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Chandaji Sukhraj And Company v. Lal And Co. (Tobacco Trading Company)
Factual and Procedural Background
The dispute involves two firms trading in tobacco at Guntur. The plaintiff-firm sought (a) a settlement of accounts of a partnership formed on 21-4-1951 with the first defendant firm for one year, or alternatively (b) dissolution of the partnership and settlement of accounts. The partnership's business was purchasing tobacco chura from the I.L.T.D. Company. The first defendant (Lal and Co.) had entered into a contract with I.L.T.D. on 20-4-1951 and held a government licence for dealing in tobacco; the partnership was formed the next day, 21-4-1951.
Under the partnership terms the plaintiff was to finance the venture except Rs. 10,000 to be contributed by the first defendant; profits were to be shared equally. The plaintiff alleged advances of Rs. 1,000 at formation and Rs. 7,125 subsequently and that the business yielded profits.
The first defendant and its two partners admitted formation and terms but pleaded that the plaintiff failed to furnish required funds when Rs. 20,000 was needed, leading to refund of the first defendant's capital and settlement of accounts. They also pleaded that the partnership was unregistered and illegal because the plaintiff had not obtained a licence under the Central Excises and Salt Act, 1944, and therefore claimed the plaintiff cannot obtain relief in court.
The trial court held the partnership illegal for lack of a fresh licence after formation and dismissed the suit without deciding other issues. The plaintiff appealed.
Legal Issues Presented
- Whether the plaintiff's participation in the tobacco business as a partner of a licensed dealer is illegal and whether rights arising out of that partnership contract are unenforceable in a Court of law.
Arguments of the Parties
Plaintiff's contentions (as presented in the opinion)
- The plaintiff alleged formation of the partnership on 21-4-1951 and that it financed the joint venture (advancing specified sums) and that the business yielded profits.
- The plaintiff sought accounts and/or dissolution and settlement of partnership accounts.
Defendants' arguments (as presented in the opinion)
- The defendants accepted the partnership formation and terms but said the plaintiff failed to contribute promised funds, leading to refunding of the first defendant's capital and settlement.
- They argued the partnership was illegal because the plaintiff did not obtain a licence under the Central Excises and Salt Act, 1944, thus invoking Section 6 (prohibition subject to licence) and penalties under Section 9.
- They contended the partnership or the act of taking in the plaintiff amounted to a transfer of the licence (or of the business) forbidden by Rule 178(2) (no licence shall be sold or transferred) and relied on precedents holding similar partnerships void in the context of other excise/abkari statutes.
- They pressed that Section 23 of the Indian Contract Act (agreements forbidden by law) rendered the partnership unenforceable.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Velu v. Sivasooriam, ILR (1950) Mad 987 : AIR 1950 Mad 444 (Full Bench) | Held that a partnership formed to conduct arrack/toddy business under a licence granted to only one person is void ab initio because it involves either (a) transfer of the licence (prohibited) or (b) breach of Abkari Act s.15 by the unlicensed partner selling without a licence. | The court declined to extend the Full Bench's principle to partnerships for trading in tobacco under the Central Excises and Salt Rules because Rule 178 (Central Excise Rules) contains special provisions (sub-rules 4 and 5) treating partnership differently from an absolute transfer. |
| Padmanabhan v. Badri Nath, 10 Ind Cas 126 : 21 Mad LJ 425 | Ratio that a partnership could amount to a transfer of the right of sale under a licence under the Opium Act; partnership was treated as transfer where licence clause prohibited sale/transfer/appointment of agents without permission. | The court stated it would not extend that ratio to the present case because Central Excise Rules contain express provisions for partnership (Rule 178(4) and (5)) that differ from the Opium Act's rules. |
| Champsey Dossa v. Gordhandas Kessowji, 40 Ind Cas 805 : AIR 1917 Bom 250 | Considered Bombay Salt Act provisions prohibiting subletting/alienation of the privilege; licence clause reiterated prohibition. | The Bombay High Court held that admitting family members or others to a share of profits was not sub-letting/alienation unless there was a document transferring part of the right to manufacture or vend. The present court relied on this approach to note absence of any document transferring the licence here. |
| Gordhandas Kessowji v. Champsey Dossa, AIR 1921 PC 137 (Privy Council) | Confirmation of the Bombay High Court's view that sharing profits without a document transferring rights is not a prohibited transfer. | The court cited the Privy Council confirmation to support the proposition that mere admission of partners to share profits does not necessarily amount to an illegal transfer of the licence. |
| Kalyanasundaram Pillai v. Chockalingam Chettiar, (1951) 2 Mad LJ 459 : AIR 1952 Mad 293 | Dealt with compulsory sale in execution and interpretation of Rules (102–104) of similar rules; Rule 104 provided that a licence shall be transferable and registrable. | The court cited this decision to illustrate that, where the rule-book expressly allows transfer or contains different wording, the result differs; it used the case to support reading sub-rules of Rule 178 cumulatively to infer permitted categories. |
| Marudamuthu Pillai v. Rangasami Mooppan, ILR 24 Mad 401 | Principle (approved by Madras Full Bench) that allowing an unlicensed partner to be part of the business could enable evasion of liabilities intended by law to be cast on persons carrying on abkari business. | The court considered this principle but held the difficulty it identifies is removed by Rule 178(4), which subjects incoming partners to the conditions of the licence, thereby preventing evasion. |
| Gopalakrishnayya v. Hanumayya, (Decision of this Court dated 2-12-55 in S.A No. 675 of 1952) | Interpreted Rule 178(4) as not prohibiting a licensee from entering into a partnership; emphasized that partners are bound by licence conditions and the rule therefore does not permit evasion of obligations. | The court relied on this decision and quotation from it to support the interpretation that Rule 178(4) protects the State's interest while allowing partnerships and that formation of partnership does not amount to forbidden transfer when partners are bound by licence conditions. |
| Govindaraj v. Kandaswami Gounder, ILR (1957) Mad 1245 : AIR 1957 Mad 186 | Under the same Act and Rules, held that a licensee's formation of a partnership without reporting and amending licence could be a contravention, precluding suits for accounts between the parties. | The court distinguished this decision: there the suit was by the licensee who had failed to perform the reporting duty (and thus could be proceeded against for violating Rule 178(4)); here the plaintiff is the incoming partner who had no duty to report and should not be deprived of relief for the licensee's default. |
Court's Reasoning and Analysis
The court's analysis proceeded stepwise and focused primarily on statutory interpretation of the Central Excises and Salt Act, 1944 (the Act) and the associated Rules (notably Rule 178) as they bear on partnerships where one partner holds a licence.
1) Statutory background and defendants' contention:
- The defendants relied on Section 6 of the Act (operations subject to licence) and Section 9 (penalties for contravention), arguing that because the plaintiff did not obtain a licence the partnership's object was "forbidden by law" under Section 23 of the Indian Contract Act.
- They further relied on Rule 174 and Rule 178(2) (which states "no licence shall be sold or transferred") to argue that taking in a partner amounted to an unlawful transfer.
2) Close reading of Rule 178 and its sub-rules:
- The court set out Rule 178 in full and emphasized sub-rule (4): if the holder of a licence enters into a partnership in regard to the business covered by the licence he must report the fact within thirty days and get the licence suitably amended, and that "the partner as well as the original holder of the licence shall be bound by the conditions of that licence."
- From Rule 178 the court derived that an incoming partner need not take out a fresh licence; the duty to report and amend the licence is placed unilaterally on the original licensee. The incoming partner's liability under the licence arises by operation of Rule 178(4) irrespective of whether the original licensee reports the partnership.
3) Distinction between transfer and partnership:
- The court distinguished an absolute transfer of the licence or business (addressed by sub-rule (2) and sub-rule (3)) from a mere admission of a partner. Sub-rule (3) deals with assignment of entire business (wholesale transfer) where the transferee must obtain a fresh licence; this is different from an incoming partner who does not require a fresh licence.
- Thus the expression "transfer" in sub-rule (2) was limited to absolute assignments where the licensee completely effaces himself; it does not cover the ordinary admission of a partner who remains distinct from a complete transferee.
4) Comparative and precedential analysis:
- The Full Bench decision in Velu v. Sivasooriam (arrack/toddy context) and other decisions under Abkari/Opium Acts were considered, but the court emphasized that the wording and context of Central Excise Rules (Rule 178) differ materially because they contain special provisions for partnership (sub-rules 4 and 5).
- Case law such as Champsey Dossa and its Privy Council confirmation was used to support the proposition that admitting partners to a share of profits is not necessarily a prohibited transfer absent a document effecting transfer of the licence/privilege.
- The court underscored decisions (including its own earlier decision in Gopalakrishnayya v. Hanumayya) that read Rule 178(4) as permitting partnerships while binding incoming partners to licence conditions so as to prevent evasion of statutory obligations.
5) Policy and purposive considerations:
- The court noted the Central Excises and Salt Act is primarily fiscal (a tax-collection statute). The object is to secure dues; if the licence-holder brings in a financier partner who strengthens recovery prospects, the State's interest is served rather than prejudiced.
- Rule 178(4)'s requirement of reporting is a measure to inform authorities, not to create a pre-condition for the legal imposition of obligations on incoming partners. The incoming partner is bound by licence conditions from the moment of entry, whether or not the reporting occurs.
6) Distinguishing adverse authority and equities:
- The court distinguished Govindaraj v. Kandaswami Gounder on its facts because there the licensee (plaintiff) failed to perform the reporting duty and thus could be proceeded against; in the present case, the plaintiff is the incoming partner and had no duty to report.
- The court observed that the defendant who defaulted in reporting (if he did) should not be allowed to take advantage of his own wrong (equitable principle), although the court did not decide the case on that ground because it was not pleaded.
7) Conclusion of analysis:
- The court concluded there is no statutory prohibition in the Act and Rules that renders the plaintiff's participation as a partner illegal or unenforceable; Rule 178(4) contemplates partnerships and binds incoming partners to licence conditions so that statutory liabilities are preserved.
Holding and Implications
Holding:
The decision of the lower court is set aside.
The court held that the plaintiff's participation in the tobacco business as a partner of a licensed dealer is not illegal under the Central Excises and Salt Act, 1944 and the associated Rules, and that the rights arising from the partnership contract are enforceable in a Court of law. The partnership is not vitiated by illegality merely because the incoming partner did not obtain a fresh licence.
Direct consequences and remedial orders:
- The suit is remanded to the lower court for trial and disposal according to law on the remaining issues between the parties.
- The costs will abide the result of the fresh trial.
- The court-fee paid on the memorandum of appeal will be refunded to the appellant (plaintiff).
Implications beyond the parties: The opinion emphasizes a statutory interpretation that Rule 178(4) protects State revenue by binding incoming partners to licence conditions and thereby prevents evasion; it declines to extend precedents from differently worded statutes (Abkari, Opium) to the Central Excise context. The court did not state that it was creating a new broad precedent beyond its interpretative conclusion in this case.
Ranganadham Chetty, J.:— This dispute is primarily between two firms of traders in tobacco at Guntur. Plaintiff-firm asks for a settlement of accounts of a partnership entered into on 21-4-1951 with the first defendant firm for a period of one year, or in the alternative, for a dissolution of the said partnership and for settlement of accounts. The business of the partnership consisted in purchasing tobacco chura from I.L.T.D Company. The first defendant, Lal and Co., whose financing partner is the second defendant and the managing partner, the third defendant, had entered into a contract on 20-4-1951 with the I.L.T.D Company for the purchase of tobacco chura. The first defendant had a licence from the Government for dealing in tobacco. The next day, that is, on 21-4-1951 the partnership was entered into. The terms were, inter alia, that the plaintiff firm should finance the joint venture to the extent required except in a sum of Rs. 10,000 which obviously the other partner, namely, the first defendant? undertook to contribute and that the profits should be shared by the two partners equally. The plaintiff alleges that it advanced a sum of Rs. 1,000 on the date of the formation of the partnership and Rs. 7,125 subsequently, and that business was carried on and yielded good profits.
2. The first defendant firm with its two partners, the second and third defendants, admitted the formation of the partnership and the terms but pleaded that the plaintiff failed to keep its promise of contributing all funds necessary, that when a sum of Rs. 20,000 was found essential for the purchase of stocks from the I.L.T.D Company, plaintiff failed to furnish the funds with the result that the contribution of capital which that firm had made was refunded to it and all accounts settled. It was further pleaded that the partnership was not registered and was, at any rate, illegal in view of the plaintiff not having taken a licence for the business under the Central Excises and Salt Act, 1944 and the plaintiff cannot have any relief in a Court of law. The lower Court dealt with the question of illegality of the partnership and found it against the plaintiff in view of a fresh licence not having been obtained after the formation of the partnership. The suit was dismissed even without the need for traversing the other questions raised in the suit. The plaintiff has, therefore, preferred this appeal.
3. The question for determination is whether the plaintiffs participation in the tobacco business as a partner is illegal and the rights arising out of the said partnership contract are unenforceable in a Court of law.
4. The argument for the defendants is that the object of the agreement of partnership is illegal under Section 23 of the Indian Contract Act inasmuch as it is ‘forbidden by law’. A prohibition may be express or may be inferred from the penalties. In regard to the wholesale purchase or sale of tobacco as in the present case, there is not only an express prohibition embodied in Section 6 of the Central Excises and Salt Act, 1944, but any act which infringes the said provision is visited with penalties under S. 9. Anticipating an objection by the plaintiff firm that it is entitled to the benefit of the licence taken undoubtedly by the first defendant, stress is laid by the defence on another prohibition embodied in Rule 178(2) against the sale or transfer of a licence. I shall now examine the contention of the defendants in some detail.
5. Under the Central Excises and Salt Act, 1944 aforementioned (which will hereinafter be referred to as the Act) a number of rules were framed. Section 6 on the wording of which much emphasis has been laid by the defence provided thus:
“6. Certain operations to be subject to licence.
The Central Government may, by notification in the Official Gazette, provide that, from such date as may be specified in the notification, no person shall, except under the authority and in accordance with the terms and conditions of a licence granted under this Act, engage in—
(a) xxxxxxx
(b) the wholesale purchase or sale (whether on his own account or as a broker or commission figment) or the storage of any specified goods included in the first schedule.”
Tobacco is the 9th item of the First Schedule. The notification referred to above is not available but I am asked by the parties to take it that a Notification must have been issued in tune with, S. 6. The consequences of infringing the provisions of the Notification are provided under S. 9, thus:
“9. Offiences and penalties. — Whoever commits any of the following offences, namely:
(a) contravenes any of the provisions of a notification issued under S. 6 or of S. 8, or of a Rule made under clause (iii) of sub-sec. (2) of S. 37;
(b) xxxxxxxx
(c) xxxxxxxx
(d) xxxxxxxx
shall, for every such offence be punishable with imprisonment, for a term which may extend to six months, or with fine which may extend to two thousand rupees, or with both.”
It is argued by the defendants that, inasmuch as the plaintiff has not taken out a licence under the Act under S. 6, he is liable to pay a penalty under S. 9 and that, apart from the express prohibition embodied in S. 6, the omission makes the object and act of the plaintiff forbidden in law and, therefore, illegal, under Section 23 of the Contract Act. Again there is rule 174 reiterating the prohibition of S. 6 in these words:
“174. Persons requiring a licence: Every manufacturer, trader, or person hereinafter mentioned, shall be required to take out a licence and shall not conduct his business in regard to such goods otherwise than by the authority, and subject to the terms and conditions of a licence granted by a duly authorised officer in the proper Form:
xxxxxxxx”
The licence in the present case is Ex. B-58. It was issued on 16-11-1954.
6. For a proper appreciation of the requirements of the Act and the Rules in regard to a partner of a licensee, Rule 178 has to be scanned closely and has necessarily to be set forth in extenso:
“178. Form of Licence: Limitations:
1. Every licence granted or renewed under these Rules shall be in such one of the proper Forms of licence as may be appropriate, shall have reference only to the premises, if any, described in the licence, and shall be for a period not exceeding one year and shall expire on the date specified therein.
2. Every licence shall be deemed to have been granted or renewed personally to the licensee and no licence shall be sold or transferred.
3. Where a licensee transfers his business to another person, the transferee shall obtain a fresh licence under these Rules but it shall be granted free of fee for the residue of the period covered by the original licence.
3-A. Where a licensee dies, the original licence shall be deemed to have been terminated and if more than one person claiming to be the heir to the deceased, apply for the grant of a fresh licence for the same premises, the licence shall be granted to the person who in the opinion of the licensing authority, is in actual possession of the said premises, provided that the grant of the licence to such person shall not prejudice the rights of any other person over the licensed business or the licensed premises to which such person may be lawfully entitled.
4. If the holder of a licence enters into partnership in regard to the business covered by the licence he shall report the fact to the licensing authority within thirty days of his entering into such partnership and shall get his licence suitably amended. Where a partnership is entered into, the partner as well the original holder of the licence shall be bound by the conditions of that licence.
5. If a partnership is dissolved every person who was a partner shall send a report of the dissolution to the licensing authority within ten days of such dissolution.
6. If during the currency of a licence the licensee desires to transfer his business to new premises, he shall intimate his intention to the licensing authority at least fifteen days in advance, specifying the address of the new premises, and get his licence suitably amended. The licence shall, thereupon, hold good in respect of the new premises.”
One thing is clear from the above rule that a partner need not take out a fresh licence after he joins the original licensee under an agreement of a partnership. All that is required under sub-rule (4) is that the licensee who is the original proprietor shall report the fact to the licensing authority within thirty days of his entering into such partnership and shall get his licence suitably amended. The duty of reporting is made to rest unilaterally on the original licensee. There is no similar burden placed on the incoming partner. The requirement of the Act and the rules would be sufficiently met if the original licensee intimates the fact of his taking in a partner to the licensing authority within thirty days. The new partner is not required to take out a fresh licence nor is he bound to give an intimation to the licensing authority. Section 6 relates only with dealers who have to take a fresh licence. A partner of a licensee is not one such dealer. The grand of a fresh licence to a fresh partner is provided nowhere in the Act or the rules. The plaintiff in this case was under no such obligation to take out a fresh licence and has not infringed the provisions of Section 6 or any notification presumably issued thereunder or Rule 174. The plaintiff's participation in the business of the original licensee as his partner does not attract the penalties under Section 9.
7. It is then argued by the defendants that the act of the first defendant faking the plaintiff as a partner amounts to a transfer of business; and such a transfer is forbidden under Rule 178(2) and is punishable under Section 9 because it amounts under Section 9(a) to a contravention of a rule made under clause (iii) of sub-section (2) of Section 37. Reliance is placed by the defendants on the decision in Velu v. Sivasooriam, ILR (1950) Mad 987 : (AIR 1950 Mad 444) (FB) that a partnership entered into for the purpose of conducting a business in arrack or toddy, on a licence granted or to be granted to only one of them is void ab initio, whether the contract of partnership was entered into before the licence was granted or afterwards in that it involves, either a transfer of the licence which is prohibited under clause (a) of Rule 27 of the General Sales Notification issued under the Madras Abkari Act (I of 1886) or a breach of Section 15 of the Act because the unlicensed partner, by himself or through his agent, the other partner, sells without a licence.
8. Section 15 of the Abkari Act stood as:
“15. No liquor or intoxicating drug shall be sold without licence from the Collector.”
Rule 27 said:
“27. No privilege of supply or vend shall be sold, transferred or sub-rented without the Collector's previous permission.”
Rule 178(2) in the Act under discussion is worded:
“Every licence shall be deemed to have been granted or renewed personally to the licensee and no licence shall be sold or transferred.”
The expression ‘privilege’ used in the Abkari Rule may be taken to be synonymous with the word ‘licence’ used in the Central Excises and Salt Rules. If Rule 178(2) had stood as it is without anything more, there may perhaps be some plausibility in urging that the taking in a partner by a licensee virtually amounts to a transfer of the licence itself on the authority of the aforesaid decision of the Full Bench. But we have in Rule 178 special provisions in regard to a partnership namely Rules 4 and 5. Rule 4 provides:
“If the holder of a licence enteres into partnership in regard to the business covered by the licence he shall report…….”
9. Rule 5 states: “If a partnership is dissolved every person who was a partner shall send a report of the dissolution…….”
No rule framed under the Abkari Act has been brought to my notice which provides for the special case of a partnership. It may be noticed that quite in contradistinction to the absolute prohibition against a transfer embodied in sub-rule (2) of Rule 178, we have in Rule 4 the liberty given to a licensee to enter into a partnership with another without the need for him or for the other partner to take a fresh licence. There is only one thing insisted on, namely, that the original licensee should report the matter to the authorities and get the licence suitably amended.
10. It is clear that the intention of the rule-making authority in framing the two sub-rules (4) and (5) standing in contrast to sub-rule (2) is to exclude the category of partners from the question of transferability of licence. The construction of a particular provision of an Act or of a rule framed thereunder has to depend upon its own wording and the context and any principle deduced from such provision can hardly be applicable to the case of a different Act and a different set of rules framed under that Act whose wording is not identical and the context materially differs. I am not inclined to extend, therefore, the principle of ILR (1950) Mad 987 : (AIR 1950 Mad 444) (FB) to cases of a partnership formed for trading in tobacco, nor the ratio decidendi of Padmanabhan v. Badri Nath, 10 Ind Cas 126 : 21 Mad LJ 425 that the partnership between the plaintiff and the defendant therein amount to a transfer of the right of a sale under a licence eranted under the Opium Act. Clause 26 of the licence under the Opium Act provided that:
“except with the permission of the Collector you shall not sell, transfer, or sub-let your privilege, nor appoint any person as your agent for the management of your privilege.”
The suit was brought by the unlicensed partner for dissolution and accounts and was dismissed. There too, no special provision seems to have been made for the case of a partner as under the Central Excise Rules.
11. In Champsey Dossa v. Gordhandas Kessowji, 40 Ind Cas 805 : (AIR 1917 Bom 250) the provisions of the Bombay Salt Act came up for discussion. Section 11 prohibited the subletting or alienating the whole or any part of the privilege. Clause 5 of the licence provided:
“That he, the licensee, shall not without the written permission of the Collector sub-let, sell, mortgage or otherwise alienate whole or in part the privilege granted by this license of manufacturing salt on the land aforesaid.”
This clause reiterated the prohibition. Nevertheless, some members of the family and others were admitted to the privilege. The Bombay High Court held that the admission of the partner to a share in the profits cannot be considered as a sub-letting or alienation of the part of the privilege unless there is a document directly transferring to the partners or attempting to transfer to the partners a part of the right to manufacture or vend. The judgment; was confirmed by the Privy Council in Gordhandas Kessowji v. Champsey Dossa, AIR 1921 PC 137. In the case I am dealing with too, there is no document of transfer of the licence. In Kalyanasundaram Pillai v. Chockalingam Chettiar, 1951-2 Mad LJ 459 : (AIR 1952 Mad 293) the effect of a compulsory sale in execution had to be considered.
12. The right of manufacture, excavation, collection or removal of salt was sold. The Madras High Court had to interpret Rules 102 to 104 of the very set of rules of which Rule 178 is now under discussion. Rule 104 provided that the licence shall be transferable and may be relinquished subject only to the condition that they shall have no effect against a Collector unless registered. It was held that there was no prohibition against a transfer. Similar must be the line of reasoning when the liberty to transfer is not conceded directly but can be inferred from a cumulative reading of sub-rules (2) and (4) of Rule 178. In Gopalakrishnayya v. Hanumayya (Decision of this Court dated 2-12-55 in S.A No. 675 of 1952 and the Memorandum of Cross Objections), my learned brother had to consider these two sub-rules and expressed:
“The rule does not prohibit the licensee from entering into a partnership as under the provisions of the Abkari Act. Sri Konda Kotayya, the learned advocate for the appellant, laid great stress on the Full Bench decision of the Madras High Court in ILR (1950) Mad 987 : (AIR 1950 Mad 444). The Full Bench approved the decision in Marudamuthu Pillai v. Rangasami Mooppan, ILR 24 Mad 401. The principle that was approved by the Full Bench is laid down in ILR 24 Mad 401 in the following terms:
‘The reason is obvious that unless he were licensed, there could be no control over him. To hold that a person who has not got a licence could still be partner with one who has a license and as such partner carry on the business with or without the other would enable the unlicensed partner to evade the liabilities intended by the law to be cast on persons carrying on abkari business.’
Having regard to the express terms of R. 178(4) which provides that where a partnership is entered into the partner as well as the original holder of the licence shall be bound by the conditions of that licence, the difficulty pointed out in the Full Bench decision disappears. As the partner is bound by the conditions of the licence he cannot evade the liabilities laid down by the Act. Even adopting the view laid down by the Full Bench that the formation of a partnership amounts to a transfer within the meaning of Rule 2, it is still protected by the terms of Rule 4.”
The various clauses of Rule 178 make it abundantly clear that the taking in of a partner does not amount to a transfer of the licence for the following reasons:
(a) I have already adverted to the patent factor that special provisions for a partnership are engrafted in sub-rules (4) and (5) following sub-rule (2) which prohibits the transfer of a licence. Thus the sub-rules exclude the applicability of the general prohibition.
(b) The Rule 178 makes a distinction between transfer of a licence en bloc and the creation of an interest in a running business. Sub-rule (3) deals with a case where the licensee makes an assignment of his entire business to another person with all his rights, obligations, privileges and duties, effaces himself completely and clothes the transferee with all that he had possessed as an absolute transfer. Such a case is provided for under Sub-rule (3) which follows immediately sub-rule (2) under which the sale or transferability of a licence is prohibited. These two rules have to be read together. What is connoted by the expression ‘transfer’ under sub-rule (2) is an absolute assignment where the licensee reserves no interest in himself and puts in his place another person. When there is such wholesale and absolute transfer, taking of a fresh licence is incumbent on the transferee as provided under Section 6 of the Act.
(c) Again, a licence is essential if the original licensee dies. The licence becomes automatically terminated. The legal representative shall have to obtain a fresh licence. This is provided for under sub-rule (3-A).
The above two categories exhaust the conditions, under which the original licence becomes ineffective by reason of its non-transferability and non-survival, but the case is different in the case of a fresh partner as he is allowed to avail himself of the old licence.
(d) The policy underlying the concession-made to a partnership appears to be based on the fact that the Central Excises and Salt Act, unlike the Opium or Abkari Acts is a pure fiscal statute. The object of the State is to secure the dues under a licence as effectively and expeditiously as possible. If the licensee, through any act contributes to see and facilitate the realisation of the objective, that must indeed be welcome to the State.
13. When the licensee takes in a partner, as often, happens, as the financing participant in the business the state should be particularly glad and extend such facilities as it can to the licensee and the incoming partner. The minimum restriction has, therefore, been placed on the formation of the partnership. All that sub-rule (4) requires is that the holder of the licence should merely report to the authorities, the fact of his taking in partner so as to apprise them of the additional guarantee of recovery of the dues which the licensee is placing at their disposal. The State would be stultifying its own end if it should discourage such a move. It may be noticed that the last sentence of sub-rule (4), significantly enough, provides that the very circumstance of the formation of a partnership would subject the incoming partner as well as the original licensee to all the conditions of the original licence:
“(4) Where a partnership is entered into, the partner as well as the original holder of the licence shall be bound by the conditions of that licence.”
14. The obligations under the licence automatically fasten themselves on to the incoming partner irrespective of the question whether his entry is notified to the authorities or not. The original licensee, of course, has to make a report and get the licence amended but that is not a condition precedent to the imposition of the liability on the incoming partners. There is thirty days' time given for the report but even from the day of the entry into the partnership, the new partner is subject to the terms of the licence.
15. Learned Advocate for the defendants wants me to read the aforesaid provision as being subject to the making of a report which is provided in the earlier sentence of the sub-rule. In my view, the two are independent provisions. There is nothing to indicate a connection between the two. In fact, the State would be interested in making the two provisions independent. If the springing of an obligation of the incoming partner were to be dependant on the report to the authorities and a recognition given by them, the easiest way of evading such a liability would be to refrain from sending a report. That could hardly be the intention of the rule-making authority.
16. That the report and recognition on the one hand and the liability of the incoming partner on the other have no relation to each other, would be manifest from the link which has been deliberately provided in sub-rule (6) between its two’ successive passages:
“(6) If during the currency of a licence the licensee desires to transfer his business to new premises, he shall intimate his intention to the licensing authority at least fifteen days in advance, specifying the address of the new premises, and get his licence suitably amended. The licence shall, thereupon, hold good in respect of the new premises.”
Here, too, a report has to be sent of the change of premises. But the original licence would hold good thereupon. The omission of a correlative of this kind between the two provisions in sub-rule (4) cannot but be viewed as particularly significant. The rule-making authority has deliberately omitted the link in sub-rule (4) while it has provided in sub-rule 6. The intention is that if the licensee brings to the notice of the authorities the liability of a virtual guarantor for the dues, well and good. Even otherwise if such entry and participation by a partner comes to their notice aliunde, they should be in a position to enforce the obligations against the new entrant suo motu.
17. The learned advocate for the defendants has cited a decision of the Madras High Court in Govindaraj v. Kandaswami Gounder, ILR (1957) Mad 1245 : (AIR 1957 Mad 186). The case arose under this very Act and the Rules. Plaintiff was trading in tobacco under a licence obtained in his own name. He took in a partner in 1945. The partnership was dissolved in 1950 and the entry of the new partner was not intimated to the authorities. The licence was not amended. The licensee filed a suit for accounts of the dissolved partnership. Rajagopal Ayyengar, J. held:
“Prima facie it would be seen that the formation of the partnership by a licensee without reporting it to the authorities within thirty days and having the licence amended by the inclusion of the names of the partners would he a contravention of the Act and the rules with the consequence that after the expiry of the thirty days the licensee could be proceeded against for violating the terms of his licence and the newly added partners for engaging in a business in tobacco contrary to Ss. 6 and 8. Viewed thus, the action of the plaintiff as well as that of the defendants would clearly appear to be prohibited by law so as to preclude any action between them of the type now before tile court. It needs little argument to prove that if there was a partnership as stated in the plaint, the defendants could not file any suit for accounts since their participation in the business would be prohibited by Sections 6 and 8 of the Act and conversely a suit by the plaintiff cannot stand on any better footing.”
With great respect, I am unable to subscribe to this view. The prohibition embodied in Ss. 6 and 8 is directed against only the persons who are compelled by law to take a licence or a fresh licence and not fresh partners who come on the scene for whom no fresh licence need be issued. An amendment of the old licence is not the same thing as the issue of a fresh licence. Section 6, it may be noted, lays down that:
“no person shall, except under the authority and in accordance with the terms and conditions of a licence granted under this Act, engage in……. In the case of incoming partners, there is no provision for the grant of a licence and that, too, under the Act; all that is to be secured is a mere amendment of a licence, an amendment under the Rules. Neither the holder of the licence can be charged with an infringement of S. 6 because he, in fact, holds a licence granted under the Act; nor can the incoming partner be charged with an infraction of S. 6 because he is nowhere required to ask for the grant of a licence under the Act. Similar is the position under S. 8 which deals with possession of excisable goods.
18. Again, the aforesaid decision is clearly distinguishable because it was the holder of the licence who filed the suit without complying with the requirements of the first part of sub-rule (4), that is, of reporting to the audiorities the fact of his taking the defendant as a partner. It was he that could be proceeded against for infringement, not of course, of S. 6 or S. 8 but of Rule 178(4). As a plaintiff he may not be able to seek relief in view of his own fault; but in the case with which we are concerned here, plaintiff is the new entrant who under no section of the Act or the Rules is called upon even to bring his entry to the notice of the authorities. His is a passive role.
19. The active part of intimation has to be performed only by the holder of the licence, that is, the other partner and he figures here only as a defendant. I do not see why the new entrant should suffer for the fault of the old partner. I may mention here, that it is the defaulting partner here who is raising the defence of illegality of the partnership. It is he that brought about the illegality, if at all, and not the plaintiff. I cannot resist the feeling that the well known principle of Equity that no man can be allowed to take advantage of his own wrong has a direct application to the defence in this suit.
20. It may not be open to the defendant to plead his own fault for non-suiting his adversary but the question has not been raised in the pleadings and I would refrain from basing a decision on this ground. I am definitely of the view that there is no prohibition against the formation of a partnership in regard to the business conducted under a licence granted under the Act. There is no illegality vitiating the partnership and the suit is perfectly maintainable. The decision of the lower court is set aside and the suit remanded to the lower court for a trial and disposal according to law on the other issues arising in the case. The costs will abide the result of the fresh trial. The court-fee paid on the memorandum of appeal will be refunded to the appellant.
21. Umamaheswaram, J.:— I have perused the judgment of my learned brother and I agree with the conclusion arrived at by him. The question which arises for decision in this case was considered by me in Second Appeal No. 675 of 1952 and I held that on a true interpretation of Rule 178 of the Central Excise Rules, 1944, the licensee is not prohibited from entering into a partnership. I distinguished the Full Bench decision of the Madras High Court in ILR (1950) Mad 987 : (AIR 1950 Mad 444) on the ground that the rules framed under the Abkari Act are differently worded. I took the view that even on the footing that the formation of a partnership amounts to a transfer within the meaning of Rule 178(2), still it is protected by the terms of Rule 178(4).
22. I followed the principle laid down by Govinda Menon, J. in (1951) 2 Mad LJ 459 : (AIR 1952 Mad 293) and held that the object of Central Excise Act is nothing but a fiscal one intended for collecting taxes and that no question of public policy or illegality arises so as to attract the provisions of Section 23 of the Indian Contract Act. For the reasons aforesaid, I am unable to follow with great respect the view taken by Rajagopala Iyengar, J. in ILR (1957) Mad 1245 : (AIR 1957 Mad 186) as regards the scope and effect of Rule 178 of the Central Excise Rules.
CD/V.B.B
23. Suit remanded.
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