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Dayabhai and Co. Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMadhya Pradesh High Court
Decided On
Case NumberMisc. Civil Case No. 28 of 1964
Judge
Reported inAIR1966MP13; [1966]59ITR364(MP); 1965MPLJ644
ActsIncome Tax Act, 1922 - Sections 26A; Motor Vehicles Act - Sections 31, 42, 59 and 59(2); Contract Act - Sections 23
AppellantDayabhai and Co.
RespondentCommissioner of Income-tax
Appellant AdvocateK.A. Chitale and ;V.S. Dabir, Advs.
Respondent AdvocateM. Adhikari, Adv. General and ;R.J. Bhave, Govt. Adv.
Cases ReferredThwaites v. Coulthwaite
Excerpt:
- - the income-tax officer took the status of the assessee as 'association of persons'.the appellate assistant commissioner of income-tax endorsed the decision of the income-tax officer. and that the partnership in question was, therefore, valid under the partnership act as well as under the motor vehicles act, 1939. in support of his contention learned counsel relied on umacharan shaw & bros. an agreement entered into between certain persons to form a partnership being contractual in nature would like any other contract, become illegal if, as stated in section 23 of the indian contract act, the object of the agreement (a) is forbidden by law; it can also be carried on with vehicles belonging to the partnership firm on the basis of permits obtained by a partner in respect of those.....dixit, c.j.1. in this reference under section 66 (1) of the indian income-tax act, 1922, at the instance of the assessee messrs. dayabhai & co. of barwani, the question posed for our answer is:'whether on the facts and in the circumstances of this case, the assessee is entitled to registration under section 26-a of the indian income-tax act for the assessment year 1956-57?'2. the facts of the case are as follows. one dayabhai was carrying on under the name and style of 'dayabhai & co.' the business of plying buses and trucks, and exhibition of cinema films. the permits for the running of stage carriages and trucks issued under the motor vehicles act, 1939, were in the name of dayabhai. in august 1954, dayabhai admitted his brother chhotabhai as a partner in this business. a partnership.....
Judgment:

Dixit, C.J.

1. In this reference under Section 66 (1) of the Indian Income-tax Act, 1922, at the instance of the assessee Messrs. Dayabhai & Co. of Barwani, the question posed for our answer is:

'Whether on the facts and in the circumstances of this case, the assessee is entitled to registration under Section 26-A of the Indian Income-tax Act for the assessment year 1956-57?'

2. The facts of the case are as follows. One Dayabhai was carrying on under the name and style of 'Dayabhai & Co.' the business of plying buses and trucks, and exhibition of cinema films. The permits for the running of stage carriages and trucks issued under the Motor Vehicles Act, 1939, were in the name of Dayabhai. In August 1954, Dayabhai admitted his brother Chhotabhai as a partner in this business. A partnership deed was executed between the two brothers on 1st August 1954. Under the agreement the two brothers shared equally the profits and losses of the partnership business which according to the deed consisted mainly of 'Bus plying and Cinema exhibition.' The partnership business commenced from 1st August 1954. Clause 3 of the agreement between the two brothers stated:

' . . Prior to the formation of firm Motor Bus and Truck plying business at Barwani was being carried on by Shri Dayabhai as a proprietary concern. But due to lack of proper administration, the business was running in losses and to improve efficiency in management he admitted Shri Chhotabhai Poonambhai as a partner and agreed to carry on the business of bus plying and Cinemas in partnership and accordingly, this partnership firm has been constituted.'

According to the deed the capital contributed by the partners was to be credited to their respective accounts. It said nothing about the transfer to the partnership firm of any permits held by Dayabhai or of any assets including buses and trucks belonging to him. In the statement of the case sent up by the Tribunal it has been said that on the formation of the firm on 1st August 1954 all the assets and liabilities of the old business which was carried on by Dayabhai as an individual were transferred to the firm and that in the balance-sheets as on 31st March 1955 and 31st March 1956 the firm showed the buses as assets of the firm itself and the cost of the buses purchased after the constitution of the firm was debited to the capital investment account and provision was made on that basis for depreciation.

3. For the assessment year 1956-57, the accounting year of which ended on 31st March 1956, the firm which under the deed dated 1st August 1954 bore the name 'Messrs. Dayabhai & Co.' made an application for registration under Section 26A of the Act. This application was rejected by the Income-tax Officer.

4. In rejecting the claim for registration the Income-tax Officer relied on Sections 31 and 59 of the Motor Vehicles Act. 1939 and the decisions of the Madras High Court in M. Hiria Gowder v. Naga Maistry : AIR1957Mad620 , Velu Padayachi v. Sivasopriam Pillai ILR 1950 Mad 987: AIR 1950 Mad 444 and D. Mohideen Sahib & Co. v. Commissioner of Income-tax Madras : [1950]18ITR200(Mad) and that of the Kerala High Court in Commissioner of Income-tax Mysore, T.C. Coorg and Bangalore v. Union Tobacco Co., Ernakulam : [1961]41ITR115(Ker) . He gave as his reasons that as the partnership business of plying buses was carried on the strength of permits obtained and standing in the name of Dayabhai, the partnership constituted by the two brothers involved transfer of vehicles and permits in contravention of the provisions of Sections 31 and 59 (1) of the Motor Vehicles Act, 1939, and, therefore, the partnership was not valid. The Income-tax Officer took the status of the assessee as 'association of persons'. The Appellate Assistant Commissioner of Income-tax endorsed the decision of the Income-tax Officer.

5. The assessee then preferred a second appeal to the Tribunal contending that the partnership constituted by the deed of 1st August 1954 was legal and valid; that there was no provision in the Motor Vehicles Act prohibiting the formation of a partnership for carrying on the business of running stage carriages and trucks; that the partnership firm could carry on business on the strength of permits obtained by a partner; and that no transfer for vehicles or permits in contravention of Sections 31 and 59 (1) was involved. The Tribunal rejected all these contentions relying on : AIR1957Mad620 and anearlier decision of its own. It took the view that there was necessarily a transfer of vehicles and permits in contravention of the provisions of the Motor Vehicles Act referred to above when the firm carried on the transfer business on permits issued to Dayabhai. and consequently the partnership was illegal. In the view it took of the matter the Tribunal did not consider the effect of the terms of the partnership deed dated 1st August 1954, or determine the question whether Dayabhai's brother Chhotabhai took any part in the conduct of the business; and if so, what; or give any finding on the material before it whether there was in fact any transfer of vehicles and permits by Dayabhai to the firm in contravention of Sections 31 and 59 of the Motor Vehicles Act, 1939. It has been stated by the Tribunal in the statement of the case that in the appeal filed by the assessee no ground was raised in regard to cinema business.

5a. Before us also, the arguments advanced on behalf of the assessee were confined to the validity of partnership in relation to transport business. It was urged by Shri Chitale, learned counsel appearing for the assessee, that the Motor Vehicles Act did not prohibit the carrying on of transport business in partnership, and therefore, a partnership for carrying on that business was not per se illegal; that Under the law of Partnership and the Motor Vehicles Act a partnership firm could validly and lawfully carry on transport business on the strength of permits obtained by a partner and with vehicles belonging to the partner or to the firm; that, therefore, there was no contravention of any statutory provisions when the assessee firm carried on transport business on the basis of permits obtained by Dayabhai; that the partnership deed contained no clause about the transfer of vehicles or permits held by Dayabhai and that there was no evidence to show that there was in fact a transfer of vehicles or permits by Dayabhai in transgression of Sections 31 and 59 of the Motor Vehicles Act, 1939.

Learned counsel further submitted that under the agreement dated 1st August 1954 Dayabhai agreed to share profits and losses of his business in consideration of his brother's contribution towards the capital of the business; that such an agreement was neither illegal nor opposed to any statutory provision and did not involve a transfer of any permits held by Dayabhai; that he alone remained personally responsible for the performance and fulfilment of the conditions and the terms on which the permits were issued to him for the running of stage carriages and trucks; and that the partnership in question was, therefore, valid under the Partnership Act as well as under the Motor Vehicles Act, 1939. In support of his contention learned counsel relied on Umacharan Shaw & Bros. v. Commissioner of Income-tax West Bengal : [1959]37ITR271(SC) , Champsey v. Gordhandas; AIR 1917 Bom. 250 which was affirmed by the Privy Council in Gordhandas Kessowji V. Champsey Dossa AIR 1921 P. C. 137; Mt.Manbharibai v. Bajrang Rice Mill, Warasheoni ILR 1956 Nag 774: AIR 1956 Nag 225and Shiv Dayal Mela Mal v. Firm BishanDass Shankar Dass .Learned counsel for the assessee said that inview of the decision of the Supreme Court in1959-37 ITR 271 the view takenby the Madras High Court that a partnershipcarrying on transport business on the basisof a permit obtained by one of the partnerswas illegal was not correct.

6. The argument of learned Advocate-General appearing for the Department follow ed the line of reasoning adopted by the learned Judges of the Madras High Court in AIR 1957 Mad 620 : ILR (1950) Mad 987 : AIR 1950 Mad 444 and Varadarajulu v. Thavasi Nadar AIR 1903 Mad. 413 in support of their conclusion that an agreement of partnership, which entails a transfer of a permit granted by the Government when there is an express provision prohibiting such a transfer, is illegal and void ab initio; and. therefore, a partnership in respect of transport business involving a transfer of permit is illegal and void and in contravention of Section 59(1) of the Motor Vehicles Act, 1939. Learned Advocate General said that here the partnership firm was formed for taking over Dayabhai's business in contravention of the Motor Vehicles Act. that the firm was bound to take out a permit under the Motor Vehicles Act for doing the transport business and in the absence of any such permit having been granted to the firm it must be held that the object of the partnership was unlawful: and that in any case even if it was not unlawful from the beginning, the partnership became unlawful when it operated stage carriages and buses on the basis of permits issued to Dayabhai.

7. The precise issue that arises in this case is whether a partnership formed for doing transport business is illegal or becomes so if the business is carried on by a partner on permits obtained by him and with vehicles belonging to him or to the partnership firm. The general principles which have to be applied for determining whether a partnership is illegal cannot be in doubt. An agreement entered into between certain persons to form a partnership being contractual in nature would like any other contract, become illegal if, as stated in Section 23 of the Indian Contract Act, the object of the agreement (a) is forbidden by law; or (b) is of such a nature that. if permitted, it would defeat the provisions of any law; or (c) is fraudulent; or (d) involves or implies injury to the person or property of another; or (e) is immoral or opposed to public policy. The further rule, as pointed out in ILR 1956 Nag 774 : AIR 1956 Nag 225 is that illegality of a partnership is never presumed. ft has to be proved by those who assert its existence by showing either that the object of the partnership agreement is unlawful; or though lawful itself, is one which cannot he achieved without violation of law; or that its attainment issought in a manner forbidden by law. Now, the Motor Vehicles Act, 1939, does not prohibit the formation of a partnership for carrying on the business of running stage carriages and trucks. It does not lay down either that if a partnership is formed for transport business, then the business can only be carried on with vehicles owned by the partnership firm and on the strength of permits obtained by the firm itself and not by any partner.

What Section 31 of the Motor Vehicles Act prescribes it that where the ownership of any motor vehicle registered under Chapter HI of that Act is transferred, then the transferor and the transferee shall report the transfer to the registering authority within the time and in the manner indicated in that provision. Section 42(1) of the Motor Vehicles Act prohibits the owner of a transport vehicle from using or permitting the use of the vehicle in any public place save in accordance with the conditions of the permit granted by the competent authority authorizing the use of the vehicle in that place and in the manner in which the vehicle is being used. Section 59(1) forbids the transfer of a permit from one person to another except with the permission of the transport authority which granted the permit. Without such permission the person to whom a vehicle covered by a permit is transferred does not get the. right to use that vehicle in the manner authorized by the permit. It is clear enough from these provision's that they do not make a partnership formed with the object of carrying on the transport business illegal. The question is whether when such a partnership business is carried on by a partner on the strength of permits obtained by him and with vehicles belonging to him or the firm there is necessarily a violation of the above provisions

8. In connection with this question it is very important to note the rule of the law of partnership that it is not necessary that partnership business must be, carried on only with the properly of the firm. Persons may be partners in a business and vet the properly by means of which the business is carried on may not be the property of the firm, but mar be the separate property of one or more of the partners (See Fromont v. Coupland (1824) 2 Bin 170: 130 ER 271; Pocock v. Carter. 1912 1 Ch. 663 and Miles v. Clarke, 1953 1 All ER 779. Another principle which must be borne in mind is that laid down by the Supreme Court in Veerappa Pillai v. Raman and daman Ltd. : [1952]1SCR583 that the right to use a vehicle as a stage carriage under the Motor Vehicles Act, 1939, is not an adjunct of the ownership of the vehicle and the issue of a permit does not depend upon the ownership of the vehicle: and that all that is required for obtaining a permit is possession of the vehicle, which satisfies the requirements of the statute or the rules framed thereunder Neither the Central Provinces and Berar Motor Vehicles Rules, 1940, nor the Madhya Bharat Motor Vehicles Rules, 1949, make the ownership of vehicle a condition precedent for the grant of a permit. Indeed, they could not when the Motor Vehicles Act, 1939, itself does not prescribe such a condition. Rule 52 of the C.P. and Berar Motor Vehicles Rule, 1940, and Rule 58(a) of the Madhya Bharat Rules only require the person to whom a permit is granted to produce, if he was not on the date of his application for permit in possession of the vehicle, a certificate of registration of the vehicle in his possession.

9. It follows from the above propositions that partnership business in transport, can be carried on on the strength of a permit obtained by a partner and with a vehicle belonging to him. It can also be carried on with vehicles belonging to the partnership firm on the basis of permits obtained by a partner in respect of those vehicles, as a partner though not owner of those vehicles is clearly as a partner in possession of those vehicles. In the absence of any provision in the Motor Vehicles Act laying down that transport business in partnership can only be done on permits issued and obtained by the firm itself and with vehicles of which the firm is the owner, it cannot be held that Sections 31, 42 and 59 of the Motor Vehicles Act are transgressed when transport business is carried on with vehicles belonging to a partner or to the firm on the authorization of permits held by a partner. In the partnership business done by partner with vehicles belonging to him or in the partnership firm on permits obtained and held by him, there is no transfer of vehicles or transfer of permits. There being thus no violation of any provision of the Motor Vehicles Act, a partnership firm constituted for carrying on transport business cannot be regarded as illegal merely because the partnership business is carried on by a partner on the strength of permits obtained and held by him and with vehicles belonging to him or to the partnership firm.

10. Such a partnership agreement cannot also he held to be void as against public policy. It does not fall under the well-settled classes of contracts which have been ruled by authority as contrary to public policy and it cannot be declared to he a contract opposed to public policy by inventing a new head of public policy.

11. The view, which we have expressed above, of the matter is supported by many cases. The first is the decision of the Supreme Court in : [1959]37ITR271(SC) . There a partnership was entered into between a person and his two nephews in respect of three liquor shops which were held in different names of the partners. The claim for registration was rejected by the Income-tax Officer and the Appellate Assistant Commissioner of Income lax. While upholding the decision of the Appellate Assistant Commissioner and the Income tax Officer the Tribunal observed:

'A partnership is an artificial legal entity 14 the partnership among the three partners is one which could not be disclosed to the very authorities under whom licences are obtained for the excise shops and the fact that the partnership having come into existence is not made known to others, it will not be open to the assessee to claim registration under Section 26A. All this establishes that no genuine partnership had come into existence.'

In the order which the Tribunal passed rejecting the assessee's application under Section 66(1) it was stated that the Tribunal had not based its decision on the illegality of the partnership. The Calcutta High Court also summarily rejected the assessee's application under Section 66(2) of the Act. When the matter went up before the Supreme Court it was urged on behalf of Revenue that the partnership was illegal as it transgressed certain provisions of the Bengal Excise Act, 1911. Dealing with this contention the Supreme Court said:

'Though the Tribunal stated that it had not proceeded on the ground that the partnership was illegal being against the Bengal Excise Act, 1911, the argument was referred to as supporting the conclusion that the firm was not genuine. Section 42(1) (a) of the Bengal Excise Act reads:

'42(1) Subject to such restrictions as the Stale Government may prescribe the authority who granted any licence, permit or pass under this Act has cancel or suspend it. . . (a) if it is transferred or sub-let by the holder thereof without the permission of the said authority. There was no evidence that the excise licences were transferred or sub-let. The three shops, it appears, were managed separately and their accounts were kept distinct. There was thus nothing which militated against the partnership and if cannot he said that this affected the genuineness of the agreement.'

The decision of the Supreme Court in Umacharan Shaw's case 1059 37 ITR 271 is an authority for the proposition that partnership business can be carried on with property which does not belong to the firm hut belongs to a partner; and that when the relevant statute regulating business conducted under a licence issued thereunder does not prohibit the licensee from taking a partner but simply prohibits the transfer or sub-lease of the licence, then the partnership business can be carried on, on the strength of a licence held by a partner and that in such a case by the formation of a partnership itself or by the conduct of its business there is no transfer or sub-lease of a licence held by a partner. This is clear from the Supreme Court's observations in Shaw's case 1950 37 ITR 271 that there was no evidence that the excise licence had been transferred and that there was nothing which militated against the partnership. This decision of the Supreme Court is, in our judgment determinative of the reference before us.

12. The other case in AIR 1917 Bom 250, where a licensee under Section 11 of the Bombay Salt Act, 1890, admitted some members of his family and others as partners in the business to share profits. The partnersdid not take any part in the manufacture of salt. It was held by the Bombay High Court that the arrangement did net infringe the terms of the licence or Section 11 of the Bombay Salt Act which only prohibited the licensee from sub-letting the whole or part of the privilege and that the admission of partners to share the profits could not be considered as sub-letting or alienation of a part of the privilege unless there was an agreement directly transferring to the partners or attempting to transfer to the partners a part of the right to manufacture or vend. This decision of the Bombay High Court was upheld by the Privy Council in AIR 1921 PC 137, In the advice which their Lordships of the Privy Council tendered to His Majesty it was simply stated by them that no reason had been adduced inducing them to doubt the correctness of the judgment appealed from.

In the same line is the decision in ILR 1956 Nag 774: AIR 1956 Nag 225. In that case a person had entered into an agreement with Government for purchase of wheat and rice on certain conditions, one of them being that he would not assign or sub-let or transfer in any manner whatsoever the whole or any part of his interest in the agreement. Later, the person entered into a partnership for doing the business of purchase of wheat and rice. Under the partnership agreement, the responsibility of running the business was of the partner who had concluded the agreement with the Government for purchase of wheat and rice. It was held by the Nagpur High Court that the partnership was not illegal and that mere infringement of a term in the agreement with the Government against subletting or transfer did not render the transaction illegal especially when the partnership agreement provided for the carrying on of the business by only one of the partners. So also the Punjab High Court held in AIR 1961 Pun 405 that where a licensee under the Opium Act enters into an agreement with a third person to share the profits and losses of his business in consideration of the latter's contribution towards the capital of the business, then such an agreement is neither illegal nor opposed to public policy nor in contravention of the rules framed by the Punjab Government prohibiting the transfer or sub-letting of the licence by the holder thereof without the permission of the Deputy Excise and Taxation Commissioner. It was further held by the Punjab High Court that such an agreement did not involve the transfer or sub-lease of the licence and that the licensee alone remained responsible to the Government and was liable for the performance of the contract and the conditions under which the licence was granted to him.

13. There is also the decision of the Patna High Court in Commissioner of Income-tax Patna v. K.C.S. Reddy : [1960]38ITR560(Patna) . In that case a person who held a dealer's licence under the Bihar Mica Act, 1947, entered into a partnership with four other persons in respect of his business in mica. The firm's application for registration under Section 26A of the Income-tax Act was rejected by the Income-tax Officer on the ground that the partnership was carrying on business in mica without itself holding a dealer's licence in the name of the partnership, and, therefore, the provisions of the Bihar Mica Act were contravened and the partnership was unlawful. The Appellate Tribunal held that the partnership was not unlawful and allowed the application for registration. The Patna High Court upheld the decision of the Appellate Tribunal holding that the Bihar Act did not require a partnership as such to take out a dealer's licence before carrying on the business of dealing in mica; and that there was no provision in the Bihar Act prohibiting a partnership from carrying on the business so long as the partner who actually dealt in mica had a dealer's licence.

14. All these cases fully support the view that where the relevant statute does not prohibit a licensee or a permit-holder from taking a partner hut simply prohibits a transfer or a sub-lease of the licence or the permit, then the licensee or the permit-holder by merely admitting a partner or partners in the business to which the licence or the permit relates does not transgress the prohibition against transfer or sub-lease and the partnership is legal.

15. The Madras High Court has no doubt expressed a contrary view in a number of cases. In AIR 1957 Mad 620 the principle that was enunciated was that an agreement of partnership entailing a transfer of a licence or a permit granted by the Government when there is an express provision prohibiting such a transfer is illegal and void ab initio and a partnership in respect of lorry business which involved a transfer of a permit would be illegal and void as Section 59(1) of the Motor Vehicles Act expressly prohibited a transfer of a permit except with the permission of the transport authority. The judgment in the case of M. Hiria Gowder AIR 1957 Mad 620 does not indicate whether in that case the partnership deed directly transferred to the partner or attempted to transfer to the partner any permit. It will be observed that in M. Hiria Gowder's case AIR 1957 Mad 620 the learned Chief Justice did not draw any distinction between a statutory provision or a term or a condition in the permit prohibiting a permit-holder from taking a partner and a statutory provision or a term or a condition simply prohibiting a transfer except under certain conditions There is an implied recognition of this distinction in the decision of the Supreme Court in Umacharan Shaw's case : [1959]37ITR271(SC) . The Privy Council also in AIR 1921 PC 137 upheld the distinction. In AIR 1957 Mad. 620 the earlier decisions of the Madras High Court in ILR (1950) Mad 987 : AIR 1950 Mad 444 and Viswanathan v. Namakchand Gupta (S) AIR 1955 Mad 536 werefollowed. The decisions in AIR 1963 Mad 413, Muddi Narayanam and Bros, a firm v. K. Subbaraju : [1950]18ITR200(Mad) and : [1961]41ITR115(Ker) were all governed by the same reasoning which prevailed in ILR (1950) Mad 987 : AIR 1950 Mad 444 and AIR 1957 Mad 620.

In our judgment, the decision of the Supreme Court in Umacharan Shaw's case : [1959]37ITR271(SC) gives a conclusive answer to the reasoning adopted in Madias, Andhra Pradesh and Kerala High Court cases and the view expressed in those cases that a partnership entered into for the purpose of conducting a business on a licence granted or to be granted to one of the partners is void ab initio if the statute under which the licence is granted prohibits a transfer of the licence is not correct. In those cases it has been held that there is a violation of the provision against transfer because if the licensed partner carries on the partnership business, then the unlicensed partner by himself or through his agent, the other partner, carries on the business in direct violation of the prohibition. As to this it is sufficient to say that when, as we have endeavoured to point out earlier, a partnership business can be carried on by a partner with property belonging to the firm or to himself or to the other partner on the strength of a permit or licence held by him and the relevant statute does not require a partnership as such to take out a licence for carrying on the business, then there is no question of the unlicensed partner by himself or through his agent, the other partner, carrying on the partnership business without a licence

16. It may be mentioned that in A. D. Thiagaraja Pillai v. Commissioner of Income-tax : [1965]55ITR419(Mad) a Division Bench of the Madras High Court did not take the decision in ILR (1950) Mad 987 : AIR 1950 Mad 444 as laying down that where a business can be carried only under a licence and the licence cannot be transferred except with permission of the competent authority, then, if a person who has a licence to do that business takes partners, the mere existence of partners renders the partnership illegal. In that ease the question arose whether a partnership formed by two persons to exploit a licence to vend toddy obtained by certain benamidars was illegal. While dealing with this question the learned Chief Justice who delivered the judgment of the Court referred to Velu Padayachi's case ILR (1950) Mad 987 : AIR 1950 Mad 444 and said:

'In ILR (1950) Mad 987 : AIR 1950 Mad 444 a Full Bench of this Court declared that a partnership entered into for the purpose of conducting business in arrack or toddy, on a licence granted or to be granted to only one of them, would be void ab initio and there would be no difference in the application of this principle whether the contract of partnership was entered into before the licence was granted or afterwards. The underlying basis of this decision was that such a partnership would amount to a breach of the provisions contained in Section 15 of the Abkari Act, which would be punishable under Section 55 of that Act. Section 15 of the Abkari Act states: 'No liquor or intoxicating drug shall he sold without licence from the Collector.' Sections 55 and 56 of the Act render punishable the sale of liquor or intoxicating drug in contravention of the Act, or of any rule or order made, or of any licence or permit obtained thereunder. A licence issued under the Act generally contains a clause that no privilege of supply or vend shall be sold, transferred or sub-rented without the Collector's previous permission. It was held by the Full Bench that the formation of a partnership to exploit a licence granted in favour of one of the partners would amount to a contravention of the provisions of Section 15 of the Abkari Act or of the terms of the licence referred to above. But, obviously, there can be no such illegality if there had been a full disclosure to the revenue authorities of the position, namely, that the partnership was to take the benefit of the contract in the name of one of them: to such a case permission of the authorities can be presumed.'

Later, in the judgment he observed that-

'it cannot be taken as a matter of assumption or presumption that a partnership formed for doing abkari business is illegal. If the licence had teen taken in the name of the firm itself, its business would be perfectly valid. Even if the licence is not found to be so taken but issued in the name of only one of the partners, the partnership would still be legal if there had been a full disclosure to the Government at the relevant time that the licence was to be used by the firm itself.'

Thus, the question whether a licence was or was not transferred without the permission of the competent authority was treated by the Madras High Court in Thiagaraja Pillai's case : [1965]55ITR419(Mad) as one depending upon the facts of each case and not one concluded by the fact that the person holding a licence has admitted some persons as partners in the business carried on with the licence.

17. Here, the partnership deed nowhere said anything about the transfer of permits held by Dayabhai or of the vehicles owned by him to the partnership firm. It did not provide that Dayabhai's permits would stand transferred to the firm and would become a privilege of the firm. The Tribunal found that in the balance-sheets as on 31st March 1955 and 31st March 1956 the vehicles owned by Dayabhai before the formation of the partnership were shown as assets of the firm itself. These entries arc altogether irrelevant in determining the legality of the partnership. The transfer of his vehicles by Dayabhai to the firm as evidenced by the balance sheetsdid not render the permits be held ineffective for the reason that the issue of a permit in resort of a vehicle, depends on the possession of a vehicle and not on its ownership Again, the transfer of vehicles by itself did not involve any violation of Section 31 or 59(1) of the Motor Vehicles Act. Section 31 does not prohibit the transfer of a vehicle by one person to another. All that it says is that where the ownership is transferred, then the transferor and the transferee shall report the transfer in the manner laid down in that provision. The transfer of vehicles is thus not illegal. It may be that by their failure to report the transfer as required by Section 31 of the Motor Vehicles Act both Dayabhai and the firm contravened that provision. The transfer, if any, to the firm of Dayabhai's vehicles and the non compliance of Section 31 thereafter is no different in kind from the transfer by a stranger to the firm of his vehicles and the non compliance of Section 31 thereafter.

If a firm, the legality of which cannot be assailed on any ground, purchases vehicles from some person and thereafter there is a fail are on the part of the vendor and the firm to report the transfer, then clearly it would be impossible to contend that the firm has become illegal because of a violation of Section 31. The question of illegality of a partnership must he distinguished from illegality of any acts done in the course of its business by the firm or some or all of its members. If the partnership is legal, then the commission by it of some illegal acts or failure to obey some statutory provision can-not make it illegal. This principle has been laid down in Thwaites v. Coulthwaite 1896-1 Ch. 490. Again, as is clear from Section 59 (1) of the Motor Vehicles Act itself, the transfer of a vehicle in no way involves a transfer of any permit in respect of the vehicle. The fact, therefore that in the balance-sheets vehicles belonging to Dayabhai were shown as belonging to the firm is of no significance whatsoever in determining whether the partnership formed by the two brothers was legal or illegal. The Tribunal has not found that the partnership business was carried on by Chhotabhai who did not hold any permit. To assume that Chhotabhai carried on the business is really, in the present case, to presume the illegality of the partnership. In fact, no such assumption can be made when Clause 3 of the partnership deed clearly stated that Dayabhai had agreed to lake Chhotahhai as a partner and 'agreed to carry on the business of bus plying and Cinemas in partnership' The underlined there into ' ') words 'agreed to carry on' only show that according to the deed the business was to he carried on by Dayabhai and that Chhotabhai was not to participate in the working of the permit by taking actual part in the business. The present case is, therefore. fully governed by the decision of the Bombay High Court in AIR 1917 Bom 250 affirmed by the Privy Council inAIR 1921 PC 137 and the decision in ILR (1956) Nag 774 : AIR 1956 Nag 225.

18. For the foregoing reasons, our conclusion is that the assessee-firm wax not illegal and was entitled to registration under Section 20A of the Indian Income tax Act. 1922. for the assessment year 1950 57. The question propounded by the Tribunal is. therefore, answered in the affirmative.

19. In the circumstances of the case,there will be no order about costs of thisreference.


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