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Additional Commissioner of Income-tax Vs. Degaon Gangareddy G. Ramkishan and Co. and ors. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAndhra Pradesh High Court
Decided On
Case NumberCase Referred No. 25 of 1973
Judge
Reported in[1978]111ITR93(AP)
ActsIncome Tax Act, 1961 - Sections 184; Andhra Pradesh (Telangana Area) Abkari Act
AppellantAdditional Commissioner of Income-tax
RespondentDegaon Gangareddy G. Ramkishan and Co. and ors.
Appellant AdvocateP. Rama Rao, Adv.
Respondent AdvocateT. Ramachandra Rao and ;N.V. Ranganatham, Advs.
Excerpt:
direct taxation - registration of sub-partnership - section 184 of income tax act, 1961, andhra pradesh (telangana area) abkari act - whether sub-partnership firm entitled to registration - sub-partnership recognized by indian law to share part of profit in main firm but sub-partners not considered as partner in main firm - sub-partnership firm run business of contributing capital on behalf of partner in main firm and share profits with partner - held, sub-partnership firm genuine and entitled to registration. - - ' 10. it is now well-settled that the partners of a firm may share their profits with strangers and such strangers shall not become partners of the firm and strangers do not become partners by having common partners. 11. it is well settled that it is the real and true.....kondaiah, j.1. at the instance of the additional commissioner of income-tax, andhra pradesh, the income-tax appellate tribunal, hyderabad bench, in exercise of its powers under section 256(1) of the income-tax act has drawn up a consolidated statement of the case and submitted the same to this court for its opinion on the following question of law:'whether, on the facts and in the circumstances of the case, the sub-partnerships are entitled to the benefits of registration under the income-tax act, 1961, for the assessment year 1964-65 ?'2. in order to appreciate the scope of the question, it is necessary to state the facts and circumstances, admitted or found by the tribunal that gave rise to the question. the consolidated statement of the case is in respect of seven sub-partnerships,.....
Judgment:

Kondaiah, J.

1. At the instance of the Additional Commissioner of Income-tax, Andhra Pradesh, the Income-tax Appellate Tribunal, Hyderabad Bench, in exercise of its powers under Section 256(1) of the Income-tax Act has drawn up a consolidated statement of the case and submitted the same to this court for its opinion on the following question of law:

'Whether, on the facts and in the circumstances of the case, the sub-partnerships are entitled to the benefits of registration under the Income-tax Act, 1961, for the assessment year 1964-65 ?'

2. In order to appreciate the scope of the question, it is necessary to state the facts and circumstances, admitted or found by the Tribunal that gave rise to the question. The consolidated statement of the case is in respect of seven sub-partnerships, whose main partner is a partner in the main partnership firm known as 'Nizamabad Group Sendhi Contractors'. As the Tribunal adopted the facts in I.T.A'. No. 1031 of 1969-70 as typical of the facts in all the seven appeals and disposed of the appeals by a common order, we prefer to refer to the facts of that appeal in detail.

3. For the assessment year 1964-65, the corresponding accounting year being Fasli year 1962-63 (period commencing from October 1, 1962, and ending with September 30, 1963) a partnership by name 'Nizamabad Group Sendhi Contractors', was formed under a deed of partnership dated October 15, 1962, with 17 partners, one of whom, Rampuram Ganga Goud, having 10% share. On August 27, 1963, Ganga Goud and 11 others had executed a partnership deed to the effect that Ganga Goud, after becoming a partner in the Nizamabad Sendhi Group Contractors, found it difficult to contribute the required capital towards his share and, therefore, the other 11 partners agreed to provide the finance on their being taken as partners in respect of his 10% share in the main partnership. There are, no doubt, two minor partners, who are entitled only to share in the profits but not liable for losses. The main partnership, i.e., Nizamabad Sendhi Group Contractors, are the lessees, who happened to be the highest bidders in the auction held by the excise authorities for the Fasli years 1962-63. That partnership has been registered by the income-tax department under the Income-tax Act.

4. The partners of the sub-partnership have filed an application for registration on September 30, 1963. The Income-tax Officer rejected the claim of the sub-partnership for registration under the Income-tax Act, on the ground that no business was conducted by the assessee during the relevant year of account and that the sub-partnership was ab initio void under the Andhra Pradesh (Telangana Area) Abkari Act (hereinafter called as 'Abkari Act') as the members of the sub-partnership except Ganga Goud were not licence holders under the Abkari Act.

5. On appeal, the Appellate Assistant Commissioner agreeing with the assessing authority beld that the business of the sub-partnership was the same as that of the main partnership and the sub-partnership, if allowed, would defeat the purpose of the Abkari Act and dismissed the appeal. The applications for registration under the Income-tax Act by six other sub-partnerships similarly formed by the partners of the main partnership with others were rejected by the assessing authority and the appeals preferred by them to the Appellate Assistant Commissioner were also dismissed. All these seven sub-partnerships preferred appeals to the Appellate Tribunal. As the points at issue in all the appeals are similar, the Tribunal disposed of all the appeals by a common order. On a consideration of the various clauses of the sub-partnership deed dated August 27, 1963, the Tribunal held that it could not be said that the sub-partnerships did not carry on any business, that sub-partnerships are separate entities valid in law and that it could not agree with the department's view that no sub-partnership was existing. Rejecting the plea of the department that the business of the sub-partnership was the same as that of the main partnership, the Tribunal allowed the appeals and directed that the sub-partnerships are entitled to registration under the Income-tax Act. Hence this referense.'

6. Mr. P. Rama Rao, the learned standing counsel for the income-tax department, contended that the sub-partnerships are illegal and void on the ground that some of the partners of those firms are deriving profits from the business of abkari without obtaining licence in their names. To put it differently the 1st partner, Rampuram Ganga Goud, alone is the licensee and the other eleven persons in that sub-partnership are admittedly non-licensees and by the first partner the others too have a share in 10% of the profits in the main firm of which he is a partner. The sub-partnership must be held to be in contravention of Section 14 of the Andhra Pradesh (Telangana Area) Abkari Act, 1314 Fasli, read with Rule 23 of 1353 Fasli and, therefore, void and non est in law. This claim of the department is resisted by Mr. N.V. Ranganadham, the learned counsel for the assessee, contending, inter alia, that the business of the main firm is different from the sub-partnership, that the other eleven partners of the sub-partnership have nothing to do with the main firm and its business and the business of the sub-partnership is to finance one of the partners of the main firm whose business is abkari business, and, therefore, Section 14 of the Abkari Act has nothing to do with the distribution of profits of the abkari business after allotment of the same to the share of a partner, and sub-partnerships are neither illegal nor void and non est in law, and they are entitled to be registered under the Indian Income-tax Act.

7. In order to appreciate the scope of the respective contentions of the counsel, it is necessary to briefly refer to the law relating to the concept and content of partnership and the principles that govern the registration of a firm under the Income-tax Act.

8. The Supreme Court had to consider the question whether a partnership constituted by some members of a Hindu undivided family holding shares on behalf of the family is or is not entitled for registration subsequent to the partition of the joint family sub-dividing the shares held by the members of the firm and the members continuing to hold shares in the firm as before in Commissioner of Income-tax v. Bagyalakshmi & Co. : [1965]55ITR660(SC) . Therein, the learned judge, Subba Rao (as he then was), speaking for the court, has very aptly and succinctly described the concept and content of partnership and the position of a partner vis-a-vis a partnership and third parties thus at page 664 :

'A partnership is a creature of contract... A contract of partnership has no concern with the obligation of the partners to others in respect of their shares of profit in the partnership. It only regulates the rights and liabilities of the partners. A partner may be the karta of a joint Hindu family; he may be a trustee ; he may enter into a sub-partnership with others; he may, under an agreement, express or implied, be the representative of a group of persons; he may be a benamidar for another. In all such cases he occupies a dual position. Qua the partnership, he functions in his personal capacity ; qua the third parties, in his representative capacity. The third parties, whom one of the partners represents, cannot enforce their rights against the other partners nor the other partners can do so against the said third parties. Their right is only to a share in the profits of their partner-representative in accordance with law or in accordance with the terms of the agreement, as the case may be.'

9. On a consideration of the facts of that case, it was held that one of the partners of the main firm could have validly entered into a genuine partnership with others taking a 10 annas share in the business, though in fact as between the members of the family he has only a 2 annas share therein. It was further observed (page 664) :

'He would have been answerable for the profits pertaining to his share to the divided members of the family, but it would not have affected the validity or genuineness of the partnership.. ...we do not see why a different result should flow if instead of one member of the divided family two members thereof under some arrangement between the said members of the family took 10 annas share in the partnership.' The partnership deed in that case was found to be genuine and, therefore, it was held that a divided member or some of the divided members of an erstwhile joint family can certainly enter into a partnership with third parties under some arrangement among the members of the divided family and their shares in the partnership depend upon the terms of the partnership and the shares of the members of the divided family in the interest of their representative in the partnership depend upon the terms of the partition deed, and answered the question in favour of the assessee.

The next case that requires to be noticed is that in Commissioner of Income-tax v. V.A. Abdul Rahim and Co. : [1965]55ITR651(SC) , wherein it was held that a partnership in which one of the persons was a benamidar of another was a genuine partnership entitled to registration under Section 26A of the Indian Income-tax Act, 1922. The learned judge, Subba Rao J. (as he then was), speaking for the court, summed up the legal position thus at page 659 : 'When a firm makes an application under Section 26A of the Act for registration, the Income-tax Officer can reject the same if he comes to the conclusion that the partnership is not genuine or the instrument of partnership does not specify correctly the individual shares of the partners. But once he conies to the conclusion that the partnership is genuine and a valid one, he cannot refuse registration on the ground that one of the partners is a benamidar of another. If the partnership is genuine and legal, the share given to the benamidar will be the correct specification of his individual share in the partnership. The beneficial interest in the income pertaining to the share of the said benamidar may have relevance to the matter of assessment, but none in regard to the question of registration.'

10. It is now well-settled that the partners of a firm may share their profits with strangers and such strangers shall not become partners of the firm and strangers do not become partners by having common partners. Nor is the legal position different where the profits of such partners in the partnership are divided between him and strangers as partners. This brings us to examine the question whether a partner in a firm and one or more strangers can form a partnership and the nature and character of such partnership.

11. It is well settled that it is the real and true income of an assessee, be it an individual partner of a firm, that is assessable to tax. Any income, if diverted before it reaches the assessee, is a permissible deduction. Where a person is obliged to apply certain sums of money out of his income, such sums are permissible deductions and they cannot be termed to be real income receipts of that person. But, however, after ascertainment of the real and total income of the assessee, if he is obliged to pay another person a portion of his own income, such amount is not a permissible deduction. We may notice in this context the test laid down by the learned judge, Hidayatullah J. (as he then was) in Commissioner of Income-tax v. Sitaldas Tirathdas : [1961]41ITR367(SC) for determining the question whether a principal amount is or is not an income. The learned judge observed thus:

'Where by the obligation income is diverted before it reaches the assessee, it is deductible ; but where the income is required to be applied to discharge an obligation after such income reaches the assessee, the same consequence, in law, does not follow. It is the first kind of payment which can truly be excused and not the second. The second payment is merely an obligation to pay another a portion of one's own income, which has been received and is since applied. The first is a case in which the income never reaches the assessee, who even if he were to collect it, does so, not as part of his income, but for and on behalf of the person to whom it is payable.'

12. Applying the aforesaid principles enunciated by the Supreme Court, it admits ot no doubt that it is open to a partner of a registered firm either to earn an income that falls to his share by himself and enjoy the entire income or make himself liable for the losses, if any, or, in the alternative, agree to divert a portion of his income or loss to other strangers provided they agree to be as sub-partners by constituting a sub-partnership.

13. A partner of a registered firm may agree to enter into partnership with one or more individuals in respect of his share in the registered firm. There is no prohibition under the law of partnership or under, the provisions of the Indian Income-tax Act and the rules made thereunder for registration of the firms prohibiting a partner of a firm from entering into such partnerships with strangers in respect of his share in the main firm. In such circumstances, the second partnership is described as a sub-partnership, which is a separate legal entity. The concept of sub-partnership has been recognised in India. We may, in this context, profitably notice what has been stated by Lindley on Partnership, 12th edition, at page 99, with regard to constitution of a sub-partnership and its incidents :

'A sub-partnership is, as it were, a partnership within a partnership : it presupposes the existence of a partnership to which it is itself subordinate. An agreement to share profits only constitutes a partnership between the parties to the agreement. If, therefore, several persons are partners and one of them agrees to share the profits derived by him with a stranger, this agreement does not make the stranger a partner in the original firm. The result of such an agreement is to constitute what is called a sub-partnership, that is to say, it makes the parties to it partners inter se; but it in no way affects the other members of the principal firm.' A Division Bench of the Punjab High Court in Commissioner of Income-tax v. Laxmi Trading Company held that there could, in law, be a partnership between a partner in a head-firm and another individual in respect of the partner's share in the head-firm so as to entitle the partners in the sub-firm to apply for registration thereof under Section 26A of the Indian Income-tax Act, 1922.

A Division Bench of the Bombay High Court in Ratilal B. Daftari v. Commissioner of Income-tax : [1959]36ITR18(Bom) had to consider the question whether the assessee therein was liable to be assessed on his share of profits of the sub-partnership or the main partnership. Therein, the assessee was one of the sixteen partners in the main registered firm. Towards share capital, he contributed Rs. 25,000 out of the capital of the partnership of Rs. 3,45,000. The assessee had entered into an agreement with four others for contribution of his share capital of Rs. 25,000 and agreed for sharing the profits and losses in proportion to their individual contribution. His share of income in the main partnership was Rs. 14,661 and his share in the sub-partnership was Rs. 5,864. The court held that the income of Rs. 14,661 belonged to the sub-partnership and it did not reach the assessee who was entitled only to Rs. 5,864 from and out of Rs. 14,661. Hence, he was liable to be assessed on his share of profits of the sub-partnership firm as that was the real income. The learned judge, S.T. Desai J., observed at page 24:

'...it is the real income of the partner which alone can be taxed whatever may be the machinery that may be employed by the revenue.' After referring to the decision of the Punjab High Court in Commissioner of Income-tax v. Laxmi Trading Company the learned judge proceeded to observe thus (page 24) : '...it is competent to persons, who may be said to be in the position of sub-partners under one of the partners, to insist upon being recognised by the income-tax department and to insist upon registration of the sub-partnership firm. In such a case, it would be a partnership within a partnership and the department would also have to recognise the sub-partnership or the sub-firm as an entity, which would be entitled to claim the benefit of the provisions contained in Section 23(5)(a).'

14. The aforesaid decision of the Punjab High Court and that of the Bombay High Court have been approved by the Supreme Court in Murlidhar Himatsingka v. Commissioner of Income-tax : [1966]62ITR323(SC) . Therein, Murlidhar Himatsingka, a partner in a registered firm A, entered into a sub-partnership B, with his two sons and a grandson on December 21, 1949. The profits and losses of Murlidhar Himatsingka in the main firm shall as per Clause 5 of the sub-partnership deed belong to the sub-partnership and shall be borne and divided in accordance with the shares specified therein, although the capital with its assets and liabilities would belong to Murlidhar Himatsingka exclusively. For the assessment years 1952-53, 1953-54 and 1955-56, Murlidhar Himatsingka's share in the main firm was sought to be assessed in his individual assessment of Murlidhar Himatsingka. It was held that Murlidhar's share in the losses in the registered firm, i.e., the main firm, was also to be shared. The right to receive profits and pay losses became an asset of the partnership, that there was an overriding obligation in that case and the income of Murlidhar Himatsingka in the main firm did not remain his income in spite of the sub-partnership, and that, therefore, Murlidhar Himatsingka's share of income from the main firm had to be included in the assessment of the sub-partnership and not in Murlidhar Himatsingka's personal assessment, and there was nothing in Section 23(5)(a) of the Indian Income-tax Act, 1922, which prevented the income of the sub-partnership and Section 23(5)(a) being applied again. It was held that a sub-partner has definite enforceable rights to claim a share in the profits accrued to or received by the partner in the original partnership. The learned judge, Sikri J. (as he then was), speaking for the court, observed at pages 331, 332 thus :

' .........when a sub-partnership is entered into, the partner changes his character vis-a-vis the sub-partners and the income-tax authorities, although other partners in the original partnership are not affected by the changes that may have taken place.... .....In our view, in the case of a sub-partnership, the sub-partnership creates a superior title and diverts the income before it becomes the income of the partner. In other words, the partner in the main firm receives the income not only on his behalf but on behalf of the partners in the sub-partnership........Under the law of partnership it is the benamidar who would be entitled to receive the profits from the other partners but for income-tax purposes it does not mean that it is the benamidar alone who can be assessed in respect of the income received by him.'

15. This decision is an authority for the proposition that a valid sub-partnership can be entered into by a partner of the main firm with some strangers to share the income or loss receivable by him from the main partnership and a sub-partner has definite enforceable rights to claim a share in the profits accrued to or received by the partner in the original partnership, and such sub-partnership is entitled to registration and it creates a superior title and diverts the income from the main firm before it becomes the income of the partner.

16. Next question that falls for consideration is whether a partner of the main firm who deals in liquor, opium, tobacco or any other prohibited article which requires a specific permission of the State Government or the District Collector, as the case may be, can validly enter into a sub-partnership with strangers in respect of his share in the main partnership. No authoritative decision of the Supreme Court or any other High Court on this aspect has been brought to our notice. It is, therefore, pertinent to examine whether the fact that the main firm deals in liquor or any other prohibited article which requires a specific permission of the Collector or the Government would alter the legal position of a partner vis-a-vis his sub-partners and the partner vis-a-vis sub-partnership which is constituted not to deal in liquor or any other prohibited article but only to contribute the share capital of the partner in the main firm and share the profits or losses that would accrue or fall to his share in the main firm. Any partner of a registered firm, as pointed out earlier is competent to enter into sub-partnership in respect of his share of the business in the main firm. The partners of the sub-firm would not become partners of the main firm. The position of the sub-partners would not, in our considered opinion alter in any manner even if the business of the main firm is to deal in liquor or any other prohibited articles. The partners of the sub-partnership would be only entitled to share the profits and losses, as the case may be, that accrue or fall to the share of the partner in the main firm. Unless privity of contract be established between the partners of the main firm and the partners of the sub-partnership, the members of the sub-partnership do not become partners of the main firm, as sub-partners are different and distinct entities from the main partners. The existence of sub-partners would not in any way affect the members of the main firm for the purpose of Section 4 of the Companies Act. See Chandulal Damodardas v. Keshavlal Kuberdas Amin [1936] 6 Comp Cas 295 ; AIR 1936 Bom 246 and Sugar Syndicate v. Income-tax Commissioner, AIR 1957 AP 332. In the case of Sugar Syndicate v. Income-tax Commissioner, AIR 1957 AP 332 a Division Bench of this High Court had to consider the question whether the Tribunal was justified in refusing registration to the firm and its renewal under Section 26A of the Indian Income-tax Act, 1922. In that case, for the assessment years 1951-52 and 1952-53, the assessee-firm submitted returns and also applied for registration under Section 26A of the Income-tax Act. The registration was refused on the ground that more than twenty persons had participated in the division of profits whereas the partnership deed shows only 17 persons as partners. The other persons were representing the other firms. As the appeals to the Income-tax Officer and the Appellate Assistant Commissioner were not successful a reference was made to the High Court under Section 66(2) of the Act. The High Court opined that the main partners were less than 20 and the others only must be construed to be sub-partners and sub-partners are distinct from the main partners and the firm is entitled to registration under Section 26A. The learned judge Ansari J. (as he then was), speaking for the court, observed at pages 334 and 335 thus:

'.........the proposition is well-established that unless privity of contract be established between persons constituting a partnership and those who are partners of a partner in a partnership, they do not become partners. It is equally clear that sharing profits or advancing money to a partner for purposes of his paying part of the capital would not render such partners members of the main firm.' The learned judge further observed (page 336): 'Sub-partners being distinct from partners, it follows that the existence of sub-partners would not affect the number of members of a firm for purposes of Section 4 of the Companies Act.'

17. This decision of our High Court supports the claim of the assessee for the grant of registration of sub-partnership. This legal position is not and cannot be disputed by the revenue.

18. The assertion that is now sought to be made by the revenue in the present case is that the decisions of the Supreme Court in Murlidhar Himatsingka v. Commissioner of Income-tax : [1966]62ITR323(SC) , Commissioner of Income-tax v. Bagyalakshmi and Co. : [1965]55ITR660(SC) and Commissioner of Income-tax v. A. Abdul Rahim and Co. : [1965]55ITR651(SC) and that of the Punjab High Court in Commissioner of Income-tax v. Laxmi Trading Company are not applicable to the present case as there is an absolute prohibition under Section 14 of the Andhra Pradesh (Telangana Area) Abkari Act, 1316 Fasli, read with Rule 23 of 1353 Fasli with regard to the carrying on of the business in liquor and to share profits in the business without the requisite permission of the State Government, and Section 14 is enacted in furtherance of the public policy because the supply and production of liquor is regulated by the Government and also for the collection of public revenue. The learned standing counsel relied upon the Full Bench decision of the Madras High Court in Velu Padayachi v. Sivasooriam Pillai, : AIR1950Mad444 [FB], of this court in Commissioner of Income-tax v. Krishna Reddy : [1962]46ITR784(AP) and Dinshawji v. Abdul Rasool Khan, : AIR1967AP119 , of the Kerala High Court in Commissioner of Income-tax v. Union Tobacco Go. : [1961]41ITR115(Ker) of the Punjab High Court in Commissioner of Income-tax v. Benarsi Das & Co. and in Lalchand Mohan Lal Fazilka v. Commissioner of Income-tax of the Orissa High Court in Mohapatra Bhandar v. Commissioner of Income-tax : [1965]58ITR671(Orissa) and of the Madhya Pradesh High Court in Commissioner of Income-tax v. Pagoda Hotel and Restaurant : [1974]93ITR271(MP) and in Commissioner of Income-tax v. Sheonarayan Harnarayan 0065/1972 : [1975]100ITR213(MP) .

19. The Full Bench decision of the Madras High Court in Velu Padayachi v. Sivasooriam Pillai, : AIR1950Mad444 [FB] is an authority for the proposition that a partnership entered into for the purpose of conducting a business in arrack or toddy on a licence granted or to be granted to only one of the partners is void ab initio irrespective of the fact whether the contract was entered into before the licence was granted or afterwards, and even 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, and, therefore, a suit filed for recovery of any amount due on settlement of accounts of such illegal partnership is not maintainable.

20. In Commissioner of Income-tax v. Krishna Reddy : [1962]46ITR784(AP) a Division Bench of this court held that the contract of partnership in respect of the liquor business was void as being opposed to public policy. To the same effect is the later decision of this court in Dinshawji v. Abdul Rasool Khan, : AIR1967AP119 . Therein a contract between A and B to run the business of supplying liquor in partnership on licence obtained in the name of B was held to be void being opposed to Section 14 of the Abkari Act and Rule 23 and the suit by A against B for damages for breach of contract was not maintainable. The decision of the Kerala High Court in Commissioner of Income-tax v. Union Tobacco Co. : [1961]41ITR115(Ker) is to the same effect, but it pertains to tobacco business. The decision of Punjab High Court in Commissioner of Income-tax v. Benarsi Das & Co. and in Lalchand Mohan Lal Fazilka v. Commissioner of Income-tax and that of the Orissa High Court in Mohapatra Bhandar v. Commissioner of Income-tax : [1965]58ITR671(Orissa) pertains to the Opium Act. The decisions of the Madhya Pradesh High Court in Commissioner of Income-tax v. Pagoda Hotel and Restaurant : [1974]93ITR271(MP) and in Commissioner of Income-tax v. Sheonarayan Harnarayan [1965] 100 ITR 213 are in respect of liquor business where a licence was granted in-the name of an individual to carry on business in liquor and he entered into a partnership with another person, and such partnership was held to be void in so far as it related to liquor business. In Commissioner of Income-tax v. Sheonarayan Harnarayan 0065/1972 : [1975]100ITR213(MP) it was held that mere intimation of partnership to the Collector was not sufficient under Rule VI of the Madhya Pradesh Excise Rules which requires a written permission to the Collector endorsed on the licence. Therefore, the partnership formed in contravention of that provision was held to be void ab initio. All the decisions relied upon by the revenue are applicable only if it is found as a fact that the sub-partnership had carried on the business of liquor, tobacco, opium or any other prohibited article without the requisite permission of the State Government or the Collector, as the case may be. The business in liquor, opium, tobacco and other prohibited articles requires the specific permission of the State Government and the District Collector and the business can only be done in those prohibited items by persons who obtain specific licence for the same. The requirement of a specific licence by the person or persons who conduct such business is a condition precedent as persons other than licensees or permit holders are specifically prohibited on grounds of public policy from conducting such business. The pertinent question that arises in the present case is whether the sub-partnership has intended to do and in fact did business in liquor in the accounting year. If the sub-partnership also had indulged in the business of liquor without the requisite licence in the name of the sub-partnership or in the names of all the partners of the sub-partnership, the sub-partnership, on the application of the principles referred to above, must be held to be void ab initio and non est as it intended to do business in liquor without the requisite licence. If, on the other hand, the business of the sub-partnership is not the sale of liquor or dealing in liquor or doing anything in connection with the purchase and sale of liquor in any manner, it cannot be said that those sub-partnerships are illegal and void and non est. We, therefore, have to look to the object and intendment of the sub-partnership as indicated from the several clauses of the deed of sub-partnership and the other material on record. Though the Income-tax Officer and the Appellate Assistant Commissioner were of the view that the business of the sub-partnership is also the business of the main partnership, viz., Nizamabad Sendhi Group, which admittedly obtained licence and did business in liquor during the accounting year in question, the Income-tax Appellate Tribunal, which is the final fact finding authority, did not agree with the department's view. We may in this context notice the following facts found by the Tribunal in its order at pages 68 and 69 of the printed book :

'According to the preamble of the deed the party of the first part had found it difficult to contribute the required capital for 10% share in the main firm and the other partners, who are capable of, providing certain finances, have agreed to provide finance ats was required by the party of the first part according to the necessities of his share in the said firm provided they are given certain shares out of the share of the party of the first part in the said firm. A perusal of the various clauses of the partnership deed shows that it cannot be said that the assessee did not carry on any business. The appellant firm has financed and owned the capital invested by one of its partners in the main firm. The profits earned by the partners in the main firm have to be shared with the other partners. Except the minors, the other partners are not immune from sharing the losses. Taking a total view of the matter, we are unable to subscribe to the contention raised on behalf of the department that there existed no firm. It is not in dispute and it is indisputable that the appellant-firm is a sub-partnership.' The Tribunal has rejected the contention of the revenue that the business of the sub-partnership is the same as the business of the parent-firm and the lessee, who is one of the partners of the parent-firm, has taken other persons into the partnership without the permission of the Government and as such Section 14 of the Hyderabad Abkari Act is infringed. The Tribunal was of the view that the sub-partnership had been formed mainly to finance the business of one of the partners of the main firm doing abkari business and share the profits and losses accrued to or received by him from the main firm. We also agree with the view of the Tribunal on a careful consideration of the material provisions of the sub-partnership deed and the other evidence available to us. When once the department's contention that the sub-partnership business is only that of the main partnership which deals in liquor has been rejected by the Tribunal, it cannot be validly argued that the sub-partnerships formed by some of the partners of the main firm with strangers are prohibited under Section 14 of the Abkari Act as they did not do any business of liquor. We may add that there is absolutely no material to hold that the sub-partnerships had at any time during the entire accounting period purchased or sold or dealt with in any manner in liquor so as to attract the provisions of the Abkari Act and the rules made thereunder. The question of obtaining licence for liquor business by the sub-partnerships would arise only if they intended to do liquor business or in fact did liquor business but not otherwise. As long as the sub-partnerships confined their business to only sharing the profit from one of the partners of the main partnership doing abkari business in lieu of their capital investment for the share of that partner; it cannot be said that such sub-partnerships are prohibited in law. As pointed out earlier, sub-partnership can validly be formed for the purpose of doing any business other than those prohibited by law without the requisite permission or licence. For these reasons, we have no hesitation to hold that all the decisions relied upon by the revenue are distinguishable on facts and not applicable to the case on hand.

21. It is well-settled that there is no prohibition in law against forming partnerships or sub-partnerships and they are entitled to registration if they are found to be genuine, and the applications for registration under the Income-tax Act are in accordance with the rules. Admittedly, the sub-partnerships in the present case are found to be genuine. It is not the case of the revenue that there are no sub-partnerships at all. The applications for registration are also found to be in order. The sub-partnerships had their own business of procuring capital to one of the partners of the main firm and also to share the profits or losses accrued to or received by him.

22. In Jer and Co. v. Commissioner of Income-tax : [1971]79ITR546(SC) it was held that the licence in form FL-II did not prohibit the holder from entering into a partnership, but it merely provided that the licence shall not be sub-let or transferred, and since there was no prohibition against the holder of a licence in foreign liquor entering into a partnership, the partnership was legal and the appellant-firm therein was entitled to registration. The aforesaid decision is an authority for the proposition that the prohibition must be construed very strictly. As the rule therein did not specifically prohibit the entering into partnership although it prohibited only transfer and sub-letting, it was held that the partnership was valid and entitled to registration.

23. For all the reasons stated, the question must be and is hereby answered in the affirmative and in favour of the assessee and against the department. The Commissioner shall pay the costs of this reference. Advocate's fee is fixed at Rs. 250.


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