Citation Codes

Equivalent Citations

citation codes

Case Number

Income-tax Reference No. 1 of 1987

Judges

M. Srinivasan C.J
A.L Vaidya, J.

Acts

provisions of section 23 of the Indian Contract Act.
section 26A of the Indian Income-tax Act, 1922,
provisions of the U.P Excise Rules, 1910.
section 184(7) of the Income-tax Act
SECTION 185 INCOME TAX ACT
INCOME TAX ACT

See more information ...

Smart Summary

Structured Summary of the Opinion (M. Srinivasan, C.J.)

Factual and Procedural Background

The Tribunal referred the following question to the Court: “Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in ordering that the claim of the assessee-firm for registration under section 185 of the Income-tax Act, 1961, be accepted?”

The assessee filed Form No. 12 seeking renewal of registration for the assessment year 1980–81 on 10 July 1980. The Income-tax Officer (ITO) refused to renew the registration on the ground that the licence to vend liquor had been obtained only in the name of Shri P.C. Anand while he had entered into partnership with others in the assessee-firm. The ITO gave specified reasons for refusal but did not make factual findings on whether the conditions of the licence prohibited formation of a partnership or whether the non-licence-holder partners had actually engaged in purchase and sale of liquor while partners.

The assessee appealed to the Appellate Assistant Commissioner of Income-tax (Patiala Range), who reversed the ITO's order and granted renewal, relying on earlier decisions (including the Tribunal in Jagdish Rai Monga and the Andhra Pradesh High Court in CIT v. Nalli Venkataramana). The matter proceeded to the Income-tax Appellate Tribunal, which followed its earlier judgment in Jagdish Rai Monga and dismissed the appeal (i.e., affirmed the Appellate Assistant Commissioner's order). The Commissioner of Income-tax then caused a question to be referred to this Court.

Legal Issues Presented

Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in ordering that the claim of the assessee-firm for registration under section 185 of the Income-tax Act be accepted?

Arguments of the Parties

Income-tax Officer's (Revenue) Arguments

The licence to vend liquor is a personal right granted to Shri P.C. Anand and is not assignable.
The licence does not transfer any interest (i.e., no transfer of the licence or its rights to others).
If other persons illegally share the licence and commit illegal acts, the licensee cannot sue strangers in his own name (suggesting illegality or unauthorized sharing cannot be validated).
The Himachal Pradesh Liquor Licence Rules prohibit a licensee from allowing any person to conduct sales on his behalf unless the names of such persons have been previously approved by the competent excise authorities.
The Punjab & Haryana High Court judgment in CIT v. Hardit Singh Pal Chand & Co. (1979) was relied upon to show that if a licensee takes a partner or admits new partners in contravention of excise provisions, the firm will not be entitled to registration.

Assessee / Appellate Assistant Commissioner's Arguments

The Appellate Assistant Commissioner noted that the ITO did not find, as a fact, that the licence conditions prohibited the formation of a partnership.
The ITO also did not find that the non-licence-holder partners had engaged in the purchase and sale of liquor while they were partners.
The Appellate Assistant Commissioner relied on the Tribunal's earlier decision in Jagdish Rai Monga and the Andhra Pradesh High Court decision in CIT v. Nalli Venkataramana (and related authorities) to support that a partnership in such circumstances can be entitled to registration if no licence condition or statute prohibits such partnership and other conditions of the Income-tax Act are satisfied.
The firm had previously been granted registration and had applied for renewal in Form No. 12; the mandatory wording of section 184(7) contemplates registration to have effect for subsequent years provided the specified conditions are satisfied.

Advocate-General's Submission (as noted by the Court)

The Advocate-General drew attention to the Supreme Court order in Commissioner of Income Tax, A.P. v. B. Posetty & Co. (1996), where the Division Bench had referred an issue to a three-judge Bench for authoritative pronouncement; this was noted but the Court held that the Posetty matter did not arise in the present case and the reference had no relevance here.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Jagdish Rai Monga v. ITO, ITA No. 575 of 1981; [1981] 14 TLR 856 (Tribunal)	The opinion indicates the Tribunal's earlier decision was relevant authority supporting registration in facts of that case (specific principle set out in that judgment is not detailed in the provided opinion).	The Appellate Assistant Commissioner relied on this Tribunal judgment; the Tribunal, on appeal in the present matter, followed its earlier judgment in Jagdish Rai Monga and dismissed the appeal, a view which this Court upheld.
CIT v. Hardit Singh Pal Chand & Co., [1979] 120 ITR 289 (Punjab & Haryana High Court)	Principle cited by the ITO that if a licensee of a liquor contract takes any person as partner or admits new partners in contravention of excise provisions, the firm will not be entitled to registration.	The ITO relied on this judgment as support for refusing renewal; the Court recorded this reliance but found that the ITO had not made necessary factual findings to apply such a principle to this case.
Jer and Co. v. CIT, [1971] 79 ITR 546 (Supreme Court)	Where a licence (Form FL-II in that case) contains no prohibition against entering into a partnership, and only prohibits subletting or transfer of the licence, a firm in which one partner holds the licence may be entitled to registration.	The Court cited Jer and Co. as authority supporting the proposition that absence of a prohibition in licence permits partnership and entitlement to registration. This reasoning influenced the Court's conclusion that registration could not be refused without factual findings of illegality.
CIT v. Nalli Venkataramana, [1984] 145 ITR 759 (Andhra Pradesh High Court)	Following Jer and Co., held that where an individual holding a licence forms a partnership to run the liquor business, such partnership would be entitled to registration provided other conditions in section 185 are fulfilled; partnership did not violate public policy or section 23 of the Indian Contract Act where no prohibition existed in licence.	The Appellate Assistant Commissioner relied upon this judgment; the Court referenced it as consistent authority supporting registration where no licence prohibition exists.
CIT v. P. Thirupathi Rao Co. (citation mentioned alongside Nalli Venkataramana)	This specific opinion and its principle are cited by the Appellate Assistant Commissioner in support of his decision; the precise rule or principle from this case is not detailed in the provided opinion.	The Appellate Assistant Commissioner relied on this authority along with the Andhra Pradesh High Court decision; the Court does not elaborate further on its separate application.
Bihari Lal Jaiswal v. CIT, [1996] 217 ITR 746 (Supreme Court)	Stated that if law or licence condition prohibits entering into a particular partnership, such partnership is void (section 23 Indian Contract Act); where licence conditions do not prohibit partnership, such partnership cannot be held illegal or void. Also emphasized that Income-tax authorities must have regard to the law governing partnerships when granting registration because registration confers substantial benefit.	The Court cited this authority to articulate the correct legal principle distinguishing prohibited partnerships from permissible ones; it was applied to explain that absent a specific prohibition or factual finding of illegality, registration should not be refused.
Commissioner Of Income Tax, A.P v. B. Posetty & Co., [1996] 220 ITR 216 (Supreme Court)	The Division Bench in that case referred a question for consideration by a three-judge Bench for authoritative pronouncement; the detailed principle was to be considered further.	The Advocate-General drew attention to this order, but the Court held the Posetty matter (including its reference to a three-judge Bench) did not arise in the present case and therefore had no relevance to the decision here.
CIT (Addl) v. Degaon Ganga Reddy G. Ramakrishna and Co., [1995] 214 ITR 650 (Supreme Court)	Dealt with whether a sub-partnership could claim benefit of registration; the Bench took the view that registration could be given provided the sub-partnership is different from the main partnership (as recorded in the present opinion).	The Court observed that this authority was considered by a Division Bench in Posetty's case; it did not directly decide issues in the present matter but was noted in the course of discussing related jurisprudence.
Narayanan & Co. v. Commissioner Of Income-Tax, [1997] 223 ITR 209 (Kerala High Court Full Bench)	The Full Bench followed the Supreme Court in Bihari Lal Jaiswal and repeated the proposition laid down there (i.e., distinction between prohibited and permissible partnerships).	The Court noted this Full Bench ruling and observed that it will not affect the position in the present case; it reiterated that necessary factual findings were absent in the present record.

Court's Reasoning and Analysis

The Court proceeded by examining both the factual record and the applicable judicial authorities cited by the parties. The analysis unfolded in the following steps, as recorded in the opinion:

Identification of the discrete procedural posture: the ITO had refused renewal of registration but had not made findings of fact on two critical points — whether the licence conditions prohibited the formation of the partnership, and whether the non-licence-holder partners had actually engaged in purchase and sale of liquor while they were partners. The absence of these factual findings was central to the Court's reasoning.
Review of case law: the Court summarized and relied on a line of authorities beginning with the Supreme Court's decision in Jer and Co. v. CIT (1971), which held that where a licence did not prohibit entering into a partnership (and only prohibited subletting or transfer), a firm could be entitled to registration. The Andhra Pradesh High Court in CIT v. Nalli Venkataramana followed this reasoning. The Court also considered the Supreme Court's later exposition in Bihari Lal Jaiswal (1996), which clarified that where the law or licence specifically prohibits the partnership, such partnership is unlawful and cannot be recognized; but where no specific prohibition exists, the partnership is not to be treated as illegal.
Distinguishing irrelevant procedural referrals: the Court noted the reference made in Commissioner of Income Tax, A.P v. B. Posetty & Co. (1996) to a three-judge Bench on a related issue, but concluded that the question referred in Posetty did not arise in the present case and thus the Posetty reference was irrelevant to the present decision.
Application of legal principles to the present facts: given the absence of a finding by the ITO that the licence conditions prohibited partnership or that the non-licence-holder partners had engaged in the business activities in question, the Court held it was not open to presume illegality. The Court stated the well-settled proposition that there is no presumption of illegality. The firm had earlier been granted registration and had applied for renewal; section 184(7) (as quoted) contemplates registration continuing for subsequent years provided the two conditions in the proviso are satisfied.
Conclusion from the synthesis of facts and law: because the two conditions in the proviso to section 184(7) were not disputed to be satisfied and there was no factual finding by the ITO that the assessee had failed to fulfil those conditions or that the partnership was prohibited, the Court found no justification for the ITO's refusal to renew registration. Consequently, the Court found the view expressed by the Appellate Tribunal and the Appellate Assistant Commissioner to be correct.

Holding and Implications

Holding: The Court answered the referred question in the affirmative and held that the Income-tax Appellate Tribunal was right in law in ordering that the claim of the assessee-firm for registration under section 185 of the Income-tax Act be accepted.

Implications:

The direct effect of the decision is that the view of the Appellate Assistant Commissioner and the Appellate Tribunal — granting renewal/registration to the assessee-firm under section 185 — is affirmed.
The Court's decision rests on the absence of factual findings by the ITO that would establish illegality (either because the licence prohibited partnership or because non-licence-holder partners had engaged in prohibited activities). Because those factual findings were not made, registration could not be refused.
The opinion applies existing judicial principles (including Jer and Co. and Bihari Lal Jaiswal) to the facts at hand; the Court did not purport to lay down a new general rule beyond those authorities. Insofar as broader or unsettled issues (for example, those referred to a larger Bench in other cases) were mentioned, the Court held they were not relevant to the present case.

Note: This summary is confined strictly to information contained in the provided opinion. No facts, arguments, or legal principles not present in the opinion have been added or inferred.

Show full summary ...

Commissioner Of Income-Tax v. Subash Chand And Co.

M. Srinivasan, C.J:— The Tribunal has referred the following question:

“Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in ordering that the claim of the assessee-firm for registration under section 185 of the Income-tax Act, 1961, be accepted?”

2. The assessee in this case filed Form No. 12 seeking renewal of registration for the year under consideration, namely, 1980-81, on July 10, 1980.

3. The Income-tax Officer refused to renew the registration on the ground that the licence to vend liquor had been obtained only in the name of Shri P.C Anand and he had entered into partnership with others in the assessee-firm. The Income-tax Officer gave the following reasons for refusing the continuation of registration:

“(a) The right of a licence is a right in person which authorised the licensee to do the thing for which it has been granted. The licence granted to Shri P.C Anand is not assignable.

(b) In the licence there is no transfer of interest.

(c) If other person who illegally shares the licence does some illegal act, the licensee has no right to sue strangers in his own name.

(d) The Himachal Pradesh Liquor Licence Rules also prohibit a licensee from allowing any person to conduct sales on his behalf unless the name(s) of such person(s) has/have previously been approved by the competent excise authorities.

(e) The learned judges of the Punjab and Haryana High Court have held in the judgment quoted in CIT v. Hardit Singh Pal Chand and Co., [1979] 120 ITR 289 that if a licensee of a liquor contract takes any person a partner or if the licensee is a firm, admits new partners in contravention of the provisions of the Excise Act, the firm will not be entitled to registration.”

4. The Income-tax Officer did nbt, however, find as a fact whether the conditions of the licence prohibit formation of partnership by the licensee; nor was there a finding of fact by him whether the other partners had indulged in the activities of purchase and sale of liquor while they were members of the partnership.

5. There was an appeal by the assessee before the Appellate Assistant Commissioner of Income-tax, Patiala Range. The Appellate Assistant Commissioner reversed the order of the Income-tax Officer and granted the prayer of the assessee. While doing so, the Appellate Assistant Commissioner placed reliance on the judgment of the Tribunal in Jagdish Rai Monga v. ITO, ITA No. 575 of 1981 and also the judgment of the Andhra Pradesh High Court in CIT v. Nalli Venkataramana and CIT v. P. Thirupathi Rao Co., [1984] 145 ITR 759. The Appellate Assistant Commissioner pointed out that the Income-tax Officer had nowhere held that the non-licence-holder partners have indulged in the purchase and sale of liquor in any way. The matter was taken on appeal to the Tribunal. The Tribunal simply followed its earlier judgment in Jagdish Rai Monga, [1981] 14 TLR 856 and dismissed the appeal. Thereafter, the question was referred by the Tribunal at the instance of the Commissioner of Income-tax to this court.

6. The position with regard to the partnership in the business of purchase and sale of liquor when the licence has been obtained by one of the partners has been considered in several cases. It is enough if we refer to the judgment of the Supreme Court in Jer and Co. v. CIT, [1971] 79 ITR 546. The appellant in that case was a firm with two partners, which was carrying on the business of wholesale merchants and in foreign liquor. The licence was obtained and renewed every year by one of the partners under the provisions of the U.P Excise Rules, 1910. The licence contained no prohibition against entering into partnership for carrying on the business in foreign liquor by the holder of the licence. The firm was registered under section 26A of the Indian Income-tax Act, 1922, and it was also renewed for the assessment years 1958-59 and 1959-60. But the Commissioner, under section 33B, cancelled the registration for those years. The Appellate Tribunal, on appeal, held that the firm was entitled to be registered, as there was no subletting or transfer of the business covered by the licence in contravention of clause 13 thereof. On a reference, the High Court held that the firm was not entitled to registration. On appeal, the Supreme Court reversed the decision of the High Court and held that the licence in Form FL-II did not prohibit the holder from entering into a partnership and it merely provided that the licence shall not be sublet or transferred. On that footing, the Supreme Court held that the firm was entitled to registration.

7. The question arose again before the Andhra Pradesh High Court in CIT v. Nalli Venkataramana, [1984] 145 ITR 759. Following the reasoning of the Supreme Court in Jer and Co.'s case, [1971] 79 ITR 546, the Andhra Pradesh High Court held that where an individual, who holds a licence to sell liquor, forms a partnership to run the liquor business, such a partnership would be entitled to registration, provided it fulfils the other conditions stipulated in section 185 of the Income-tax Act. The court pointed out that the partnership agreement did not violate any public policy or offend the provisions of section 23 of the Indian Contract Act. The main reasoning is that there was no prohibition in the rules or the conditions of the licence against the constitution of a partnership.

8. The above judgment of the Andhra Pradesh High Court as well as the judgment of the Supreme Court in Jer and Co., [1971] 79 ITR 546, came up for consideration before the Supreme Court again in Bihari Lal Jaiswal v. CIT, [1996] 217 ITR 746. After referring to the relevant rules of licence, etc., the Supreme Court stated the proposition of law in the following terms (page 758):

“When the law prohibits the entering into a particular partnership agreement, there can be in law no partnership agreement of that nature. The question of such an agreement being genuine cannot, therefore, arise. Where, of course, the statutory provisions or the conditions of licence do not prohibit the entering into of partnership, it is obvious, such a partnership cannot be held to be illegal, unlawful or void, as held by this court in Jer and Co.'s case, [1971] 79 ITR 546. But where there is a specific prohibition as in the case before us, any partnership entered into would be an unlawful and void agreement within the meaning of section 23 and no other law, whether State or Central, can recognize such an agreement. The fact that such a partnership can be permitted by the Collector does not detract from the mandatory character of the clause. As pointed out above, Licence Condition No. 14 expressly provides that for breach of any condition of licence or of the Act or the Rules made thereunder, the licence may be cancelled. The context—that it is an excise enactment—should not be forgotten. The grant of registration under the Income-tax Act, it must be remembered, confers a substantial benefit upon the partnership firm and its members. There is no reason why such a benefit should be extended to persons who have entered into a partnership agreement prohibited by law. One arm of law cannot be utilised to defeat the other arm of law. Doing so would be opposed to public policy and bring the law into ridicule. It would be wrong to think that while acting under the Income-tax Act, the Income-tax Officer need not look to the law governing the partnership which is seeking registration. It would probably have been a different matter if the Income-tax Act had specifically provided that the registration can be granted notwithstanding that the partnership is violative of any other law—but it does not say so.”

9. The learned Advocate-General has drawn our attention to the order of the Supreme Court in Commissioner Of Income Tax, A.P v. B. Posetty & Co.. and Co., [1996] 220 ITR 216. In that case another Division Bench had occasion to refer to Bihari Lal Jaiswal's case, [1996] 217 ITR 746 (SC) and another judgment of the Supreme Court in CIT (Addl) v. Degaon Ganga Reddy G. Ramakrishna and Co., [1995] 214 ITR 650 (SC), where a question arose whether a sub-partnership could claim the benefit of registration under the provisions of the Income-tax Act. The Bench which decided Degaon Ganga Reddy's case, [1995] 214 ITR 650 (SC) took the view that such registration could be given provided the sub-partnership is different from the main partnership. The Division Bench while dealing with B. Posetty and Co. 's case, [1996] 220 ITR 216 (SC) felt that the matter should be considered at length by a Bench of three learned judges so that an authoritative pronouncement should be made on the question which arose therein. In such circumstances, the Bench directed the matter to be placed before the Chief Justice to constitute a Bench of three learned judges to decide the question. Thus, the question which arose before the Division Bench in B. Posetty and Co.'s case, [1996] 220 ITR 216 (SC) does not arise in this case and the order of reference to a three-judge Bench has no relevance in the present case.

10. Our attention is also drawn to the judgment of the Kerala High Court in Narayanan & Co. v. Commissioner Of Income-Tax, [1997] 223 ITR 209 [FB], The Full Bench of the Kerala High Court simply followed the judgment of the Supreme Court in Bihari Lal Jaiswal's case, [1996] 217 ITR 746 and repeated the proposition laid down by the Supreme Court in that case. The ruling will not affect the position in this case. As pointed out already the necessary factual findings have not been arrived at by the Income-tax Officer. In the absence of such finding, it is not open to this court to presume an illegality. It is too well-settled that there is no presumption of illegality. In this case there is an additional factor that the firm had been granted registration earlier and they have applied for renewal of registration in Form No. 12. The wording of section 184(7) of the Income-tax Act is mandatory in terms and it contemplates registration to have effect for every subsequent year provided the two conditions mentioned therein are satisfied. In this case there is no dispute that the two conditions mentioned in the proviso to sub-section (7) of section 184 of the Act are satisfied and it is not found by the Income-tax Officer that the assessee has failed to fulfil those conditions. In such circumstances, we do not find any justification for refusing registration as has been done by the Income-tax Officer. The view expressed by the Appellate Tribunal affirming the order of the Appellate Assistant Commissioner is correct and we answer the question referred to us in the affirmative that in the facts and circumstances of the case, the Income-tax Appellate Tribunal is right in law in ordering the claim of the assessee-firm for registration under section 185 of the Income-tax Act to be accepted.

Commissioner Of Income-Tax v. Subash Chand And Co.

Structured Summary of the Opinion (M. Srinivasan, C.J.)

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Income-tax Officer's (Revenue) Arguments

Assessee / Appellate Assistant Commissioner's Arguments

Advocate-General's Submission (as noted by the Court)

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Commissioner Of Income-Tax v. Subash Chand And Co.

Comments