Commissioner of Income Tax vs K.A. Sundaram and Co.

K.K. Usha, J.—This reference, at the instance of the Revenue, arises out of the order passed by the Income Tax Appellate Tribunal, Cochin Bench, in I.T.A. No. 146/Coch of 1993. The relevant assessment year is 1990-91. The following questions are raised for the opinion of this court :

"1. Whether, on the facts and in the circumstances of the case and where a partner obtains a licence and the firm carries on the business of abkari contracts, the Tribunal is right in law in holding--

(i) it cannot be said that the concerned partner has transferred the licence or the privilege to and in favour of the partnership firm of which he is a partner ;

(ii) such transfer, if any, is not prohibited under the Abkari Act?

Whether, on the facts and in the circumstances of the case, the assessee is entitled to be treated as a registered firm under the Income Tax Act ?"

The relevant facts are as follows : The assessee, a partnership firm, was refused registration u/s 185(1)(a) of the Income Tax Act, 1961, for the assessment year 1990-91 by the assessing authority, who found that the firm was carrying on abkari business in violation of the provisions of the Kerala Abkari Act. A licence issued under the provisions of the Kerala Abkari Act was in the name of one of the partners of the firm. The assessing authority took the view that the transfer of the partner''s licence to the firm without written consent of the excise authorities is against the provisions of the Kerala Abkari Act and, therefore, the firm is not entitled to registration on the ground that its business was being carried on in violation of the provisions of the Kerala Abkari Act and that the formation of the partnership itself was illegal. The assessee took up the matter successfully in appeal before the Commissioner of Income Tax (Appeals) which decision was upheld by the Tribunal in the second appeal filed by the Revenue.

It is contended by learned standing counsel for the Revenue that the issue involved in this reference is directly covered by a decision of the Full Bench of this court in Narayanan and Co. and K.S. Ramakrishnan, P.K. Narayanan and Co. Vs. Commissioner of Income Tax, . In the above case, only one of the partners was having licence to conduct sale of arrack. After obtaining the licence in his individual name, he entered into partnership with others. This court, after considering in detail the provisions of the Kerala Abkari Act and the Kerala Abkari Shops (Disposal in Auction) Rules, 1974, came to the conclusion that when the licensee enters into an agreement to share the privilege granted to him under the licence with others, he transfers a portion of his exclusive privilege to deal in liquor covered by the licence in favour of his partners and such a transfer is hit by the provisions in Rule 6(22) of the Rules. It was also held that such a contract of partnership is void u/s 23 of the Contract Act and a void contract of partnership cannot be recognised as a genuine partnership for the purpose of the Income Tax Act, 1961.

Learned counsel for the assessee contended that the above decision has no application in the facts of the present case. According to him, in this ''case, transfer of the licence to the business of the firm was not after formation of partnership as in the case reported in Narayanan and Co. and K.S. Ramakrishnan, P.K. Narayanan and Co. Vs. Commissioner of Income Tax, . Referring to annexure D, copy of the partnership deed dated March 1, 1989, produced along with C. M. P. No. 3382 of 1997, learned counsel would contend that in the present case, the very partnership was formed for the purpose of exploiting the licence to be obtained in the name of one of the partners that there was no transfer of licence in the name of the partnership and, therefore, the contract of partnership cannot be held as illegal, which would justify refusal of registration. Learned counsel placed reliance on a decision of the Supreme Court in Jer and Co. Vs. Commissioner of Income Tax, U.P., in support of his contention that there was no transfer of the licence in favour of the firm violating the provisions of the Kerala Abkari Act and Rules made thereunder. He also contended that it is not illegal for a partnership to exploit the licence to carry on a business in the name of one of its partners. Reference was made by learned counsel to the decision of the Chancery Division in Dungate v. Lee [1967] 1 All ER 241 in support of the above contention. According to him, prohibition against forming of partnership is provided only under Rule 19(4) of the Kerala Rectified Spirit Rules, 1972, alone, which reads as follows ;

"(4) If the holder of a licence wishes to enter into a partnership in regard to the business covered by the licence he shall do so only after obtaining the previous sanction of the Commissioner and thereafter his licence shall be suitably amended. Where a partnership is entered into, the partner as well as the original holder of the licence shall be bound by the conditions of that licence."

In all other rules, such as the Kerala Foreign Liquor (Compounding, Blending and Bottling) Rules, 1975, and the Abkari Shops (Disposal in Auction) Rules, 1974, there is no reference to any prohibition in formation of a partnership by the licensee.

Rule 6(22) of the Kerala Abkari Shops (Disposal in Auction) Rules, 1974, reads as follows :

"(22) The licensee shall not sell or otherwise transfer his contract or licence without the written consent of the Assistant Excise Commissioner concerned. No licensee shall lease out or Sub-rent the whole or any portion of the privilege granted to him under the licence."

Rule 13(2) of the Kerala Foreign Liquor (Compounding, Blending and Bottling) Rules, reads as follows :

"(2) The licensee shall not sell, lease out, Subrenl or otherwise transfer the privilege granted to him under the licence without the previous sanction of the Commissioner."

Condition No. 24 in the licence issued for the privilege of supplying foreign liquor by wholesale and selling in retail without privilege of consumption on the premises (Form FL 1) contains the following provision :

"24. The licensee shall not sell or otherwise transfer the subject-matter of his contract or licence without the written consent of the Assistant Excise Commissioner. No licensee shall lease out or Sub-rent the whole or any portion of the privilege granted to him under the licence."

In the licence for possession and supply of foreign liquor in wholesale (Form F. L. 10), condition No. 9 provides as follows :

"The licensee shall not lease out, sell or otherwise transfer his licence without the written consent of the Excise Commissioner."

On the wording of the abovementioned rules and regulations, learned counsel for the assessee contends that there is no prohibition provided by law for a licensee to enter into a partnership except in the case of rule 19(4) of the Kerala Rectified Spirit Rules. Under these circumstances, according to learned counsel, it cannot be contended that a partnership firm formed for the purpose of exploiting a licence in the name of one of the partners would be hit by Section 23 of the Indian Contract Act, 1872. According to the assessee, even if the licence can be issued only in the name of an individual, it is not illegal to conduct the business through a partnership by utilising the licence.

We do not find any reason to accept the contention raised by the assessee that the dictum laid down by this court in Narayanan and Co. and K.S. Ramakrishnan, P.K. Narayanan and Co. Vs. Commissioner of Income Tax, cannot have any application to the facts of this case. It is true that in the above case, the licensee entered into a partnership by which he transferred a portion of his privilege under the licence in favour of other partners and thus violated the provisions of the rules. We cannot find any difference in the legal position when the very object of the partnership was for treating the licence to be obtained in the name of one of the partners as property of the firm and the business in respect of such licence has to be carried on by the firm. Clause 7 of the deed of partnership dated March 1, 1989, produced as annexure "D", reads as follows :

"7. It is specifically agreed that the abkari licences for which kist payments are made out of the firm''s funds shall be treated as the property of the firm even though they are obtained in the name of any of the party/parties hereto. The business in respect of such licences shall be carried on by the firm duly enjoying the rights and undertaking the liabilities in respect thereof."

In Narayanan and Co. and K.S. Ramakrishnan, P.K. Narayanan and Co. Vs. Commissioner of Income Tax, , this court had considered in detail, all the relevant provisions of the Abkari Act and the Rules, as also the public policy involved, in granting licence by the State for production, manufacture, possession, purchase and sale of intoxicated liquors, etc. It was noted that such licence can be issued only in the name of an individual and that he cannot share the privilege with others, since such an action would violate the conditions which would, in turn, be against public policy. The very object for which the partnership is formed in the case of the assessee is to treat the licence to be obtained in the name of its partner as property of the partnership and to carry on the abkari business on the basis of the above licence by the firm with all rights and liabilities of the licensee. Such a contract would also take in transfer of a portion of the privilege of the partner in favour of other partners which would be against the provisions of the rules. The Full Bench had observed in Narayanan and Co. and K.S. Ramakrishnan, P.K. Narayanan and Co. Vs. Commissioner of Income Tax, as follows (page 218) :

"So, the partnership that has been entered into for sharing the privilege in dealing in liquor with other partners is a prohibited one. Such a contract of partnership is void u/s 23 of the Contract Act."

We fully agree with the above observation. If that be so, no difference can be spelt out in the legality of the contract of partnership merely for the reason that even at the time of execution of the deed of partnership the intention was to do business by exploiting the licence to be obtained in the name of one of the partners.

The attempt made by learned counsel for the assessee by contending that except in the case of Rule 19(4) of the Kerala Rectified Spirit Rules, there is no prohibition against forming a partnership, was only for a reconsideration of the dictum laid down by this court in Narayanan and Co. and K.S. Ramakrishnan, P.K. Narayanan and Co. Vs. Commissioner of Income Tax, . We are afraid that the assessee could not make out a case which would persuade us to take a view that the decision in Narayanan and Co. and K.S. Ramakrishnan, P.K. Narayanan and Co. Vs. Commissioner of Income Tax, requires reconsideration. What is provided under Rule 19(4) of the Kerala Rectified Spirit Rules, according to us, is not a specific prohibition against forming of partnership. The above provision really grants permission to form a partnership on specifying certain conditions. The decision of the Supreme Court in Jer and Co. Vs. Commissioner of Income Tax, U.P., is of no help to the assessee. Apart from the fact that the Full Bench had also considered the above decision before it took the view that there is transfer of a portion of the rights of the licensee in favour of the other partners, when a partnership is formed for exploiting the licence in the name of one of the partners, we find that the question of transfer in favour of a partnership as such was not raised before the Supreme Court in the above-mentioned decision. The thrust of the argument in that case was whether there was any prohibition in the holder of the licence entering into a partnership. It was found that there was no such prohibition. The question whether entering into a partnership would entail a transfer of a portion of the rights of the licensee in favour of the partnership, was not as such raised. In this context, it is relevant to refer to a decision of the Supreme Court in Sunil Siddharthbhai Vs. Commissioner of Income Tax, Ahmedabad, Gujarat, . In the above case, it was held that when an assessee brought his personal assets, namely, shares of limited companies, into the partnership firm as his contribution to his capital, there was a transfer of a capital asset within the meaning of Section 45 of the Income Tax Act. The exclusive interest of the partner in the individual asset before he enters the partnership is reduced on such entry into a shared interest. This would also support the view taken by this court in Narayanan and Co. and K.S. Ramakrishnan, P.K. Narayanan and Co. Vs. Commissioner of Income Tax, . The decision of the Chancery Division relied on by learned counsel for the assessee is also of no help to support the contention that there is nothing illegal in the partnership carrying on the business by exploiting the licence issued in the name of one of its partners. In the above case it was found that the Betting and Gaming Act, 1960, required that every partner who acted as a bookmaker, should have a bookmaker''s permit, but, there was no requirement that every partner in a bookmaker''s business should have a bookmaker''s permit. On the facts, it was found that at the time when the parties entered into the partnership agreement, there was no intention that the partnership which was not having the bookmaker''s permit was to perform the duties of a bookmaker. If that be so, the partnership agreement was not in conflict with the provisions of the Act and its validity cannot be questioned.

In the present case, even the terms of the agreement would make it clear that the intention of the parties was to treat the licence to be obtained in the name of one of its partners as property of the partnership and the partnership to do the business on the basis of the above licence with all rights and liabilities arising therefrom. Under these circumstances, without any hesitation, we would hold that the partnership was hit by the provisions contained u/s 23 of the Indian Contract Act. The assessing authority was, therefore, fully justified in refusing to grant registration.

In the light of the above discussion, we answer all the questions in the negative, against the assessee and in favour of the Revenue.

A copy of this judgment under the seal of this court and the signature of the Registrar shall be forwarded to the Income Tax Appellate Tribunal, Cochin Bench.