1. The appellant is the plaintiff. He lost the suit, which he filed for rendition of the accounts of the dissolved partnership of the first defendant by the second defendant and for an account being taken regarding the plaintiff's share of net assets and profits to be paid by the second defendant or in the alternative for dissolution of the defendant-firm and rendition of accounts by the second defendant and for a direction to pay the plaintiff's share of assets and profits.
2. The plaintiff, the second defendant and seven others entered into an agreement. Ex. B-1, on 16-5-1949 to construct a cinema hall at Gopinthapuram near Tekkali in Srikakulam District under the name and style as 'Gowri Shankar Talkies' and to do joint cinema business with a total share capital of Rs. 1,04,500-00. Later on, a partnership deed under Ex. B-2 dated 18-8-1951 was entered into by 9 partners, namely, (1) Sri Chennuru Sambasiva Rao (D-2), (2) Chennuru Ramarao (Plaintiff), (3) S. Iswarappa Chowdary, (4) L. Kameswara Rao, (D-3), (5) P. Lakshminarasamma, (6) Chennuru Lakshmana Murthy. (7) M. Appa Rao (D-4) (8) s. Suryanarayana (D-5) and (9) T. Tulasidas. According to the terms of Ex. B-2, the second defendant, who is the Managing Partner, should manage the business. This partnership business continued till 1952. In that year the second defendant acquired the shares of S. Ishwaraya Chowdary, Ch. Lakshmana Murty, Lakshiminarasamma and Tulasi Das and introduced Koppala Jagannaikulu (D-6) as a new partners. Hence, another partnership deed Ex. B. 3 dated 2-3-1952 was executed with six partners, namely, (1) Ch. Ramarao (Plaintiff), (2) Ch. Sambasivarao (D-2) (3) Lopinti Kameswara Rao (D-3) (4) Madugala Apparao (D-4), and (6) Koppala Jagannaikulu (D-6), the first defendant being the Gowri Shankara Talkies. This partnership under Ex. B. 3 was again dissolved in the year 1959 and a new registered partnership deed. Ex. B.4 dt. 30-9-1959 was executed with the second defendant continuing as the managing partner. None of these partnership deeds mentions in whose name the license should be obtained. But it was admitted by the plaintiff and the 2nd defendant and others that the licence for running the cinema hall was obtained in the name of the plaintiff. The licence was renewed every year by the plaintiff for running the cinema. Disputes arose between the plaintiff and the second defendant in connection with the salt business at Nowpada, which was said to have been entrusted by the second defendant to the plaintiff from 1-4-1957 to 31-3-1967 and the plaintiff was said to be due to him about Rs. 28,000/- in the salt business. The plaintiff, of course, admits that he was looking after the salt business of the second defendant but denies that it was completely entrusted to him and also denies the allegation of the second defendant that he was due to him in a sum of Rs. 28,000/- in salt business. The plaintiff contends that though the second defendant was carrying on the business as the managing partner of the first defendant-firm, the second defendant was not showing the accounts to him or the other partners and he was postponing on some pretext or other and had not given any share in the profits to the plaintiff in spite of repeated demands. Thus the disputes that had arisen on account of the failure on the part of the second defendant to show the accounts and to give any share in the profits to the plaintiff and other partners were referred to the arbitrator under the arbitration agreement Ex. B. 7, dt. 27-9-1969. The plaintiff admitted that the disputes were referred to the arbitrator under the arbitration agreement, Ex. B. 7. The second defendant submitted an application before the Collector requesting him to renew the licence in his name; but not in the name of the plaintiff. The Collector refused to renew the licence in the name of the second defendant. In view of the dispute raised by the second defendant the plaintiff also did not submit his application for the renewal of the licence. The Collector, while refusing to renew the licence in the name of the second defendant, stated in his order that the grant of renewal of licence would be considered when the application would be considered when the application would be submitted by the plaintiff after fulfilling the requirements under the Cinematograph Act and the Rules framed thereunder. (Vide Ex. B. 5 dt. 1-9-1969). It is, therefore, clear that the business was admittedly carried on till 1968 and it was stopped subsequently due to failure to obtain renewal of licence by the plaintiff on account of the disputes between the brothers. The plaintiff contends that since the second defendant failed to produce the accounts or to pay to the partners their shares in the profits, the plaintiff issued the registered notice dt. 20-8-1968 to the second defendant to render accounts within one week sending copies of the same to defendants 3, 4, 5, and 6. The second defendant on the receipt of the notice issued reply dt. 26-8-1968 with counter allegations. The plaintiff, therefore, filed the suit.
3. The second defendant raised several contentions while resisting the suit. One of the contentions is that as per the conditions of the licence, the plaintiff cannot assign, sub-let or otherwise transfer the licence or the licenced premises without the previous permission of the licensing authority nor shall the licensee without the permission allow any other person during the period of the currency of the licence to exhibit films in the licensed premises and as the plaintiff entered into the partnership agreement dt. 30-9-59 whereunder he assigned and transferred his rights to defendants 2 to 5 and particularly to the second defendant in the matter of film selection, film booking and exhibition of films etc., and as the prohibition contemplated under the Cinematograph Act is absolute, the partnership agreement for running the business is illegal and void ab initio as it is opposed to public policy and also it is violative of the licensing conditions and the partnership agreements is, therefore, hit by Sec. 23 of the Contract Act and the suit is thus not maintainable under law. The second defendant also contends that as the disputes are referred to arbitrators, civil court has no jurisdiction to entertain the suit. He further contends that as the partnership deed is not registered, the suit for accounts against the said firm is not maintainable under S. 69 of the Partnership Act.
4. The third defendant contends that the second defendant and the plaintiff were responsible for the business and they are, therefore, responsible for the loss sustained by the firm. He also contends that he has no objection for the dissolution of the firm and for rendition of accounts and for distribution of profits. The fourth defendant adopted the written statement filed by the second defendant. Defendants 5 and 6 remained ex parte.
5. The learned Subordinate Judge held that the licence for running the cinema hall was obtained in the name of the plaintiff, that as cl. 12 of the conditions of the licence provides that the licensee shall not without the permission of the licensing authority assign, sub-let or otherwise transfer the licence or the licenced premises nor shall the licensee without permission as aforesaid allow any other person during the period of currency of the licence to exhibit films in the licenced premises and as S. 11 of the A. P. Cinemas (Regulation) Act., 1955, provides that the Government may be notification make rules for carrying out purposes of this Act and as the rules relating to the terms and conditions and restrictions for grant of licence are framed by the Government for carrying out the purposes of the Cinematograph Act and as any violation of the conditions of the licence is made a continuing offence under S. 9 of the Act and as the Full Bench of the Madras High Court held in Velu Padayachi v. Siva Sooriam, : AIR1950Mad444 that a partnership entered into for the purpose of conducting a business in arrack or toddy on a licence granted to one of the partners is void ab initio, and as the second defendant, one of the partners, was carrying on the cinema business while the licence was in the name of the plaintiff and hence the partnership amounts to a transfer and it is, therefore, prohibited by cl. 12 of the conditions of the licence. The learned Subordinate Judge also held that the ruling in Velu Padayachi's case was approved and followed by the High Court of Andhra Pradesh in K. R. Prasad v. T. V. Subba Rao, (1970) 2 AWR 218 in which it was held that a suit for accounts is not maintainable as the partnership is illegal and is hit by S. 23 of the contract Act inasmuch as the partnership for carrying on the business with permit standing in the name of another is opposed to S. 59(1) of the Motor Vehicles Act. The learned Subordinate Judges also held that this Court considered in K. R. Prasad v. T. V. Subba Rao the decision of the Privy Council in Gordhan Das Messowji v. Champsey Dossa, AIR 1921 PC 137 and distinguished it by holding that the partners therein took no part in the manufacture of salt and therefore it was held that forming partnership with others did not infringe the provisions of the licence or of S. 11 of the Bombay Salt Act. The learned Subordinate Judge also held that the suit cannot be proceeded with when the matter is referred to the Arbitrators. The learned Subordinate Judge also held that the suit is barred by limitation in as much as it was not filed with in the period of three years from the date of receipt of Ex. A.1 notice. In view of these three findings, he held that the suit is not maintainable and ultimately dismissed the suit.
6. Sri. P. C. Poornaiah, the learned counsel for the appellant, contends that there is nothing illegal in the partnership between the plaintiff and the defendants and the agreement Ex. B. 1 dt. 16-5-1949 cannot be held to be illegal or opposed to public policy and that there is no transfer or letting of the cinema business as contemplated under R. 12 of the Cinematograph Rules, 1962 and the interpretation placed by the lower count on R. 12 and S. 9 of the said Act is contrary to law and the reported decisions. He further contends that in view of the rulings of the Supreme Court in Umacharan Shaw and Brothers v. Commr. I. T. : 37ITR271(SC) , Viswanatha Pillai v. Shanmugham, : 2SCR896 and Jer & Company v. Commr. I. T. 1972 Tax LR 2436 (SC) and also the Division Bench of this Court in I. T. Commr. V. Venkataramana, 1983 Tax LR 1355 A P the formation of the partnership does not amount to transfer and the partnership agreement is not illegal and is, therefore, not opposed to public policy. He also contends that the plaintiff is not entitled to get refund of the capital account invested on the ground that the partnership is void ab initio, is contrary to law (sic).
7. Sri J. V. Suryanarayana, the learned counsel for the respondents, on the other hand, contends that neither the Supreme Court decisions cited above nor the decision of the Division Bench of this Court in I. T. Commr. V. Venkataramana (1983 Tax LR 1355 (supra) are applicable to the facts of this case and they can be distinguished from the facts of the case. He further contends that when the second defendant, who is not licence-holder, is carrying on the partnership business on the licence standing in the name of the plaintiff, the formation of the partnership amounts to transfer of the rights under the licence and it is clear that the partnership was entered into for the purpose of bringing about the result prohibited by law and the partnership agreement is thus opposed to S. 23 of the Contract Act and hence it is void ab initio. He, therefore, contends that the lower court is justified in holding so in the light of the several decisions on which it relied.
8. From the contentions raised by the counsel on both sides, the only point that arises for consideration is :
'Whether the partnership agreement is hit by S. 23 of the Contract Act
9. Before we deal with the main point, we would like to hold that the suit is not barred by limitation. The notice of dissolution was received by defendant 4 on 22-12-1971 by defendant 5 on 23-12-1971, by defendant 6 on 22-12-1971, by defendant 2 under Ex. A. 18 dt. 22-12-1971 and the suit is, therefore, in time as it filed in the year 1972. The lower court erred in thinking that the limitation runs from the date of Ex. A. 1 i.e. 20-8-1968 and not from the notice of dissolution. The lower court has, therefore, committed illegality in holding that the suit is barred by limitation. Sri J. V. Suryanarayana conceded this position and he did not address any arguments in support of the finding of the lower court on this aspect.
10. The lower court also was erroneous in holding that the suit is not maintainable in view of the pendency of the arbitration proceedings, since the arbitration proceedings lapsed long back and they are not pending. Even this position is also conceded by Sri. J. V. Suryanarayana as he did not address any arguments in support of the finding of the lower court on this aspect.
11. Admittedly the business was run by the second defendant without holding a licence in his name as the licence stands in the name of the plaintiff. According to cl. 12 of the conditions of the licence, the licensee shall not, without the permission of the licensing authority, assign, sub-let or otherwise transfer the licence or the licensed premises as aforesaid allow any other person during the period of currency of the licence, to exhibit films in the licensed premises. S. 11 empowers the Government to make rules by notification, for carrying out the purposes of this Act. The conditions of licence were prescribed under the Rules framed under S. 11 of the A. P. Cinemas (Regulation) Act, 1955. Contravention of any of the conditions of licence will entail punishment as provided by S. 9 of the Act S. 9 reads as follows :-
'If the owner or person in-charge of a cinematograph uses the same or allows it to be used in contravention of the provisions of this Act, or of the Rules made thereunder, or of the conditions and restrictions upon or subject to which any licence has been granted under this Act, he shall be punishable with a find which may extend to one thousand rupees, and, in the case of a continuing offence, with a further fine which may extend to one hundred rupees for each day during which the offence continues.'
12. Clause 12 is, therefore, an important condition, which requires strict compliance. Under this clause the licenses shall not assign, sub-let or otherwise transfer the licence or licensed premises without obtaining prior permission from the licensing authority. It further enjoins the licensee not to allow any other person to exhibit films in the licensed premises without permission of the licensing authority during the period of the currency of the licence. These conditions, therefore, should be strictly followed by the licensee.
13. The Legislature did not feel satisfied with providing these conditions under Cl. 12. It further felt it necessary to impose penalty under Sec. 9 in the case of contravention of cl. 12 and also to treat it was a continuing offence in order to keep the licence-holder alert of his responsibilities and vigilant of his liabilities in case of continuous disobedience.
14. As the rules provide for prohibition of assigning or sub-letting or transferring of the licence or the licensed premises without the permission of the licencing authority and the violation of the conditions provided by Cl 12 of the conditions of licence will be visited with penalty of Rs. 1,000/- and in the case of continuing offence with a further fine which may extent to Rs. 100/- for each day during which the offence continues, any contract providing for transfer or sub-letting or assigning of the licence will become void ab initio inasmuch as it is opposed to S. 23 of the Contract Act.
15. The question is whether the plaintiff is deemed to have assigned or transferred the licence when he and others entered into a partnership agreement.
16. The learned Subordinate Judge relying upon the decision of the Full Bench of the Madras High Court in Velu Padayachi v. Sivasooriam : AIR1950Mad444 (supra) held that the partnership agreement is hit by S. 23 of the Contract Act.
17. In that case, a licence to vend arrack was issued to the defendant. He entered into a partnership agreement with some others for the purpose of conducting business in arrack or toddy on the licence granted to the defendant. Then disputes arose between the plaintiff and the defendant. The plaintiff filed the suit for the balance due on the settlement on accounts. Then the question arose whether a partner who entered into a partnership for the purpose of vending arrack can file a suit for the balance due on settlement of accounts when only one of the partners had obtained a licence under the Abkari Act for the vending of arrack. The District Munsif decreed the suit holding that the plaintiff is entitled to decree for the balance due on settlement of accounts. Then the matter came in revision under S. 25 of the Provincial Small Cause Courts Act before Subba Rao, J., (as he then was) who in view of conflict of opinion referred the matter to a Bench. When the matter came before Satyanarayana Rao and Govinda Menon, JJ., many cases other than those cited before Subba Rao, J., were referred to, some of them being Bench decisions and so they referred the manner to a Full Bench. The Full Bench proceeded to dispose of the civil revision petition on the footing that the parties to the partnership agreement sold arrack themselves or through other partners as their agents on a licence granted to the defendant alone in which there was a term prohibiting him from transferring his rights. The Full Bench examined a catena of decisions on this aspect starting from Maruda Muthu v. Rangasami (1901) ILR 24 Mad 401 to Venkatasubbayya v. Attar Sheik AIR 1949 Mad 252. Their Lordships observed that a licence is a personal privilege to vend and if a licence is acquired by one partner, it is certainly his licence and not the licence of the partnership. Since it was granted to him on the express understanding that it was to be used by him and by him alone, its use by the partnership would involve a transfer in precisely the same way as it would if the partnership were entered into after the licence was issued. On the question of public policy, it is difficult to see any difference between the object of the partnership entered into before the licence was granted and one entered into after it was granted. In either case the partnership should be entered into for the purpose of bringing about the result prohibited by law, i.e., the vending of arrack by a person who had no licence to do so. Their Lordships further observed :-
'.......................that there is a long and consistent body of opinion of this High Court from Marudamathu v. Rangasami (1901) ILR 24 Mad 401, onwards, with which we agree, that a partnership entered into for the purpose of conducing a business in arrack or toddy on a licence granted or to be granted to only one of them is void ab initio, whether the contract was entered into before the licence was granted or afterwards in that in either involves a transfer of the licence, which is prohibited under Rule 27 and punishable under S. 56, or a breach of S. 15, Abkari Act, punishable under S. 55., because the unlicensed partner, by himself or through his agent, the other partner, sells without a license. If a partnership is lawful at its inception because it is not intended to infringe any provision of the Contract Act, it nevertheless becomes unlawful when it intends to conduct the business jointly on a licence granted to one only of the partners.'
18. The above decision was followed by His Lordship Chief Justice Rajamannar and Venkatarama Ayyar, J., in Viswanathan v. Namakchand : AIR1955Mad536 . In that case the plaintiff entered into an agreement with the owner of the threatre called Chitra Talkies in Komaleswaranpet, Madras for taking it on lease for a period of four years with an option to renew the same for a further period of four years. In pursuance of this agreement he actually entered into possession of the threatre on 1-4-1949 and equipped it with the talkie machinery, electric fittings, furniture and so forth so as to make it suitable for exhibiting films. Meantime on 26-2-1949 the plaintiff and the defendants had entered into a contract, Ex. P. 1, Whereby they agreed to run the theatre in partnership. According to the terms of Ex. P. 1, the plaintiff has to get a registered lease deed for the premises and also a licence for running the theatre as talkie house and that thereafter a regular partnership deed should be executed. The capital for the firm consisting of equipments and the furniture was fixed at Rs. 1,30,000/- and the defendants paid the plaintiff a sum of Rs. 65,000/- for their half share thereof, that the benefits of the lease and of the furniture and fittings and other equipments and machinery and goodwill of the theatre together with the benefits of the licence obtained thereof should be the properties of the partnership. The plaintiff obtained a registered lease deed, Ex. P. 3, dt. 19-5-1948 for the premises and the licence for running the talkies on 11-8-1949 and both of them in his own name and a formal partnership deed, Ex. P. 2, was also executed on 5-9-1949. On 4-4-1950 the plaintiff received a notice., Ex. P. 4, from the Income-tax Department that the partnership with reference to Chitra Talkies was illegal and void ab initio in view of the Full Bench decision in Velu Padayachi v. Sivasooriam : AIR1950Mad444 (supra) and the plaintiff would alone be considered as the sole proprietor of the concern. On the basis of Ex. P. 4 the plaintiff sent a notice, Ex. P. 5, on 7-4-1950 to the defendants that as there could be no transfer of the licence relating to Chitra Talkies the partnership was void ab initio and that the plaintiff was the sole proprietor of it. The defendant gave a reply, Ex. P.7, dt. 20-4-1950 that the partnership was not illegal, and that it continued to subsist and that the plaintiff could not claim exclusive rights in the business and they also applied to the Commissioner of Police under Ex. P. 6 dt. 9-4-1950 that the licence may be renewed in the name of the partners. On 24-4-1950 the Commissioner of Police sent a memo Ext. P. 8 to the plaintiff drawing his attention to the fact that by taking a partnership he had broken the condition 7 of the licence and calling upon him to show cause why the licence should not be cancelled or in the alternative that it should not renewed in the name of the partnership. The plaintiff gave a reply Ex. P. 9 on 22-4-1950 that the partnership is illegal and void ab initio and that accordingly the licence might be renewed in his own name and it was also stated that the matter was sub judice. On 17-5-1950 the Commissioner of Police passed an order Ex. P. 10 cancelling the licence altogether. Thereupon, the plaintiff instituted the suit out of which the appeal arose for a declaration that the partnership was illegal and void ab initio as being in contravention of condition No. 7 of the licence and for an injunction restraining the defendants from interfering with the rights of the plaintiff as the sole proprietor of the business. The defendants resisted the suit on several grounds. They pleaded that the partnership was not illegal and that even if partnership is illegal, they did not affect their rights in the theatre premises, furniture and fittings, that the declaration prayed for should be refused as the object of the plaintiff was to defraud the defendants of large sums of money paid for the purpose of partnership and that in any event the grant of relief should be made conditional on the plaintiff repaying to the defendants all the sums paid by them with interest. Issue No. (1) in that suit is 'Is the partnership deed dt. 5-9-1949 entered into between the plaintiff and the defendants illegal and void ab initio
19. Balakrishna Aiyer, J., who tried the suit, held on issue No. 1 that as Cl. 7 is substantially in the same terms as R. 27 it should follow on the authority of the decision in Velu Padayachi v. Sivasooriam : AIR1950Mad444 (Supra) that the suit partnership is illegal in so far as it relates to the business which is the subject matter of the licence and hence the partnership is illegal and void ab initio.
20. Then the plaintiff preferred an appeal and in that appeal that finding was assailed. In the appeal the learned Judges also took the view that the partnership was illegal, though they followed the earlier decision of the Madras High Court. It was also contended before the Bench that even if the suit partnership is in contravention of cl. 7 of the licence it should nevertheless be held not to be illegal on the authority of Velu Padayachi v. Sivasooriam (Supra) as that was the decision under the Abkari Act and there was material difference between the Act and the Cinematograph Act. It was argued that while under the Abkari Act there was in addition to R. 27 which prohibited the transfer of a licence a provision, S. 55, making it an offence to sell intoxicating liquor in contravention of the Act but there is nothing corresponding to that provision in the Cinematograph Act making an exhibition of a film by a non-licensee an offence, that while a transfer of the licence under the Abkari Act would involve the commission of an offence under Sec. 55 no such consequence would follow by a transfer in violation of Cl. 7 of the licence under the Cinematograph Act, that the partnership formed in breach of Cl. 7 would, therefore, be not illegal though the licence itself might be liable to be cancelled under cl. 7. The plaintiff on the other hand contended that the transfer of a licence in contravention of Cl. 7 would be an offence punishable under S. 8 (1) of the Act. The learned Judge took the view that when a penalty is imposed in contravention of a provision of law that can be taken as an indication that the transaction is prohibited. Then Their Lordships considered whether a transfer in R. 7 had or had not the same meaning which it appears to have in R. 27 of the Abkari Rules; that while the appointment of an agent is prohibited under the Abkari Act R. 19 of the Rules framed under the Cinematograph Act expressly recognises that a licence might put an agent in charge of the concern; that as every partner is in law the agent of the other partners, a partnership with reference to cinema licence amounts only to the constitution of agents and that in consequence while a partnership with reference to the Abkari licence would be a transfer prohibited by R. 27 as held in Velu Padayachi v. Sivasoorima, : AIR1950Mad444 , it will not be so under R. 7. The contention is that read along with R. 19, R. 7 prohibits only transfers which completely divest the licencee of all interests in the concern. But this contention cannot be accepted for R. 19 prohibits that a licensee, his servants and agents shall apply comply with all orders issued by the Chief Electrical Inspector, it has in contemplation a person appointed by a licencee to perform his functions as his agent. It has no reference to persons who may be regarded in law as agents for certain purposes and under certain conditions. In the context an agent is a person different from the licensee; whereas in a partnership every partner fills a dual capacity of both a principal who will be bound by the acts of his partners and an agent who can bind them as principals. The Act is clearly concerned with one is an agent in fact and not under a rule of law. The learned Judges, therefore, held that the decision is Velu Padayachi v. Sivasooriam governs the rights of the parties and the partnership insofar as it relates to the carrying on of the business under the licence must be held to be illegal and void ab initio.
21. Chief Justice Subba Rao of the High Court of Andhra (as he then was) took the same view enunciated in Velu Padayachi v. Sivasooriam in Rama Rao v. Papayya AIR 1954 Ap 51 by holding that the partnership entered into between the licencee and his partners in direct contravention of the statutory prohibition being illegal and unenforceable, the suit for accounts by the other partners against the licensee is not maintainable. In that case the plaintiffs and the defendants formed a partnership in the name and style of Tadepalli Papayya & Co., for running rice ration shop business from 3-9-1944 at Bezwada. The said business was conducted on the basis of a ration shop licence issued in the name of the first defendant. The suit was filed for a declaration that the firm Tadepalli Papayya & Co., had been dissolved on 1-9-1945 for settlement of accounts and for directing the first defendant to pay such amount as may be found due to the plaintiff. Both the courts below held that the alleged partnership was illegal and unenforceable and dismissed the suit. Hence the plaintiff preferred the second appeal. The only question that arose for consideration in the second appeal was whether the second partnership was illegal. His Lordship observed that the answer to the question depends upon the provisions of the Defence of India Rules and that of the Madras Rationing Rules, 1943. His Lordship observed that under S. 13 the authorisation cannot be used by any person other than the person to whom it was issued. Under S. 16 such a person is prohibited from transferring a rationing document to other person. Under the Defence of India Rules any contravention of rules made in exercise of the powers conferred under that rule was made an offence punishable as such. His Lordship, therefore, observed as follows :-
'It is obvious that any contract involving the transfer of a rationing document not only contravenes the express prohibition contained in S. 13 of the Order but also relates to an Act which is made an offence punishable under the Defence of India Rules. Such a contract would be void under Sec. 23 of the Contract Act, as the object of that contract involves something illegal or contrary to public policy.'
In support of this view. His Lordship relied upon the Full Bench Decision of the Madras High Court in Velu Padayachi's case : AIR1950Mad444 supra.
22. In Govindaraj v. Kandaswamy Gounder : AIR1957Mad186 the view of the Full Bench in Velu Padayachi's case (supra) was followed.
23. Rajamannar, C. J., speaking for the Bench in Maniam Hira Gowder v. Naga Maistry : AIR1957Mad620 also reiterated the proposition of law enunciated in Velu Padayachi's case, supra, while dealing with a case under the Motor Vehicles Act. S. 59 (1) of the Motor Vehicles Act expressly prohibits transfer of a permit except with the permission of the transport authority. The licence-holder for running the lorry business entered into a partnership with others under the same permit. His Lordship referred to a long catena of cases starting from Velu Padayachi's case, supra and observed that an agreement of partnership which will entail a transfer of licence or permit granted by the Government when there is an express provision prohibiting such transfer is illegal and void ab initio.
24. A Division Bench of the Kerala High Court consisting of Ansari and Raghavan, JJ., also followed the ruling of the Full Bench in Velu Padayachi's case supra in I. T., Commissioner v. Union of Tobacco Co : 41ITR115(Ker) . In that case 12 persons had formed a partnership under a deed of 23-8-1949. Some of these partners obtained several tobacco licences earlier for the year 1925 at the auction conducted by the then Cochin Government and the partnership had been formed to exploit the licences obtained by the partners as well as two licences held by the strangers. One of the conditions of the licence is that the licence shall not lease out, sell or otherwise transfer the subject matter of his contract or licence without the written consent of the Excise Commissioner. An application was made to the Income Tax Officer for the registration of the firm under S. 26-A of the Income-tax Act, 1922. The Income-tax Officer held that the firm having been constituted in contravention of the excise rules was illegal and should not be registered. The Appellate authority has concurred with the view taken by the Income-tax Officer relying upon Govindaraj v. Kandaswamy Gounder : AIR1957Mad186 supra. The Appellate Tribunal reversing the order held that the partnership did not amount to infringement of the several provisions of the Act 7 of 1884. In the alternative the Tribunal held that the object of the Act being to collect revenue any contract in conflict with its provisions would not be void under S. 23 of the Contract Act. The Income-tax Department, thereafter, asked for the case to be stated and hence the following question has been referred to the High Court : 'Whether the firm is registrable under S. 26A for the assessment year 1951-52 ?'
25. The Advocate for the Department has urged that a contract transferring rights under the licences and contrary to the rule contained in the notification is void and as the partnership clearly amounts to such a contract it cannot be registered. In support of this argument the learned advocate relies upon the Full Bench decision of the Madras High Court in Velu Padayachi's case : AIR1950Mad444 supra and also Govindaraj v. Kandaswami Gounder supra. The Bench observed as follows :-
'A licensee by entering into a partnership passes partial but substantial interests in what he has in favour of another, and thereby does what the rule against transfers seeks to forbid without permission. The same result is reached when prohibition against transfer of possession is analysed; for it cannot be disputed that by becoming a partner a licensee in possession of the goods converts without transfer of corpus his possession into that of an agent. The vicarious possession is then substantially different and the rule against transfer is attracted. Consequently, a partnership, with a view to exploit the advantages accruing to persons having licence 'A' to 'B' under the Cochin Tobacco Act and the Notifications thereunder is illegal and entry into such partnership amounts to transfer of licensee's right so that the partnership firm cannot be registered under S. 26-A of the Income-tax Act.'
Their Lordship observed 'We, therefore, think the view of Menon, J., in : AIR1950Mad444 , that mere entering into partnership amounts to transfer of licensee's right is correct and the contract to do so is void because such a transfer is prohibited.'
26. In Varadarajulu v. Thavasi Nadar : AIR1963Mad413 a Bench consisting of Ramakrishnan and Kunhamed Kutti, JJ., also following the ruling of the Full Bench of the Madras High Court in Velu Padayachi, supra, and also followed the rulings in Viswanathan v. Namakchand, : AIR1955Mad536 supra, Govindaraj v. Kandaswamy Gounder, : AIR1957Mad186 and Maniam Hira Gowder v. Naga Maistry : AIR1957Mad620 supra. In that case the plaintiff entered into a partnership trade in lorry service with the second defendant and carried on the business under the name and style of 'Magiszch Lorry Service'. Differences arose between them and the plaintiff wanted to retire from the partnership and subsequently suit was laid for the recovery of the amount. The four defendants contended that the partnership agreement between the plaintiff and the second defendant in respect of the lorry service was illegal and void as being opposed to public policy and that the suit promissory note which was executed in pursuance of the settlement of the accounts of partnership was illegal and unenforceable. The other contention need not be mentioned. The trial Court found that the partnership agreement between the plaintiff and the second defendant was illegal as it contravened the provisions of the Motor Vehicles Act. The suit promissory note, which was executed in pursuance of the settlement of the accounts of the partnership, was illegal and unenforceable. The plaintiff took up the case in appeal before the single Judge. The learned single Judge found that the suits is one for the recovery of the amount paid by the plaintiff to the second defendant for the purchase of a lorry and it was this amount which the second defendant along with the three defendants undertook to repay. The suit was only for the recovery of the money due on a promissory note which represented the amount paid by the plaintiff for the purchase of the lorry to the second defendant. The suit pronote was, therefore, not tainted with illegality or voidity on any of the grounds urged by the defendants. The learned Judge also found that even if the partnership was void in the interests of Justice the plaintiff would be entitled to get back the amount which he advanced to the second defendant. Then L. P. A., was preferred by the defendants. The Bench differed from the finding of the learned single Judge but confirmed the finding of the trial Court. The Bench observed that ' the learned single Judge apparently did not consider it necessary to decide whether the partnership was illegal being opposed to public policy and being in contravention of the provisions of the Motor Vehicles Act. The Bench observed :
'From the evidence it would appear that the partnership was the owner of the vehicle. It is a common ground that the vehicle was used with a permit obtained by the second defendant. This is clearly a contravention of S. 42 (1) of the Act. S. 59 (1) of the Act prohibits a transfer of permit from one person to another except with the permission of the transport authority. Without such permission the transfer will not operate to confer on any person to whom the vehicle is transferred any right to use the vehicle in the manner authorised by the permit. In other words, if the partnership wanted to use the vehicle for which the permit was obtained in the name of one partner it was necessary to obtain the permission mentioned in S. 59 (1). Rules 196 and 197 of the Rules framed under the Motor Vehicles Act provide for the formalities to be observed when a permit is to be transferred from one person to another. Sec 112 of the Act makes any contravention of the provisions of the Act or the Rules thereunder a criminal offence punishable with fine Sec. 123 provides for the punishment of a person who causes or allows a motor vehicle to be used without a permit required under sub-sec. (1) of S. 42 or in contravention of any conditions of such permit relating to the route on which or the area in which or purposes for which the vehicle may be used. It is clear, therefore, that the partnership in using the motor vehicle for which the permit had been obtained in the second defendant's name contravened the provisions of the Act. The partnership was illegal and opposed to public policy.'
Then the learned Judges referred to the decisions of the Full Bench of the Madras High Court in Velu Padayachi's case : AIR1950Mad444 supra, Viswanathan v. Namakchand, : AIR1955Mad536 supra, Govindraj v. Kandaswamy Gounder : AIR1957Mad186 supra and Maniam Hiria Gowder v. Naga Maistry : AIR1957Mad620 supra and some other decisions which lend support to the view taken by them.
27. A Bench of this Court in Rama Rao v. Suryanarayana : AIR1964AP256 , also followed the rulings in Velu Padayachi v. Sivasooriam, supra and Maniam Hiria Gowder v. Naga Maistry, supra, and held as follows :-
'The prohibition against the transfer of a permit enacted in S. 59 of the Motor Vehicles Act (1939), has relation to matters of public interest. If the transfer is mutually agreed to disregarding this provision, it is fundamental that Courts would not enforce such an agreement as its object is forbidden by law or is of such a nature that, if permitted it would defeat the provisions of the law, within the meaning of S. 123 of the Contract Act.'
The Bench also further held that where there is an agreement which contravenes S. 59 (1) of the Motor Vehicles Act, such an agreement could not be enforced.
28. Another Bench of this Court consisting of Basireddy and Anantarama Aiyar, JJ., also followed the ruling of the Full Bench of the Madras High Court in Velu Padayachi's case supra in Basavayya v. Kotayya, : AIR1964AP145 . In this case the Bench has to consider whether the partnership is void on the ground that it is opposed to the public policy when the licence to carry on the business was given to one of the partners but to the firm. The plaintiff and the defendants were the partners of a firm and did business fro 1944 to 1947 in Sundry articles and cloth. A licence, Ex. A. 1 was granted to the plaintiff to deal in cloth but it was used by the partners for carrying on the partnership business. Later disputes arose between the two partners. The plaintiff, therefore, filed the suit for dissolution of the partnership and for accounts. The defendant resisted the suit contending that the suit is not maintainable for the suit partnership being void. The learned Principal District Munsif framed issue No. 1 which is as follows :
'Whether the suit is not maintainable by reason of the suit partnership being void ?'
The learned District Munsif held that the partnership was illegal, void and unenforceable and consequently the suit was not maintainable. He, therefore, dismissed the suit. The plaintiff preferred appeal, A. S. No. 36/56 before the Subordinate Judge at Eluru. The learned Subordinate Judge agreed with the trial Court and dismissed the appeal. Hence the plaintiff preferred second appeal in the High Court. When the appeal came before the single Judge, the learned Judge directed the appeal to be posted before a Bench in view of the importance of questions and large number of similar questions that may arise. The appeal was, therefore, posted before a Bench.
29. The Bench considered the Full Bench decision of the Madras High Court in Velu Padayachi, : AIR1950Mad444 supra and some other decisions and held that a licence issued to a person under M. C. D. C. Order is a personal privilege given to the licensee and the privilege granted under it cannot extend to another person with whom the licensee chooses or forms a partnership. The M. C. D. C., protection of public revenue but in furtherance of public policy. This is clear from the provisions of the order. The formation of the partnership in effect amounts to transfer of rights under the licence by the licensee mentioned in that licence to his partners. If the transfer of the rights or formation of the partnership in the above manner were expressly prohibited by law, then the dealing in the business by the partnership would amount to an offence punishable under R. 81 (4) of the Defence of India Rules and also to the penalty of confiscation of stocks etc, under Cl. 17 of the M. C. D. C. Order, which is also a punitive provision. The mere fact that punishment is provided for formation of a partnership may not render the partnership illegal, if there is no express provision in the Act concerned making it illegal provided that object of the Act is merely for the protection of the revenue. But if the object of the Act is in furtherance of a public policy, the formation of the partnership would become illegal under category 5 (b) of S. 23 as being opposed to the public policy. The formation of the partnership can be illegal if it falls under Category 2 of S. 23. That it, such partnership, if permitted, would defeat the provisions of the M. C. D. C. Order. The learned Judges ultimately held that the suit partnership was void and the suit was not maintainable.
30. Another Bench of this Court consisting of Obul Reddy and Ramachandra Raju, JJ., also followed in K. R. Prasad v. T. V. Subba Rao, (1970) 2 AWR 218, the Full Bench decision of the Madras High Court in Velu Padayachi v. Sivasooriam Pillai supra and a Division Bench Decision of the Madras High Court in Maniam Hiria Gowder v. Naga Maistry : AIR1957Mad620 supra. In that case the plaintiff, first defendant and the second defendant constituted a firm without a name and that firm was formed for the purposes of carrying on transport business and in pursuance thereof they purchased five vehicles which were being run on different routes in Krishna District. It was agreed among the partners that the plaintiff should supervise and control the proper running of the bus services and that defendants 1 and 2 should have control over the finances of the firm including the daily connections. Subsequently disputes arose between the partners. Ultimately the plaintiff had to file a suit for dissolution of the partnership and rendition of accounts by defendants 1 and 2. The suit was resisted on several grounds. The main issue which requires to be mentioned here as it is relevant for the purpose of this case, (is) that (whether) the partnership was an illegal as one as it was contrary to the provisions of the Motor Vehicles Act, as no partnership can be formed for running buses with permits which are held by others. The Subordinate Judge on the main issue held that the partnership was formed for the object, which is prohibited by the provisions of the Motor Vehicles Act and it is, therefore, illegal. The learned Judge following the rulings of the Madras High Court cited above, held that in the case before them the plaintiff not only purchased the buses with permits which are not transferable except in accordance with the provisions of the Motor Vehicles Act but also claimed to have entered into a partnership with defendants 1 and 2 to carry on the business with permits which stood in the name of the third party. The learned Judges held that it is doubtless that the partnership in question is not a lawful one even if it is assumed that there was any such partnership in existence, because it was formed for the purpose of infringing the provisions of the Motor Vehicles Act and as such the partnership is hit by S. 23 of the Contract Act.
31. The ruling of the Full Bench of the Madras High Court in Velu Padayachi : AIR1950Mad444 supra was also followed by the Bench of the Punjab High Court in Commr., of Income-tax v. Banarasi Das & Company .
32. All these decisions unanimously declared that the partnership agreement is hit by S. 23 of the Contract Act if the business is run with the licence granted in favour of a named partner either before or after he enteres into a partnership with other partners, since the licence is given to the said person on the express condition as provided by the statute, which governs the grant of licence that the should not assign, sub-let or transfer the licence to another without the permission from the authority granting the licence and the contravention of such a condition entails penalty or penal consequences. It is based on the doctrine that a licence is the personal privilege given to the licensee, who is precluded from assigning or transferring it to any other person and the transfer of the licence in contravention of such condition is void. Formation of partnership for carrying on business under a licence standing in the name of one of the partners virtually amounts to transfer of rights under the licence by the licensee to his partners. If the object of the Act in prohibiting the transfer of the licence is only to advance public policy, the formation of partnership for carrying on business with such a licence would become illegal, inasmuch as it is opposed to public policy and is, therefore, hit by S. 23 of the Contract Act.
33. Sri C. Poornaiah, the learned counsel for the appellant, contends that the ruling of the Full Bench of the Madras High Court in Velu Padayachi's case supra, the decision of the Division Bench of the Madras High Court in Viswanathan v. Namakchand : AIR1955Mad536 supra., Govindaraj v. Kandaswamy Gounder : AIR1957Mad186 supra, Maniam Hiria Gowder v. Naga Maistry AIR 1957 Mad 920 supra, I. T. Commr. V. Union of Tobacco Co : 41ITR115(Ker) supra, Varadarajulu v. Thavasi Nadar : AIR1963Mad413 supra, Rama Rao v. Suryanarayana : AIR1964AP256 Supra Basavayya v. Kotayya v. T. V. Subbarao 1970 AWR 218 (supra) and Commr of Income-tax v. Banarasi Das and Company, supra are no more good law since they were deemed to have been impliedly overruled by the Supreme Court in Jer & Company v. Commr., of I. T. : 60ITR335(All) , followed the Full Bench decision of the Madras High Court in Velu Padayachi's case and other decisions cited above and held that the assesse-partnership is invalid because it was formed with the avowed object of carrying on the business on the authority of the licence issued in the name of Dady one of the partners and transferred by him to the partnership against the provisions of the Excise Act and Rules and consequently the contract of partnership was void under S. 23 of the Contract Act. But this decision was reversed by the Supreme Court in Jer & Company v. Commr., of I. T., supra.
34. In that case one person by name Dady held licence during the two assessment years. But the licence of wholesale vending intoxicant of foreign liquor was obtained at Agra by the partnership under the name and style of Jer & Company and not by Dady. Jer & Company authorised the salesman named Md. Ismail to do the actual vending. It never obtained licence for the wholesale vending of foreign liquor. The partnership was registered under S. 26A in 1945 and the registration was renewed from year to year up to the end of assessment year 1959-60. The registration was renewed for the assessment year 1959-60 in Sept. 1958 and for assessment year 1959-60 on 10th July, 1959. On Sept. 3, 1963 the Commissioner of Income-tax acting under S. 33B of the Income-tax Act cancelled the renewal for the two assessment years after necessary formalities because in his opinion the object of the partnership was illegal, it being to carry on the business of selling foreign liquor contrary to the rules framed by the Government under the Excise Act. The partners filed an appeal which was allowed by the Tribunal. The Tribunal examined the question whether the business covered by the licence had seen sub-let or transferred. The tribunal answered the question in the negative because the business of vending liquor continued to be carried on by Dady as well, that Cl. 13 of the licence has not been contravened and the licence should not be and has not been cancelled on the ground of contravention of any conditions of the licence, that there is absolutely no prohibition against the formation of partnership to carry on the business of vending foreign liquor under the licence, that the business is being carried by the partnership on the licence issued to the licensee, that there is no illegality in the partnership is entitled to registrations. Subsequently at the instance of the Commissioner of Income-tax the Tribunal made a reference to the High Court.
35. Their Lordships of the Allahabad High Court considered the rulings of the Full Bench decision of the Madras High Court in Velu Padayachi's case : AIR1950Mad444 supra, Govindaraj v. Kandaswami : AIR1957Mad186 supra, Commr., of Income-tax v. Union Tobacco Company, : 41ITR115(Ker) supra; Commr., of Income-tax v. Benarasi Das & Company : AIR1964AP256 supra and Commr., of Income-tax v. Krishna Reddy : 46ITR784(AP) and agreed with the view laid down by the rulings rendered therein and held that the asessee partnership was invalid because it was formed with the avowed object of carrying on the business of wholesale vend in foreign liquor without a licence in its favour. The object of the partnership was to carry on the business on the authority of the licence issued in the name of Dady and transferred by him to the partnership against the provisions of the Excise Act and Rules. Thus, it was to carry on the business against the provisions of the Excise Act and Rules and consequently the contract of partnership was void under S. 23 of the Contract Act. As, in the eye of law, the assesse partnership did not exist, it could not be registered.
36. Aggrieved with this decision, the Company preferred an appeal to the Supreme Court. The Supreme Court held in Jer & Company v. Commr. I-T. 1972 Tax LR 2436 supra that the Commissioner and the High Court proceeded on the footing that the licence was governed by R. 322 which prohibited the holder of an licence from entering into a partnership with another person. But it is clear from the record that the licence in Form FL II was issued under the U. P. Excise Manual. The licence does not prohibit from entering into partnership by the holder of the licence; it merely provides that the licence shall not be sub-let or transferred. Since there is no prohibition against entry by the holder of the licence into the partnership the question whether the partnership was illegal does not arise. The firm was entitled on that account to registration. Their Lordships observed that it is somewhat unfortunate that the attention of the Commissioner and the High Court was not invited to the form in which the licence was issued by the Excise authorities. They proceeded to decide the case on the footing that the R. 322 of the Excise Manual applies but that rule has no application here. Their Lordships did not advert to any of the decisions considered and relied upon by the Bench of the Allahabad High Court but reversed the judgment of the High Court. When the Supreme Court reversed the decision of the High Court without referring to any of the decisions considered by the High Court, can it be said that all the decisions considered and relied upon the Bench of the High Court should be deemed to have been impliedly overruled ?
37. A Bench of our High Court consisting of Seetharama Reddy and Jagannadha Rao, JJ., in I-T. Commr., v. Venkataramana 1983 Tax LR 1355 (supra) took the view that when the Supreme Court reversed the decision of the Allahabad High Court in Jer & Company v. Commr. I.-T. : 60ITR335(All) , it should be deemed that all the decisions relied upon by that Court in that decision should be deemed to have been impliedly overruled. For taking that view, the learned Judges relied upon the decision of the Madhya Pradesh High Court in Dayabhai & Co. V. Commr. of Income-tax : 59ITR364(MP) and also the decision of the Patna High Court in Commr., of Income-tax v. Narapathi : 97ITR645(Patna) and the Punjab High Court in Commr., of Income-tax v. Gyan Chand, and observed in para 30 as follows :
'With respect, we agree with the view taken by the Madhya Pradesh, Patna and the Punjab High Courts in the above rulings for, in our opinion too, the reversal of the Allahabad High Court's judgment by the Supreme Court has the effect of the Supreme Court impliedly overruling the various judgments which have been followed by the Allahabad High Court including the Madras Full Bench.'
For holding that the view taken by the Full Bench in Velu Padayachi's case, : AIR1950Mad444 supra was impliedly overrules by the Supreme Court, the Bench also relied upon another decision of the Supreme Court in Viswanathan Pillai v. Shanmugham, : 2SCR896 in which it was held that a stage carriage could be plied lawfully by the real owner even though the permit was in the name of the benamidar. Their Lordships expressly dissented from the judgment of the Madras High Court in Varadarajulu Naidu v. Thaveli Nadar : AIR1963Mad413 , which relied upon the decisions of the Full Bench decision of the Madras High Court in Velu Padayachi's case supra and also the Bench decision in Viswanathan v. Namakchand : AIR1955Mad536 supra for holding that the partnership for carrying on business with the permit or licence obtained in the name of one of the partners was invalid.
38. At this juncture, it is necessary for us to refer to a decision rendered by one of us (Ramachandra Raju, J) (who) while disposing of A. S. No. 1234/80 on 20-9-1982 relied upon the decision of the Full Bench of the Madras High Court in Velu Padayachi's case supra and the decision of the Bench of the same High Court in Viswanathan v. Namakchand supra. My learned brother did not accept the contention of the counsel for the appellant that the decision in Viswanathan v. Namakchand, supra should be deemed to have been overruled by the decision of the Supreme Court in Viswanatha Pillai v. Shanmugham, (supra). But a Bench of this Court in I-T. Commr. V. Venkataramana, 1983 Tax LR 1355 A P supra, held that as the Supreme Court in Viswanathan Pillai v. Shanmugham (supra) expressly dissented from the judgment of the Madras High Court in Varadarajulu Naidu v. Thaveli Nadar, : AIR1963Mad413 (supra) it is deemed that the said decision of the Madras High Court has been overruled. The Bench of this Court further observed :
'What we have stated about the result of the reversal of the Allahabad judgment in Jer & Company : 60ITR335(All) equally applies to the Madras judgment in Varadarajuly Naidu' case and it must follow that the dissent extended to Velu Padayachi's case which was followed in Varadarajuly Naidu's case.'
The result of this ruling is that the decision of the Madras High Court in Viswanathan v. Nanakchand (supra) is deemed to have been overruled along with the decision in Varadarajulu Naidu's case (supra) by the ruling of the Supreme Court in Viswanatha Pilla's case (supra). Consequently the unreported decision of my learned brother, P. Ramachandra Raju, J., in A. S. 1234/80 dt. 20-9-1982 should also be deemed to have been impliedly overruled.
39. As the law propounded by the Full Bench of the Madras High Court in Velu Padayachi's case that the formation of a partnership for carrying on business under a licence standing in the name of one of the partners virtually amounts to transfer of rights under the licence by the licensee to his partners is no more a good law. What is the law governing the matter ?
40. For this question, we get the answer in the law that was laid down in Champsey Dossa v. Gordhandas Kessowji, AIR 1917 Bom 250, Gordhandas Kessowji v. Champsey Dossa AIR 1921 PC 137 (supra), Umacharan Shaw v. Commr., of Income-tax : 37ITR271(SC) (supra), Viswanatha Pillai v. Shanmugham, : 2SCR896 , (supra) and Jer & Company v. I.-T. Commr., 1972 Tax LR 2436 (supra), Md. Warsat Hussain v. Commr., I.-T : 82ITR718(Patna) and C. I. T. V. Gaian Chand and Company, (Punj & Har) (supra) and also the decision of this Court in I. T. Commr. A. P. V. Venkataramana 1983 Tax LR 1355 (supra).
41. The Division Bench of this Court in I. T. Commissioner A. P. V. Venkataramana (supra) relied upon the above decisions and propounded the law that the formation of partnership by a licensee partner does not amount to a transfer of the licence and hence the partnership formed by the licensee under the A. P. Exercise Act and Rules framed thereunder with others cannot be said to be illegal. We think that this is the law governing all the partnership agreements entered into by the licensees, be it under the Excise Act or under this Cinematograph Act or under Motor Vehicles Act.
42. In Champsey v. Gordhandas (supra) business in salt was carried on in the name of Kessowji Dossa and the joint family had a share of 11 annas and defendant 2 had a share of three annas and defendant 3 two annas. In 1911, Gordhanadas, the son of Kessowji, separated from the family, and a fresh agreement was entered into by which it was arranged that out of the 11 annas share of the joint family in the business of Kessowji Dossa, Gordhandas should have a four annas share and the other members who remained joint a seven annas share. The business of manufacturing salt was carried on under agreements with certain persons, who held licences from Government for long periods and who are styled 'shilotries'. Clause 5 of the licence reads as follows :-
'That he, the licensee shall not without the written permission of myself, i.e. (the Collector of Salt Revenue) or of my successor in office for the time being, sub-let, sell, mortgage or otherwise alienate whole or in part the privilege granted by this licence of manufacturing salt on the land within the aforesaid limits.'
In the partnership agreement, it is recited that the parties shall share in the profits of certain shops in certain proportions. Disputes arose amongst the parties. One of the partners sued for injunction against other partners restraining them from excluding plaintiff from a share in the partnership or in the alternative for dissolution. Resisting the suit, the defendant contended that the partnership agreement was illegal and the suit is, therefore, not maintainable. The important question involved was whether entering into partnership by the licensee had the effect of contravening the provisions of S. 11 of Bombay Salt Act (11 of 1890). The learned single Judge observed that the agreements of 1909 and 1911 do not infringe the conditions imposed upon Gordhan Das by the various licences which he held for the manufacture of salt. Then the matter was taken in appeal. Their Lordships of the Privy Council in Gordhandas Kessowji v. Champsey Dossa, AIR 1921 PC 137 (supra) confirmed the judgment and decree of the learned single Judge of the Bombay Salt Court and held that a licensee of salt manufacture cannot be said to contravene the terms of his licence whereby he is prohibited from alienating the interest, simply because he admits members of his family and others as partners, who however, do not actually take part in the manufacture, nor is there any document directly transferring the right of manufacture to such partners.
43. In Umacharan Shaw v. Commr., of I. T. : 37ITR271(SC) , the Supreme Court held that mere formation of a partnership by someone who held licence with others who had no such licence does not amount to transfer of the licence within the meaning of S. 42 of the Bengal Excise Act. In that case Bhuban Mohan Shaw held excise licence for dealing in foreign liquor. After his death his brothers formed a Hindu joint family of which Uma Charan Shaw was the karta. The family continued the said business and excise licences were taken in the names of Uma Charan Shaw and Panchukali Shaw. The business of the family improved and other shops were opened. The licenses of those shops were held in different names of the Hindu Joint family. The family had acquired immovable properties in Calcutta in addition to the shops. In 1938 the family because disrupted and on April 7, 1939 Uma Charan Shaw and his two brothers entered into a deed of partnership, which was also registered with the Registrar or Firms, West Bengal. By this deed the three brothers agreed to carry on the joint family business in partnership and they opened an separate account which they called Bati Khata which purported to show the capital contributions and accounts of the partners and also division of profits amongst them according to their shares. The deed of partnership also provided that the income of the immovable property was to be collected jointly and divided equally between the three brothers. During the earlier years the joint family was assessed as a Hindu undivided family under the name of Uma Charan Shaw and Brothers with Uma Charan Shaw as to kartha in respect of the business on the immoveable property. In the assessment year 1939-40, Uma Charan Shaw made application sunder Ss. 25A and 26A of the Act asking for an order that the family had effected a partition and for registration of the partnership firm as formed by the deed of April. 7, 1939, but the applications were rejected by the Income-tax Officer, District II- (2), Calcutta. The Income-tax authorities continued to assess the Hindu undivided family. On Dec. 1, 1944 all the immoveable property of the family was conveyed to a limited liability company called the Bhuban Mohan Shaw Estate Limited, by the three brothers who were each allotted 91 shares of the face value of Rs. 1,00,000/- each. Thereafter the income of these properties was assessed in the hands of the company. Aboy Charan Shaw died on April, 14, 1945 and his son Shashadar Shaw was taken in as a partner representing the branch of his father. The share of the Branch was same as that of Aboy Charan. In Jan., 1946 another limited company called Shaw Brothers Stores Limited consisting of Uma Charan, Panchukali and Shashadar took over the business of Shaw Brothers at No. 12/13 Bertram Street, Calcutta. The income of that business was, thence, assessed in the hands of the said Company. Uma Charan died on Jan 25, 1947 and his son Radha Raman Shaw was taken into the partnership with a share equal to that of his father. On April 10, 1947 a fresh deed of partnership was entered into by Panchukali, Shashadhar and Radha Raman in respect of the remaining shops. On the basis of the said deed of partnership, a fresh application under S. 25-A of the Act was submitted. At first a return was filed as a Hindu Undivided family by the appellant. The return was corrected by filing another but again as a Hindu undivided family. A third return was then filed as a firm in the name of Uma Charan Shaw and Brothers, a firm of the partners. Simultaneously, applications are made under Ss. 25A and 26A of the Act. The I. T. O. II (2) Calcutta rejected the application under S. 26 A. He observed that the assessment should be as a Hindu undivided family as hitherto. The usual appeals followed but were dismissed. The appellants applied first to the Tribunal u/s. 66 (1) and later to the High Court u/s. 66 (2) for a reference but failed. The appellant firm accordingly filed two appeals as stated above. The Appellate Assistant Commissioner of Income-tax endorsed all the above reasons given by the I. T. O. Their Lordships of the Supreme Court examined the provisions of S. 42 (1) (a) of the Bengal Excise Act, which says that subject to such restrictions as the State Government may prescribe the authority who granted any licence, permit or pass under this Act may cancel or suspend it (a) if it is transferred or sub-let by the holder thereof without the permission of the said authority. Their Lordships observed that there was no evidence that the excise licences were transferred or sub-let. The three shops were managed separately and their accounts were kept distinct. There was thus nothing which militated against the partnership and it cannot, therefore, be said that this affected the genuineness of the agreement. Their Lordships further observed that there is nothing which made the partnership doubtful. Thus, the Supreme Court held that mere formation of a partnership by someone who held licence with others who had no such licence does not amount to transfer of the licence within the meaning of S. 42 of the Bengal Excise Act.
44. In Viswanatha Pillai v. Shanmugham : 2SCR896 (supra) their Lordships examined S. 41 (1) of the Motor Vehicles Act and observed that S. 42 (1) does not require that the owner himself should obtain the permit. It only requires the owner that the transport vehicle shall not be used except in accordance with the conditions of the permit. These is no justification for inserting the words 'permit granted' in S. 42 (1). The definition of the 'permit' itself shows that all permits need not be in the name of the owner because the latter part of the definition shows that it is only in the case of a private carrier or a public carrier that a permit has to be in the owner's name. From this decision it is clear that it is not necessary that in each case, the person in whose favour a permit has been issued should be the owner of the vehicle covered by it.
45. In Jer & Company v. Commr., Income-tax 1972 Tax LR 2436 (supra) we have already narrated the facts of the case in (earlier) paras and also the decision of the Allahabad High Court which was based on the Full Bench decision of the Madras High Court in Velu Padayachi's case : AIR1950Mad444 (supra). Reversing the decision of the Allahabad High Court, their Lordships of the Supreme Court held that the licence does not prohibit from entering into a partnership by the holder of the licence. It merely prohibits that the licensee shall not sub-let or transfer. Since there is no prohibition against the entry by the holder of the licence into a partnership the question whether the partnership was illegal does not arise.
46. In C. I. R. V. Gian Chand & Company (supra) the Division Bench of the Punjab and Haryana High Court held that the firm whose five partners had obtained licences in their separate names from the Fisheries Department of the Punjab Government for fishing in the public waters, did not become illegal by taking in four others as partners and was not disentitled to registration under S. 185 of the Income-tax Act, 1961 as the Punjab Fisheries Rules did not contain any rule prohibiting entering into partnership so far as the fishing licences were concerned.
47. In Commr. I-T v. Narpati Khan & Co. (1975) Tax LR 640 (supra), an application under s. 26 of the Act for the registration of the firm styled as Narpati Khan and Company had been filed. The assessee is a dealer in country liquor and runs five shops where distillation and sales of liquor are carried on. Licenses for the shops in question stand in the names of three of the partners, whereas the partnership is constituted of seven persons, four of them being non-licensees under the Bihar and Orissa Excise Act. In the assessment years 1958-59, the licence for one of the liquor shops was in the name of one of the partners. Narpati Khan and the other four shops were run under the licences obtained in the names of Nakur Chandra Khan and Surend Nath Mandal. In the assessment year 1959-60 also, there were five shops and seven partners. The partners were the same as in the earlier assessment year, except that Kartik Chandra Mandal was introduced in this year in place of Nakur Chandra Khan. The assessee-firm applies for registration of the firm which was refused in the first instance by the Income-tax Officer. The asessee took up the matter in appeal before the Appellate Assistant Commissioner, who confirmed the orders of the I. T. O., in respect of both the assessment years. The assessee then took up the matter in further appeal to the Income-tax Appellate Tribunal, where it was contended by the learned counsel for the assessee that there was no bar to a partnership being formed for sharing the profits of an excise business even if some of the partners were not licencees. The Tribunal is set aside the order of the Appellate Assistant Commissioner and remanded the case to him for recording certain findings holding that :
'Since the authorities below have not applied their mind as to whether there has been any transfer of the licence to the partnership, we need not consider the effect of these provisions for finding out whether the licence has been transferred. The points to be ascertained shall be .................whether the non-licensee partners could manage the liquor business as such and so on.'
In view of the orders of remand, the Appellate Assistant Commissioner asked the assessing officer to make an enquiry and submit a report on points :
1) Whether the excise licence has been transferred to the partnership ?
2) & 3)........................
4) Whether the non-licensee partner could manage the liquor business as such
The I. T. O., reported that the excise licence had not been transferred to the partnership, that it could not be verified whether the non-licensee partners could manage the liquor business as such and that according to Cl. 5 of the partnership deed all the partners were to manage the partnership business, but as the licence was only in the names of only a few of them, the others could manage the liquor business as insignificant employees. On receipt of the finding the Appellate Assistant Commissioner heard the matter and held that according to the partnership deed each partner was entitled to take part in ten management of the business, that non-licensee partners were not mere working partners, but they had contributed their share of capital as well. He however, accepted the finding recorded by the I. T. O., that the licence was not transferred in the name of the firm. Having thus, held the Appellate Assistant Commissioner allowed the appeals before him and directed the I. T. O., to register the firm under the provisions of S. 26A. The Revenue, thereafter, went up in appeal to the Income-tax Appellate Tribunal. The Appellate Tribunal held that on facts as found it was not possible to hold that there was either a de facto transfer or assignment of the excise licences in favour of the partnership, as was contended by the revenue on the footing that since the liquor manufacturing business was carried on by the partnership itself, it should be deemed to have been so doing only by an implied transfer or assignment of the licences in favour of the firm. At the instance of the revenue, the Tribunal referred the question for the decision of the Patna High Court. On behalf of the Commissioner of Income-tax it was urged that the partnership deed in question ought to have been held to be invalid in law as being in contravention of the provisions of S. 13 (f) of the Bihar and Orissa Excise Act, 1915.
48. S. K. Jha, J., as speaking for the Bench, observed that the law is well settled that while the licence may be in the name of one or more persons, and there is nothing either in the terms of the licence or any law for the time being in force laying down that such a licensee or licensees was or were prohibited from entering into a partnership for carrying on the business founded upon such a licensee, such licensees were at liberty to enter into a partnership agreement with other persons for the purpose of carrying on the business. This is for the simple reason that in the absence of any statutory bar and in the absence of any term in the licence itself, prohibiting such an agreement, the partnership agreement cannot be said to be void. In support of their view the learned Judges relied upon the decisions in Dayabhai & Co. V. Commr., of Income-tax : 59ITR364(MP) (supra), Commr., of Income-tax v. K. C. S. Reddy, : 38ITR560(Patna) and Umacharan Shaw & Bros v. Commr., of Income-tax : 37ITR271(SC) (supra).
49. In K. C. S. Reddy's case a Division Bench of the Patna High Court held that though a Mica dealer's licence under the provisions of the Bihar Mica Act, 1947 was in the name of one of the partners, there was no prohibition either in the Act or in the license granted to that partner precluding him from entering into a partnership agreement with other persons who were licence-holders for carrying on the business, reserving to himself the right and duty of fulfilling the terms imposed upon him by the licence. It was also held in that case that since the partnership firm is not a legal entity, no dealer's licence could be taken out in its name and it was still open to the firm to carry on the business in pursuance of the licence granted to one of the partners.
50. In Md. Warasat Hussain v. Commr. I. T., (1971) Tax LR 1877 (supra) the excise licences are not in the names of Mst. Bibi Aliman and Bibi Majidan each of them holding 0-1-0 share in the firm. Their position is just like sleeping partners who have left the management and control of the business to the other partners. They were never in possession of or had any hand in the sale of the intoxicants in various excise shops nor they had control over the management and possession or sale of the excisable materials. Three shop licences were in the name of Mohd. Warasat Hussain, four shop licences in the name of Mohd. Amanat Hussain and two shop licences in the name of Sheikh Hafazat Ali. One shop licence was in the name of Mohd. Sharaft Hussain. The I. T. O., was of the opinion that as a result of the alleged partnership, the two lady partners, who did not have any excise licence would be carrying on sales of excisable goods without licence, either by themselves or though others and it violated S. 13 (a) and 13 (d) of the Bihar and Orissa Excise Act. Consequently he came to the conclusion that the alleged partnership entered into for the purpose of carrying on excise business on licences granted to some of the partners only would be illegal and void ab initio. He accordingly held the status to be an 'association of persons' and refused renewal of registration under S. 26-A. The order of the Income-tax Officer was upheld by the Appellate Assistant Commissioner. In the appeal before the Tribunal the assessee relied upon the Supreme Court decision in Umacharan Shaw and Brothers v. Commr., of Income-tax and submitted that legally there was no bar to the formation of the present partnership. But the Tribunal did not accept this submission and held that the partnership was illegal and the Income-tax authorities were justified in refusing registration. On the application of the assessee the Appellate Assistant Tribunal has referred to the High Court the question of law which is to the effect 'Whether the alleged firm was entitled to registration under S. 26-A of the Income-tax Act ?'
51. The learned counsel for the assessee submitted that as there is no express provision in the Act against the constitution of such a partnership for carrying on the business of dealing in excisable articles, the partnership could not be held invalid. In support of his contention he relied upon the decision of that court in the Commr., of Income-tax v. K. C. S. Reddy : 38ITR560(Patna) (supra) in which it was held that the partnership was held to be legally valid as there was no express prohibition under the Bihar Mica Act that such a partnership could not carry on business to deal in mica provided the person who actually sells or who actually purchases and who actually is in possession of mica held the dealer's licence. He also relied upon the decision of the Supreme Court in Umacharan Shaw and Bros, v. Commr., of Income-tax : 37ITR271(SC) (supra) in which their Lordships took the view that the mere formation of partnership by someone who held licence with others who had no such licence does not amount to transfer of the licence within the meaning of S. 42 of the Bengal Excise Act. The learned Judges followed these rulings and held that mere formation of partnership did not amount to a transfer of the licence within the meaning of S. 23 of the Bihar and Orissa Excise Act and the firm was, therefore, entitled to registration.
52. The Bench of our High Court in I. T. Commr., v. Venkataramana, 1983 Tax LR 1355 (supra) also held that the formation of a partnership by a licensee partner does not amount to a transfer of the licence. Hence the partnership formed by a licensee under A. P. Excise Act and Rules framed thereunder with other cannot be said to be illegal and, therefore, registration to such firm I. T. Act cannot be refused. In that case the assessee was a firm, consisting of 11 partners constituted by a partnership deed. One of the partners of the assessee firm was the successful bidder in the auction conducted under the A. P. Excise (Lease of Right to Sell Liquor in Retail) Rules, 1969 framed under A. P. Excise Act 1968. The assessee-firm applied for a registration under S. 185, I. T. Act, 1961 and filed an application in Form No. 11. The I. T. O., was of the opinion that the partnership entered into for the purpose of conducting a business in arrack or toddy on a licence granted only to one of the partners was void ab initio because such a partnership either involves a transfer of a licence which is prohibited under R. 19 of the relevant Rules or because of the violation S. 15 of the A. P. Excise Act. The learned Judges held that there was no transfer of the licence within R. 19 (1) and S. 15 would not be applicable to the non-licensee partners and the said partnership was not illegal. The partnership was also valid as between partners; as well the partnership agreement could not be said to be violative of public policy within the meaning of S. 23 of the Contract Act.
53. In the light of the above decisions, it is clear that as a licence does not prohibit the holder of licence from entering into a partnership with any other and as there is no sub-letting or transfer of the licence by the licensee to any of the partners, the formation of a partnership with the licence holder does not amount to a transfer of the licence and the partnership cannot, therefore, be said to be illegal or opposed to S. 23 of the Contract Act. The point is answered in the negative and in favour of the appellant.
54. This is the only point that is argued by the counsel on both the sides and it is decided in favour of the appellant-plaintiff.
55. For the above reasons, we set aside the judgment and decree of the trial Court and decree the suit.
56. In the result, the appeal is allowed with costs.
57. Appeal allowed.