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Petitioner: THE COMMISSIONER OF INCOME TAX ANDHRA PRADESH, HYDERABAD VS Respondent: NALLI VENKATRAMANA
1986 P T D 260
1986 P T D 260
[Andhra Pradesh (India)]
Before Seetharam Reddy and Jagannadha Rao, JJ
THE COMMISSIONER OF INCOME TAX ANDHRA PRADESH, HYDERABAD
Versus
NALLI VENKATRAMANA and others
Case Referred Nos. 241 and 279 of 1980, decided on 18th April, 1983.
Income‑tax‑‑
‑‑‑Firm‑‑Registration‑‑A licensee under Excise Act, and Rules framed thereunder forming partnership with others for carrying on liquor business‑‑Formation of such partnership, held not illegal Registration can be granted to such partnership firm.
A I R 1950 Mad. 441 (FB), A I R 1957 glad. 186, A I R 1950 Mad. 451; AIR 1960 Kar. 276; (1962) 44 I T R 835 (Punj); (1962) 46 IT R 784 (AndhPra.), held impliedly overruled in view of (1959) 37 IT R 271 (SC): 1972 Tax L R 2436 (S C) and A I R 1969 S C 493.
The formation of a partnerships by a licensee partner does not amount to a transfer of the licence. Hence the partnership formed by the licensee under Excise Act and Rules framed thereunder, with others cannot be said to be illegal and therefore, registration to such firm under I.‑T. Act cannot be refused.
The assesses was a firm, consisting of 11 partners constituted by a Partnership deed. One of the partners of the assesses firm was the successful bidder in the auction conducted under the Excise Rules. The assesses‑firm applied for registration and filed an application. The I. T.O. was of the opinion that the partnership entered into for the purpose of conducting a business in arrack or toddy on a licence granted only to one of the partners was void ab initio because such a partnership either involves a transfer of a licence, which Is prohibited under Rules.
Held that there was no transfer of the licence within Rule and relevant law would not be applicable to the non‑licensee partners and the said partnership was not illegal. The partnership was also valid as between partners. As well the partnership agreement could not be said to be violative of public policy within the meaning of Contract Act. Consequently since there was no violation of Rules, the partnership firm was entitled to registration under the Income‑tax Act.
JUDGMENT
JAGANNADHA RAO, J.‑‑These two references at the instance of the Commissioner of Income‑tax, Andhra Pradesh, raise certain common questions of law and can be disposed of together.
2. We shall first advert to the facts mentioned In R.C. No.241/80. The assesses is a firm consisting of 11 partners constituted by a partnership deed, dated 12‑11‑1973, w.e.f. 1‑10‑1973. The partnership was to remain in force for one year up to 30‑9‑1974. One of the partners of the assesses firm was the successful bidder in the auction conducted under the A.P. Excise (Lease of Right to Sell Liquor in Retail) Rules, 1969 (hereinafter called the Rules (which were framed under the A.P. Excise Act 1968 (hereinafter called the Act). As per the preamble of the partnership deed the said successful bidder who obtained the licence to carry on business of buying in bulk and selling in retail, required man‑power to assist hit‑n in the conduct of the said business and also to contribute the required capital. Hence, the partnership firm was constituted. Clause 2 of the partnership deed says that the business of the firm small he the sharing of the profit or loss arising out of the arrack business conducted at Salipet under the licence held by the aforesaid successful bidder. Clause 4 of the said deed mentions the capital that was contributed by the partners. The successful bidder was not required to contribute any capital. Clause 6 of the deed states that the first partner viz., the aforesaid successful bidder will have a share of 1% of the net profits and the remaining 99% of the profit, or loss shall be divided between the partners in the ratio of their capital contribution. It, therefore, follows that the first partner is entitled to one per cent of the profit but was not to suffer any loss because the ratio of his capital contributed under (sic) Cl. 8 is an important clause. It lays down that the first partner, viz., the successful bidder in whose name the licence stood, should lift the arrack and conduct the sale wilt the assistance of the other partners strictly complying with the provisions of Excise Act. It, further says that the other partners shall assist the first, partner in the conduct of the business and the management of the shop. They were also required to assist the first partner in the matter of the business. The first partner was also to supervise the entire business carried on by the assesses‑firm. It may be stated that as many as 32 other partnership firms were formed or the above lines with the lame successful bidder as the first partner in every case but with varying number of other partners. The different partnerships related to different shops.
3. The assesses‑firm applied for registration under section 185, I. T. Act, 1961, and filed an application in form No.11. The I. T.O. took a sworn statement from the successful bidder on 18‑12‑1976 and came to the conclusion that the firm was not a genuine one. He also observed that the assesses firm was formed illegally and so it was void ab initio. He referred to Rule 19(l) of the Rules, which prohibits the transfer of the licence by the licensee to any other person. Then he referred to Rules 19 (2) of the Rules, which states that no licensee can include or exclude any partner except with the previous permission of the licensing authority. He observed that the formation of partnership was no doubt allowed under the rules for doing the aforesaid business but that it was necessary for the partners to disclose their partnership before the licence was issued. Since the existence of the firm was not disclosed to the licensing authority the licence crust be deemed to have been issued only to the successful bidder in whose name the licence stood. He also referred to section 15, Excise Act, which states that no person shall eel: or buy any intoxicant except under the authority and in accordance with the terms and conditions of a licence granted in this behalf. The I.T.O. was of the opinion that the partnership entered Into for the purpose of conducting a business in arrack or toddy on a licence granted only to one of the partners was void ab initio because such a partnership either involves; transfer of licence, which is prohibited under rule 19 or because section 15 was being violated by the unlicensed partners who sell the arrack or toddy.
Hence in either case the assessee a firm ‑was engaged in illegal business and so it is void in the eye of law. In that view of the matter he refused the assessee's claim for registration under section 185, I.‑T. Act.
4. The assessee appealed to the Appellate Assistant Commissioner. He came to the conclusion that the firm was a genuine firm and that the I.‑T.O. should have given a chance to the assessee to correct the discrepancy in the profit sharing ratio mentioned in the partnership deed and the form No. 11 application. , Coming to the legality of the partnership the Appellate Assistant Commissioner held that the rulings relied upon by the Income‑tax Officer did not apply to the facts of the case. He placed reliance among other cases on the judgments of the Supreme Court in Umacharan Shaw and Brothers v. Commissioner I. T. (1959) 37 I.T.R. 271 (S.C.) and Jer & Co. v. Commr., I.T. (1971) 79 I.T.R. 546: (1972 Tax L.R. 2436) (S.C.) and came to the‑conclusion that the formation of a partnership by the licensee was not prohibited, even though the licence was in the name of one of the partners. He also pointed out that in contrast 'to section 15 and R. 19 of the Rules there were other provisions in the A.P. Denatured Spirit and Denatured Spirituous Preparation Rules, 1970. Condition No. 9 under Rule 5(2) of the A.P. Indian Liquor (Storage in Bond) Rules, 1969 and Rules 39 of the A.P. Foreign Liquor and Indian Liquor Rules, 1970 prohibiting the formation of partnership whereas there was no such prohibition in section 15 or R. 19, Arrack and Toddy Rules, 1969, with which we are concerned. He found that the intention of the partners was that the sale and purchase of liquor should always be carried on in a lawful manner i.e., by or on behalf of the licensee alone. He, therefore, held that the firm was not void ab initio and he directed the I.‑T.O. to grant registration to the Assesses‑firm.
5. The Department appealed to the Income‑tax Appellate Tribunal. Various rulings were relied upon the Department as well as the assessee before the Tribunal.
6. The Tribunal after considering the contentions and the relevant case law upheld the order of the Appellate Assistant Commissioner both in regard to the genuineness of the firm as well as the validity of the firm and its entitlement for registration. They then referred to section 15 of the Act and R. 19 of the Rules and came to the conclusion that the licence was converted by the licensee for the use of the partnership, and as such there was no transfer and for that proposition relied upon the judgment of the Supreme Court in the case of Hind Construction Ltd. (1972) 83 I.T.R. 211 (1972 Tax L.R. 1009) (S.C.). The Tribunal also stated that the partnership firm was not a legal or a juristic person and relied upon the judgment of the Supreme Court in Dulichand Lakshminarayan (1956) 29 I.T.R. 535 (A I R 1956 S C 354). They, therefore, held that there was no transfer of the licence in favour of the partners and that the licence became the property of the partnership firm and consequently R. 19(1) was not infringed. Then they referred to various rulings of the High Court and the Supreme Court in regard to the legality of the partnership. They relied upon the decision of the Supreme Court in Jer & Co. (1972 Tax L.R. 2436) and held that Rule 19 (1) is not violated. So far as Rule 19(2) is concerned they stated that the said rule prohibited the induction or the exclusion of the partners in an existing partnership firm which was itself a licensee and, that the said 'rule is not applicable to the facts of the case. They also relied upon the decision of the Supreme Court in Umacharan Shaw 1 Brothers v. Commissioner I.‑T. (1959 37 I T R 271) and came to the conclusion that the formation of a partnership in the case of a licence standing in the name of one of the partners was not illegal. They then referred to S. 15 (1) Excise Act, and referred to cl. (8) of the Partnership Deed, which provided that the licensee partner alone should lift the arrack and conduct the sale. They also pointed out that there has been no action taken by the Excise authorities against the licensee for infringement of the Excise Act or the Rules in view of his taking other partners. Even if the‑ other partners sold the liquor it was obvious that they were, acting as mere agents of the licensee. They agreed with the Appellate Assistant Commissioner that so far as these transactions are concerned there was no prohibition for forming a partnership as in the case of certain other intoxicants for which different rules were made expressly prohibiting the formation of a partnership. They, therefore, held that section 15 of the Act was not violated. They also incidentally referred to the practice in Visakapatnam and its suburbs where there were similar partnership firms and therefore, confirmed the order of the Appellate Assistant, Commissioner:
7. On the above facts the Tribunal framed the following three points for decision of this Court:‑
"(1) Whether on the facts and in 'the circumstances of the case, the Appellate Tribunal was justified in holding that the assesses‑firm is entitled to the benefits of registration?
(2) Whether, on the facts and in the circumstances of the case, the finding of the Appellate Tribunal that the firm had not violated Rule 19(2), Andhra. Pradesh Excise Rules, was correct?
(3) Whether on the facts and in the circumstances of the case, the Appellate Tribunal was justified to hold that there was no transfer when the licence became the property of the partnership‑firm and that Rule 19(1), Andhra Pradesh Excise (Arrack and Toddy Licenses General Conditions) Rules, 1969, was not infringed?"
8. In R.C. 279 of 1980 which arises from Karimnagar District the facts are as follows: The assesses way a partnership firm of six partners carrying on business in Sharab and Sendhi Contracts. The licence was taken in the name of one of the partners Sri Veeranna so far as 8rrack business way concerned. In so far as Sendhi business was concerned a licence was taken in the name of the five outer partners. The assessee applied for registration of the firm for the assessment year 1972‑73. The I. T.O. held that he was not entitled to registration on the ground that he did not intimate the excise authorities that it was the sole concern of a single individual or a group of persons (sic). Therefore, it was not open to claim the licence granted to the individual or some of the partners of the firm, ass belonging to the partnership itself, unless the full constitution of the partnership as shown in the partnership deed was the entity as per the excise records under Rule 19(2) A.7. Excise (arrack and Toddy Licence General Conditions) Rules, 1969. He held that the persons who obtained the licence are not the persons who carried on the business. He, therefore, refused registration.
9. On appeal the Appellate Assistant Commissioner confirmed the order of the I.T.O. and dismissed the appeal preferred by the assesses. The assesses then preferred a second appeal to the Income‑tax Appellate Tribunal which on a consideration of the facts and the law allowed the appeal and directed grant of registration. They pointed out that, the question of illegality of a partnership must be distinguished from illegality of any acts done in the course of its business by the firm or all of its members. They made a distribution between the partnership agreement which though not void at its inception, yet in the course of the business some of the members did something which could be termed illegal. They held that in such a case registration could not be refused on the ground that some illegality was committed during the conduct of the business and subsequent to the formation of the partnership itself. After referring to various cases including the case of Umacharan Shaw and Brothers. (1959‑37 I T R 271) decided by the Supreme Court and the case of Jer a Co. 1972 Tax L R 2436 decided by the Supreme Court they came to the conclusion that rule 19(1) or rule 19(2) o: the Rules was not violated. They also pointed out that punishment under section 36(c) of the Act was only in respect of wilful contraventions. In case where the Excise authority did not choose to cancel the licence, the licensee will be entitled to carry on his business under the licence and that this indicated that the Excise Act did not intend to prohibit such a partnership. They made a distinction between the penal provisions ifs any enactment imposing a punishment once for all in contradistinction to cases where punishment was imposed in a recurring manner. They held that the present cases fell in the first category and an inference of total prohibition cannot be made.
10. On the above basis the Tribunal allowed the appeal of the assessee. The Tribunal framed the following point for consideration in this R. C.:
'"Whether on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the assessee firm is entitled to the benefits of Registration.?
11. The matter was argued by the learned counsel for the department. Sri M.S.N. Murthy as well as Sri Y.V. Anjaneyulu for the assessee and quite a large number of rulings have been cited before us and we shall refer to them a little later. But the sheet anchor of the contention of the learned counsel for the Department has been the decision of the Full Bench of the Madras High Court in Velupadayschi's, case A I R 1950 Mad. 444 at 449: (1950) 1 Mad. L J 315 rat p. 3324. He pointed out that the said ruling has been followed by the Andhra Pradesh High Court in various cases including Basavayya v. Kotayya A I R 1964 Indh. Pra. 145. He relied upon an unreported judgment of the Supreme Court in Civil Appeal No. 30160 decided on 11‑4‑1962 Govind Rao v. Nath Mat 1962 S C (Notes) 215 and tried to distinguish the cases of Umacharan Shaw and Brothers v. Commissioner Income‑tax 1959‑37 I T R 271 and the case of Jer a Company v, Commissioner Income‑tax 1972 Tax L R 2436 decided by the Supreme Court.
12. On the other hand Sri Y.V. Anjaneyulu, the learned counsel for the assessee referred to several rulings contesting the said proposition. He relied very strongly on the decision of the Privy Council in Gordhandes v Champaey Dossa A I R 1921 P C 137 and of the Supreme Court in Umacharan Brother v Commissioner Income-tax Commissioner Income‑tax 1972 Tax L R 2436 and also on several other rulings of the various High Courts.
13. Before adverting to the case law on the various questions, it would be convenient to mention the statutory provisions. Section 15, A.P, Excise Act 1968 reads as follows: ‑
"Section 15.‑‑ Sale or buying of excisable article without licence prohibited. ‑‑
(1) No person shall sell or buy any Intoxicant except under the authority and in accordance with the terms and conditions of a licence granted in this behalf."
Rules 19 (at the relevant time) read as follows: ‑
"Rule 19 Transfer of licences: ‑
(1) The licensee shall not transfer the licence for the sale of arrack or toddy to any other person.
(2) Where a licence is granted jointly no licensee shall Include or exclude any partner except with the previous permission of the licensing authority.
(The subsequent amendment of sub‑clause (2) detailing the procedure for obtaining permission is not being extracted as it does not affect the discussion."
14. From the aforesaid rival contentions the following portions arise for consideration:
(1) "Whether the formation of a partnership by a person having a licence under the A.P. Excise Act amounts to a transfer of the licence in favour of the partner within rule 19(1) of the Rules?
(2) Whether the prohibition mentioned in section 15, A.P. Excise Act, applies to the non‑licensee partners so as to the partnership illegal?
(3) Whether there is any violation of rule 19(2) of the Rules making the partnership illegal?
(4) Whether section 23, Contract Act, invalidated the partnership?
15. The question of public policy has also been adverted to by the learned counsel for the department and we shall deal that question incidentally.
16. Though counsel on both sides have cited a good number of rulings before us, we feel it will be convenient to deal initially with the following cases:‑
(1) Gordhandas Kessowji v. Champsey Dossa A I R 1921 P C 137.
(2) Umcharan Shaw and Brothers v. Commissioner Income‑tax 1959‑37 I T R 271 (SC).
(3) Jer a Company v. Commissioner Income‑tax 1972 Tax L R 2436 (S C).
17. The Privy Council decision in Gordhandas Kessowji v. Champsey Dossa A I R 1921 P C 137 is very brief. It is an appeal against the judgment of the Bombay High Court in Champsey Dossa v. Gordhandas Kessowji A I R 1917 Bom. 250 and, therefore, we shall advert to the facts as narrated in the judgment of the Bombay High Court. The question in that case arose under section 11 Bombay Salt Act (Act 2 of 1890). The licence in that case was for the manufacture of sale. The relevant clause in the licence was as follows:-
"Clause (5).‑‑ That the, the licensee, shall not without the written permission of myself, (i.e. the Collector of Salt Revenue) or of my successor in office for the time being, sublet, sell, mortgage or otherwise alienate whole or in part the privllege granted by this licence of, manufacturing salt on the land within the aforesaid limits. "
The first defendant in that case who held the licence entered into a partnership alongwith the plaintiff. The latter filed a suit for an injunction to restrain the defendants from excluding the plaintiff from their share in the partnership or in the alternative for dissolution. The defendants contended that the partnership was illegal.
The Bombay High Court held as follows:
"The admission of partners to share in the profits cannot be considered as a subletting or alienation of a part of the privilege unless there has been a document directly transferring to the partners or attempting to transfer to the partners a part of the right to manufacture or vend."
The Privy Council confirmed the said judgment and observed as follows:‑
"A licensee of salt manufacture cannot be said to contravene the terms of his licence whereby he is prohibited from alienating the interest, simply because he admits members of his family and others as partners, who however, do not actually take part in the manufacture, nor is there any document directly transferring the right of manufacture to such partners."
The above decision of the Privy Council will make it clear that formation of a partnership does not, amount to a transfer.
18. The next case which may be usefully referred to is the decision of the Supreme Court in Umacharan Shaw and Brothers case 1959‑37 ITR 271. The above case, dealt with section 42(1), Bengal Excise Act, 1911, and arose from the Calcutta High Court. Section 42(1) of the Act reads as follows:‑
"Subject to such restrictions as the State Government may prescribe, the authority who granted any licence permit or pass under this Act may cancel or suspend it:
(a) If it is transferred or sublet by the holder thereof without the permission of the said authority."
In that case there were three brothers who formed a joint family under the Dayabhaga Law and carried on business in the sale of foreign liquor. The licences for the three shops were in the different names of the brothers but not; in the name of the family. One brother died in 1945 and his son was taken as a partner. Another brother died in 1947 and his son also was taken as a partner.
A fresh partnership deed was executed between these two new entrants and the last of the three brothers. The partnership deed executed on 10‑4‑1947 provided that the capital of the partnership was the amount as found to the credit of the parties, that the banking account will be opened in the firm‑name or in other name as agreed upon. For the year 1948‑49 two returns were filed showing the income from the business as having been received in the status of a Hindu undivided family and a third return was filed as a partnership. Simultaneously applications were made for an order recognising the partition and for the registration of the partnership. The I. T.O. rejected the claim for registration of the partnership on the, ground that there was no separate capital account, etc. and held that, the partnership was not genuine. The said finding was confirmed by the Appellate Authority as well as the Tribunal. It was also confirmed by the high Court. In the Supreme Court it was contended for the assessee that the partnership was genuine and should have been granted registration. Their Lordships of the Supreme Court, while dealing with the question of genuineness of the firm, adverted to the legality of the firm and observed as follows:‑
"There was no evidence that the excise licences were transferred or sublet. The three shops, it, appears, were managed separately and their accounts were kept distinct. There was thus nothing which militated against the partnership and it cannot be said that this affected the genuineness of the agreement."
The appeal was allowed and a direction was issued to the authorities to register the partnership. We are of the view that the above observations, even if considered to be Obiter Dicta clearly hold that formation of a partnership by a licensee‑partner does not amount to a transfer of the licence and the said observations are binding on us.
19. The next decision of the Supreme Court in the Jer a Company v. Commissioner Income‑tax 1972 Tax L R 2436 arose from Allahabad and related try a licence obtained under rule 574 U.P. Excise Rules, 1910, in respect of wholesale vending of foreign liquor in Form FL II. Form FL II contains clause (13) which states: "The business covered by this licence shall not be sublet or transferred." The Excise Commissioner was authorised tp cancel or suspend a licence for breach of conditions of the licence. The above provisions would show that there was no positive prohibition against formation of a partnership in clause 13 of the licence in FL II. However, in rule 322 of the Excise Manual there was not only a prohibition against the transfer or subletting but also against formation of a partnership in respect of an excise licence without the prior approval of the Excise Commissioner.
20. Their Lordships of the Supreme Court observed as follows: ‑
"The Commissioner and the High Court had…
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