrong. As can be seen even from the partnership deed dated 9-5-1974, Shri M.R. Appanna Heggade and Shri M.B. Manjappa who were fathers of Shri M.A. Lakshmana and Shri M.Ramachandra, respectively, passed away long back. Shri M.R. Appanna Heggade died on 8-2-1972, whereas M.B. Manjappa died on 23-6-1973.
Their estate duty assessment was also filed before us. He further argued that assuming that Shri M.A. Lakshmana Heggade under a wrong impression of law presumed that the assessee could not. carry on money-lending business in the absence of obtaining money-lending licence from the requisite authority under the Karnataka Money-Lenders Act, the said admission which was made under a wrong impression of law does not bind either the assessee or the person who made it. Therefore, even on that ground the refusal of registration to the assessee is not supportable.
2. We heard both the parties wholly and fully. We have considered all the documents and records. We are of the opinion that the assessee should be held to have carried on business for the assessment year 1981-82, whose previous year ended by 7-11-1980 and, therefore, it should have been granted registration under Section 185(1)(a) of the Income-tax Act, 1961 ('the Act'). Firstly, we have to hold that the so-called affirmation of Shri M.A. Lakshmana that due to the death of Shri M.R. Appanna Heggade and Shri M.B. Manjappa, they decided to deposit the amounts with the debtor firm and they did not want to carry on money-lending business is wrong inasmuch as the said persons passed way long prior to 13-6-1980 under which date of the partnership deed there was reconstitution. Further, we have to hold that the assessee lent an amount of Rs. 48,000 and Rs. 1,25,000 in cash to the debtor firm and the rest of the amount due from the debtor firm represented interest accumulated. It is, no doubt, true that there is difference and distinction between deposit and loan. It is also true that if the assessee merely deposits the monies with the debtor firm, it would not amount to carrying on of business. But if it had lent monies, then the activity of the assessee can be called business. Before deciding whether it is deposit or loan, we are of the opinion that the intention of the parties should be gathered taking into consideration all the facts and circumstances of the case and we should not attempt to give our finding taking into consideration only the facts and circumstances obtaining in isolation. In Venkataramaiya's Law Lexicon, Second edn. at p. 653 on the strength of the decision of the Supreme Court in V.E.A.Annamalai Chettiar v. S.V.V.S. Veerappa Chettiar AIR 1956 SC 12 at p.
14, it is stated that whether a transaction is a transaction of loan or deposit does not depend merely on the terms of the document but has got to be judged from the intention of the parties and all the circumstances of the case. The same author at the same page on the strength of the Madras High Court decision in Abdul Hamid Sahib v.Rahmat Bi AIR 1965 Mad. 427 has stated that the terms 'loans' and 'deposits' are not mutually exclusive terms. There are a number of common features between the two. In a sense, a deposit is also a loan with this difference that it is a loan with something more. Both are debts repayable. But when the repayment is to be made furnished the real point of distinction between the two concepts. A loan is repayable the minute it is incurred. But this is not so with a deposit. Either the repayment will depend upon the maturity date fixed therefor, or the terms of the agreement relating to the demand, on making of which the deposit will become repayable. In other words, unlike a loan there is no immediate obligation to repay in the case of a deposit. We have ascertained in this case that the assessee had advanced khata debt to the debtor firm. It is a debt repayable on demand with interest. Simply because the whole money of the assessee together with borrowed money was lent to the debtor firm only and not to several debtors, it does not make the activity of the assessee anytheless business. Suppose a contractor gets a big contract for lakhs of rupees from a Government and he obtains contractual profit, we are still calling this profit as business profit. The case of the assessee is in no way different from the illustration given above. The assessee gets its business income (interest income) from one party. In Venkataramaiya's Law Lexicon, Second edn. at p. 653, already adverted to above, the learned author took the view that in banking, sums paid to the bank for credit in the account of a customer do not constitute a deposit in the sense usually understood but such sum is in reality a loan advanced to the banker.
Having regard to all the above, we are of the opinion that the assessee carried on business of money-lending. Coming next to the question whether the business carried on by the assessee is legal or illegal, we are of the view that it is a legal business even in the absence of obtaining money-lending licence under the Karnataka Money Lenders Act.
Section 11 of the Karnataka Money Lenders Act is appropriate in this connection and it reads as follows: After the expiry of six months from the date on which this Act comes into force, no Court shall pass a decree in favour of a money-lender in any suit to which this Act applies, filed by a money-lender unless, the Court is satisfied that at the time when the loan or any part thereof to which the suit relates was advanced and on the date such suit was filed: the money-lender held a valid licence.
(a) suits in respect of loans advanced by a money-lender before the date on which this Act comes into force; (b) the powers of an official receiver, and administrator or a Court under the provisions of the Karnataka Insolvency Act, 1925, or other corresponding law in force in any area of the State or of a liquidator under the Companies Act, 1956 to realise the property of a moneylender.
Note: Under this section, a money-lender carrying on business of lending money without a valid licence could file a suit for recovery of his money in a court of law and the Court can grant him stay of proceeding for a period of 3 months in order to facilitate him produce a licence.
So, from the above provision, it is clear that a money-lender, who carried on business of money-lending without a valid licence could file a suit for money and after filing such suit, the suit should be stayed for three months within which time the money-lender should be granted opportunity to obtain such licence. Therefore, it is clear that the order of the ITO that the assessee cannot carry on business without obtaining the licence under the Karnataka Money Lenders Act is not wholly correct. So also the argument that in the absence of obtaining licence, the business carried on by the assessee would become per se illegal also does not appear to be correct. On the other hand, the true legal position appears to be that a money-lender can lend monies without obtaining money-lending licence. Lending monies without licence is not illegal. Realisation of money without going to the court of law is also not illegal business. Even in the absence of realisation of debts, a money-lender can validly file a suit and the Court affords him opportunity for three months to obtain the licence. In the face of those enabling provisions, it is very difficult for us to hold that the money-lending business carried on by the assessee would be illegal and the assessee is not entitled to registration because it has carried on such illegal business. We, therefore, set aside the orders of the lower authorities and hold that the assessee is entitled for registration as it did legal business. We direct the ITO to grant registration to the assessee-firm.
3. In view of our finding that the assessee is entitled for registration as a firm under Section 185(1)(c) of the Income-tax Act, we hold in IT Appeal No. 165 (Bang.) of 1983 that the status of the assessee as an 'AOP' cannot be sustained and, therefore, both the assessment orders as well as the AAC's order thereon are hereby set aside and the matter is sent back to the ITO with a direction to determine the taxable income of the assessee-firm for the assessment year 1981-82 after giving due opportunity to the assessee.
4. In the result, IT Appeal No. 481 (Bang.) of 1982 is allowed while IT Appeal No. 165 (Bang.) of 1983 is allowed for statistical purposes.