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Case Number
Advocates
  • R.N.Mishra
  • R.C.Patnaik
  • D.Mohanty
Judges
  • Hon'ble Mr. Justice Ramaswamy Laxman Narasimham
  • Hon'ble Mr. Justice Raj Kishore Das
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Citation Codes
Equivalent Citations
citation codes
Case Number
Advocates
  • R.N.Mishra
  • R.C.Patnaik
  • D.Mohanty
Judges
  • Hon'ble Mr. Justice Ramaswamy Laxman Narasimham
  • Hon'ble Mr. Justice Raj Kishore Das
Acts
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Smart Summary

Legal Opinion — Summary and Analysis

Factual and Procedural Background

This matter is a reference under section 66(1) of the Indian Income-tax Act, 1922 made by the Income-tax Appellate Tribunal asking whether the Income-tax Officer was justified in refusing registration of an alleged partnership firm under Section 26-A of the Income-tax Act.

The factual matrix as stated in the opinion: Udayanath Mohapatra held a licence for an excise shop dealing in ganja and opium for the relevant previous year. Finding difficulty in financing the business alone, he executed a deed of partnership on 30-3-1950 admitting five other persons, and the partnership (described as Mohapatra Bhandar) applied for registration under Section 26-A for the relevant year.

The income-tax authorities refused to register the partnership on the ground that, under the Bihar and Orissa Excise Act rules and the Opium Act rules applicable in Orissa, transfer or sub-lease of the licence (even partial) is prohibited except with the previous permission of the Collector, and no such permission had been obtained. The authorities therefore treated the partnership agreement as involving an unlawful transfer of the licence and refused registration. The Tribunal referred the question to this Court for opinion.

Legal Issues Presented

  1. Whether, on the facts and circumstances of the case, the Income-tax Officer was justified in refusing registration of the alleged firm under Section 26-A of the Income-tax Act.

Arguments of the Parties

Income-tax authorities / Tribunal

  • The authorities took the position that the licence-holding business in respect of ganja and opium could not be transferred or sub-leased (even in part) without the previous permission of the Collector under the applicable Excise and Opium rules in Orissa.
  • Because the prior permission was not obtained, any agreement by which the licensee made over the business to the partnership to carry on possession and sale of excisable goods was unlawful; carrying on such business without licence is an offence under the relevant statutes.
  • The Tribunal relied on decisions (Madras, Kerala and Punjab High Courts) holding that such agreements are void ab initio and, on that basis, refused to register the firm.

Assessee (Mr. Misra)

  • Mr. Misra argued that if the licensee continued to carry on the actual business of possessing and selling the excisable goods, merely entering into a partnership to obtain financial assistance and share profits would not amount to a 'transfer or sub-lease' of the licence, and therefore such a partnership agreement would not be unlawful.
  • He relied on several authorities (including Gordhandas Kersowji v. Champsey Dossa; Shiam Bihari Lal v. Malhi; Radhey Shiyam v. Mewalal; and a Patna High Court decision concerning K.C.S. Reddy) which, in the circumstances they decided, held that mere admission of partners for sharing profits did not amount to an unlawful transfer when the licensee continued to do the actual licensed activity.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
D. Mohideen Sahib & Co v. Commissioner of Income-tax, Madras (1950-18 ITR 200 : AIR 1950 Mad 451) Held that an agreement constituting transfer of a licence prohibited by statute/rules is void ab initio. The Court noted that the Tribunal relied on this Madras decision and followed it; the present Court followed the Madras decision (and related Madras Full Bench authority) in holding the partnership agreement unlawful on these facts.
Velu Padayachi v. Sivasooriam Pillai (AIR 1950 Mad 444) (Full Bench) Full Bench decision supporting the principle that agreements contravening prohibition on licence transfer are void ab initio. Identified as the basis for the Madras decision relied on by the Tribunal; the Court followed the line of authority originating with these Madras decisions.
Commr. of Income-tax, Mysore v. Union Tobacco Co., Ernakulam (1961-41 ITR 115 : AIR 1960 Kerala 270) Followed the Madras view that such agreements are void when they effect prohibited transfer of licence rights. Noted as a decision that followed the Madras view; the Court cited it as part of the line of authority it followed.
Commr. of Income-tax v. Benarsi Das & Co. (1962-44 ITR 835 (Punj)) Another High Court decision following the view that agreements transferring licence rights in contravention of statutory rules are invalid. Cited as part of the consistent line of authority (Madras/Kerala/Punjab) that the Court followed in reaching its conclusion.
Gordhandas Kersowji v. Champsey Dossa (AIR 1921 P.C. 137) On the Bombay Salt Act, held that admitting partners who share profits only, while the licensee himself does the actual manufacture/sale, did not constitute contravention of the prohibition on alienation of the licensee's interest (distinguished on the statutory context). The Court acknowledged the principle but observed that the decision was grounded on different statutory/regulatory language; it concluded that the Gordhandas principle did not apply where the local rules expressly prohibit partial transfer as in Orissa.
Shiam Bihari Lal v. Malhi (AIR 1917 All 54) Where a licensee entered into a profit-sharing arrangement but the licensee continued to be the person actually entitled to sell the goods, it was held not to be a transfer or sub-lease of the licence. Recognised by the Court as authority for the proposition relied on by the assessee; the Court held that those decisions were inapplicable in the present case because of the express prohibition in Orissa rules and the factual finding that the firm took over management.
Radhey Shiyam v. Mewalal (AIR 1929 All 210) Similar principle as Shiam Bihari Lal: profit-sharing admissions did not amount to transfer when the licensee continued to perform the licensed acts. Cited by the Court as authority relied upon by the assessee, but the Court found it distinguishable on statutory and factual grounds.
Karsan Sadashiv Patil v. Gatlu Shiwaji Patil (ILR 37 Bom 320) Interpreting the Bombay Abkari Act/rules, held that mere admission of partners for profit-sharing did not constitute transfer where the then-applicable rules omitted prohibitions; contextualised to the earlier Bombay rules of 1895 and 1902. The Court referred to this decision to explain why certain earlier precedents held differently: because the rule language in Bombay had changed; the Court observed that Orissa rules expressly prohibit partial transfer, unlike the Bombay rules after omission.
Commr. of Income-tax, Patna v. K.C.S. Reddy (1960-38 ITR 500 / AIR 1960 Pat 398) Held that where the licensee remained the managing partner and actually carried on the business, a partnership did not amount to an unlawful transfer; there was no express prohibition in the relevant statute against a partnership carrying on the business so long as the person actually in possession had the required dealer's licence. The Court distinguished that Patna decision on the facts: in that case the licensee remained the managing partner and actually performed the licensed activity; in the present case, findings established that the firm took over management and the business, so the Patna case was not applicable.

Court's Reasoning and Analysis

The Court's analysis proceeded in the following steps, based strictly on the material and reasoning contained in the opinion:

  1. Statutory/regulatory framework: The Court set out the operative rules under the Bihar and Orissa Excise Act and under the Opium Act as applied in Orissa. Both sets of subsidiary rules contained an express prohibition that “No transfer or sub-lease (whether entire or partial) of a licence shall be made except with the previous permission of the Collector” (Rule 152 for excise, and Condition No. 8 for opium licences).
  2. Absence of permission: It was admitted that the previous permission of the Collector was not obtained for the partnership to carry on the business in respect of opium and ganja for the year in question. The Court treated this as a decisive statutory shortcoming.
  3. Legal consequence of absence of permission: The Court accepted the submission of the income-tax authorities that entering into an agreement to carry on the licensed business without the required prior permission would be unlawful because carrying on such business without licence (or in contravention of licence conditions) is an offence under the applicable statutes.
  4. Precedential support: The Court noted a line of High Court decisions (Madras Full Bench and related Madras decision, and subsequent Kerala and Punjab decisions) that held similar agreements to be void ab initio where they effected a prohibited transfer of licence rights. The Tribunal had relied on that line of authority, and the Court followed it.
  5. Consideration of the assessee's authorities: The Court considered the cases relied upon by the assessee (including Gordhandas and other decisions) which, on their facts, held that admission of partners for profit-sharing did not amount to transfer where the licensee continued to perform the licensed acts. The Court emphasized that those decisions were dependent on different statutory/regulatory language or on factual findings that the licensee continued to do the act of possession/sale.
  6. Effect of the Orissa rules' language: The Court highlighted that the Orissa rules expressly prohibit partial transfer or sub-lease, and that this language aligns more with the older Bombay rule situation where prohibition existed (as explained in the Bombay decision). Thus the Gordhandas line was not applicable where the rules expressly prohibited even partial transfer.
  7. Findings of fact: The Court accepted and relied upon the factual findings of the income-tax authorities quoted in the opinion (that U.N. Mohapatra made over the business to the firm because he could not finance it individually; the firm financed and took over management; profits/losses of the excise shops were incorporated into the firm's accounts). Those findings showed that the firm did not merely contribute finance and share profits but carried on the actual business and its management during the year in question.
  8. Distinguishing counter-authority: The Court distinguished the Patna (K.C.S. Reddy) decision on its facts because in that case the licence-holder remained the managing partner and actually conducted the business; here there was no finding that Udayanath Mohapatra was the sole managing partner for the excise business, and the partnership deed did not show management was left entirely to him.
  9. No need for further clarification: The Court considered and rejected the request for further statement of the case from the Tribunal, concluding that the Tribunal's factual findings were not ambiguous and were sufficient to decide the reference.
  10. Conclusion of law: Applying the statutory language, the unchallenged factual findings, and the line of authority which treats agreements effecting prohibited transfers as void, the Court held that the partnership agreement was unlawful and that the Income-tax authorities were justified in refusing registration of the partnership under Section 26-A.

Holding and Implications

Reference answered in the affirmative; the Income-tax Officer was justified in refusing registration of the partnership firm under Section 26-A.

Direct consequences and immediate implications (as stated in the opinion):

  • The Court held that the partnership agreement was unlawful because it amounted to a transfer of the licence in contravention of the Orissa Excise and Opium rules (no prior permission of the Collector having been obtained).
  • Consequently, the Income-tax authorities were justified in refusing registration of the partnership under Section 26-A for the year in question.
  • The applicant (the party who sought registration) was ordered to pay the costs of the reference to the opposite party.

The opinion applies and follows existing High Court precedent (Madras/Kerala/Punjab) to the facts; the text does not discuss broader doctrinal developments beyond the direct effect on the parties in this case.

Additional procedural note: R.K. Das, J. agreed with the opinion of Chief Justice Narasimham. The formal disposal records that the reference was answered in the affirmative and costs were awarded against the applicant.

Show full summary ...

    Mahapatra Bhandar v. Commissioner Of Income-Tax

    Narasimham, C.J:— This is a reference under section 66(1) of the Indian Income-tax Act, 1922 made by the Income-tax Appellate Tribunal referring the following question for the opinion of this Court:

    “Whether on the facts and circumstances of the case the Income Tax Officer was justified in refusing registration of the alleged firm under Section 26-A of the Income Tax Act.”

    2. One Udayanatji Mohapatra held a license for excise shop in ganja and opium in his own name, for the previous year ending 31-3-62 for which the assessment year would be 1952–1953. Finding difficulty in financing the said excise shop individually, he entered into partnership with five other persons and a deed of partnership was executed on 30-3-1950. In that deed the interest of each partner in the profits and losses was specified. The partnership firm was described as Mohapatra Bhandar and that firm applied for registration under Section 26-A of the Income-tax Act for the year in question. The income-tax authorities refused registration of the firm on the ground that the transfer of excise business by Udayanath to the firm was prohibited, by the Excise Laws of Orissa and consequently the object of the firm was to carry on unlawful business. Possession and sale of Ganja are regulated by the Provisions of the Bihar and Orissa Excise Act under which such possession and sale are prohibited except in accordance with a license granted under the Act. Rule 152 of the Rules made by the Board of Revenue, Orissa under that Act is as follows:

    “No transfer or sub-lease (whether entire or partial) of a license shall be made except with the previous permission of the Collector.”

    3. Possession and sale of opium is governed by the provision of the Opium Act of 1878 which prohibits such possession and sale except by a person holding a permit or license, in accordance with the Rules made by the Government of Orissa, under that Act. The Board of Revenue made subsidiary rules under the provisions of the said Rules, regarding the grant of license made under the Opium Laws. Condition No. 8 of the General Conditions applicable to such licenses is as follows:

    “No transfer or sub-lease (whether entire or partial) of a license shall be made except with the previous permission of the Collector.”

    4. Here it is admitted that the previous permission of the Collector was not taken so as to enable the assessee firm to carry on the business of possessing and selling opium and Ganja for the year in question. Hence any agreement between the licensee namely Udayanath Mohapatra and the other partners for carrying on the business in respect of those conditions without obtaining the previous permission of the Collector would be unlawful because carrying on such business without license is an offence under the Bihar and Orissa Excise Act and the Opium Act.

    5. The learned Tribunal relied on a Madras decision reported in D. Mohideen Sahib & Co v. Commr. of Income-tax, Madras, 1950-18 ITR 200 : (AIR 1950 Mad 451) which again was based on an earlier Full Bench decision of the same High Court, reported in Velu Padayachi v. Sivasooriam Pillai, AIR 1950 Mad 444 (FB) where it was held that such an agreement is void ab initio. This view has been followed by the Kerala High Court in Commr. of Income-tax, Mysore v. Union Tobaco Co. Ernakulam, 1961-41 ITR 115 : (AIR 1960 Kerala 270) and by the Punjab High Court in Commr of Income-tax v. Benarsi Das & Co., 1962-44 ITR 835 (Punj).

    6. Mr. Misra for the assessee however, urged that so long as the actual business of possessing and selling the excisable goods was done by the licensee, the mere fact that it entered into partnership with other persons for carrying on that business will not amount to ‘transfer or sub-lease’ of the license, and consequently such an agreement of partnership would not be unlawful. For this purpose he relied on Gordhandas Kersowji v. Champsey Dossa, AIR 1921 P.C 137, Shiam Bihari Lal v. Malhi, AIR 1917 All 54 (1); Radhey Shiyam v. Mewalal, AIR 1929 All 210 and a decision of the Patna High Court reported in Commr of Income-tax, Patna v. K.C.S Reddy, 1960-38 ITR 500 : (AIR 1900 Pat 398).

    7. In AIR 1921 P.C 137 it was held on a construction of the provisions of the Bombay Salt Act, 1890, that if a licensee admits partners into his business for the purpose of sharing the profits only, though the actual manufacture of sale was done by the licensee himself there was no contravention of the statutory prohibition against alienation of the licensee's interest. Their Lordships however took care to observe that the decisions to the contrary, based on other Acts had no application to that case. In AIR 1917 All 54 (1) it was held that if a licensee under the U.P Excise Act contracted with another person on the understanding that the latter would advance money to the former in sharing the profits of the business, there was no transfer or sub-lease of the license inasmuch as a contract did not entitle the transferee to sell any of the goods covered by the license. AIR 1929 All 210 also is a case of this type. In Karsan Sadashiv Patil v. Gatlu Shiwaji Patil, ILR 37 Bom 320 also it was held on a construction of the Bombay Abkari Act that if a licensee takes in partners for the purpose of sharing profits only there would be no transfer or sub-lease of the license. But in that very case it was pointed out that in Abkari Rules of 1895 there was prohibition of transfer or sub-lease (in whole or in part) of the right of the licensee to vend excisable goods and that in 1902 all references to the question of sub-letting a part of the right to vend or of admitting persons into the business were omitted from the rules. It was in consequence of this omission that the learned Judge held that a mere admission of partners for the purpose of sharing profits would not amount to transfer or sub-lease of the license.

    8. Here, however the rules quoted above expressly prohibit even partial transfer or sub-lease of the license. The language of the Orissa rule seems to be similar to the rule in Bombay in 1895—as pointed out in the aforesaid Bombay decision. It may therefore be held that if a licensee admits other persons as partners merely for the purpose of obtaining financial contribution for his business and sharing in the profits thereof there may be partial transfer of the license which is also prohibited in the Orissa Rules.

    9. Apart from this consideration, it was never the case of the assessee at any time that the actual business of possessing and selling excisable goods was carried on only by Udayanath Mohapatra and the other persons merely made financial contributions and shared in the profit without actually managing the business. The partnership deed which is on the record does not show that the management of the firm so far as these articles were concerned was left entirely in the sole charge of Udayanath Mohapatra. The findings of fact of all the income-tax authorities are as follows:

    “Shri U.N Mohapatra one of the partners took a license for excise shop in his own name. On the tooting that he was not able to finance the excise business individually he made over the business to the firm in lieu of finance to meet the requirement of the Excise business. It was agreed that the partners would share the profits or loss in the excise business also according to the share of each partner in the firm. The firm financed the business and took over its management. At the end of the year the, net result of the several excise shops were incorporated in its profit and loss account.”

    10. This finding clearly shows that the firm did not merely take over the financial part of the business but the entire business including its management. The business here consists merely in storing and selling excisable goods like opium and ganja and when the Income-tax authorities have categorically held that this business was handed over by the licensee to the Firm and the firm managed this business during the year in question, it must be held that there was a complete transfer of the business against the provisions of the Excise Rules prevailing in the State.

    11. The Patna case reported in 1960-38 ITR 560 : (AIR 1960 Pat 398) is clearly distinguishable. There a licence under the provisions of the Bihar Mica Act, 1948 entered into a partnership with other persons for dealing in mica but he remained the managing partner of the firm. The learned Judges therefore held that the actual business of dealing in mica was done by the licensee himself and not by the partnership firm. This will be clear from the following pages at page 506 (of ITR): (at p. 399 of AIR):—

    “It is the admitted position in this case that Mr. K.C Reddy who is one of the partners of the Firm is in possession of a dealer's licence and under para. 6 of the partnership deed Mr. K.C Reddy is the Managing Partner. If Mr. K.C Reddy had the intention of delegating to the other partners of the firm the power of selling or purchasing mica, it is undoubtedly open to him to apply to the controller under the provision of S. 7 of the statute for endorse the name of the other partners on the licence…… The important point to be noticed is that there is no express prohibition in the Bihar Mica Act, that a partnership cannot carry on the business of dealing in mica provided of course that the person who actually sells and who actually purchases and who is actually in possession of the mica has the dealer's licence required under S. 4(1)(d) of the Act.”

    12. Here as already pointed out there is no finding that Udayanath Mohapatra was the managing partner of the Firm for excise business. The partnership deed itself shows that there was no managing partner for the firm and the finding of fact by the Tribunal is that the Firm carried on the business which would necessarily mean the securing, possessing and selling of excisable articles in question.

    13. Mr. Misra then contended that there is no clear finding on this point by the lower authority and a further statement of the case may be called for from the Tribunal as to whether all the partners or the licensee alone actually carried on the business of possessing and selling excisable articles. In my opinion there is no ambiguity in the findings of the Tribunal quoted above and it is unnecessary to call for a further statement of the case.

    14. For these reasons I would, following the Madras, Kerala and the Punjab decisions referred to earlier, hold that the agreement of partnership was unlawful and consequently the Income-tax Authorities were justified in refusing registration of the partnership.

    15. The question is therefore answered in the affirmative. The applicant should pay the costs of this reference to the opposite party.

    16. R.K Das, J.: I agree.

    EI/AGJ/V.B.B

    17. Reference answered in the affirmative.

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    Comments

    Mahapatra Bhandar v. Commissioner Of Income-Tax
    (Dec 4, 1964)