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Commr. Of Income Tax A.P. Iv, Hyd. v. Nalli Venkataramana
Judgment Summary — Jagannadha Rao, J.
Factual and Procedural Background
This opinion concerns two references (R.C. No. 241/80 and R.C. No. 279/80) made at the instance of the Commissioner of Income-tax, Andhra Pradesh. Both arise from refusals by Income Tax authorities to register partnership firms under section 185 of the Income-tax Act, 1961 on the ground that the partnerships were illegal because the excise licence(s) were held in the name of one or some partners only.
R.C. No. 241/80: A firm (assessee) was constituted by a partnership deed dated 12-11-73 effective 1-10-73; the licence to carry on arrack retailing was in the name of one partner (the successful bidder). The Income Tax Officer, after a sworn statement, concluded the firm was not genuine and void ab initio, relying on Rule 19(1) and 19(2) of the A.P. Excise (Arrack and Toddy Licences General Conditions) Rules, 1969 and section 15 of the A.P. Excise Act, 1968; registration under section 185 of the Income-tax Act was refused.
On appeal the Appellate Assistant Commissioner found the firm genuine, held the partnership not illegal, and directed registration. The Department appealed to the Income Tax Appellate Tribunal (ITAT), which upheld the Appellate Assistant Commissioner and confirmed entitlement to registration.
R.C. No. 279/80 (Karimnagar District): A partnership of six partners carried on arrack & sendhi contracts; arrack licence was in the name of one partner, sendhi licences in the other partners' names. The Income Tax Officer refused registration on grounds including non-intimation to Excise authorities and non-correspondence of excise records with partnership constitution. The Appellate Assistant Commissioner confirmed refusal; the ITAT allowed the appeal and directed registration.
Both matters were referred to this Court on questions involving (inter alia) whether formation of such partnerships contravened Rule 19(1) or 19(2) or section 15 of the Excise Act, and whether the partnerships offended section 23 (public policy) or otherwise were void.
Legal Issues Presented
- Whether formation of a partnership by a person holding an excise licence amounts to a transfer of the licence within Rule 19(1) of the A.P. Excise Rules (i.e., whether such formation is a prohibited transfer).
- Whether section 15 of the A.P. Excise Act applies to non-licensee partners such that the partnership becomes illegal.
- Whether Rule 19(2) (requiring previous permission of the licensing authority for including/excluding partners where a licence is granted jointly) was violated in a manner that renders the partnership illegal.
- Whether section 23 of the Indian Contract Act (public policy) invalidates the partnership agreement.
Arguments of the Parties
Revenue / Department (Appellant) — main contentions
- The formation of a partnership by a licensee partner is equivalent to a transfer or subletting of the licence and thus prohibited by Rule 19(1) and punishable under the relevant provisions; the partnership is therefore void ab initio. (Based heavily on Madras Full Bench decision in Velu Padayachy and cases that followed it.)
- Invoked a line of High Court decisions (Madras Full Bench and cases from Andhra Pradesh, Kerala, Punjab and Allahabad High Court earlier) holding such partnerships invalid; relied on an unreported Supreme Court decision (Govind Rao v. Nathumal C.A. No.30/60 dated 11-4-1962) as supportive.
- Raised public policy and statutory-prohibition arguments under Excise legislation to contend the partnership is unlawful, and relied on distinctions in certain statutes that, they argued, required licences in the partnership's name or expressly prohibited partnerships.
Assessee (Respondent) — main contentions
- Relied on authoritative precedents (Privy Council and Supreme Court decisions including Gordhandas Khesowjee v. Champsey Busha; Umacharan Shah & Brothers v. C.I.T.; Jer & Co. v. C.I.T.; Viswanatha Pillai v. Shanmugham) to contend that the mere admission of partners does not amount to a transfer of licence and does not render the partnership void.
- Argued that Rule 19 and section 15, read with the partnership deed clauses, did not prohibit formation of the partnership; partners acted so that the licence-holder would carry out activities in conformity with the Excise law (e.g., clauses limiting who will lift and sell the arrack).
- Contended that failure to obtain administrative permission (where such sanction is required) may attract fines or penal consequences but does not automatically invalidate the partnership contract vis-à-vis the partners; illegality in performance of business does not equate to illegality of the partnership agreement itself.
Lower authorities (findings relied on by parties)
- Income Tax Officer (R.C.241/80): held the firm was not genuine and void ab initio, referencing Rule 19(1) and Rule 19(2) and section 15; refused registration.
- Appellate Assistant Commissioner: held firm genuine; directed correction of discrepancies and held formation of partnership not prohibited; directed registration.
- Income Tax Appellate Tribunal: upheld Appellate Assistant Commissioner's order; held there was no transfer, partnership not a juristic person, Rule 19(1) and 19(2) not infringed in the facts, and section 15 not violated; directed registration.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Gordhandas Khesowjee v. Champsey Busha, AIR 1921 PC 137 | Principle: admission of partners does not amount to subletting/alienation where partners do not actually take part and there is no document transferring rights. | The court relied on the Privy Council to support that formation of partnership does not amount to transfer of licence; used as primary authority for non-transfer proposition. |
| Umacharan Shah & Brothers v. C.I.T, (1959) 37 I.T.R. 271 (SC) | Principle: absence of evidence of transfer or subletting; formation of partnership by licensee does not make the partnership illegal where licences were not transferred. | Held binding and applied to conclude that a partnership by a licensee partner is not a transfer; cited as authoritative support for registration entitlement. |
| Jer. & Company v. C.I.T, (1971) 79 I.T.R. 546 (SC) | Principle: where licence form does not prohibit partnership, partnership is not illegal; formation of partnership by licence-holder does not amount to transfer. | Used to reinforce Umacharan Shah's position; treated as binding and decisive that Rule 19(1) is not infringed by such partnerships in the present facts. |
| Viswanatha Pillai v. Shanmugham, AIR 1969 SC 493 (1 SCC 188) | Principle: interpretation of statutory wording (e.g., permitting use of permit by real owner though permit held by benamidar); rejection of Madras High Court view on permit/partnership issues. | Cited to support that statutory wording like Sec.15 does not use "granted to him" and therefore does not prohibit partnerships simply because licence is in one name; used to justify implied overruling of earlier High Court precedents. |
| Hind Construction Ltd., 83 I.T.R. 211 (SC) | Principle: used by Tribunal to support proposition that conversion of licence for partnership use is not a transfer. | Relied upon by ITAT to hold there was no transfer when licence used by partnership; supported Tribunal's conclusion on non-infringement of Rule 19(1). |
| Dulichand Lakshminarayan, 29 I.T.R. 535 (SC) | Principle: partnership firm is not a legal or juristic person for certain purposes. | Relied on by the Tribunal to support that partnership is not a separate juristic person such as to require licence in its own name under the relevant rules. |
| Velu Padayachi v. Siva Sooriyam Pillai, AIR 1950 Mad. 444 (Full Bench) | Principle (Madras FB): held that partnership entered into for business on licence granted in name of one partner is void ab initio (decision relied upon by Revenue). | The Court held this Full Bench view has been impliedly overruled by later Supreme Court decisions (Umacharan, Jer. & Viswanatha Pillai) and therefore is not followed. |
| Basavayya v. Kotaiah, AIR 1965 A.P. 145 | Decision of Andhra Pradesh High Court following the Madras Full Bench view. | Held to be no longer good law because it followed the Madras Full Bench; the Court treated it as impliedly overruled by subsequent Supreme Court authority. |
| Govind Rao v. Nathumal (Civil Appeal No. 30/60, dated 11-4-1962) (unreported) | Relied on by Revenue as supporting prohibition of partnership where statute defined dealing to include partnership. | Court found it distinguishable: in that case the statute specifically defined "deal" to include partnership and required partnership itself to hold licence; therefore not applicable to present Facts. |
| G. K. (Govindaraj) / D. Mohideen Sahib & Co. (various High Court cases cited) | These High Court decisions had followed Madras Full Bench, holding partnerships invalid where licence only in one name. | The Court held those rulings were impliedly overruled by subsequent Supreme Court decisions and therefore not authoritative for present questions. |
| JER & Company (Allahabad High Court) (1966) 60 I.T.R. 335 | Allahabad High Court had followed Madras Full Bench and similar High Court cases to hold partnership invalid; three important passages cited. | The Supreme Court reversed this Allahabad judgment in Jer. & Co. (1971); the present Court held that reversal implies overruling of decisions which the Allahabad Court followed, so that those lines of High Court authority are no longer good law. |
| PC Kapoor v. C.I.T (Full Bench, referenced as Kapoor's case) (reported) | Principle: administrative failure (permission not obtained) attracting penalty does not necessarily render contract void between parties; distinction between recurrent penalty (prohibition) and one-time penalty. | Applied to hold that non-obtaining of permission under Rule 19(2) may attract punishment but does not make partnership void; partnership valid between partners and entitled to registration. |
| Udhoodass v. Prem Prakash, AIR 1964 Allahabad 1 (FB) | Principle: tenancy entered into without required permission under statute was valid between parties though authorities could punish — statute penal, not voiding contract. | Followed (and applied) to conclude that failure to obtain permission from Excise authorities under Rule 19(2) does not make partnership invalid between the partners. |
| Muralidhar v. State of Uttar Pradesh, (1973) (Supreme Court) | Principle: Supreme Court approved Udhoodass, holding tenancy valid between parties despite statutory permission not obtained. | Used to support proposition that contractual relationships are not invalidated between parties merely because statutory permission was not obtained and a penalty exists. |
| Gherumal v. Mahadeodas, AIR 1959 SC 781 | Principle: wagering/collateral partnerships can be valid between partners in face of statutory restrictions. | Cited to support that partnerships may be valid as between partners even if the subject matter is regulated and penal sanctions exist for violation. |
| Dungate v. Lee, 1967 (1) All E.R. 241 | Principle (English authority): a statute requiring a permit for a particular role does not require every partner to hold permit; partnership may be valid provided partners structure roles lawfully. | Relied on analogically to show non-licensee partner may confine participation to permissible roles (e.g., accounts) and partnership need not be voided. |
| Morles v. Philip Thant and Son Limited, 1954 (1) QB 29 | Principle: distinction between illegality of contract and illegality in its performance. | Cited via Mysore High Court authority to support that subsequent illegal acts do not necessarily render the contract void. |
| Mandalsa Devi v. Ramnarian, AIR 1965 SC 1718 | Principle cited in context of whether a firm is a juristic person (cited alongside Dulichand). | Used in support of the view that a firm is not a juristic entity for purposes requiring licences in a separate name under the relevant statute. |
| Commissioner of Income Tax v. K.C.S. Reddy, (1960) 38 I.T.R. 563 (Patna) | Principle: partnership by licence-holder was held entitled to registration where statute did not prohibit partnership. | Cited as consistent authority supporting registration and validity of partnership where statute did not expressly forbid partnership formation. |
| Malwa Knitting Works v. C.I.T, (1977) 107 ITR 379 (M.P.) | Principle: advocate becoming partner did not make partnership illegal even if it raised regulatory concerns; registration could not be refused. | Applied by analogical reference to show that regulatory or disciplinary contraventions do not automatically invalidate the partnership for Income Tax registration. |
| Sri Ramakrishna Mining Company v. C.I.T, (1969) 64 ITR 197 (Mysore) | Principle: rule requiring sanction for transfer did not render transfer or partnership void where there was no express prohibition; partnership entitled to registration. | Relied upon to show absence of express prohibition in Rules/Act means partnership remains valid between parties. |
| Commissioner of Income Tax v. Mamck Chandra Devi (Division Bench reference) | Principle: where control order did not prohibit partnership, partnership entitled to registration; compared with section-like provisions. | Used as an analogous decision construing similar language to Sec. 15 and concluding partnership formation was not prohibited. |
| Budhram v. Dhuri Co-operative Society, AIR 1972 Punjab & Haryana 185 | Decision following Govind Rao; cited by Revenue in support of prohibition doctrine. | Court observed this case followed Govind Rao and held it was distinguishable for present facts; not followed here as applicable authority. |
| A number of other High Court authorities cited by parties (e.g., Union Tobacco Co., Benarasi Das & Co., Krishna Reddi) | Principles: varied — many followed Madras Full Bench or treated Rule/Act effectively as prohibiting partnership in their contexts. | The Court treated those authorities as implicitly overruled or distinguishable in light of intervening Supreme Court decisions (Umacharan, Jer. & Viswanatha Pillai) and thus not controlling on present questions. |
| Young v. Bristol Aeroplane Co. Ltd., 1946 (1) All ER 98 | House of Lords principle on when a court may refuse to follow its own prior decisions inconsistent with higher authority. | Invoked to support the proposition that earlier High Court authority inconsistent with Supreme Court decisions must give way; applied by analogy to justify not following Madras Full Bench line of cases. |
| Jai Kaur v. Sher Singh, AIR 1960 SC 1118 | Principle: when Supreme Court decides a question, earlier conflicting decisions must be regarded as wrongly decided. | Invoked to support application of doctrine of implied overruling of conflicting High Court decisions by later Supreme Court rulings. |
| B.M. Lakshmi v. Malkapur Municipality, (1970) 2 SCC 267 | Principle: High Court cannot ignore a binding Supreme Court decision even if it thinks certain provisions were not brought to Supreme Court's notice. | Applied to reject Revenue's submission that Supreme Court decisions were not authoritative because they did not expressly address some issues (e.g., public policy); Court held Supreme Court rulings were binding. |
| Kodanda Rao v. Government of Andhra Pradesh, 1981 (2) A.L.T. 280 (Division Bench) | Principle applied: a court can decline to follow its own prior decisions in view of subsequent higher authority. | Cited as local authority applying Young v. Bristol Aeroplane principle; Court used similar reasoning to decline to follow earlier local judgments inconsistent with Supreme Court rulings. |
Court's Reasoning and Analysis
The Court undertook a step-by-step analysis centered on statutory construction, precedential authority, and the legal consequences of administrative contraventions:
-
Interpretation of Rule 19(1) and section 15:
- Rule 19(1) prohibits transfer of the licence to any other person. The Court held, relying on the Privy Council (Gordhandas) and Supreme Court authorities (Umacharan Shah; Jer. & Co.), that admitting partners and sharing profits does not in law amount to a transfer of the licence where there is no document effecting transfer and where the licence-holder continues to operate within the licence terms.
- Section 15 prohibits sale/buying of intoxicant except under licence; the Court noted the statutory language does not say "licence granted to him" and therefore does not expressly prohibit a partnership where the licence is in one partner's name. The Court observed absence of any express provision making formation of a partnership illegal under Sec.15 or Rule 19.
-
Precedential hierarchy and doctrine of implied overruling:
- The Court examined a line of High Court cases (beginning with Madras Full Bench in Velu Padayachi) that had held such partnerships void. It noted that subsequent Supreme Court decisions (Umacharan Shah; Jer. & Co.; Viswanatha Pillai) either decided the very question differently or expressly dissented from the Madras Full Bench approach.
- Applying the principle that a later binding Supreme Court decision implicitly overrules earlier inconsistent High Court decisions (and authorities following them), the Court concluded the Madras Full Bench and those High Court decisions following it were impliedly overruled and no longer good law.
-
Distinction between illegality of agreement and illegality of acts in performance:
- The Court adopted the distinction that even if certain acts in the course of business may be illegal (and punishable), that does not necessarily render the partnership agreement void ab initio. It relied on authorities (Kapoor's Full Bench, Udhoodass, Muralidhar approval, Morles, Dungate v. Lee) to hold that penal provisions or administrative sanctions do not ipso facto make the underlying contract void as between the parties.
- Thus, failure to obtain permission under Rule 19(2) could lead to penal consequences but does not automatically invalidate the partnership for Income Tax registration purposes.
-
Construction of partnership deeds and practical operation:
- The partnership deeds in the facts contained clauses (e.g., clause 8) requiring the licence-holder to lift and sell arrack and that other partners would assist and not necessarily act as independent licensees. The Court held that partnership deeds must be construed, where possible, in a manner consistent with the Excise Act and Rules so as to render them valid.
- The Court observed there was no material showing non-licensee partners had acted in contravention of the Act or Rules; and that Excise authorities had not taken action (cancellation/suspension), which was a relevant circumstance favoring validity.
-
Application to the two references:
- On the combined reasoning — statutory interpretation, binding Supreme Court authority, and principle distinguishing illegality of contract and illegal performance — the Court concluded that (a) Rule 19(1) is not contravened by formation of the partnerships in the facts before it; (b) Sec.15 does not make the partnerships illegal; and (c) Rule 19(2), while requiring permission where licences are initially joint, does not render a partnership invalid as between parties if permission was not obtained (penalty may be imposed but partnership remains valid between partners).
-
Public policy (section 23 Contract Act):
- The Court addressed the public policy argument and refused to ignore binding Supreme Court decisions on grounds that those decisions did not expressly discuss public policy. It applied authorities to hold that the partnership agreements did not offend public policy under section 23 of the Indian Contract Act.
Holding and Implications
Holding: The Court answered the questions framed by the Tribunal in the affirmative in favour of the assessee. It held that there was no violation of Rule 19(1) or Rule 19(2) or Section 15 of the A.P. Excise Act in the facts of R.C. No. 241/80 and R.C. No. 279/80, and that the partnership firms were valid and entitled to registration under the Income Tax Act.
Implications:
- Direct effect: The orders of the Income Tax Appellate Tribunal and the Appellate Assistant Commissioner (granting registration) were upheld — the partnership firms must be treated as entitled to registration under section 185 of the Income-tax Act.
- Doctrinal consequence: The Court held that certain High Court authorities (notably the Madras Full Bench in Velu Padayachi and subsequent High Court decisions that followed that view) must be regarded as impliedly overruled in light of later Supreme Court decisions (Umacharan Shah; Jer. & Co.; Viswanatha Pillai). The Court therefore declined to follow those earlier High Court lines of authority.
- Scope of administrative/penal consequences: The decision emphasises that failure to obtain required administrative permission or statutory contraventions may attract penalties or permit cancellation/suspension by Excise authorities, but such consequences do not automatically render the partnership void as between the partners nor can they serve as a ground to refuse Income Tax registration where the partnership is otherwise genuine and lawful in its object and construction.
- Public policy: The Court held that the partnership agreements in these cases did not violate section 23 of the Indian Contract Act; the Supreme Court authorities relied upon were binding for this purpose.
Summary constructed exclusively from the legal opinion provided. No facts or holdings beyond those appearing in the text were added.
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 assessee is a firm consisting of 1.1 partners constituted by a partnership deed dated 12-11-73 with effect from 1-10-73. The partnership was to remain in force for one year upto 30-9-1974. One of the partners of the assessee 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 the business of buying in bulk and selling in retail required man power to assist him in the conduct of the said business and also to contribute the required capitals. Hence the partnership firm was constituted. Clause 2 of the partnership deed says that the business of the firm shall be 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 dead 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 contribution was ‘nil’ Clause 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 with the assistance of the other partners strictly complying with the provisions of the Excise Act. It further says that the other partners shaft 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 assesse-firm. It may be stated that as many as 32 other partnership firms were formed on the above lines with the same successful bidder as the first partners in every case but with varying number of other partners. The different partnerships related to different shops. The assessee-firm applied for registration under section 185 of the income-Tax Act, 1961 and filed an Application in form No. 11. The Income Tax. Officer took a sworn statement from the successful bidder on 18-12-76 and came to the conclusion that the firm was not a genuine one. He also observed that the assessea firm was formed illegally and so it was void ab initio. He referred to Rule 19(1) of the Rules which prohibits the transfer of the licence by the licencee to any other person. Then he referred to Rule 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 a 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 must be deemed to have been issued only to the successful bidder in whose name the licence stood. He also referred to section, 15 of the Excise Act which states that 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. The Income Tax Officer 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 Rule 19 or because section, 15 was being violated by the unlicenced partners who sell the arrack or toddy. Hence in either case the assessee-firm was engaged in illegal business and so it is void in eye of law. In that view of the matter he refused the assessee's claim for registration under section 185 of the Income Tax Act.
3. The Assessee appealed to the Appellate Assistant Commissioner. He came to the conclusion that the firm was a genuine firm and that the Income Tax Officer should have given a chance to the assessee to correct the descripancy 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 Shah and Brothers v. C.I.T 1959 37 I.T.R 271 (SC) and Jer. & Co. v. C.I.T 1971-79 ITR 546 (SC) 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 Rule 19 of the Rules there were other provisions in the A.P Denatured Spirit and Denatured Spirituous Preparations Rules, 1970, Condition No. 9 under Rule 5(2) of the A.P Indian Liquor (Storage in Bond) Rules, 1969 and Rule 39 of the A.P Foreign Liquor and Indian Liquor Rules 1970 prohibiting the formation of partnership where as there was no such prohibition in section 15 or Rule 19 of the Arrack and Toddy Rules, 1969 with which we are concerned. He found that the intention of the partners was that the sale purchase of liquor should always be carried on in a lawful manner i.e by or on behalf of the licencee alone. He therefore held that the firm was not void ab initio and he directed the Income Tax Officer to grant registration to the assessee-firm.
4. The Department appealed to the Income Tax Appellate Tribunal. Various rulings were relied upon by the Department as well as the assessee before the Tribunal.
5. The Tribunal after considering the contentions and the relevant case law up-held 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 Rule 19 of the Rules and came to the conclusion that the licence which 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. 83 ITR 211 (SC). The Tribunal also stated that the partnership firm was not a legal or juristic person and relied upon the judgment of the Supreme Court in Dulichand Lakshminarayan 29 ITR 535 (SC). 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 rule 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. 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 Shah & Brothers v. C.I.T and came to the conclusion that the formation of a partnership in the case of a license standing in the name of one of the partners was not illegal. They then referred to Section 15(1) of the Excise Act and referred to clause (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 infringment 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 Visakhapatnam and its suburbs where there were similar partnership firms and therefore confirmed the order of the Appellate Assistant Commissioner.
6. 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 assessee-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) of the 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) of the Andhra Pradesh Excise (Arrack and Toddy Licences General Conditions) Rules, 1969 was not infringed?
7. In R.C No. 279/80 which arises from Karimnagar District the facts are as follows:— The assessee was a partnership firm of six parners carrying on business in Sharab & Sendhi contracts. The licence was taken in the name of one of the partners Sri Veeranna so far as arrack business was concerned. In so far as Sendhi business was concerned a licence was taken in the name of the five other partners. The assessee applied for registration of the firm for the assessment year 1972-1973. The Income Tax Officer 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 group of persons. Therefore it was not open to claim the licence granted to the individual or some of the partners of the firm, as 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) of the A.P Excise (Arrack and Toddy Licence General Conditions) Rules 1969. He held that the persons who obtained the licence are not the persons who carriedon the business. He therefore refused registration.
8. On appeal the Appellate Asistant Commissioner confirmed the order of the Income Tax Officer and dismissed the appeal preferred by the assessee. The assessee 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 distinction 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 Shah & Brothers (1959) 37 ITR 271 SC decided by the Supreme Court and the case of Jer. & Co. (1971) 79 ITR 546 SC decided by the Supreme Court they came to the conclusion that Rule 19(1) or Rule 19(2) of the rules were not violated. They also pointed out that punishment under Section 36(c) of the Act was only in respect of wilful contraventions. In a case where the Excise authority did not choose to cancel the licence, the licensee will be entitled to carryon 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 in 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 in inference of total prohibition cannot be made.
9. 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”?
10. 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 Velupadayachy's AIR 1950 Mad. 444 at 449 (F.B) 1950 (1) MLJ 315 at 324 case. He pointed out: that the said ruling has been followed by the Andhra Pradesh High Court in various cases including Basavayya v. Kotayya AIR. 1964 A.P 145. He relied upon an unreported judgment of the Supreme Court in Govind Rao v. Nathumal C.A No. 30/60, dated 11-4-1962, and tried to distinguish the cases of Umacharan Shah and Brothers v. C.I.T (1959) 37 ITR 271 SC and the case of Jer & Company v. C.I.T (1971) 79 ITR 546 SC decided by the Supreme Court.
11. 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 Gordhandas Khesowjee v. Champsey Busha AIR 1921 PC 137 and of the Supreme Court in Umacharan Shah & Brothers v. C.I.T (1959) 37 ITR 271 SC and Jer. & Company v. C.I.T (1971) 79 ITR 546 SC and also on several other rulings of the various High Courts.
12. Before adverting to the case law on the various questions, it would be convenient to mention the statutory provisions. Section 15 of the 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”.
13. Rule 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 licencing 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 questions 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 Sec. 15 of the A.P Excise Act applies to the non-licensee partners so as to make the partnership illegal?
3. Whether there is any violation of Rule 19(2) of the rules making the partnership illegal.
4. Whether Sec. 23 of the Indian Contract Act invalidates 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 Khesowji v. Champsey Dossa AIR. 1921 PC. 137
2. Umacharan Shah & Brothers v. C.I.T (1959) 37 ITR 271 SC.
3. Jer & Company v. C.I.T (1971) 79 ITR 546 SC.
17. The Privy Council decision in Gorchandas Khesowji v. Champsey Dosha AIR. 1921 PC 137 is very brief. It is an appeal against the judgment of the Bombay High Court in Champsey Dossa v. Gordhandas Khesowji AIR. 1917 Bombay 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 Sec. 11 of the Bombay Salt Act (Act 2 of 1890). The licence in that case was for the manufacture of salt. The relevant clause in the licence was as follows;
“Clause (5); That he, 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, sub-let, sell, mortgage or otherwise alienate whole or in part the privilege granted by this licence of manufacturing salt on the land within the aforesaid limits.”
18. The first defendant in that case who held the licence entered into a partnership along with 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 illegel. 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.”
19. 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 pertners who, however, do not actually take part in the manufacture nor is there any document directly transferring the right of manufacture to such partners”.
20. The above decision of the Privy Council will make it clear that formation of a partnership does not amount to a transfer
21. The next case which may be usefully referred to is the decision of the Supreme Court in Umacharan Shah & Brothers Case 1. The above case dealt with Section 42(1) of the Bengal Excise Act, 1911 and arose from the Calcutta High Court, Section 42(1) of the Act read 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 sub-let by the holder thereof without the permission of the said authority”.
22. In that case there were three brothers who formed a joint family under the Dayabbaga 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 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 amount as found to the cridit of the parties, that the banking account will be opened in the firm-name or in other name as agreed upon. For the years 1948-1949 two returns were filed showing the income from the business as having been received in the status of 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 Income Tax Officer rejected the claim for registration on 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 assessees 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”.
23. 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.
24. The next decision of the Supreme Court in Jer & Company v. C.I.T 1 (1971) 79 ITR 546 SC. arose from Allahabad and related to a licence obtained under Rule 574 of the U.P Excise Rules, 1910 in respect of wholesale vending of foreign liquor in form FLII. Form FLII contains clause (13) which states:
“The business covered by their licence shall not be sub-let or transferred”.
25. The Excise Commissioner was authorised to 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 sub-letting but also against formation of a partnership in respect of an excise licence without the prior approval of the Excise Commissioner.
26. Their Lordships of the Supreme Court observed as follows.
“The Commissioner and the High Court had proceeded on the footing that the licence was governed by Rule 322 of the Excise rules which prohibited the holder of the licence from entering into a partnership with another person. But the licence, it is clear from the record, was in Form FL. II. issued under the U.P Excise Manual. The licence does not prohibit the holder from entering into a partnership by the holder of the licence it merely provides that the licence shall not be sub-let or transferred. Since there is no prohibition in the licence against the holder entering into a partnership, the question. “Whether the partnership was illegal does not arise. The firm was entitled on that account for registration. It is some-what unfortunate that the attention of the Commissioner and the High Court was not invited to the form in which the licence was issued by the Excise Authorities. They proceeded to decide the case on the footing that Rule 322 of the Excise Manual applied, but that rule has no application here.”
27. This decision of the Supreme Court would make it absolutely clear that the view expressed in Umacharan's case (1959) 37 ITR 271 SC had been reiterated by Their Lordships when they held that formation of a partnership by a licensee did not amount to a transfer.
28. It is however contended for the Revenue that the Madras High Court in a Full Bench decision in Velu Padayachi's Case - AIR 1950 Mad. 444 at 449 FB had taken the view that under the Madras Abkari Act the formation of a partnership by a licensee partner amounted to a transfer of the licence. It is also contended that the said view was followed by this court in several judgments including the one in Basavaiah v. Kotaiah AIR 1965 A.P 145. Other cases such as the case of D. Mahideen Sahib and Co. v. Commissioner of Income Tax (1950) 18 ITR 200 and Commissioner Of Income-Tax v. Krishna Reddy. (1962) 46 ITR 784 were also relied upon. It was also submitted for the Revenue that the Kerala High Court in Commissioner Of Income-Tax, Bangalore…Applicant;* v. Union Tobacco Company…. (1961) 41 ITR 115 and the Punjab High Court in Commissioner of Income Tax v. Benarsi Das and Company (1962) 44 I.T.R 835 had taken the same view.
29. The question for consideration therefore is: Whether in view of the above two judgments of the Supreme Court these judgments cited by the learned counsel for the Revenue can still be said to be binding on us?
30. We are of the opinion that the clue to the question is to be found in the judgment of the Allahabad High Court in JER & Company (1966) 60 I.T.R 335 which was reversed by the Supreme Court judgment in JER & Company (1971) 79 I.T.R 546 (S.C) and we shall also refer to the Supreme Court judgment in Viswanatha Pillai's-(1969) 1 SCC 188 : AIR 1969 S.C 493, case also as pointing out the same clue.
31. In JER & Company's Case (1966) 60 I.T.R 335 decided by the Allahabad High Court, the question was raised under the Income Tax whether a partnership could be granted registration under the Income Tax Act even though it was trading on the basis of licence granted in the name of one of the partners. The Allahabad High Court held that it was not entitled to registration but on appeal the Supreme Court held that it was entitled to registration.
32. There are Three Passages. In the judgment of the Allahabad High Court in JER & Company (1966) 60 I.T.R 335 which are important:
(1) at page 343 of MLJ (449 of AIR)
“In Velu Paddayachi v. Siva Sooriyam Pillai AIR 1950 Mad. 444 at 449 : 1950 (1) MLJ 315 at 324 Govindaraj v. Kanda Swamy AIR 1957 Mad. 186 D. Mohideen Sahib & Co. v. Commissioner Of Income-Tax (1950) 18 I.T.R 200. Commissioner Of Income-Tax, Bangalore…Applicant;* v. Union Tobacco Company…. (1961) 411 I.T.R 115. Commissioner of Income Tax v. Benarasi Das & Company (1962) 44 I.T.R 835 and Commissioner of Income Tax v. Krishna Reddi (1962) 46 ITR 784 the partnership entered into by the licensee with other persons was held to be invalid or void”.
(2) at page 343 of MLJ (449 of AIR)
“In the case of Velupadayachi AIR 1950 Mad. 444 at 449 FB. the High Court of Madras had to deal with the Madras Excise Act and Rules having Similar Provisions to our Excise Act and Rules……………”and
(3) at page 343 of MLJ (449 of AIR).
“The passage approving the final conclusion of Horwill, J. in the Madras Full Bench as follows:
stating that Horwill, J. observed at page 324:
“…………Partnership entered into for the purpose conducting a business in arrack or toddy on the licence granted to only one of them is void ab initio. In that it either involves a transfer of the licence which is prohibited under Rule 27 and punishable under Section 56, or a breach of Section 15……punishable under Section 55, because the unlicenced partner, by himself or through his agent, the other partners sells without a licence”.
33. The above three passages from the judgment of the Allahabad High Court show that—
(a) the Allahabad High Court followed the Madras Full Bench;
(b) it also followed the other judgments of the Punjab, Madras, Andhra Pradesh and Kerala High Courts which followed the Madras Full Bench; and
(c) that the provisions of the Madras Abkari Act and rules and those of U.P Law are similar.
34. At Page 342, the Allahabad High Court also sought to distinguish Umacharan's case (1959) 37 I.T.R 271 SC on the ground that in that case Their Lordships of the Supreme Court were only concerned with the genuineness of firm and not with its legality.
35. It was this judgment of the Allahabad High Court in JER & Company (1966) 60 I.T.R 335 that was reversed by the Supreme Court in JER & Company (1971) 79 I.T.R 546 SC what is the effect of that reversal?
36. It may be noted that the Madhya Pradesh High Court in Daya-bhai & Company v. C.I.T (1966) 59 I.T.R 364 at 374 the Patna High Court in C.I.T v. Narapathi (1974) 97 I.T.R 645 at 651 and the Punjab High Court in C.I.T v. Gianchand (1973) 87 I.T.R 113 at 115 have already taken the view that the Madras Full Bench in Velu Padayachi's case or the cases following the said judgment must be deemed to have been impliedly overruled by the Supreme Court judgments. In the Patna case C.I.T v. Narapathi above mentioned, Untwalia C.J (as he then was) and S.K Jha, J. Observed:—
“Thus………. the cases relied upon by the learned Counsel for the Revenue, namely, D. Mohideen Sahab and Company v. Commr. of Income Tax; C.I.T v. Union Tobacco Company (1961) 41 ITR 115. (Kerala), and JER and Company v. Commissioner of Income Tax. (1966)-60 ITR 335 (Allahabad)……. must be held to be no longer good law.”
37. With respect, we agree with the view taken by the Madhya Pradesh, Patna and the Punjab High Courts in the above rulings for in our opinion too, the reversal of the Allahabad High Court's judgment by the Supreme Court has the effect of the Supreme Court impliedly over-ruling the various judgments which have been followed by the Allahabad High Court including the Madras Full Bench.
38. The same conclusion is to be arrived at from another decision of the Supreme Court in Viswanadha Pillai v. Shanmugham A.I.R (1969) 1 SCC 188 : AIR 1969 S.C 493 arising under the Motor Vehicles Act. While holding that a stage carriage could be plied lawfully by the real owner even though the permit was in the name of the benamidar. Their Lordships expressly dissented from the judgment of the Madras High Court in Varadarajulu Naidu v. Thavasi Nadar A.I.R 1963 Mad. 413 in paragraph 10 of their judgment.
39. An examination of Varadarajulu Naidu's A.I.R 1963 Mad. 413 of the Madras High Court would show that the Madras High Court relied upon Velu Padayachi's Case for coming to the conclusion that a partnership for carrying on transport business with the permit obtained in the name of one of the partners was invalid. In para 9 (at page 417) of Varadarajulu Naidu's case the Madras High Court observed:
“The second defendant was a partner, and as a partner he became an agent of the partnership as well as the other partner, and the running of the lorry with the permit of the 2nd defendant involved a contravention of the Motor Vehicles Act, namely, the user of the lorry by the owner, namely the partnership, who had no licence in its name. The view in Velu Padayachi case ILR 1950 Mad. 987 (AIR 1950 Mad. 444) FB is still good law, and therefore, we are of the opinion that the partnership in this case was an illegal one………”.
40. And as this judgment has been Expressly dissented by Their Lordships in Viswanatha Pillai's (1969) 1 SCC 188 : AIR 1969 SC 493 case what we have stated about the result of the reversal of the Allahabad judgment in Jer & Company's case (1966) 60 ITR 335 equally applies to the Madras Judgment in Varadarajulu Naidu's (1969) 1 SCC 188 : AIR 1969 SC 493 case, and it must follow that the dissent extended to Velu Padayachi's case (5) which was followed in Varadarajulu Naidu's case (19).
41. In Viswanatha Pillai's case the Supreme Court (1969) 1 SCC 188 : AIR 1969 SC 493 pointed out that in Section 42 of the Motor Vehicles Act, the words used were “permit granted” and the statute did not say “permit granted to him”. A reading of Sec. 15 of the A.P Excise Act shows that Sec. 15 also does not use the words to him.
42. It was argued for the Revenue that the judgment of the Supreme Court in Viswanadha Pillai's case arose under the Motor Vehicles Act and cannot be applied to Excise Laws of the kind with which we are concerned. But the said argument loses sight of the fact that both in Umacharan's case (1959) 37 ITR 271 (SC) and in the case of Jer & Company (1971) 79 ITR 546 (SC) the Supreme Court was dealing only with Excise Laws similar to the Madras and Andhra Pradesh Excise Laws.
43. Though a decision of the Supreme Court may not, in so many words, state that certain cases were wrongly decided, still when the supreme court decides a particular question in a particular way, every previous decision which had answered the same question in a different way cannot but he held to have been wrongly decided. This is the principle enunciated in Jai Kaur v. Sher Singh AIR 1960 SC 1118.
44. Even though the learned counsel on either side have not suggested that the matter may be referred to a Full Bench, we have considered the said question and in view of the Supreme Court Judgments (and particularly the one reversing the Allahabad view) and in view of the fact that the doctrine of implied over-ruling has already been applied on this very question by the Madhya Pradesh High Court in daya bhais's case (1966) 59 I.T.R 364 at 374 the Patna High Court in Narapathi's case (1974) 97 I.T.R 645 at 651 and the Punjab High Court in Gianchand's case (1973) 87 I.T.R 113 at 115 we are of the view, respectfully agreeing with the said High Courts, that the doctrine of implied over-ruling is applicable to the situation on hand and what applies to the Allahabad Judgment applies equally to the judgments of the Madras, Andhra Pradesh, Kerala and earlier Punjab cases referred to and followed by the Allahabad High Court in Jer & Company's.
45. In Young v. Bristol Aeroplane Company Limited 1946 (1) All England Reporter 98 the second proposition laid down by the House of Lords was as follows.
“The court is bound to refuse to follow the decision of its own, which, though not expressly over-ruled, cannot in its opinion, stand with a decision of the House of Lords”.
46. The above proposition of law has recently been applied by a Division Bench of this Court in Kodanda Rao v. Government of Andhra Pradesh 1981 (2) A.L.T 280 by Madhava Reddy, (as he then was) and Raghuvir, J. for not following certain judgments of this court in view of certain other judgments of the Supreme Court on the same point taking a different view.
47. For all the above reasons and applying the Supreme Court judgments in (a) Umacharans Case (1959) 37 I.T.R 271 (S.C) (b) JER and Company's Case (1971) 79 I.T.R 546 S.C (c) Viswanatha Pillai's case (1969) 1 SCC 188 : A.I.R 1969 S.C 493 we are of the view and we say so with great respect that the reversal of the judgment of the Allahabad High Court i.e, Jer and Company (1966) 60 I.T.R 335 and the dissent of the Madras High Court's Judgment i.e, Varadarajulu Naidu's case AIR 1963 Mad. 413 as above mentioned in the two cases i.e, Jer and Company and Viswanatha's case (1969) 1 SCC 188 : AIR 1969 SC 493 respectively by the Supreme Court have the effect of impliedly over-ruling:
1. Velu Padayachi's Case Madras AIR 1950 Mad. 444 at 449 F.B 2. Govindaraj's case (Madras) AIR 1957 Mad. 1863. Mohideen Sahib and Company's case (Madras) (1950) 18 ITR 2004. Union Tobacco's case (1961) 41 ITR 115 (Kerala) 5. Benarsi Das's case (1962) 44 ITR 835 (Punj.) and 6. Krishna Reddi's case Andhra Pradesh which were followed either by the Allahabad High Court in Jer & Company (1966) 60 ITR 335 or by the Madras High Court in Varadarajulu Naidu's case AIR 1963 Mad. 413. I he judgment of the Andhra Pradesh High Court in Basavaiah v. Kotaiah AIR 1965 AP 145 which also followed the Madras F B cannot, if we may say so with great respect, be treated as good law for the same reasons. We shall, a little later, deal with the unreported judgment of the Supreme Court referred to therein. We respectfully state the judgment of the Andhra Pradesh High Court in CS & Company v. Lal & Company AIR 1960 (AP) 444 is consistent with the judgment of the Supreme Court.
48. Therefore the view taken by the Madras F.B AIR 1950 Mad. 444 at 449 FB In para 9 (page 449 of AIR and 343 of MLJ) in respect of rule 27 and Section 15 of the Madras Abkari Act (1886) cannot, if we may say so with great respect, be held to be holding the field after these Supreme Court Judgment. That is also the view expressed by the Madhya Pradesh, Patna and Punjab High Courts in the rulings already referred to by us.
49. The legal position can be summarised as follows:
(1) Rule 19(1) of the Rules directs that a licensee shall not transfer the licence to any other person. However when a licensee enters into a partnership with others for sharing the profits or losses arising out of the use of the license, there is, in the eye of law, no transfer of the licence. Consequentially there is no contravention of Rule 19(1). The position cannot be compared with a situation where the licensee partner actually transfers the licence in favour of a third party.
(2) Section. 15 of the Act, no doubt, requires that 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 that behalf. But Section. 15 does not use words licence ‘granted to him’ nor is there any other specific provision either requiring the partnership to take out a licence or making the formation of a partnership illegal.
50. It may also be noted that the Revenue has not produced the relevent licence to point out which particular term or condition of the licence has been contravened.
51. We may also point out that Section. 15 of the A.P Excise Act is similar to para 3 of the West Bengal Rice and Paddy Control Order, 1960 which reads follows:
“No person shall carry on business as a dealer except under and in accord-with the licence granted under the Act.”
52. The permit holder entered into a partnership in Commissioner of Income Tax v. Mamck Chandra Devi and the question arose whether the partnership was illegal and not entitled to registration under the Income Tax Act. Speaking for the Division Bench and construing para 3 of the Control Order and after referring to the three Supreme Court Judgments in Umacharan's case Jer and Company (1971) 79 ITR 546 (SC) and Viswanadha Pillai's (1969) 1 SCC 188 : AIR 1969 SC 493 case Sabyasachi ??? J. (as he then was) observed:
“In this case, the provisions of the Control Order, as we have set out herein before, do not prohibit entering into a partnership or make the formation of partnership illegal.”
53. And held that the partnership was entitled to registration.
54. To a like effect is the decision of the Patna High Court in Commissioner of Income Tax v. K.C.S Reddy (1960) 38 ITR 563 where the Bihar Mica Act, 1948 required a licence for purchase sale or possession of mica, and a partnership by the licensee was held entitled to registration.
55. Similarly Dungate v. Lee 1967 (1) All England Reports 241 provides a close analogy to Section 15 of the Andhra Pradesh Excise Act. In the said case the provisions of the Betting and Gaming Act, 1960 and 1963 were considered. Section 2 provided that no person shall act as a book maker on his own account unless he is a holder of a permit authorising him to act. Otherwise he was liable to be punished. Section 28(1) defined ‘book maker’ as any person other than, the Board who whether on his own account or as servant or agent to any other person carries on the business etc. Para 17 of Schedule I provided that the licence may be refused by the authority if it is satisfied that the business will be managed or carried on for the benefit of a third party. Inspite of the above provisions a partnership was formed by the licensee partner who was the defendant in the case. The plaintiff was the partner who had no book maker's permit. The plaintiff did not take bets over the counter of the office but took bets some times on telephone. The plaintiff sued for dissolution. The defendant pleaded that the partnership was void under the Act. Buckley, J. held that although the Act required every partner who “Acted as a Book Maker” to have a book maker's permit, it did not require that every partner should have a book maker's permit and accordingly the partnership was held valid. It was observed by Buckley, J. as follows:
“There is, of course, nothing illegal about the carrying on of a betting office business with due regard to the Betting and Gaming Act, 1960 nor anything illegal about forming a partnership to carry on such business with due regard to the requirements of the Act of 1960”.
(emphasis supplied)
56. We respectfully agree with the above rulings.
57. The learned counsel for the Department placed strong reliance on the unreported decision of the Supreme Court in Govinda Rao v. Nathumal Civil Appeal No. 30/60 dt 11-4-62 of Supreme Court. That was an appeal from the judgment of the Bombay High Court reported in Govind Rao v. Nathumal and the facts of the case can be pulled out from that judgment of the Bombay High Court. The judgment of the High Court as well as the Supreme Court on appeal have been considered in detail by Chandurkur, J., of the Bombay High Court in Vasantha Rao Shesh Rao v. Devi Prasad Mahadeo (1970) 72 Bombay Law Reporter 333 and have been distinguished and were held to be not in conflict with the decision of the Privy Council in Godhandas Khesowji's case AIR 1921 PC 137 or the Supreme Court judgment in Umacharan's case (1959) 37 ITR 271 (SC).
58. We also agree that Govinda Rao's case is clearly distinguishable. There the Supreme Court laid emphasis on Section 3(1) of the CP and Berar Food Grains Control Order, 1945 which prohibited any person to Deal in food grains without a licence. The words “Deal in Food Grains” were defined as follows:
“To engage in the business of purchase, sale, or storage for sale of food grains whether on one's own account or an account of or any partnership.”
59. In that judgment the Supreme Court observed as follows;
“Without going into the pleas of the defendants it is quite clear that the appellant (plaintiff) was making it easy for the respondent to trade in food grains in Central Provinces without holding a licence, thus abetting an offence of the contravention of the Food-grains Control Order by the respondents, if not committing an offence himself. The definition of the phrase ‘dealing in food-grains’ which we have quoted clearly shows that every person who dealt in food-grains in a place where the order applied had to possess a licence. The word ‘person’.
“In Sec. 3(1) must include a group or association of persons like a firm of partners. A licence in the name of one of the partners was not enough. The partnership thus was an illegal one, because the object of the partnership was illegal…… It is obvious that the partnership was not licensed as a partnership. Therefore, the partnership could not deal in food-grians in Central Provinces and Berar. The licence in the name of the appellant was not one in favour of the partnership, and the whole of the transaction by the partnership was in contravention of the food grains Control Order. A court would not enforce any claim arising from this illegal partnership.”
60. A reading of the above judgment of the Supreme Court would clearly show that in that case there was a specific prohibition against the formation of a partnership by the licensee partner. It is also important to note that even with the permission of the competent authority a licence in the name of one partner could not be used by the partnership and it was necessary that the partnership itself, as a unit was to have a licence in its own name as pointed out by Chandurkar, J. in Vasantha Rao's case. (1970) 72 Bombay Law Reporter 333.
61. Agreeing respectfully with the view taken in Vasantha Rao's case by the Bombay High Court, we hold that the unreported judgment of the Supreme Court in Govinda Rao's case Civil Appeal No. 30/60 dated 11-4-82 of Supreme Court, is clearly distinguishable in as much as in that case there was a specific prohibition against a partner using his licence for the purpose of a partnership of which he was a partner and as the partnership itself was liable to hold a licence in its own name. There was no provision for the conversion of the partner's licence even with permission for the purpose of being used by the partnership firm.
62. It is therefore not necessary for us to discuss the case in Budhram v. Dhuri Co-operative Society AIR 1972 Punjab & Haryana 185, which followed Govinda Rao's case (supra)
63. Learned Counsel for the Department also contended that a partnership firm is a juristic person and that in Govinda Rao v. Nathumal (supra) the Supreme Court held that a partnership was a juristic person liable to take out a licence in its own name.
64. We have already pointed out that the special statutory provisions in Govinda Rao's case (supra) required the partnership itself to take a licence and it is in that context that it was so decided In Mandalsa Devi v. Ramnarian AIR 1965 SC 1718 and in Dul Chand's case 29 ITR 535 (Supreme Court) the Supreme Court held that two Supreme Court judgments and the other Supreme Court Judgments already referred to, we are of the opinion, that a firm is not a juristic entity and under the Andhra Pradesh Excise Act and Rules, the firm need not take out a licence in its own name.
65. For the aforesaid reasons, we are of the opinion, on questions one and two framed by us that there is no transfer of the licence within Rule 19(1) and that Section 15 does not apply to the non-licensee partners and that the partnership is not illegal.
66. The third question framed by us earlier is as follows: Whether the partnership becomes illegal if the Rule 19(2) of the A.P Excise Rules has been violated. A reading of the rule would show that the said provision is not applicable to the case of a licence in the name of single person. Hence in RC No. 241/80 the said rule was conceded to be not relevant. The said Rule 19(2) would be relevant, however, in RC No. 279/80 and the question would arise in the RC with regard to the said rule in as much as the licence was initially in the name of more than one person and thereafter one more person was brought in as a fresh partner. Rule 19(2) requires the sanction of the concerned authorities for including fresh partners in the partnership.
67. It may be noted in this context that Chapter VII of the Act provided that such contraventions, may be visited with either a punishment or fine in a certain amount of rupees to be imposed at one time and not for every day during the continuance of the partnership without such permission. There is also no express provision making the partnership illegal.
68. This question has come up for consideration in connection with registration of partnership firms under the Income Tax Act.
69. A Full Bench of the Allahabad High Court dealt with this aspect in PC Kapoor v. C.I.T (1973) 90 ITR 172 Rule 337, which was considered in that case required the permission of the competent authority but the said rule was treated as purely administrative. However, condition No. 4 of the licence also required the permission of the competent authority for the formation of the partnership and if the condition was violated it resulted in a fine upto over Rs. 200/- under Section 64 of the UP Excise Act. The question arose whether the permission not having been obtained, the partnership itself became invalid disentitling the partnership for registration under the Income Tax Act. In that connection the Full Bench quoted the following passage from Halsbury's Laws of England 3rd Edition Vol. VIII, para 245 page 241 as follows:
“If the penalty is recurrent, that is to say, if it is imposed not merely once for all but as often as the fact is done, this amounts to a prohibition”.
70. They then referred to the Full Bench decision of the same court in Udhoodass v. Prem Prakash AIR 1964 Allahabad 1 (FB), where a Full Bench of the Allahabad High Court held that a contract of tenancy entered into without the permission of the concerned authority under the U.P Control of Rent and Eviction Act was not void even though the statute penalised the land lord for letting out the premises in contravention of the provisions of the Act. As between the parties to the contract, the tenancy was held to be valid. After referring to the said Full Bench in Udhoodas's case (AIR 1964 Allahabad 1 (Full Bench) the Full Bench in Kapoor's case 1963 All. IJ 406 : AIR 1964 All. 1 (FB). While holding the partnership to be valid and directing registration observed as follows:
“It follows that the wide proposition that, whenever a contract which result in breach of some provisions of Law, is entered into and the contracting party becomes liable to be punished under the law, it necessarily is a contract which is forbidden by law and is as such void, cannot be accepted”.
71. The decision of the Allahabad Full Bench in Udhoordas case (Supra) has since been approved by the Supreme Court in Muralidhar v. State of Uttar Pradesh (1973) 90 ITR 172. There Mathew, J. observed.
“In Udoordas v. Preme Prakash (AIR 1964 Allahabad 1 (FB) a Full bench of the Allahabad High Court took the view that a lease made in violation of the provisions of Sec. 7(2) would be valid between the parties and would create the relationship of landlord and tenant between them although it might not bind the authorities concerned. In the light of this ruling—the correctness of which we see no reason to doubt-we think that the respondent was a tenant.”
(emphasis supplied).
72. In that case, the provisions of Section 7 of the U.P Rent Control Act required the permission of the District Magistrate-tor letting out accommodation. The Act did not say that the tenancy created without permission was invalid. It only provided for punishment. The lease was held valid between the parties. The said Supreme Court decision approving the Allahabad Full Bench was followed by a Full Bench of this Court in Shankarlal v. Jagadeswar Rao AIR 1980 AP 181 (FB) in relation to the Hyderabad and Andhra Pradesh Rent Control Act.
73. As the Full Bench of the Allahabad High Court in Kapoor's case 1663 All. LJ 406 : AIR 1964 All. 1 (FB) with which we respectfully agree, applied the above principle of law in Udhoordas case (supra)which has since been accepted by the Supreme Court and followed by this Court, we are of the view that the partnership is valid as between the parties even though permission of the Excise authorities was not obtained and even though the authorities may have power to punish the parties for contravention of the Act or the Rules.
74. In Gherumal v. Mahadeodas AIR 1959 SC 781, Their Lordships approved the decision in Thaites v. Coulth waite (1896) 1 Ch 496 and held that in respect of wagering contracts collateral partnerships were valid as between the partners.
75. A similar view was taken by the Madhya Pradesh High Court in Malwa Knitting Works v. C.I.T (1977) 107 ITR 379, where an advocate becoming a partner in a business concern was held not to make the partnership illegal but only involved the advocate liable for disciplinary action under the Bar Councils Act. The registration of the partnership could not be refused under the Income Tax Act. Similarly the Mysore High Court in Sri ramakrishna Mining Company v. CIT. (1969) 64 ITR 197 considered Section 49 of the Mines and Minerals (Regulation and Development) Act, 1948 under which a mining lease was to be in accordance with Rule 37 of the Mineral Concession Rules, 1949. Though the said rule provided that a lessee may make a transfer of the lease only with the previous sanction of the State Government, it was held by the Mysore High Court that the transfer and the consequential partnership formed by the transferee did not make either the transfer or the partnership void and that the partnership was entitled to registration under the Income Tax Act. It was held that there was no express prohibition against transfer or formation of partnership and that Rule 37 was only an enabling provision.
76. The above ruling are directly applicable to the facts of the present case and following the same, we hold that the partnership is valid as between partners.
77. In Commissioner of Income Tax v. Sheonarayana (1975) 100 ITR. 213 (M.P), and Commissioner of Income tax v. Pagola Hotel and Restaurant (1974) 97 ITR. 271 (M.P) and Mohopatra Bhandar v. Commissioner of Income Tax (1965) 58 ITR. 671 (Orissa) relied upon by the Revenue the relevant rules only required the permission of the competent authority for the license partner forming a partnership and there was no express prohibition making the partnership illegal. The partnerships were however held to be illegal by the Madhya Pradesh and Orissa High Courts. If we may say so with great respect the said view is contrary to the principles laid down by the Supreme Court in the above cases' and we are of the opinion that these cases are not correctly decided.
78. The fact that the excise authorities have not exercised their power of cancelling or suspending the licence is also an important circumstance in favour of the assessee, vide Kapoor's case A.L Thyagaraja Pillai v. CIT (1965) 55 ITR. 419 and Viswanadha Pillai's case (1969) 1 SCC 188 : AIR 1969 S.C 493 and we respectfully follow these rulings.
79. In fact, the Appellate Assistant Commissioner and the Tribunal rightly in our view, observed that Rule 19(1)(2) and Section 15 have to be contrasted with the M.P Denatured Spirit and Denatured Spirituous Preparation Rules 1970 and condition 9 under Rule 5(2) of the A.P Indian Liquor (Storage in Bond) Rules, 1969 and Rule 39 of the A.P Foreign Liquor and Indian Liquor Rules, 1970. These latter rules unlike the rules with which we are concerned. Specially prohibited the formation of a partnership. Therefore, no prohibition can be implied in Sec. 15 or Rule 19(1) or (2).
80. The legal position may be summarised as follows:— Rule 19(2) requires that whenever a new partner is introduced or excluded, the previous permission of the licensing authority should be obtained. But if such permission is not obtained the partnership is not rendered illegal. As between the partners it continues to be valid and is entitled to registration under the Income Tax Act.
81. We shall now take up the fourth point framed by us, viz, whether Section 23 of the Indian Contract Act makes the partnership agreement void.
82. We have already held that the partnership formed by the licensee partner without the permission of the competent authority cannot be considered to be illegal or void. For that purpose, we have followed the Privy Council and Supreme Court judgments In—
1. Gordhandas's case AIR 1921 PC 137
2. Umacharan's case (1959) 37 ITR 271 (SC)
3. Jer & Company's case (1971) 79 ITR 546 (SC)
4. Viswanadha's case (1969) 1 SCC 188 : AIR 1969 SC 493
5. Gherumal's case AIR 1959 SC 781; and
6. Muralidhar's case (1974) 2 SCC 472 : AIR 1974 SC 1924
83. Further, the contract of partnership has to be construed in a marcher in which it would be consistent with the provisions of the Excise Act and the Rules. The Full Bench of the Allahabad High Court in Kapoor's Case AIR 1974 SC 1964 stated that it did not necessarily follow that the non-licensee partner claimed a right to sell liquor. He participates in the business in a manner permissible by the law. In C.I.T v. KCS Reddy (1160) 38 ITR 563, the Patna High Court also held that the licensee partner had the option to decide who should conduct the business of purchasing and selling mica, in C.I.T v. Prakasa Ram (1969) 72 ITR 366 the Patna High Court considered a partnership deed which contained a provision that the non-licensing partner shall supervise and be incharge of the business. Still it held that he could not sell or purchase and the deed was to be construed in such a way so as to make it valid. Similarly in MD Warasat Hussain v. C.I.T (1969) 72 ITR 366 the Patna High Court was considering a partnership deed in which clause (6) stated that the management of the business shall be in the hands of all the partners. It was observed that there was no evidence that the non-licensee partner carried on the actual business—
“the management of the business… does not mean handling of the excisable commodities. The unlicensed partner may look after the management without handling or without being in possession of the excisable articles so long as they do not contravene the terms and conditions of the licence.”
84. Smilarly the Mysore High Court in Sri Ramakrishna Mining Company's case (1969) 64 ITR 197 observed that it was not possible for any one to suggest, having regard to the provisions of Rule 37, that the performance of the partnership contract was impossible “except by disobedience of the law.” In Dungate v. Lee (1967) 1 All England Reports 245 Buckley, J. observed that the non-licensee partner may “confine his participation in the business, to keeping accounts and records” and again observed—
“………The partnership agreement was not one which specifically acquired the plaintiff to act as a book maker……”
85. Even if the non-licensee partner took orders on telephone for credit-betting, Buckley, J. held—
“the partnership agreement was not entered on that basis—that is, with a common intention - that the plaintiff should perform this particular function”.
86. It is therefore clear that the partnership agreement has to be construed in such a way as to make it legal and so that the partners would act in accordance with the Act and Rule and with an indention not to violate the same. We respectfully follow the above rulings of the Allahabad, Patna and Mysore High Courts referred to above. There is also no material produced by the Department to show that the non-licensee partners have acted in contravention of the Act or Rules.
87. Further when a partnership-firm is formed with an intention that the non-licensee partner would not act in violation of the Act or the Rules (i.e by themselves conducting the prohibited transactions), a question might arise as to what would happen to the validity of the partnership if at times, the non-licencee partners ‘acted’ contrary to the Act or Rules.
88. We have already referred to the judgments of the Court Supreme which stated that it is for the authorities to take either penal action or exercise discretion to suspend or cancel the licence. But that does not make a partnership-which was legal, to start with—illegal on account of the susbequent wrongful action one of the partners. In fact the Dungate v. Lee (1969) 1 All England Reports 245, Buckley, J. also dealt with this aspect and held
“any infringment of the Act of 1960 that may have occurred in the conduct of the business after the establishment of partnership cannot in these circumstances have any bearing on the validity of the partnership agreement.”
89. To a like effect are observations of the Mysore High Court in Sriramakrisha Mining Company's case (1969) 64 ITR 197 where the said High Court followed Morles v. Philip Thant and Son Limited. 1954 (1) QB 29. In that decision Singleton and Denning LJJ (Hodson LJ Dissenting) pointed out the distinction between illegality of a contract and illegality in its performance. We respectfully agree with the above rulings, and hold that the subsequent acts of the partners cannot make the partnership illegal.
90. Coming to public policy under Section 23 of the Contract Act, it was argued for the Department that the Madras Full Bench in Velu Padayachi's AIR 1950 Mad 444 at 449 FB case based its conclusion on public policy also and that public policy was very much relevant under Excise Acts relating to liquor. We pointed out to the learned counsel for the Revenue, that the two cases in Umacharan's case (1959) 37 ITR 271 (SC) and Jer & Company's case (1971) 79 ITR 546 SC decided by the Supreme Court also related to the Bengal and Uttar Pradesh Excise Acts respectively and that their Lordships have still held that the partnership firms were valid and entitled to registration under the Income Tax Act. It was then contended for the Department that the Supreme Court did not, in the above case expressly deal with the question of public policy while dealing with the question of registrarion of partnership under the Income Tax Act and that the Supreme Court judgments cannot be taken as authority on the question of public policy.
91. We are of the opinion that it is not open to us to ignore the Supreme Court judgments on the ground that their Lordships have not considered the question of public policy.
92. When the Bombay High Court in a case arising under the C.P and Berarm Municipalities Act, 1922 ignored a judgment of the Supreme Court on the ground that the relevant provisions of the Act were not brought to the notice of the Supreme Court Their Lordships observed in B.M Lakshmi v. Malkapur Municipality (1970) 2 SCC 267 : A.I.R 1970 S.C 1002.
“the decision was binding on the High Court and the High Court could not ignore it because they thought that relevant provisions were not brought to the notice of the Court.”
93. We therefore reject this contention of the Department and hold that the partnership agreement does not violate any public policy.
94. For the aforesaid reasons we hold on the fourth point framed by us that the partnership in question does not offend Section 23 of the Indian Contract Act.
95. The Income Tax authorities cannot therefore refuse registration for the partnership. In view of the various judgments of the Supreme Court referred to by us, the Full Bench decision of the Madras High Court in Velu Padayachi's case AIR 1950 Mad. 444 at 449 FB and the rulings of the Andhra Pradesh High Court following the same, must be deemed to have been impliedly overruled. For the aforesaid reasons, we hold that neither in R.C No. 241/80 nor in RC No. 279/80 there is any violation of Rule 19(1) or 19(2) or Section 15, and that therefore, the partnership are entitled to registration under the Income Tax Act.
96. The Tribunal was therefore right in holding that the partnerships are valid and entitled to registration. The three questions referred to us by the Tribunal in R.C No. 241/80 are answered in the affirmative in favour of the assessee. Similarly the question in R.C No. 279/80 is answered in the affirmative and in favour of the assessee
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