G.P. Singh, C.J.
1. This judgment shall also dispose of Misc. Civil Case No. 111 of 1978.
2. These are references made by the Income-tax Appellate Tribunal and they relate to the same assessee. Misc. Civil Case No. 326 of 1976 relates to the assessment years 1968-69 to 1972-73. The questions of law referred in this reference are as follows ;
'I. Considering rule VI of the M.P. Excise Act, whether the partnership was a legal one enabling the assessee the benefit of registration for assessment year 1968-69 and continuation thereof for the subsequent years ?
2. Whether the notice dated December 20, 1973, under Section 263 issued by the CIT was a valid one ?'
3. Miscellaneous Civil Case No. 111 of 1978 relates to the assessment year 1973-74 and the question of law referred is as under;
' Whether, on the facts and in the circumstances of the case, the assessee is entitled to continuation of registration '
4. The facts briefly stated are that one Shantilal Mehta, who was taking liquor contracts for some years, was assessed to income-tax in the status of an individual. Contracts for the sale of foreign liquor at two places, i. e., Durg and Bhilai, for the period from 1st August, 1967, to 31st March, 1968, were auctioned on 24th July, 1967, and Shantilal was the highest bidder. On 1st August, 1967, Shantilal informed the Collector of Excise, through the District Excise Officer, that he took the contracts in his name on behalf of a partnership consisting of five members and that the contracts will be executed by the partnership. The licences were issued on 4th August, 1967, in the name of Shantilal. A partnership deed was executed in respect of the said contracts on 1st September, 1967. Shantilal wrote another letter on 4th September, 1967,to the Collector, stating therein that he was enclosing a copy of the partnership deed and that the Collector may do the needful in the matter. These applications remained pending with the Collector and no orders were passed on them. In the meantime, the liquor licences issued in the name of Shantilal were renewed year after year. The partnership applied for registration under Section 185 of the I.T. Act, 1961. Registration was granted for the year 1968-69 by the order of the ITO dated 6th January, 1972. The ITO granted continuation of registration for the subsequent years, i. e., 1969-70 to 1972-73. On 19th November, 1973, Shantilal again wrote to the Collector inviting his attention to his letters dated 1st August, 1967, and 4th September, 1967, and stating that the needful had not been done in the matter and that the same be done at an early date. The matter was examined by the District Excise Officer. On 29th November, 1973, the District Excise Officer reported to the Collector that a licensee cannot enter into a partnership without the written permission of the Collector and that 'this breach may now be regularised and the proposed amendment may be ordered to be made in the F.L. licences'. The Collector accepted this recommendation on 30th November, 1973. However, on the same date, the District Excise Officer proposed that as there was a continuing breach of General Licence Condition No. VI, a compounding fee of Rs. 200 be recovered in each case. This too was approved by the Collector on the same date. By letter dated 6th December, 1973, the District Excise Officer informed Shantilal to pay the composition fee of Rs. 200 for each of the licences. Shantilal was further informed that the name of M/s. Shantilal Mehta and Co., which is the name of the partnership, had been entered in both the licences. The Commissioner of Income-tax, on 20th December, 1973, issued a notice to the assessee under Section 263 of the Act. By an ex parte order dated 31st December !973, the Commissioner set aside the order of the ITO granting registration to the assessee-firm for the year 1968-69 and in consequence thereof also cancelled the continuation of registration for the years 1969-70 to 1972-73. The ground on which the registration was cancelled by the Commissioner was that as the permission of the Collector was not obtained for forming- the partnership, the partnership was illegal. The assessee filed five appeals (I.T.A. Nos. 775 to 779), which were allowed by the Tribunal by its order dated i9th August, 1975. The Tribunal held that in view of the order of the Collector dated 30th November, 1973, the defect of want of permission was completely cured and the partnership was not illegal.
5. For the assessment year 1973-74 the ITO treated the status of the assessee as an unregistered firm. The AAC, in appeal, by order dated 4th May, 1976, directed the ITO to grant renewal of registration in view ofthe order of the Tribunal dated 19th August, 1975. The Department went up in appeal to the Tribunal which was dismissed on 19th August, 1977.
6. On applications made by the Department, the questions of law set out above by us have been referred by the Tribunal.
7. Section 17 of the Madhya Pradesh Excise Act, 1915, provides that 'no intoxicant shall be sold except under the authority and subject to the terms and conditions of the licence granted in that behalf'. Sub-section (1) of Section 62 of the Act empowers the State Government to make rules for the purpose of carrying out the provisions of the Act. Clause (h) of Sub-section (2) of Section 62 in particular empowers the State Government to make rules prescribing the authority by which, the form in which, and the terms and conditions on and subject to which, any licence, permit or pass shall be granted. In exercise of this rule-making power, the State Government has framed rules laying down general licence conditions. Rule I of these Rules provides that every licence granted shall be deemed to have been granted personally to the licensee named therein and shall, on the expiry thereof, be surrendered to the Collector. Rule VI of these Rules, which provides for transfer or sub-lease of licence, reads as under;
'VI. Transfer or sub-lease of licence.--No privilege of supply or sale shall be sold, transferred or sub-leased, nor shall the holder of any such privilege enter into a partnership for the working of such privilege in any way or manner without the written permission of the Collector, which shall be endorsed on the licence. A partner, sub-lessee, transferee shall be bound by all the conditions of the licence, but the original licensee also shall continue to be responsible to the State Government for the due payment of the licence fees and proper working of the shop, except that in the case of a transfer his responsibility shall cease as soon as the transfer is endorsed of the licence.'
8. The forms of the different licences including licences for the sale of foreign liquor contain a condition that the licensee shall be bound by the General Licence Conditions. Section 31(1)(b) of the Act enables the cancellation or suspension of a licence 'in the event of any breach ... of any of the terms or conditions thereof'. Section 39(c) provides that the holder of a licence shall be punishable with fine which may extend to Rs. 500 if he ' does any act in breach of any of the conditions of the licence'. The Collector is empowered by Section 48(1) to compound any breach of the conditions of a licence or any offence. Section 48 reads as follows:
'48. Power to compound offences.--(1) The Collector may--(a) accept from any person whose licence, permit or pass is liable to be cancelled or suspended under clauses (a) and (b) of Section 31, or who is reasonably suspected of having committed an offence under Section 37, Section 38, Section 38A or Section 39, a sum of money not exceeding one thousand rupees in lieu of such cancellation or suspension or by way of composition for such offence, as the case may be, or may impose as a penalty a sum not exceeding one thousand rupees and may order the confiscation of articles which are seized ; and
(b) in any case in which any property has been seized as liable to confiscation under this Act may, at any time before an order of confiscation has been passed by a Magistrate, release the same on payment of the value thereof as estimated by the Collector.
(2) On the payment of such sum of money, or such value, or Both, as the case may be, to the Collector, the accused person, if in custody shall be discharged, the property seized (if any) shall be released, and no further proceedings shall be taken against such person or property.'
9. The consistent view of this court right from 1937 is that an agreement of partnership entered into without the permission of the Collector for working a licence for sale of liquor granted under the Excise Act is illegal, being in violation of Rule VI of the Rules prescribing the General Licence Conditions [See Nandlal v. Thomas J. William AIR 1937 Nag 250, CIT v. Pagoda Hotel and Restaurant : 93ITR271(MP) and CIT v. Sheonarayan Harnarayan 0065/1972 : 100ITR213(MP) ]. The matter was recently considered by a Division Bench of this court in Narsaiya & Co. v. CIT : 143ITR304(MP) and the same view was taken. It was held in that case that the mere making of an application to the District Excise Officer, who gave a certificate that the licensee had informed regarding the formation of a partnership for working the licence, cannot be taken to be a permission granted by the Collector under Rule VI and that such a partnership was illegal and could not be granted registration under the I.T. Act. It was also pointed out that the decision of the Supreme Court in Jer & Co. v. CIT : 79ITR546(SC) had not the effect of overruling the cases of this court relating to the interpretation of Rule VI. The Supreme Court case related to an excise licence in Form FL-2 granted under the Uttar Pradesh Excise Manual. The Allahabad High Court relied upon Rule 322 in the Manual and held that there was a prohibition for entering into a partnership and, therefore, the partnership was illegal. This view was overruled by the Supreme Court on the ground that Rule 322 was not applicable to licences in Form FL-2 and that the licence granted to the assessee in that case did not contain any condition prohibiting forming of partnership.
10. In view of the earlier authorities of this court, it has to be held that a partnership formed without obtaining the permission of the Collector as required by Rule VI of the Rules prescribing the General Licence Conditions, would be illegal and invalid and that such a partnership would not be entitled to registration under Section 185 of the I.T. Act. The question, however, in these references is as to the effect of the order of the Collector dated 30th November, 1973. By this order, as earlier noticed, the breach of Rule VI in entering into a partnership without obtaining the permission was regularised and a composition fee was also obtained for each of the licences. In this connection, the pertinent facts, as already noticed, are that the licensee of 1st August, 1967, which was the date of the commencement of the licences, applied to the Collector intimating that the licences were taken on behalf of the partnership and would be worked by it. This application to the Collector implied a request for grant of permission. The Collector was again requested on 4th September, 1967, to do the needful and a copy of the partnership deed was also sent to him. The matter, however, remained pending with the Collector and no action was taken on these applications. The Collector gave the permission on 30th November, 1973, and as the intimation to the assessee dated 1st December, 1973, shows, this permission was endorsed on the licences by mentioning the firm as the licensee in place of Shantilal, The Collector also accepted the recommendation of the District Excise Officer to accept a compounding fee and to regularise the breach of the condition of not obtaining the permission of the Collector for entering into the partnership. As the privilege of selling foreign liquor under the licences in the name of Shantilal was being worked by the partnership from the very beginning without there being any permission of the Collector, there was obviously a breach of the condition contained in Rule VI. This breach fell within the purview of Section 31(1)(b) and it would have been competent for the Collector to cancel the licences. Similarly, the breach also amounted to an offence under Section 39(c). The Collector, however, by the order dated 30th November, 1973, condoned the breaches and offences and granted permission after accepting a compounding fee. The effect of the order of the Collector, in our opinion, is clearly to grant a retrospective permission and to wipe out the breaches of Rule VI. This rule does not in terms provide for prior permission for entering into a partnership and does not prohibit grant of retrospective permission. The rule prohibits entering into partnership for the working of the privilege without the written permission of the Collector. But if the permission is retrospectively granted, the breach of the condition would be clearly wiped out and it would not be possible to hold that the partnership formed in the face of such a retrospective permission was in any way illegal orinvalid. It is a matter of common occurrence that applications made for the grant of a permission under Rule VI are not disposed of within a reasonable time ; quite often, as happened in the instant case, they remain pending for years without anyone taking any action. It would be a matter of great hardship to the licensee if it is held that the Collector has no power to grant permission retrospectively, at any rate, from the date on which the application for permission was made. As there is no specific bar contained in Rule VI for the grant of permission to operate retrospectively, in our opinion, it is a reasonable construction to adopt that the Collector has power to grant the required permission which may operate at least from the date when the application was made for the grant of permission. In these references, the first application for permission was made on 1st August, 1967, which was the date of commencement of the licences. The effect of the order of the Collector dated 30th November, 1973, was to condone the breaches and the offences and to make everything regular with effect from the beginning of the licences. We are unable to accept the contention of the learned standing counsel for the Department that as the partnership entered into, in breach of Rule VI, was illegal and void, it could not be validated by the grant of a subsequent permission. The whole thing depends upon the construction of Rule VI. As, in our opinion, Rule VI, on a reasonable construction, empowers the grant of a retrospective permission, we find no difficulty in holding the partnership valid from the very beginning. For these reasons, we are of the view that the Tribunal was right in holding that the partnership was not illegal and that registration and continuation of registration under the I.T. Act ought to be granted in favour of the partnership;
11. For the reasons mentioned above, we answer the question as follows :
M.C.C. No. 326 of 1976 :
(1) The partnership was legal and was entitled to the benefit of registration for the assessment year 1968-69 and continuation thereof for subsequent years.
(2) In view of our answer to question No. 1, it is not necessary toanswer this question.
M.C.C. No. 111 of 1978: The assessee is entitled to continuation of registration.
12. There will be no order as to costs of these references.