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Case Number

Misc. Civil Case No. 326 of 1976 arising out of the Order passed by Income Tax Appellate Tribunal in I.T Appeals Nos. 775 to 779 (Nagpur) dated 19-8-1975

Attorney(S)

For Applicant — P.S Khirwadkar.
For Opposite party — K.M Agarwal with S.B Kasbekar and D.C Bhamore.

Judges

G.P Singh, C.J
U.N Bhachawat, J.

Acts

SECTION 17 MADHYA PRADESH EXCISE ACT 1915
Section 37, Section 38, Section 38A or Section 39,
Section 185 of the I.T. Act, 1961. Registration
clauses (a) and (b) of Section 31,
rule VI of the M.P. Excise Act,
Section 31(1)(b)
Section 39(c).

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Smart Summary

Court Opinion Summary: References from the Income-tax Appellate Tribunal (M.C.C. No. 326 of 1976 & M.C.C. No. 111 of 1978)

Factual and Procedural Background

The references arise from the Income-tax Appellate Tribunal and concern the same assessee, Shantilal Mehta, who had been taking liquor contracts and was assessed to income-tax in the status of an individual. Shantilal was the highest bidder for foreign liquor contracts at Durg and Bhilai for the period 1 August 1967 to 31 March 1968. Although licences were issued in his name on 4 August 1967, he notified the Collector (through the District Excise Officer) that the contracts were taken on behalf of a five-member partnership and a partnership deed was executed on 1 September 1967; copies and requests for action were sent to the Collector on 1 August and 4 September 1967 but remained pending.

The partnership applied for registration under Section 185 of the Income-tax Act, 1961. Registration for assessment year 1968–69 was granted by the ITO (order dated 6 January 1972) and continued for subsequent years by the ITO. On 29–30 November 1973 the District Excise Officer and the Collector examined the matter, reported that permission had not been obtained for entering into a partnership (breach of General Licence Condition No. VI), recommended regularisation and recovery of a compounding fee of Rs. 200 for each licence, and the Collector accepted these recommendations and endorsed the partnership on the licences on 30 November 1973.

The Commissioner of Income-tax issued a notice under Section 263 on 20 December 1973 and by an ex parte order dated 31 December 1973 set aside the ITO's registration and continuation orders on the ground that the partnership was illegal for lack of Collector's permission. The assessee appealed (I.T.A. Nos. 775–779) and the Tribunal allowed the appeals on 19 August 1975, holding that the Collector's 30 November 1973 order cured the defect. For assessment year 1973–74, the ITO treated the assessee as an unregistered firm; the AAC directed renewal of registration on 4 May 1976, the Department's appeal to the Tribunal was dismissed on 19 August 1977, and the Department applied for references of questions of law now before the court.

Legal Issues Presented

Considering Rule VI of the Madhya Pradesh Excise Act (General Licence Conditions), whether the partnership was a legal one enabling the assessee the benefit of registration for assessment year 1968–69 and continuation thereof for the subsequent years (M.C.C. No. 326 of 1976)?
Whether the notice dated December 20, 1973 under Section 263 issued by the Commissioner of Income-tax was a valid one (M.C.C. No. 326 of 1976)?
Whether, on the facts and in the circumstances of the case, the assessee is entitled to continuation of registration (M.C.C. No. 111 of 1978)?

Arguments of the Parties

Department / Learned Standing Counsel (Appellant)

The partnership, having been entered into without the prior written permission of the Collector as required by Rule VI of the General Licence Conditions, was illegal and void.
On that basis, the partnership could not validly be granted registration under Section 185 of the Income-tax Act, and the Commissioner set aside the ITO's registration and continuations under Section 263.
The Department contended that a partnership entered into in breach of Rule VI could not be validated by a subsequent grant of permission.

Assessee / Tribunal (Respondent)

The partnership had been applied for and notified to the Collector on 1 August and 4 September 1967; the Collector had not acted on the applications for years.
The Collector's order of 30 November 1973 endorsed the partnership on the licences and accepted compounding fees, thereby regularising the breach.
The Tribunal held that the Collector's order cured the defect and that the partnership was not illegal; accordingly registration and continuations under the I.T. Act were properly granted.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Nandlal v. Thomas J. William, AIR 1937 Nag 250	That an agreement of partnership entered into without the permission of the Collector for working an excise licence is illegal, in violation of Rule VI of the General Licence Conditions.	Cited as an early and consistent authority of this court establishing the rule that partnerships formed without Collector's permission are illegal.
CIT v. Pagoda Hotel and Restaurant, [1974] 93 ITR 271 (MP)	Reaffirmation of the view that partnership formed without Collector's permission is illegal under Rule VI.	Relied on as a later decision of this court reiterating the illegality principle under Rule VI.
CIT v. Sheonarayan Harnarayan, [1975] 100 ITR 213 (MP)	Same principle — partnerships formed without permission are illegal under the General Licence Conditions.	Used to show consistent view of this court on Rule VI.
Narsaiya & Co. v. CIT, [1983] 143 ITR 304 (MP)	Mere application to the District Excise Officer does not amount to the Collector's written permission under Rule VI; partnership without permission is illegal and cannot be registered.	The court noted this recent Division Bench decision which took the same view and emphasized that a certificate from the District Excise Officer does not substitute for Collector's written permission.
Jer & Co. v. CIT, [1971] 79 ITR 546 (SC)	Supreme Court decision concerning an excise licence under the Uttar Pradesh regime where the licence did not contain a prohibition on forming partnership; Court distinguished the applicable rule in that case from Rule VI.	The court observed that Jer & Co. did not have the effect of overruling this court's decisions interpreting Rule VI because the Supreme Court's decision turned on differing licence conditions and the inapplicability of the particular rule relied upon in the Allahabad High Court.

Court's Reasoning and Analysis

The court's reasoning follows statutory provisions, the General Licence Conditions (especially Rule VI), the Collector's statutory powers, and prior authorities of this court.

The court identified the statutory and regulatory framework: Section 17(contrained sale to licensed authority), Section 62 rule-making power (enabling General Licence Conditions), Rule I (licences granted personally), and Rule VI (prohibiting entering into partnership for working the privilege without the written permission of the Collector, to be endorsed on the licence).
The court noted relevant excise enforcement provisions: Section 31(1)(b) permits cancellation or suspension of a licence on breach of its terms; Section 39(c) prescribes penalty for breach of licence condition; and Section 48(1) empowers the Collector to compound breaches or offences for a monetary composition (thus avoiding cancellation or prosecution).
The court recounted the chronology of events: (a) applications/intimation by Shantilal on 1 August and 4 September 1967 (with partnership deed of 1 September 1967) which amounted to a request for permission; (b) long inaction by the Collector while licences continued to be renewed in Shantilal's name; (c) District Excise Officer's and Collector's recommendation and acceptance on 29–30 November 1973 to endorse the partnership on the licences and accept compounding fees; and (d) the Collector's endorsement and acceptance of compounding on 30 November 1973.
The court considered the legal effect of the Collector's 30 November 1973 order: the breach of Rule VI (entering into partnership without permission) and the related offences/failures were condoned by the Collector who accepted a compounding fee and endorsed the partnership on the licences. The Collectors' statutory power under Section 48 to compound offences and the absence of any express bar in Rule VI against retrospective permission were central to the court's construction.
On construction of Rule VI, the court held that the rule prohibits entering into a partnership without written permission but does not, in express terms, forbid the grant of retrospective permission. Given the common occurrence of long pendency in deciding permissions, it is reasonable to construe Rule VI as permitting the Collector to grant permission retrospectively at least from the date when the application was made. Consequently, the Collector's endorsement of 30 November 1973 operated retrospectively (in effect, from 1 August 1967, the date of the first application/commencement of licences) and thereby validated the partnership from the beginning.
The court rejected the Department's contention that a partnership entered into in breach of Rule VI was ipso facto void and could not be validated subsequently. Instead, the court held that, on a reasonable construction of Rule VI together with the Collector's compounding power under Section 48 and the absence of a prohibition on retrospective permission, the Collector could validly grant retrospective permission and so cure the prior breach.
Applying these conclusions, the court agreed with the Tribunal's finding that the partnership was not illegal and that the assessee-firm was entitled to registration and continuation of registration under Section 185 of the Income-tax Act.

Holding and Implications

The court answered the referred questions as follows:

M.C.C. No. 326 of 1976:

The partnership was legal and was entitled to the benefit of registration for the assessment year 1968–69 and continuation thereof for subsequent years.
Because of the answer to question (1), the court did not find it necessary to answer whether the Section 263 notice of 20 December 1973 was valid.

M.C.C. No. 111 of 1978:

The assessee is entitled to continuation of registration.

Direct consequences: The Collector's endorsement of 30 November 1973 was held to regularise and validate the partnership retrospectively (effectively from the date the application for permission was made), which meant that the partnership could validly be registered under Section 185 and entitled to continuation of registration for the years in question. The court ordered that there be no order as to costs of these references.

Broader implications: The opinion applies existing authorities of this court regarding Rule VI and clarifies that, absent an express bar, the Collector's power to grant permission may be construed to operate retrospectively to cure breaches caused by inaction; the opinion does not state that it creates a new legal precedent beyond this construction. (The court relied on its prior decisions and on the distinction with Jer & Co. (SC) as explained in the text.)

Note: This summary is strictly confined to the material contained in the provided opinion and does not add information beyond the text of that opinion.

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Commissioner Of Income Tax, M.P. Bhopal v. Shantilal Mehta & Co. Durg

1. This judgment shall also dispose of Misc. Civil Case No. 111 of 1978.

2. These are references made by the Income-tax Appellate Tribunal and they relate to the same assessee. Misc. Civil Case No. 326 of 1976 relates to the assessment years 1968-69 to 1972-73. The questions of law referred in this reference are as follows ;

"I. Considering rule VI of the M.P. Excise Act, whether the partnership was a legal one enabling the assessee the benefit of registration for assessment year 1968-69 and continuation thereof for the subsequent years ?

2. Whether the notice dated December 20, 1973, under Section 263 issued by the CIT was a valid one ?"

3. Miscellaneous Civil Case No. 111 of 1978 relates to the assessment year 1973-74 and the question of law referred is as under;

" Whether, on the facts and in the circumstances of the case, the assessee is entitled to continuation of registration ?"

4. The facts briefly stated are that one Shantilal Mehta, who was taking liquor contracts for some years, was assessed to income-tax in the status of an individual. Contracts for the sale of foreign liquor at two places, i. e., Durg and Bhilai, for the period from 1st August, 1967, to 31st March, 1968, were auctioned on 24th July, 1967, and Shantilal was the highest bidder. On 1st August, 1967, Shantilal informed the Collector of Excise, through the District Excise Officer, that he took the contracts in his name on behalf of a partnership consisting of five members and that the contracts will be executed by the partnership. The licences were issued on 4th August, 1967, in the name of Shantilal. A partnership deed was executed in respect of the said contracts on 1st September, 1967. Shantilal wrote another letter on 4th September, 1967, to the Collector, stating therein that he was enclosing a copy of the partnership deed and that the Collector may do the needful in the matter. These applications remained pending with the Collector and no orders were passed on them. In the meantime, the liquor licences issued in the name of Shantilal were renewed year after year. The partnership applied for registration under Section 185 of the I.T. Act, 1961. Registration was granted for the year 1968-69 by the order of the ITO dated 6th January, 1972. The ITO granted continuation of registration for the subsequent years, i. e., 1969-70 to 1972-73. On 19th November, 1973, Shantilal again wrote to the Collector inviting his attention to his letters dated 1st August, 1967, and 4th September, 1967, and stating that the needful had not been done in the matter and that the same be done at an early date. The matter was examined by the District Excise Officer. On 29th November, 1973, the District Excise Officer reported to the Collector that a licensee cannot enter into a partnership without the written permission of the Collector and that

"this breach may now be regularised and the proposed amendment may be ordered to be made in the F.L. licences"

. The Collector accepted this recommendation on 30th November, 1973. However, on the same date, the District Excise Officer proposed that as there was a continuing breach of General Licence Condition No. VI, a compounding fee of Rs. 200 be recovered in each case. This too was approved by the Collector on the same date. By letter dated 6th December, 1973, the District Excise Officer informed Shantilal to pay the composition fee of Rs. 200 for each of the licences. Shantilal was further informed that the name of M/s. Shantilal Mehta and Co., which is the name of the partnership, had been entered in both the licences. The Commissioner of Income-tax, on 20th December, 1973, issued a notice to the assessee under Section 263 of the Act. By an ex parte order dated 31st December !973, the Commissioner set aside the order of the ITO granting registration to the assessee-firm for the year 1968-69 and in consequence thereof also cancelled the continuation of registration for the years 1969-70 to 1972-73. The ground on which the registration was cancelled by the Commissioner was that as the permission of the Collector was not obtained for forming- the partnership, the partnership was illegal. The assessee filed five appeals (I.T.A. Nos. 775 to 779), which were allowed by the Tribunal by its order dated i9th August, 1975. The Tribunal held that in view of the order of the Collector dated 30th November, 1973, the defect of want of permission was completely cured and the partnership was not illegal.

5. For the assessment year 1973-74 the ITO treated the status of the assessee as an unregistered firm. The AAC, in appeal, by order dated 4th May, 1976, directed the ITO to grant renewal of registration in view of the order of the Tribunal dated 19th August, 1975. The Department went up in appeal to the Tribunal which was dismissed on 19th August, 1977.

6. On applications made by the Department, the questions of law set out above by us have been referred by the Tribunal.

7. Section 17 of the Madhya Pradesh Excise Act, 1915, provides that

"no intoxicant shall be sold except under the authority and subject to the terms and conditions of the licence granted in that behalf"

. Sub-section (1) of Section 62 of the Act empowers the State Government to make rules for the purpose of carrying out the provisions of the Act. Clause (h) of Sub-section (2) of Section 62 in particular empowers the State Government to make rules prescribing the authority by which, the form in which, and the terms and conditions on and subject to which, any licence, permit or pass shall be granted. In exercise of this rule-making power, the State Government has framed rules laying down general licence conditions. Rule I of these Rules provides that every licence granted shall be deemed to have been granted personally to the licensee named therein and shall, on the expiry thereof, be surrendered to the Collector. Rule VI of these Rules, which provides for transfer or sub-lease of licence, reads as under;

"VI. Transfer or sub-lease of licence.--No privilege of supply or sale shall be sold, transferred or sub-leased, nor shall the holder of any such privilege enter into a partnership for the working of such privilege in any way or manner without the written permission of the Collector, which shall be endorsed on the licence. A partner, sub-lessee, transferee shall be bound by all the conditions of the licence, but the original licensee also shall continue to be responsible to the State Government for the due payment of the licence fees and proper working of the shop, except that in the case of a transfer his responsibility shall cease as soon as the transfer is endorsed of the licence."

8. The forms of the different licences including licences for the sale of foreign liquor contain a condition that the licensee shall be bound by the General Licence Conditions. Section 31(1)(b) of the Act enables the cancellation or suspension of a licence "in the event of any breach ... of any of the terms or conditions thereof". Section 39(c) provides that the holder of a licence shall be punishable with fine which may extend to Rs. 500 if he " does any act in breach of any of the conditions of the licence". The Collector is empowered by Section 48(1) to compound any breach of the conditions of a licence or any offence. Section 48 reads as follows:

"48. Power to compound offences.--(1) The Collector may--(a) accept from any person whose licence, permit or pass is liable to be cancelled or suspended under clauses (a) and (b) of Section 31, or who is reasonably suspected of having committed an offence under Section 37, Section 38, Section 38A or Section 39, a sum of money not exceeding one thousand rupees in lieu of such cancellation or suspension or by way of composition for such offence, as the case may be, or may impose as a penalty a sum not exceeding one thousand rupees and may order the confiscation of articles which are seized ; and

(b) in any case in which any property has been seized as liable to confiscation under this Act may, at any time before an order of confiscation has been passed by a Magistrate, release the same on payment of the value thereof as estimated by the Collector.

(2) On the payment of such sum of money, or such value, or Both, as the case may be, to the Collector, the accused person, if in custody shall be discharged, the property seized (if any) shall be released, and no further proceedings shall be taken against such person or property."

9. The consistent view of this court right from 1937 is that an agreement of partnership entered into without the permission of the Collector for working a licence for sale of liquor granted under the Excise Act is illegal, being in violation of Rule VI of the Rules prescribing the General Licence Conditions [See Nandlal v. Thomas J. William, AIR 1937 Nag 250, CIT v. Pagoda Hotel and Restaurant [1974] 93 ITR 271 (MP) and CIT v. Sheonarayan Harnarayan [1975] 100 ITR 213 (MP)]. The matter was recently considered by a Division Bench of this court in Narsaiya & Co. v. CIT [1983] 143 ITR 304 (supra) and the same view was taken. It was held in that case that the mere making of an application to the District Excise Officer, who gave a certificate that the licensee had informed regarding the formation of a partnership for working the licence, cannot be taken to be a permission granted by the Collector under Rule VI and that such a partnership was illegal and could not be granted registration under the I.T. Act. It was also pointed out that the decision of the Supreme Court in Jer & Co. v. CIT [1971] 79 ITR 546 had not the effect of overruling the cases of this court relating to the interpretation of Rule VI. The Supreme Court case related to an excise licence in Form FL-2 granted under the Uttar Pradesh Excise Manual. The Allahabad High Court relied upon Rule 322 in the Manual and held that there was a prohibition for entering into a partnership and, therefore, the partnership was illegal. This view was overruled by the Supreme Court on the ground that Rule 322 was not applicable to licences in Form FL-2 and that the licence granted to the assessee in that case did not contain any condition prohibiting forming of partnership.

10. In view of the earlier authorities of this court, it has to be held that a partnership formed without obtaining the permission of the Collector as required by Rule VI of the Rules prescribing the General Licence Conditions, would be illegal and invalid and that such a partnership would not be entitled to registration under section 185 of the i.t. act. The question, however, in these references is as to the effect of the order of the Collector dated 30th November, 1973. By this order, as earlier noticed, the breach of Rule VI in entering into a partnership without obtaining the permission was regularised and a composition fee was also obtained for each of the licences. In this connection, the pertinent facts, as already noticed, are that the licensee of 1st August, 1967, which was the date of the commencement of the licences, applied to the Collector intimating that the licences were taken on behalf of the partnership and would be worked by it. This application to the Collector implied a request for grant of permission. The Collector was again requested on 4th September, 1967, to do the needful and a copy of the partnership deed was also sent to him. The matter, however, remained pending with the Collector and no action was taken on these applications. The Collector gave the permission on 30th November, 1973, and as the intimation to the assessee dated 1st December, 1973, shows, this permission was endorsed on the licences by mentioning the firm as the licensee in place of Shantilal, The Collector also accepted the recommendation of the District Excise Officer to accept a compounding fee and to regularise the breach of the condition of not obtaining the permission of the Collector for entering into the partnership. As the privilege of selling foreign liquor under the licences in the name of Shantilal was being worked by the partnership from the very beginning without there being any permission of the Collector, there was obviously a breach of the condition contained in Rule VI. This breach fell within the purview of Section 31(1)(b) and it would have been competent for the Collector to cancel the licences. Similarly, the breach also amounted to an offence under Section 39(c). The Collector, however, by the order dated 30th November, 1973, condoned the breaches and offences and granted permission after accepting a compounding fee. The effect of the order of the Collector, in our opinion, is clearly to grant a retrospective permission and to wipe out the breaches of Rule VI. This rule does not in terms provide for prior permission for entering into a partnership and does not prohibit grant of retrospective permission. The rule prohibits entering into partnership for the working of the privilege without the written permission of the Collector. But if the permission is retrospectively granted, the breach of the condition would be clearly wiped out and it would not be possible to hold that the partnership formed in the face of such a retrospective permission was in any way illegal or invalid. It is a matter of common occurrence that applications made for the grant of a permission under Rule VI are not disposed of within a reasonable time ; quite often, as happened in the instant case, they remain pending for years without anyone taking any action. It would be a matter of great hardship to the licensee if it is held that the Collector has no power to grant permission retrospectively, at any rate, from the date on which the application for permission was made. As there is no specific bar contained in Rule VI for the grant of permission to operate retrospectively, in our opinion, it is a reasonable construction to adopt that the Collector has power to grant the required permission which may operate at least from the date when the application was made for the grant of permission. In these references, the first application for permission was made on 1st August, 1967, which was the date of commencement of the licences. The effect of the order of the Collector dated 30th November, 1973, was to condone the breaches and the offences and to make everything regular with effect from the beginning of the licences. We are unable to accept the contention of the learned standing counsel for the Department that as the partnership entered into, in breach of Rule VI, was illegal and void, it could not be validated by the grant of a subsequent permission. The whole thing depends upon the construction of Rule VI. As, in our opinion, Rule VI, on a reasonable construction, empowers the grant of a retrospective permission, we find no difficulty in holding the partnership valid from the very beginning. For these reasons, we are of the view that the Tribunal was right in holding that the partnership was not illegal and that registration and continuation of registration under the I.T. Act ought to be granted in favour of the partnership;

11. For the reasons mentioned above, we answer the question as follows :

M.C.C. No. 326 of 1976 :

(1) The partnership was legal and was entitled to the benefit of registration for the assessment year 1968-69 and continuation thereof for subsequent years.

(2) In view of our answer to question No. 1, it is not necessary to answer this question.

M.C.C. No. 111 of 1978:

The assessee is entitled to continuation of registration.

12. There will be no order as to costs of these references.

Commissioner Of Income Tax, M.P. Bhopal v. Shantilal Mehta & Co. Durg

Court Opinion Summary: References from the Income-tax Appellate Tribunal (M.C.C. No. 326 of 1976 & M.C.C. No. 111 of 1978)

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Department / Learned Standing Counsel (Appellant)

Assessee / Tribunal (Respondent)

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Commissioner Of Income Tax, M.P. Bhopal v. Shantilal Mehta & Co. Durg

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