Sabyasachi Mukharji, J.:— This reference under the Income-tax Act, 1961, relates to the assessment year 1962-63. Manick Chandra Dey and others, hereinafter referred to as the assessee-firm, carried on the business of wholesale dealing in sale and purchase of rice. Prior to the assessment year 1962-63, Manick Chandra Dey had been carrying on this business but for finance as also proper management he constituted a partnership firm with two other persons by means of a deed of partnership dated the 14th April, 1961. The accounting year of the assessee-firm is the Bengali calendar year and the previous year relevant to the assessment year 1962-63 started from the 14th April, 1961. The licence for carrying on the rice business was in the name of Manick Chandra Dey and even after the constitution of the assessee-firm the business was carried on by the assessee-firm during the relevant previous year under that very licence. The assessee-firm filed an application for registration under section 26A of the Indian Income-tax Act, 1922, which was subsequently replaced by an application under section 185 of the Income-tax Act, 1961. The Income-tax Officer rejected that application on the ground that the foodgrains licence was not transferable. The assessee-firm appealed to the Appellate Assistant Commissioner against the aforesaid order. The Appellate Assistant Commissioner agreed with the Income-tax Officer and held that sections 3 and 7(2) of the West Bengal Rice and Paddy Control Order, 1960, prohibited the constitution of the firm where the licence in the name of one of the partners was exploited by the firm. In this connection, however, we must refer to some significant comments of the Appellate Assistant Commissioner. The Appellate Assistant Commissioner in the course of his order observed, inter alia, as follows:
“On going through the provisions of the West Bengal Rice and Paddy Control Order, 1960, under which the licence is issued it is seen that section 3 of the Order provides that No person shall carry on business as a dealer except under and in accordance with a licence granted under paragraph 4’. Further, section 7(2) provides that ‘subject to the provisions of this order, the licensing authority or the permit issuing authority, as the case may be, may, after making such inquiry as he deems necessary, and for reasons to be recorded in writing, vary or amend a licence or permit. But no such variation or amendment shall be allowed in case of death or transfer of the interest of the licensee in his business or reconstitution of the firm in a partnership business. In such cases fresh licence has to be applied’.”
2. Being aggrieved by the aforesaid order the assessee-firm went up in appeal before the Appellate Tribunal. The Appellate Tribunal referred to the provisions of paragraphs 3(1), 4 and 7(2) and 7(3) of the Control Order and held that the licence which had been granted to Manick Chandra Dey could not have been exploited by the assessee-firm. On the constitution of the assessee-firm it should have applied for a fresh licence under paragraph 4 and sub-paragraph (3) of paragraph 7 of the Control Order and for the contravention of these provisions the licensing authority could have suspended or revoked the licence. In the present case the licensing authority had not taken any action against the original licensee or the assessee-firm and the Tribunal emphasized that there was no provision in the Control Order to the effect that the licensee rendered himself liable to any criminal action for contravention of the provisions of his order. The Tribunal further emphasized that the assessee-firm was constituted for a lawful object and was not void ab initio and at best the object became illegal when the assessee-firm started exploiting the licence which could not have been transferred to it. In the opinion of the Tribunal in that event the licence could have been suspended or revoked by the licensing authority but no such action had been taken and the income-tax department which was assessing the assessee-firm on the income from such business could not decide as to whether this action on the part of the assessee-firm was legal or illegal. In the opinion of the Tribunal for the purpose of the income-tax assessment the constitution of the firm which was legal at the inception did not become illegal because it exploited a licence which could not have been transferred to it or for the matter of that it transacted rice business without obtaining a requisite licence. In the premises, the Tribunal allowed the appeal. On an application being made, the Tribunal has referred the following question under section 256(1) of the Income-tax Act, 1961, to this court:
“Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the assessee-firm which was otherwise valid did not become illegal for reason of exploitation by it of the licence which stood in the name of one of its partners and was not transferable and the assessee-firm was entitled to registration under section 185 of the Income-tax Act, 1961?”
3. During the course of hearing of this reference our attention was drawn to the decision in the case of Commissioner of Income-tax v. Benarsi Das and Co., [1962] 44 ITR 835 (Punj), in the case of Mohapatra Bhandar v. Commissioner of Income-tax, [1965] 58 ITR 671 (Orissa) and in the case of Lalchand Mohan Lal Fazilka v. Commissioner of Income-tax, [1967] 65 ITR 418 (Punj). Those decisions suggest that the formation of such kind of partnership might become illegal. On the other hand, it appears that there are authorities to the contrary in the case of T.K.P.R Ramanatha Chettiar & Brothers v. Commissioner of Income-tax, [1969] 73 ITR 811 (Mad), in the case of Commissioner of Income-tax v. S.N Narayana Raja and Co., [1969] 74 ITR 341 (Mad) and in the case of Umackaran Shaw and Bros. v. Commissioner of Income-tax, [1959] 37 ITR 271 (SC). It appears, however, that the principles to be applied in this case are now settled by the decision of the Supreme Court. We may first refer to a decision which, though not quite to the point, has relevancy on this question, namely, the decision of the Supreme Court in the case of K.M Viswanatha Pillai v. K.M Shanmugham Pillai, (1969) 1 SCC 188 : AIR 1969 SC 493, a decision upon which the Madras High Court relied in the decisions referred to hereinbefore. There, in a case under the Motor Vehicles Act, 1939, in connection with the exploitation of licence by a benamidar it was held by the Supreme Court that under section 4(2)(1) of the Act it was not necessary that the owner himself should obtain the permit. A person in whose favour a permit had been issued need not be the owner of the vehicle covered by it. The language of section 2 made it clear that all permits need not be in the name of the owner. It was only in the case of a private carrier or a public carrier that a permit had to be in the owner's name. Benami transactions were recognised in India. But the question with which we are directly concerned in this case can be resolved by the decision of the Supreme Court in the case of Jer and Co. v. Commissioner of Income-tax, [1971] 79 ITR 546 (SC). There also the assessee-firm which was a firm with two partners, D and his brother, M, constituted under a deed of partnership dated the 21st July, 1945, carried on business of wholesale merchants and of foreign liquor. D had obtained a licence which was renewed every year, in Form FL II for wholesale vending in foreign liquor under rule 574 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 the registration had been renewed also 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 since there was no sub-letting or transfer of the business covered by the licence in contravention of clause 13 and the deed was for sharing of the profits alone. On a reference the High Court, however, held that the firm was not entitled to registration. Both 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. It was held by the Supreme Court, reversing the decision of the High Court, that the licence in Form FL II did not prohibit the holder of the licence from entering into a partnership with another person. It merely provided that the licence should not be sub-let or transferred. Rule 322 did not apply to such a licence. Since there was no prohibition, according to the Supreme Court, in the rules against the holder entering into a partnership, the partnership was legal and the assessee-firm was entitled to registration. This decision was later on considered by the Punjab and Haryana High Court in the case of Commissioner of Income-tax v. Gian Chand & Co., [1973] 87 ITR 113 (Punj), where it was held that a firm whose five partners had obtained licences in their separate names from the Fisheries Department of the Punjab Government for fishing in the public waters did not become illegal by taking in four others as partners and was not disentitled to registration under section 185 of the Income-tax Act, 1961, as the Punjab Fisheries Rules did not contain any rule prohibiting from entering into partnership, so far as the fishing licences were concerned. The Punjab High Court had also considered these two previous decisions in the light of the subsequent Supreme Court decision and was of the opinion that these could not be considered to be good law any longer. Similar view was taken by the Full Bench of the Allahabad High Court in the case of P.C Kapoor v. Commissioner of Income-tax, [1973] 90 ITR 172 (All) [FB]. In this case the provisions of the Control Order, as we have set out hereinbefore, do not prohibit entering into a partnership or make the formation of partnership illegal. On the contrary, the provisions seem to suggest that on reconstitution of the firm the new firm is entitled to apply for fresh licence. We are of the opinion that the constitution of the firm was legal and as such the firm was entitled to registration.
4. In the aforesaid view of the matter, in our opinion, the Tribunal came to a correct decision and the question referred to this court must be answered in the affirmative and in favour of the assessee. In this connection we must observe that the assessee did not appear in this reference. But we are grateful for the assistance we have received from counsel for the revenue, Mr. Ajit Kumar Sen Gupta. Each party will pay and bear its own costs.
Pyne, J.:— I agree.