All Asia Enterprises vs Commissioner of Income Tax

N.K. Agrawal, JJ.—The following common questions have been referred at the instance of the assessee for the assessment years 1981-82 to 1983-84 : " 1. Whether, on the facts and in the circumstances of the case, the Tribunal was legally right in holding that the assessee-firm had violated the rules under the Punjab Liquor Licence Rules ?

If the answer to aforesaid question is in the affirmative, whether the Tribunal was right in its interpretation of rules 6 and 7 and in holding that the assessee-firm had violated the said rules ?

Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that violation of the rules even if it was there, disentitled the assessee-firm from the benefit of registration?"

The assessee-firm carried on the business in liquor. The firm was constituted on 1-4-1980. Licence to sell foreign liquor and beer on wholesale basis was granted to the firm for the period 27-6-1980 to 31-3-1981. Thereafter, licence was renewed from year to year.

For the assessment year 1981-82, registration to the firm was refused by the ITO, after noticing that there was a change in the constitution of the firm from 5-8-1980, when two new partners were added. The firm had been first constituted by four partners to carry on the business under L-1 licence. There was another change in the firm on 20-10-1980, when two more partners were added, thus, raising the strength to eight partners. Since the names of the partners, other than the four original partners, were not entered in the licence, the ITO refused registration to the firm,

For the assessment year 1982-83, application for registration was filed in Form No. 11 in the month of March 1982 along with the partnership deed executed on 5-4-1981. The firm, in this year also, carried on the business in liquor. The business was carried on up to 31-3-1981 under the partnership deed executed on 20-10-1980. There was a change in the partnership with effect from 1-4-1981 when two existing partners retired and four new partners joined the firm, thus, raising the total number of partners to ten. The ITO noticed that L-1 licence had been first issued on 27-6-1980 to four partners only and, thereafter, new partners had been added from time to time. Since the names of the new partners had not been entered in the licence granted to the firm, the ITO, following the decision of this Court in Commissioner of Income Tax Vs. Hardit Singh Pal Chand and Co., refused registration.

For the assessment year 1983-84, declaration in Form No. 12 was filed along with the return. Though, there was no change in the constitution of the firm in this year, registration was not granted on the ground that in the earlier years, registration had been refused on account of the addition of new partners. The ITO noticed that the names of all the partners had not been entered in the liquor licence obtained for this year inasmuch as the licence continued in the names of the four partners who had joined the partnership in the beginning. The number of the partners had since increased to ten but the licence continued in the names of four partners only.

The Commissioner allowed the appeals filed by the assessee for all the three years. The Tribunal, however, in department''s appeal, upheld the orders of the ITO for all the three years, following the decision of this Court in Hardit Singh Pal Chand & Co.''s case (supra). The Tribunal took the view that the licence had been actually granted for the period 27-6-1980 to 31-3-1981 in the names of four partners constituting the firm and the licence was renewed for the next two years. Since the names of the four partners only continued in all the years in the licence, registration was rightly refused.

The question which actually arises for consideration is whether registration can be refused to a partnership firm u/s 185(1) of the income tax Act, 1961, on the ground that the person or persons holding licence to run a business in liquor had constituted such firm by adding more persons as partners without permission from the competent authority under the Punjab Excise Act and the Rules framed thereunder.

A similar question was examined by this Court in CIT v. Jagdish Chand Walia & Co. [IT Reference No. 93 of 1984, dated 29-9-1997] and it has been held that a partnership firm constituted by a licensee together with non-licensee partners to run a liquor business cannot be treated to be a genuine firm u/s 185(1) of the income tax Act inasmuch as there was a breach of rule 7 of the Punjab Liquor Licence Rules, 1956. Following the aforesaid view, the questions are answered in the affirmative, i.e., in favour of the department and against the assessee.