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  • Mehar Singh
  • Grover, JJ.
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Smart Summary

Structured Summary of the Opinion (Grover, J.)

Factual and Procedural Background

A retail opium licence was granted to Benarsi Das of Faridkot on 28 April 1954. By a deed of partnership dated 31 March 1954, Benarsi Das entered into a partnership with seven other persons under the name "Messrs. Benarsi Das & Company" to run opium contracts of Faridkot and Ransinghwala for the year 1954–55. Benarsi Das's share in the partnership profits was limited to one anna and six pies in a rupee; clause 3 of the deed provided that no partner was entitled to draw salary or remuneration.

For the assessment year 1955–56 the partnership applied for registration under section 26A of the Indian Income-tax Act. The Income-tax Officer refused registration on the ground that the firm's object was unlawful and that the partnership contract was wholly void. The Appellate Assistant Commissioner sustained that refusal. The Income-tax Appellate Tribunal, however, held that the partnership could not be said to be illegal and that the Income-tax Officer had wrongly refused registration.

On the application of the Commissioner, the Tribunal referred the following question of law to the High Court: "Whether on the facts and in the circumstances of the case registration under section 26A of the Act was rightly allowed?"

Legal Issues Presented

  1. Whether on the facts and in the circumstances of the case registration under section 26A of the Income-tax Act was rightly allowed.

Arguments of the Parties

Learned Counsel for the Commissioner

  • The licence had been obtained by Benarsi Das in his individual capacity; it had not been granted to the partnership firm.
  • By constituting the partnership, Benarsi Das sought effectively to circumvent the excise rules (including condition (t) of rule 40) that restrict who may possess and sell opium; this constituted a breach of those rules.
  • The assessee admitted utilising the services of seven other persons and paying them by a share of profits rather than salary; this enabled those persons to possess and sell opium without complying with the licence conditions and section 4 of the Opium Act, 1878.
  • Given that the partnership's object involved contravention of the Act and the rules (or would necessarily result in such contravention), the Income-tax Officer was justified in refusing registration under section 26A.
  • Reliance was placed on Mohideen Sahib & Co. v. Commissioner of Income-tax [1950] 18 I.T.R. 200 (following a Full Bench decision in Velu Padayachi v. Sivasooriam Pillai) where a similar partnership arrangement for liquor/arrack was held to involve prohibited transfer or to be unlawful when it intended to conduct business jointly on a licence granted to only one partner.

Assessee's Position (as presented in the opinion)

  • The assessee's pleaded case was that he employed or utilised the services of seven other persons for the business and, instead of paying them a salary, agreed to remunerate them by a share of profits.
  • The Tribunal ultimately accepted that the partnership could not be said to be illegal and therefore held that registration should not have been refused.

Tribunal's Reasoning (as described)

  • The Tribunal formed the opinion that the partnership was not illegal and allowed registration under section 26A.
  • The Tribunal relied upon two Lahore decisions (cited as 159 P.L.R. 1906 and Abdullah v. Allah Diya, A.I.R. 1927 Lah. 333) in support of its conclusion.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Mohideen Sahib & Co. v. Commissioner of Income-tax [1950] 18 I.T.R. 200 Held that a partnership arrangement to carry on arrack business where some shops were in individuals' names and some in strangers' names involved either a prohibited transfer of licence (rule 27) punishable under section 56 of the Abkari Act or a breach of section 15 punishable under section 55; a partnership that intended to conduct business jointly on a licence granted to only one partner became unlawful. The court treated this decision as supporting the view that a partnership which is structured to enable unlicensed persons effectively to sell opium on premises licensed to one partner can be unlawful; the opinion relied on Mohideen Sahib to support refusal of registration in the present facts.
Velu Padayachi v. Sivasooriam Pillai (Full Bench) (as followed in Mohideen Sahib) Determination that a partnership formed to conduct liquor business jointly on a licence granted to only one partner could render the partnership unlawful (public policy/ statutory scheme protecting licensed sellers). Cited as the Full Bench authority followed in Mohideen Sahib; used to show that partnerships arranged to subvert licensing rules may be held unlawful.
159 P.L.R. 1906 (Lahore decision) Applied for the proposition that entering into a partnership did not necessarily amount to a transfer of a liquor licence and that such a contract might not be void as opposed to public policy in the absence of express prohibition. The Tribunal relied on this decision; the High Court distinguished it on the facts because the local rules (condition (t) of rule 40 and section 4 of the Opium Act) in the present case impose more specific restrictions requiring prior approval for others to conduct sales.
Abdullah v. Allah Diya, A.I.R. 1927 Lah. 333 Relied on by the Tribunal as a Lahore authority bearing on the effect of partnership arrangements related to liquor licences (limited discussion in the reported opinion). The present court noted the opinion contained little discussion relevant to the present case and distinguished it for the same reasons it distinguished the other Lahore decision (differences in licence conditions and statutory/regulatory context).

Court's Reasoning and Analysis

The court's analysis proceeded from the statutory and regulatory framework governing opium licences and sales. The court reviewed:

  • Section 4 of the Opium Act, 1878: permitted possession or sale of opium only in accordance with the Act, other enactments relating to opium, or the rules framed under the Act.
  • Section 5: power of the State Government to make rules; and the Punjab Opium Orders, 1956, which include rule 40 (licence for retail sale) and condition (t) requiring prior submission and endorsement of the names of persons who may conduct sales on the licensee's behalf, and making the licensee responsible for acts of the approved persons.
  • Rules 51, 54, 55 and 59(1)(a) (as summarized in the opinion): rule 51 contemplates that licences may be granted to partnerships; rule 54 requires specification of all individuals where a licence is granted to an unincorporated firm; rule 55 permits adding partners by competent authority with specified consequences; rule 59(1)(a) allows revocation/cancellation/suspension for transfer or subletting without permission.

Applying those provisions to the facts, the court accepted the Commissioner's contention that Benarsi Das had obtained the licence personally and had not obtained a licence in the name of the partnership. The partnership, according to the court, was formed with the objective of enabling other persons to participate in possession and sale of opium on the licensed premises without complying with the licensing regime and without obtaining the requisite approvals/endorsements under condition (t).

The court considered the authorities relied upon by the Tribunal (the Lahore decisions). It observed that those decisions turned on factual and regulatory differences: in the Lahore wholesale vend decision the licence allowed employment of servants or agents and did not restrict the licensee from employing others; Chitty J. held that the taking of a partner could be akin to employing a servant remunerated by a share of profits and that, in the absence of an express prohibition, the contract would be upheld. The present court held those authorities distinguishable because condition (t) in the Punjab Opium Orders and section 4 of the Opium Act impose express restrictions that render it necessary for the licensee to obtain approval before others conduct sales.

The court also relied on Mohideen Sahib & Co. (and the Full Bench in Velu Padayachi) to the effect that even if a partnership was lawful at inception under the Contract Act, it could become unlawful when its object was to conduct the business jointly on a licence granted to only one partner. The court concluded that, given the undisputed fact that Benarsi Das never submitted the names of his partners for approval and endorsement and that the partnership's object was to enable others to sell opium on premises licensed to him alone, the partnership's object was illegal under the statutory/regulatory scheme governing opium.

The court expressly distinguished the Lahore authorities on the factual and regulatory ground that the licence conditions and statutory scheme applicable in the present case (condition (t) and section 4) make the situation materially different.

Because the Tribunal's conclusion that the partnership was not illegal was based on authorities and reasoning the court found inapposite, the referred question was answered against the Tribunal's conclusion.

Holding and Implications

Holding: The referred question was answered in the negative. The court held that registration under section 26A of the Income-tax Act was not rightly allowed in the circumstances of this case.

Implications:

  • Direct effect on the parties: The court reversed the legal position adopted by the Tribunal by concluding that the partnership's object, insofar as it enabled others to possess and sell opium on the licence granted to Benarsi Das alone without obtaining the approvals required by the rules, was unlawful and therefore registration under section 26A should not have been allowed.
  • Costs: The court noted there was no appearance for the assessee and accordingly made no order as to costs.
  • Broader precedent: The opinion distinguishes earlier Lahore decisions and relies upon Mohideen Sahib & Co. and the Full Bench decision in Velu Padayachi for the proposition that partnerships structured to subvert licensing restrictions can become unlawful. The court did not purport to lay down a novel principle beyond applying those authorities and distinguishing others on their facts; no broader new legal principle was announced beyond the application of existing authorities and the statutory/regulatory scheme to the facts at hand.

Additional note from the opinion: Mehar Singh, J. agreed with Grover, J.; the formal statement in the opinion is "Question answered in the negative."

Show full summary ...

    Commissioner Of Income-Tax v. Benarsi Das And Company

    Grover, J.:— A licence for the sale of opium was granted to one Benarsi Das of Faridkot on 28th April 1954. By means of a deed of partnership dated 31st March, 1954, the said Benarsi Das entered into a partnership with seven other persons. The partnership firm was to bear the name and style of “Messrs. Benarsi Das & Company “and it was expressly stated that it had been formed to run the opium contracts of Faridkot and Ransinghwala taken for Rs. 80,100 and Rs. 8,000 respectively for the year 1954–55. The share of Benarsi Das was to be only one anna and six pies in a rupee. According to clause 3 of the deed, no partner was entitled to draw any salary or remuneration for the work done for the firm. For the assessment year 1955–56 an application was made for registration of the partnership firm under section 26A of the Indian Income-tax Act. The Income-tax Officer declined to grant registration on the ground that the object of the firm was unlawful and the partnership contract under which the firm was constituted was wholly void. The Appellate Assistant Commissioner sustained the order of the Income-tax Officer but the Tribunal formed the opinion that the partnership could not be said to be illegal and, therefore, the Income-tax Officer was held to have wrongly refused the claim for registration. On an application of the Commissioner, the following question of law has been referred to us by the Tribunal:

    “Whether on the facts and in the circumstances of the case registration under section 26A of the Act was rightly allowed?”

    2. Under section 4 of the Opium Act, 1878 (to be referred to as the Act) a person can possess or sell opium only in accordance with what is permitted by the Act or by any other enactment relating to opium or by the rules framed under the Act. Section 5 confers powers on the State Government to make rules with regard to these matters. Section 9 prescribed the penalty for possessing or selling opium in contravention of the Act or the rules made thereunder. Under section 5 certain rules have been promulgated which are called the Punjab Opium Orders, 1956. Rule 40 provides for the grant of a licence for the sale of opium by retail.

    3. The rule also says that the licence has to be in such form and is subject, in addition to the conditions stated in the rule, to such conditions which are consistent with the provisions of the Act and of the orders as the Excise Commissioner may from time to time prescribe. Condition (t) in the aforesaid rule is as follows:

    “The licensee shall not allow any person to conduct sales in his behalf unless the name of such person has been previously submitted to the Deputy Excise and Taxation Commissioner or Excise and Taxation Officer for approval and endorsed by him on the licence. The licensee shall, however, be responsible for all the acts and deeds of the person so approved.”

    4. Rule 51 says that the licence may be granted to—

    (a) an individual;

    (b) ***

    (c) ***

    (d) a partnership or firm.

    5. According to rule 54, when a licence is granted to a partnership or firm not incorporated under any Act, all the individuals comprising the partnership or firm should be specified on the licence. Rule 55 provides that on the application in writing of all the original partners, a partner may at any time be added by authority competent to grant the licence, provided that he is otherwise eligible, in which case he shall be responsible for all obligations incurred or to be incurred under the licence during the period of its currency as if it had originally been granted in his name. Rule 59(1)(a) is to the effect that any licence may be revoked, cancelled or suspended if it is transferred or sublet by the holder thereof without the permission of the Deputy Excise and Taxation Commissioner.

    6. Now the argument of the learned counsel for the Commissioner is that the licence had been taken by Benarsi Das in his own name and had been granted to him in his individual capacity. It had not been granted to the partnership firm. By constituting the partnership, what Benarsi Das attempted to do was to get over these rules and further he was guilty of breach of condition(t) in rule 40. It is pointed out that the assessee's own case was that he utilised the services of other seven persons and rather than to pay them on salary basis, he agreed to pay them a share in the profits earned in his business. It is contended that in this manner by allowing the other persons to possess and sell opium, Benarsi Das was seeking to become a party to contravention of section 4 of the Act by the other partners. It is submitted that the whole object of the partnership being such that violation of the provisions of the Act and the rules was involved or would necessarily result therefrom, the Income-tax Officer was fully justified in disallowing registration. Our attention has been invited to Mohideen Sahib & Co. v. Commissioner of Income-tax [1950] 18 I.T.R 200., where seven persons executed an instrument of partnership for carrying on arrack business and sought registration under section 26A. The arrack shops stood some in the name of the individuals and some in the names of the strangers. Following a Full Bench decision of the same court in Velu Padayachi v. Sivasooriam Pillai, it was held that such a partnership arrangement either involved a transfer of the licence which was prohibited under rule 27 and punished under section 56 of the Abkari Act, or it was a breach of section 15 and punishable under section 55 because the unlicensed partner by himself, or through his agent, the other partner, sold without a licence. The Full Bench had also held that even though a partnership was lawful at its inception because it was not intended to infringe any of the provisions of the Contract Act, it nevertheless became unlawful when it intended to conduct the business jointly on a licence granted to only one of the partners. Consequently, it was held that registration had been rightly refused by the Income-tax Officer. One of the reasons which prevailed with the Full Bench of the Madras High Court was that a partnership formed in such circumstances would be illegal either because the offence would necessarily be committed or because it would be against general public policy underlying the enactment that only approved persons specially licensed should be allowed to sell liquors. It may be that there is no provision analogous to rule 27 which came up for consideration in the Madras case prohibiting transfer of a licence in this State which may be punishable as under section 56 of the Madras Abkari Act but it cannot be denied that the general public policy underlying the enactment and the rules in force here is that only approved persons specially licenced should be allowed to sell opium. It was open to the partnership to obtain a licence in the name of the firm but that was not done and when the licence was granted in favour of Benarsi Das only, the whole object of the partnership was to enable the other partners to sell opium on the licensed premises without complying with the provisions contained in the rules, referred to before. Admittedly Benarsi Dass never submitted the names of his other partners to the Deputy Excise and Taxation Commissioner for being allowed to conduct sales in his behalf and for getting an endorsement made on his licence in respect of the same. Even if no transfer of the licence is involved with regard to which the view of the Tribunal may be correct, but it cannot be said that the object and purpose of the partnership was not illegal.

    7. The Tribunal relied on two Lahore cases, namely, 159 P.L.R 1906 and Abdullah v. Allah Diya A.I.R 1927 Lah. 333.. In the latter case there is hardly any discussion which is relevant for our purposes but in the earlier case Chitty J. held that by entering into an agreement of partnership there was no transfer of the licence within the meaning of the excise rules and that the contract was not void as opposed to public policy but was capable of being enforced by one partner against the others. There, the question of the validity of an agreement of partnership with regard to a liquor licence was involved. The licence was for a wholesale vend and did not provide that the licensee alone shall personally attend to the sale. Clause 7 of the licence clearly contemplated the employment of servants or agents in the business; other conditions also contemplated a licence being granted to a firm. The learned judge was of the view that the taking of a partner in the business was not very different in its effect from the employment of a servant, who was to be remunerated by a share of the profits and thus entering into such a partnership did not amount to the transfer of a licence. He was further of the view that the agreement could not per se be regarded as opposed to public policy in the sense that it was in itself immoral or improper. The following observations may be noticed:

    “The result of the rulings appears to be that where there is some express prohibition by law, or rule having the force of law, against the action of the contracting parties, the contract will be held void; where there is no such prohibition, it will be upheld.”

    8. The rules to which reference has been made in the present case do contemplate that it is the licensee who must attend to the sale of opium in the premises with regard to which he holds the licence. This is clear from condition (t) which must be contained in every licence along with the other conditions mentioned in rule 40. Of course, the licensee can obtain the permission of the appropriate authority for another person conducting sales on his behalf but unless that is done, it is only the licensee who can possess and sell opium and no other. Section 4 of the Act is equally clear on the point. Moreover, the public policy underlying the Act and the rules, as stated before, is that only an approved person specially licensed should be allowed to sell opium. Thus the decision of the Punjab Chief Court is quite distinguishable and it is not possible to see how the Tribunal could properly apply the law laid down there to the facts of the present case which is one of registration under section 26A of the Income-tax Act which was not one of the matters which had to be decided by Chitty J. Even if the partnership was not per se unlawful, it cannot be said that it did not become unlawful when it intended to conduct the business jointly on a licence granted to only one of its partners as was observed in Mohideen Sahib & Co. v. Commissioner of Income-tax.

    9. In this view of the matter, the question that has been referred must be answered in the negative. As there was no appearance on behalf of the assessee, we make no order as to costs.

    Mehar Singh, J.:— I agree.

    10. Question answered in the negative.

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    Comments

    Commissioner Of Income-Tax v. Benarsi Das And Company
    (Jan 25, 1961)