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Citation Codes
Equivalent Citations
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Case Number
Attorney(S)
  • For the Appellant: T.S. Raghavachariar, Advocate.
  • For the Respondent: S. Ranganathan, V. Balasubramaniam, Advocates.
Judges
  • S. Ramachandra Iyer, C.J
  • Srinivasan, J.
Acts
  • provisions contained in Section 15 of the Abkari Act,
  • S. 55 of that Act. Section 15 of this Abkari Act
  • provisions of Section 15 of the Abkari Act
  • SECTION 27 INCOME TAX ACT
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Cites
Cited by
Citation Codes
Equivalent Citations
citation codes
Case Number
Attorney(S)
  • For the Appellant: T.S. Raghavachariar, Advocate.
  • For the Respondent: S. Ranganathan, V. Balasubramaniam, Advocates.
Judges
  • S. Ramachandra Iyer, C.J
  • Srinivasan, J.
Acts
  • provisions contained in Section 15 of the Abkari Act,
  • S. 55 of that Act. Section 15 of this Abkari Act
  • provisions of Section 15 of the Abkari Act
  • SECTION 27 INCOME TAX ACT
See more information ...
Smart Summary

Court Opinion Summary — S. Ramachandra Iyer, C.J.

Factual and Procedural Background

This reference concerns whether an application by the assessee, A.D. Thiagaraja Pillai, under Section 27 of the Income-tax Act was filed within the time permitted by that section.

Relevant facts as stated in the opinion: - A.D. Thiagaraja Pillai and Kalyanasundara Nadar were members of a firm engaged in taking Abkari contracts and vending toddy in South Arcot District. The firm used the financial year as its year of account. - Prohibition was introduced in the District on 1-10-1948. The firm filed returns for two periods after prohibition: 1-4-1947 to 31-3-1948 (income disclosed Rs. 9,144) and 1-4-1948 to 30-9-1948 (income disclosed Rs. 5,000). - The Income-tax Officer did not take up the firm's assessment until 1953. Early in 1953, the officer requisitioned a wealth statement from Kalyanasundara Nadar; there was no response. - The Income-tax Officer informed Kalyanasundara Nadar of his intention to proceed under Section 23(4); despite no response, on 11-3-1953 the officer completed the firm's assessment fixing business income at Rs. 2,00,000. Notice of demand for tax was served on Kalyanasundara Nadar on 20-3-1953. - The Income-tax Officer then assessed A.D. Thiagaraja Pillai personally, including one half of the ascertained business profits (Rs. 1,00,000). Notice of demand for Thiagaraja Pillai's assessment was served on 25-3-1953; a copy of the firm's assessment order was furnished to him on 16-4-1953. - Thiagaraja Pillai stated he only learned of the firm's assessment on receipt of the order on 16-4-1953. He applied to the Income-tax Officer on 21-4-1953 under Section 27 for cancellation of the assessment. The Income-tax Officer rejected the application as barred by limitation, holding it should have been filed within 30 days after service of the assessment order on Kalyanasundara Nadar. That view was affirmed by the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal. - The present reference asks whether the Section 27 application was within time.

Legal Issues Presented

  1. Whether the application filed by A.D. Thiagaraja Pillai under Section 27 of the Income-tax Act was filed within the time permitted by that section.
  2. Whether the notice of assessment (and demand) served on Kalyanasundara Nadar was sufficient to bind A.D. Thiagaraja Pillai — a question that turns on whether the entity assessed was a lawful partnership (a firm) or an association of persons, and if the latter, whether Kalyanasundara Nadar was the "principal officer" for service purposes.
  3. Whether the partnership between Thiagaraja Pillai and Kalyanasundara Nadar was illegal by reason of Abkari/ licensing rules (and thus whether the assessment should have been made on an association of persons rather than a firm), with consequences for the proper starting point of the time-limit for a Section 27 application.

Arguments of the Parties

Appellant (Thiagaraja Pillai) — Arguments presented by T.S. Raghavachariar

  • Contended that the partnership was effectively formed to exploit a licence taken benami by certain persons and therefore the partnership should be regarded as illegal; on that basis the assessment should be treated as one on an association of persons rather than on a firm.
  • Argued that because notice for proceeding under Section 23(4) was not served on any principal officer of the association (there being, according to counsel, no such officer), the assessment was illegal; accordingly, the time for making an application under Section 27 should be reckoned from 25-3-1953, the date when Thiagaraja Pillai received notice of demand of tax.
  • The court records that this contention was based largely on assumptions for which there were no materials on record; even the statement made by Thiagaraja Pillai under Section 66(2) described the entity as an "association" that had taken up the toddy contract, which the court viewed as implying the licence was taken in the name of the association itself.

Revenue / Income-tax Authorities

  • The Income-tax Officer rejected the Section 27 application as barred by limitation, treating the relevant 30-day period as beginning from the service of the assessment order on Kalyanasundara Nadar (20-3-1953).
  • The Appellate Assistant Commissioner affirmed that view, stating the application under Section 27 was rejected as out of time and that the Income-tax Officer had no power to condone the delay.
  • The Income-tax Appellate Tribunal also affirmed the rejection and proceeded on the assumption that the service of notice on Kalyanasundara Nadar bound Thiagaraja Pillai.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Md. Abdul Kareem and Co. v. Commissioner of Income-tax, Madras (1948‑2 Mad LJ 528; AIR 1949 Mad 509) Partnership between two persons where one had a lease of an arrack shop and the other a toddy shop to run jointly was held to be illegal; firm liable to be assessed as an association of persons. The court cited this case as an instance where a partnership in Abkari business was held illegal, but used it to explain that such rulings do not support a blanket rule that every partnership in arrack/toddy is illegal without examining the facts.
Velu Padayachi v. Sivasooriam Pillai (ILR 1950 Mad 987; AIR 1950 Mad 444) — Full Bench Declared that a partnership entered into to conduct arrack/toddy business under a licence granted to only one partner would be void ab initio; based on contravention of Section 15 of the Abkari Act and punishable under Section 55. The court relied on the Full Bench decision to set out the legal principle but stressed that illegality depends on facts, including whether there had been disclosure to and concurrence by Revenue authorities.
J.D. Italia v. D. Cowasjee (ILR 1944 Mad 697; AIR 1944 Mad 295) Where Revenue authorities were fully aware of and agreeable to partners using a licence issued in one partner’s name for the benefit of the partnership, the partnership could not be regarded as illegal. The court used this authority to show that governmental concurrence or awareness may render a partnership valid even where a licence is in one partner's name.
Commissioner of Income-tax Andhra Pradesh v. Raja Reddi Mallaram (1964‑51 ITR 285; AIR 1964 SC 825) Held that an order of assessment made after dissolution of an association of persons, after serving notice upon one of its members in accordance with Section 63(2), could be enforced against other members who were not served. The court invoked this Supreme Court decision to explain that where an assessment is on an association of persons, the procedure and effect of service (including on one member) are governed by the Act and can bind other members depending on whether service was on a principal officer.

Court's Reasoning and Analysis

The court's reasoning proceeds in logical steps grounded in statute and the authorities cited:

  1. The central factual/legal determination required is whether the entity assessed was a lawful partnership (a firm) or an association of persons; this determines the proper procedure for notice and the starting point for the time-limit applicable to a Section 27 application.
  2. Precedents establish that partnerships formed to exploit an Abkari licence may be void if they contravene Section 15 of the Abkari Act or the terms of the licence, but that illegality is not automatic. If the licence was taken in the firm's name, there is no illegality; if in one partner's name, the partnership may still be valid if the Government/Revenue authorities had knowledge of and consented to the arrangement (J.D. Italia).
  3. The legal consequences differ by characterization: - If the partnership is legal, assessment can properly be made on the firm and service of notice on one partner will bind the other partner(s), so the 30-day limitation for an application under Section 27 would run from the relevant service to the partner(s). - If the partnership is illegal and the assessment was effectively on an association of persons, statutory provisions such as Section 44 (deeming of association to continue for assessment purposes), Section 63(2) (notice may be addressed to principal officer), and the definition of "principal officer" in Section 2(12) determine whether service upon one person binds others. The question whether the person served was a principal officer is fact-specific.
  4. The court found that neither the Income-tax Officer, the Appellate Assistant Commissioner nor the Tribunal examined these critical factual questions (whether the partnership was legal or illegal, and whether Kalyanasundara Nadar was a principal officer of an association if the entity were an association). Instead they assumed that service on Kalyanasundara Nadar bound Thiagaraja Pillai and dismissed the Section 27 application as time-barred.
  5. The court emphasised that Thiagaraja Pillai, in a prior statement under Section 66(2), used the word "association" in a manner that could imply the licence was taken in the name of the association; that fact pointed against assuming illegality without investigation. In short, factual inquiry is necessary before deciding the limitation question.
  6. Because the Tribunal and the authorities failed to decide the preliminary factual issues determinative of whether service bound Thiagaraja Pillai, the Tribunal was not justified in holding the Section 27 application to be out of time.
  7. The court therefore answered the reference by finding the earlier dismissals on the ground of limitation to be unsustainable in the absence of findings on (a) legality of the partnership and (b) whether the person served was a principal officer in the event the entity was an association of persons.

Holding and Implications

Holding: The court held that the Income-tax Appellate Tribunal was not justified in holding that A.D. Thiagaraja Pillai's application under Section 27 of the Income-tax Act was out of time without first determining whether the notice served on Kalyanasundara Nadar was sufficient to bind Thiagaraja Pillai (i.e., without determining whether the entity assessed was a lawful partnership or an association of persons and, if the latter, whether Kalyanasundara Nadar was the principal officer).

Implications and immediate consequences:

  • The Tribunal's conclusion that the Section 27 application was barred by limitation is set aside to the extent that it was reached without making the necessary factual findings described above.
  • The proper course requires investigation and findings on (a) whether the partnership was legal or illegal (including whether the licence was in the firm's name or used with governmental concurrence), and (b) if the entity was an association of persons, whether Kalyanasundara Nadar was a principal officer such that service on him bound other members.
  • The court expressly noted there should be no order as to costs in the circumstances.
  • No broader, categorical rule was laid down that all partnerships in arrack/toddy are illegal; instead the court emphasised that legality turns on facts and earlier authorities, and thus no sweeping new precedent was established beyond the court's application of existing authorities to the procedural posture of this case.

Answer given by the court: the Tribunal was not justified in holding the Section 27 application to be out of time without the necessary factual determinations; no order as to costs.

Show full summary ...

    A.D. Thiagaraja Pillai v. Commissioner Of Income-Tax

    The Judgment of the Court was delivered by

    S. Ramachandra Iyer, C.J:— The question for decision in this reference is whether the application filed by the assessee under Section 27 of the Income-tax Act was within the time permitted by the section. The reference relates to the individual assessment of A.D Thiagaraja Pillai made by the Income-tax Officer, Cuddalore, on 25-4-1953 for the year 1948–1949. Thiagaraja Pillai and one Kalyanasundara Nadar were members of a firm, which had engaged itself in taking Abkari contracts and vending toddy in the South Arcot Dt. They had been doing such business for a number of years till 1-10-1948, when prohibition was introduced by the State Government in that District. The year of account adopted by the firm was the financial year. Returns of income were, after the introduction of prohibition therefore, submitted on behalf if the firm for two periods: (1) from 1-4-1947 to 31-3-1948 and (2) from 1-4-1948 to 30-9-1948. The returns disclosed an income of Rs. 9144 and Rs. 5000 respectively for the two periods referred to above. For some reason, not discoverable in the record, the Income-tax Officer did not take up the assessment of the firm till the year 1953. Early that year, he called upon Kalyanasundara Nadar to file his wealth statement for three years prior to the date of return. There was no response to that requisition. The officer then informed Kalyanasundara Nadar of his intention to proceed against the firm under S. 23(4) of the Act; even then the latter did not move on 11-3-1953, the Income-tax Officer completed the assessment fixing the business income of the firm at Rs. 2,00,000. Notice of demand for the tax was served on Kalyanasundara Nadar on 20-3-1953.

    2. The Income-tax Officer then took up the personal assessment of the other partner, A.D Thiagaraja Pillai, (with whom we are concerned) and included in his individual assessment a half here of the business profits ascertained above, namely, Rs. 1,00,000. Notice of demand in respect of this assessment was served on Thiagaraja Pillai on 25-3-1953, a copy of the order of assessment on the firm was furnished to him on 16-4-1953. Thiagaraja Pillai stated that it was only on receipt of the order on the later date that he same to know that the firm had been assessed under S. 23(3) of the Act. He, therefore applied to the Income-tax Officer on 21-4-1953, under S. 27 of the Act, for cancellation of the assessment. The Income-tax Officer rejected his application as barred by limitation. In his view, the application must have been filed within 30 days after the service of the assessment order on Kalyanasundaram. This view was affirmed on appeal and on further appeal by the Appellate Assistant Commissioner all the Income-tax Appellate Tribunal respectively.

    3. T.S Raghavachariar appearing for Thiagaraja Pillai has contended that inasmuch as the partnership now in question was formed to exploit a licence to vend toddy obtained by certain benamidars it should be regarded as an illegal one and the assessment, in the circumstances, must be held to have been made on an association of persons consisting of Thiagaraja Pillai and Kalyanasundara Nadar. On this assumption learned counsel proceeded to contend that as notice for proceeding under S. 23(4) was not served on any principal officer of the association, there being no such officer for the association, according to learned counsel, the assessment must be regarded as illegal and the time, for the purpose of an application under S. 27, should be reckoned from 25-3-1953, on which date Thiagaraja Pillai received notice of demand for payment of tax. This contention is based on more than the assumption for which there are at present no materials on record. For one thing, the case that the licence for the toddy contract was taken benami in the name of others and that the lame was taken over and exploited by Thiagaraja Pillai and Kalyanasundara Nadar is a new one. Even in the application to this court under S. 66(2) of the Act, Thiagaraja Pillai only stated:

    “This association had taken up toddy contract in the South Arcot Dt. and it had been trading in the same for a number of years”

    4. This statement clearly implies that the contract for vending toddy was taken by the firm itself.

    5. Learned counsel then argued that even if it were to be taken that the partnership took the contract, such partnership must be regarded as illegal on the principle accepted in certain decisions of this court, to which we shall presently make reference. In father words, the contention advanced before us went to the extent that every partnership doing business in arrack and toddy, should necessarily be regarded as an illegal one. Support for this contention was sought from Md. Abdul Kareem and Co. v. Commissioner of Income-tax, Madras, 1948-2 Mad LJ 528 : (AIR 1949 Mad 509) where a partnership between two persons, one who had taken a lease of an arrack shop and the other a toddy shop, to run the two businesses for their joint benefit, was held to be illegal; and the firm was held liable to be assessed as an association of persons. In Velu Padayachi v. Sivasooriam Pillai, ILR 1950 Mad 987 : (AIR 1950 Mad 444) a Full Bench of this court declared that a partnership entered into for the purpose of conducting business in arrack or toddy on a licence granted or to be granted to only one of them would be void ab initio and there would be no difference in the application of this principle whether the contract of partnership was entered into before the licence was granted or afterwards. The underlying basis of this decision was that such a partnership would amount to a breach of the provisions contained in Section 15 of the Abkari Act, which would be punishable under S. 55 of that Act. Section 15 of this Abkari Act states:

    “No liquor or intoxicating drug shall be sold without licence from the Collector”.

    6. Sections 55 and 56 of the Act render punishable the sale of liquor or intoxicating drug in contravention of the Act, or of any rule or order made, or of any licence or permit obtained thereunder. A licence issued under the Act generally contains a clause that no privilege of supply or vend shall be sold, transferred or sub-rented without the Collector's previous permission. It was held by the Full Bench that the formation of it partnership to exploit a licence granted in favour of one of the partners would amount to a contravention of the provisions of Section 15 of the Abkari Act or of the terms of the licence referred to above.

    7. But obviously there can be no such illegality if there had been a full disclosure to the Revenue authorities of the position, namely, that the partnership was to take the benefit of the contract in the name of one of them in such a case permission of the authorities can be presumed. In J.D Italia v. D. Cowasjee, ILR 1944 Mad 697 (AIR 1944 Mad 295) this court had to consider that problem. In that case two partners entered into an agreement of partnership for the purpose of acquiring a licence for carrying on business in toddy. One of them obtained the licence in his own name. It was found that the Revenue authorities were fully aware of the arrangement between the partners that the licence issued in the name of one was to be used for the benefit of the partnership evidence revealed that the Revenue Authorities were agreeable to the business being carried on in partnership, with the licence in the name of one of them. On these facts, this court held that so long as that position lasted, i.e, the concurrence of the authorities to that act of the partners, the partnership could not be regarded as illegal.

    8. There can, therefore, be no doubt, on the decisions of this court that it cannot be taken as a matter of assumption or presumption that a partnership formed for doing Abkari business is illegal. If the licence had been taken in the name of the firm itself, its business would be perfectly valid. Even if the licence is not found to be so taken, but issued in the name of only one of the partners, the partnership would still be legal, if there had been a full disclosure to the Government at the relevant time that the licence was to be used by the firm. The terms of the licence, which we have set out above do not require any particular form for the Governmental permission. The question whether in a particular case a partnership firm for the purpose of doing abkari business is legal or not will have therefore to depend on the facts of each case.

    9. If, on the principles stated above, the partnership is found to be a legal one, an assessment to income-tax can be made on it as a firm. If, on the contrary, it is found to be illegal, such assessment can only be made on the partners as an association of persons. The rule will be the same, whether the assessment is to be made during the continuance of the partnership or association of persons, or after its dissolution. In Commissioner of Income-tax Andhra Pradesh v. Raja Reddi Mallaram, 1964-51 ITR 285 : (AIR 1964 SC 825) the Supreme Court held that an order of assessment made subsequent to the dissolution of an association of persons, after serving a notice upon one of its members, in accordance with S. 63(2) of the Act, could be enforced against the other members who were not served.

    10. The question, therefore, in each case will turn on its facts and it cannot be assumed as a matter of law that every partnership formed with a view to do business in toddy under a licence taken in the name of one or a few among the partners would be illegal. As we pointed out, Thiagaraja Pillai in the instant case has himself admitted in his application under S. 66(2) “that the association” had taken up toddy contract in the South Arcot Dt. — the word association being used designedly for the purpose of the petition. That would imply that the licence was taken in the name of “the association”. If that were so, there would be no question of any illegality in the constitution of the firm.

    11. Secondly, even assuming that the licence was taken only in the name of one of the partners, or taken up by an individual and later transferred to a partnership of which he was a member or that it was taken in the name of certain benamidars, the question has still to be investigated whether that was done with the knowledge and concurrence of the Government. If there were such concurrence, there would be no illegality in the partnership. But, unfortunately, in the instant case, both the department as well as the Tribunal have proceeded to dispose of Thiagaraja Pillai's application under S. 27 without investigating whether the partnership was a legal or an illegal one. For example, the Appellate Assistant Commissioner stated:

    “The appellant has tried to raise and argue several issues such as whether the status should not have been an ‘association of persons’ whether a ‘Principal officer’ should not have been appointed, whether notices should not have been served on both persons, as the partnership or other association, whichever it may be, had been dissolved etc. It may be necessary to go into some or all of such issues, if the appeal were against the assessment itself or were against an order under S. 27 on merits. Here the application under S. 27 was rejected as being out of time and the Income-tax Officer has not even power to condone the delay”.

    12. We are unable to see how the application of Thiagaraja Pillai could be disposed of without considering those questions referred to by the Appellate Assistant Commissioner. If, for example, on an investigation of facts, it is found that the partnership between Thiagaraja Pillai and Kalyanasundara Nadar is a legal one, the service of notice on Kalyanasundara Nadar, one of the partners, would bind the other partner as well and there would be no case for cancellation of the assessment under S. 27 of the Act except by an application filed within 30 days of notice to the party. This would be so even if the partnership had been dissolved. If, it were to be found that the partnership was illegal, then the assessment could be made as on an association of persons. Even to such a case, S. 44 of the Act would apply; such an association would be deemed to continue even after its dissolution, for the purpose of assessment, and the procedure for assessment, after dissolution, of income received prior thereto, would be the same as when it existed during the continuance of the association. Section 63(2) provides that notice under the Act in the case of an association of persons, may be addressed to the principal officer thereof. Section 2(12) defines a principal officer. In order to find out whether a notice served on one of the former members of an association of persons will bind another, it has to be seen whether the former was a principal officer, within the definition referred to above. But it has not been ascertained in the present case whether Kalyanasundara Nadar, on whom notices relating to the assessment were served, was a principal officer of the association or not.

    13. The Income-tax Officer rejected Thiagaraja Pillai's application under S. 27 on the mere ground that it was filed more than 30 days after 20-3-1953, when notice was served on Kalyanasundara Nadar. In so holding the officer assumed that Kalyanasundara Nadar and Thiagaraja Pillai were partners. It does not appear from the order of the Appellate Assistant Commissioner either that he was alive to the importance of the distinction between a partnership and an association of persons in the matter of the validity of service of notice. Again the question whether in the instant case the assessment was made as on a firm or an association of persons would depend on the legality of the partnership. The Tribunal too did not consider any of the relevant matters, as it assumed that the service of notice of the assessment proceedings on Kalyanasundara Nadar would be binding on Thiagaraja Pillai. In its statement of the case, it assumed the partnership to be a mere association of persons. But strangely enough, while referring to the demand notice served on Kalyanasundara Nadar, it described him as one of the “partners”. We are unable to see how the Tribunal, without arriving at a finding on the two questions, namely, (1) whether the partnership between Thiagaraja Pillai and Kalyanasundaram Nadar was legal and (ii) if not, whether Kalyanasundara Nadar was recognised as the principal officer the association of persons, can sustain the rejection of Thiagaraja Pillai's application under S. 27 of the Act. We, therefore, answer the question referred to us in this manner, namely, the Tribunal was not justified in holding that the application of Thiagaraja Pillai under S. 27 was out of time without deciding the question whether the notice to Kalyanasundara Nadar would be sufficient notice to bind Thiagaraja Pillai. We consider that, in the circumstances of the case, there should be no order as to costs.

    KH/MVJ/D.V.C

    14. Answer accordingly.

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    Comments

    A.D. Thiagaraja Pillai v. Commissioner Of Income-Tax
    (Apr 2, 1964)