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Malu Khan Lalu Khan Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtRajasthan High Court
Decided On
Case NumberD.B. Income-tax Reference No. 19 of 1976
Judge
Reported in[1986]157ITR457(Raj)
ActsIncome Tax Act, 1961 - Sections 186; Indian Contract Act, 1872 - Sections 23; Rajasthan Excise Rules, 1956 - Rule 63(4); Excise Act
AppellantMalu Khan Lalu Khan
RespondentCommissioner of Income-tax
Appellant Advocate Guru Prakash, Adv.
Respondent Advocate M.K. Trivedi and; J.P. Joshi, Advs.
Excerpt:
.....sale of country liquor for alaksagar well, bikaner, and whereas they have agreed to admit one shri lalu khan, son of hussain khan, a minor below the age of 18 years to the benefits of the partnership and have since april 1, 1965, been carrying on the said business under the name and style of m/s. malu khan lalu khan along with a minor, shri lalu khan, admitted to the benefits of the partnership and whereas to avoid future differences, the parties hereto have agreed to reduce the terms of the partnership into writing and now this indenture witnesseth that they have agreed as under :3. clause 3 of the partnership deed is as under :3. the partnership business shall be that of acting as dealer, contractor and supplier in country liquor in the area known as alaksagar well bikaner as per the..........lalu khan3. manamudu khan (shop alaksagar)rs. 26,4153.1. malu khan1. malu khan1968-6335, 20, 502. lalukhan2. lalu khan3. manamudu khan (shop alaksagar)rs. 21,0804.1. malu khanas in col. 2 rs. 18,6601969-7036, 20, 502. lalu khan3. manamudu khan (shop alaksagar)10. it is evident from the above tabular statement that for 1968-69 and 1969-70, the assessee-firm obtained the contract by showing the age of lalu khan as 20 years. it has neither been disputed before the taxing authority nor before us that in respect of the assessment year 1967-68, rule 63(4) of the excise rules, 1956, had come into force with effect from october 14, 1965, inasmuch as rule 63(4) was inserted, vide rajasthan gazette (part iv-c) dated october 14, 1965. it will be relevant here to refer to section 33 of the.....
Judgment:

S.K. Mal Lodha, J.

1. The Income-tax Appellate Tribunal, Jaipur Bench, Jaipur (for short ' the Tribunal ' herein), has referred the following questions for our decision :

' 1. Whether, on the facts and in the circumstances of the case, the Tribunal is justified in holding that on account of violation by the partners of the firm of Sub-rule (4) of Rule 63 of the Rajasthan Excise Rules, 1956, a firm valid in law has not come into existence in view of the provisions of Section 23 the Indian Contract Act, 1872 ?

2. If the answer to the aforesaid question is in the affirmative, whether, on the facts and in the circumstances of the case, the Tribunal is justified in holding that the benefit of continuation of registration granted to the applicant firm earlier by the Income-tax Officer could be cancelled by him under Section 186 of the Income-tax Act, 1961, in respect of assessment year 1967-68 ?

3. Whether, on the facts and in the circumstances of the case, the Tribunal is justified in holding that on account of violation by the partners of the firm of Sub-rule (4) of Rule 63 of the Rajasthan Excise Rules, 1956, a firm valid in law has not come into existence in view of the provisions of Section 23 of the Indian Contract Act, 1872, and that, therefore, the benefit of continuation of registration could not be allowed to it in respect of the assessment year 1968-69?

4. Whether, on the facts and in the circumstances of the case, the Tribunal is justified in holding that the excise licence obtained in respect of the financial year 1968-69 corresponding to the assessment year 1969-70 was obtained by a fraudulent representation by the two major partners and the minor partner of the firm and that any agreement entered into with a view to share the gains of such a contract would be void, even though the minor had become major during the course of the year and a new partnership deed has been executed on October 29, 1968, on the minor attaining majority ?

5. If the answer to the aforesaid question is in the affirmative, whether the Tribunal is justified in holding that the benefit of registration could not be granted to the assessee-firm in respect of the assessment year 1969-70?'

2. The assessee, M/s Malu Khan Lalu Khan, was a partnership firm. For the assessment years 1967-68, 1968-69 and 1969-70, the accounting period for the aforesaid assessment years ended on March 31, 1967, March 31, 1968, and March 31, 1969, respectively. The assessee-firm was constitutedby means of a partnership deed dated July 1, 1965. The preamble of that partnership deed dated July 1, 1965, is as follows:

'This deed of partnership made this 1st day of July, in the year of Christ one thousand nine hundred and sixty-five between Malu Khan s/o Mehtab Khan, aged 39 years, resident of Bikaner, party hereto of the FIRST PART, Mohamdu Khan s/o Chimankhan, aged 40 years, resident of Bikaner, party hereto of the SECOND PART, whereas the parties hereto of the FIRST and SECOND parts have taken a contract for the sale of country liquor for Alaksagar well, Bikaner, and whereas they have agreed to admit one Shri Lalu Khan, son of Hussain Khan, a minor below the age of 18 years to the benefits of the partnership and have since April 1, 1965, been carrying on the said business under the name and style of M/s. Malu Khan Lalu Khan along with a minor, Shri Lalu Khan, admitted to the benefits of the partnership and whereas to avoid future differences, the parties hereto have agreed to reduce the terms of the partnership into writing and now this indenture witnesseth that they have agreed as under :'

3. Clause 3 of the partnership deed is as under :

' 3. The partnership business shall be that of acting as dealer, contractor and supplier in country liquor in the area known as Alaksagar well Bikaner as per the tender and agreement with the Government of Rajasthan.'

4. It was provided therein that Lalu Khan shall be entitled to profits of 49 np, in a rupee and in the case of loss the same shall be borne by the two partners, Mohd. Khan and Malu Khan, half and half. The partnership business was for a period of one year ending on March 31, 1966, as per the terms of the contract with the Government of Rajasthan or for such further period as may be extended by the Government. The minor, Lalu Khan, became major on August 2, 1968, and a new partnership deed dated October 29, 1968, was executed on his attaining majority making Lalu Khan a full-fledged partner of the partnership firm. The preamble of that partnership deed runs as under :

' This deed of partnership made this 29th day of October in the year of Christ one thousand nine hundred sixty-eight between Malu Khan s/o. Mehtab Khan, aged 43 years, resident of Bikaner, party hereto of the FIRST PART, Mohamdu Khan s/o Chimankhan, aged 44 years, resident of Bikaner, party hereto of the SECOND PART and Lalu Khan s/o Hussain Khan, aged 19 years, resident of Bikaner, party hereto of the THIRD PART, whereas the parties hereto of the FIRST AND SECOND parts along with the party hereto of the third part as minor being admitted to the benefits of partnership were carrying on a partnership business under the name and style ofM/s. Malu Khan Lalu Khan under an instrument of partnership dated October 18, 1966, whereas the party hereto of the third part, namely, Shri Lalu Khan, has become major and has opted to continue as partner in the said firm from August 2, 1968, when he attained the age of majority, the parties hereto have been carrying on the said business in partnership with all existing liabilities, assets and rights in partnership and whereas to avoid future differences, the parties hereto have agreed to reduce the terms of the partnership into writing and now this indenture witnesseth that they have agreed as under : '

5. Clause 3 of the partnership deed dated October 29, 1968, is as follows :

' 3. The partnership business shall be that of acting as dealer, contractor and supplier in country liquor as per the tender and agreement with the Government.'

6. The partnership firm was granted registration on the basis of the partnership deed dated July 1, 1965, in respect of the assessment year 1966-67 in terms of Section 185 of the Income-tax Act (No. XLIII of 1961) (for short ' the Act' herein). The benefit of continuation of registration was also granted in respect of the assessment year 1967-68. It appears that the Income-tax Officer on an enquiry from the excise authorities came to know that even the minor, Lalu Khan, had given the bid in the auction to obtain the licence of the said country liquor contract at Alaksagar well and, as such, the narration in the partnership deed that only Malu Khan and Mohamdu Khan had obtained the contract for the sale of country liquor for Alaksagar well, Bikaner, was not correct. According to the Income-tax Officer, Lalu Khan, who had also given a joint bid along with the other partners, was not capable to give the bid, he being a minor. The Income-tax Officer, of course, noted that Sub-rule (4) of Rule 63 was inserted by the notification dated October 14, 1965, but expressed the opinion that earlier also minors were not allowed either to bid or to take liquor contract because they have to enter into an agreement and an agreement with a minor cannot be considered valid. He, therefore, gave a notice to the assessee-firm in terms of Section 186 of the Act and asked it to show cause as to why the registration, initially granted to it, should not be withdrawn from the said firm in accordance with Section 186(1) of the Act. In the reply, it was admitted that Lalu Khan has been shown as a major before the excise authorities but contended that that does not imply that he was not actually a minor. It was reiterated that Lalu Khan was rightly shown as a minor who was admitted to the benefits of partnership. It was submitted by the assessee-firm that the Income-tax Officer was not legally authorised to cancel the registration of the firm, which according to it,was rightly allowed by the Income-tax Officer to begin with. The Income-tax Officer was of the opinion that the firm formed by the persons to secure wine contract, which they were not legally entitled to, is invalid as well as non-genuine. He, therefore, cancelled the registration granted in respect of the assessment year 1966-67 and also cancelled the benefit of continuation of registration granted regarding the assessment year 1967-68. When the question of continuation of registration for the assessment year 1968-69 came up, the Income-tax Officer refused to extend the facility of registration to the firm on the ground that in the earlier years, the registration had been cancelled and, therefore, according to the Income-tax Officer, he could not grant the renewal of registration to the assessee-firm in respect of the assessment year 1968-69. The registration application for the assessment year 1969-70 filed in Form No. 11A was also rejected and registration was refused to the firm by the Income-tax Officer for the same reasons as given by him in his order under Section 186 of the Act for the assessment year 1966-67. An appeal was taken by the assessee and the Appellate Assistant Commissioner by his order, annexure I, dated February 13, 1974, negatived the assessee's claim for registration. The assessee filed appeals before the Tribunal and it, after examining the contentions that were raised before it on behalf of the assessee and the Department, was of the opinion that the provisions of Section 186(1) could be invoked by the Income-tax Officer not only in a case where the firm is found to be bogus but even in a case where the firm is not found to have come into existence in law and that when the firm had not come into existence in law, there is no firm at all and, therefore, there is no object to which registration could have been granted. It, therefore, opined that when once such a finding is reached by the Income-tax Officer, he has no option but to have recourse to the provisions of Sub-section (1) of Section 186 of the Act and to cancel the registration which was erroneously granted earlier. It also took into consideration Sub-rule (4) of Rule 63 of the Excise Rules and opined that it had come into effect from October 14, 1965, and so the bidding by the minor Lalu Khan in respect of the accounting period corresponding to the assessment year 1967-68 was definitely in violation of Sub-rule (4) of Rule 63 of the Excise Rules. It will be relevant here to refer to the following observations of the Tribunal :

' When a minor holds himself out as a major, knowing that he is a minor and his father joins him in representing him to be a major, in order to obtain the excise contract, it is, in our opinion, a fraudulent action and the obtaining of the licence in such manner would be said to have been done fraudulently. The object of the partnership deed was to carry out the contract so obtained.'

7. The Tribunal by its order (annexure-J) dated August 16, 1975, dismissed the appeal in respect of the assessment years 1967-68, 1968-69 and 1969-70. On these facts, the aforesaid questions have been referred to this court.

8. We have heard Mr. Guru Prakash for the petitioner-assessee and Mr. M.K. Trivedi for Mr. J.P. Joshi for the Revenue.

Re : Question No. 1:

9. The Income-tax Officer cancelled the benefit of continuation of registration granted to the assessee-firm in respect of the assessment year 1967-68, vide order annexure F-2, dated March 13, 1972. This he did so on the basis of the order dated March 13, 1972, passed under Section 186(1) of the Act. In the order relating to cancellation of registration dated March 13, 1972, he has given reasons for cancelling the registration of the assessee-firm for the assessment year 1966-67. It appears that the Income-tax Officer made a reference to the District Excise Officer, Bikaner, for clarification regarding the age of Lalu Khan, the partner of the assessee-firm. Vide letter dated December 1, 1971, he intimated the following particulars :

S. No.Name of the bidder or tenderer with country liquor shopName of the person who deposited securityYear : Financial yearAge of person(1)(2)(3)(4)(5)1.I. Alaksagar with other five shopsIn group as in col. No. 2 Rs. 98, 5601966-67Not avail-able.1. Malu Khan2. Suleman3. Malu Khan4. Rukandeen5. Bhurankhan6. Mangilal7. Lalu Khan8. Gordhandass9. Mohamdu Hussain

Transferred shop

Alaksagav in the

 name; of Shri

 1.; Mahi Khan

 2.; Lalu Khan

 with; the security amount

 of; Rs. 24,300, vide

 this; office order

 No.; 267 to 274

 dated; I/26-4-662.1. Malu Khan1 . Malu Khan1967-68Not available.2. I.alu Khan2. Lalu Khan3. Manamudu khan

(Shop Alaksagar)Rs. 26,4153.1. Malu Khan1. Malu Khan1968-6335, 20, 502. LaluKhan2. Lalu Khan3. Manamudu Khan

(Shop Alaksagar)Rs. 21,0804.1. Malu Khanas in col. 2 Rs. 18,6601969-7036, 20, 502. Lalu Khan3. Manamudu Khan

(Shop Alaksagar)

10. It is evident from the above tabular statement that for 1968-69 and 1969-70, the assessee-firm obtained the contract by showing the age of Lalu Khan as 20 years. It has neither been disputed before the taxing authority nor before us that in respect of the assessment year 1967-68, Rule 63(4) of the Excise Rules, 1956, had come into force with effect from October 14, 1965, inasmuch as Rule 63(4) was inserted, vide Rajasthan Gazette (Part IV-C) dated October 14, 1965. It will be relevant here to refer to Section 33 of the Rajasthan Excise Act, 1950 :

'Section 33. Power of authority granting licence to require execution of counterpart agreement, etc.--Any authority of granting a licence under this Act may require the grantee to execute a counterpart agreement in conformity with the tenor of his licence and to give such security for the performance of such agreement or to make such deposit in lieu of security as such authority may think fit.'

11. Rule 63 of the Rajasthan Excise Rules, 1956, provides for persons debarred from bidding. Rule 63(4), which had come into force from October 14, 1965, is as follows :

' (4) No person below the age of eighteen years shall be entitled to bidat auctions.'

12. According to this rule, a person who has not completed the age of 18 years cannot bid at auctions. Rule 72(B) deals with transfer of a licence.

13. Lalu Khan was a minor and he has been shown as 20 years of age so that he may associate in biddings. The bid given by Lalu Khan with the other two partners was undoubtedly in breach of Rule 63(4) of the Rajasthan Excise Rules. Lalu Khan had shown himself as major knowing fully well that he is a minor. This he did so in order to obtain the contract from the Excise Department.

14. Section 23 of the Indian Contract Act, 1872, lays down what considerations and objects are lawful and what are not lawful. It is as under :

' Section 23. The consideration or object of an agreement is lawful, unless:--

it is forbidden by law ; or

is of such a nature that, if permitted, it would defeat the provisions

of any law ; or

is fraudulent; or

involves or implies injury to the person or property of another ; or

the court regards it as immoral, or opposed to public policy.'

In each of these cases, the consideration or object of an agreement is said to be unlawful. Every agreement of which the object or consideration is unlawful is void. '

15. It will be useful here to excerpt Illustration (e) given below this section :

' (e) A, B and C enter into an agreement for the division among them of gains acquired, or to be acquired, by them by fraud. The agreement is void, as its object is unlawful.'

16. Had Lalu khan not been represented by his father or other partners as major, the licence could not have been obtained by the three partners including the minor because Rule 63(4) of the Excise Rules provides that a person who is below the age of 18 years shall not be entitled to bid at auctions. This representation regarding Lalu Khan that he is a major though he was a minor was fraudulent as this was with a view to obtain the licence. In our opinion. Illustration (e) to Section 23 of the Contract Act provides a complete answer and, as such, the agreement is void. Apart from that, under Section 33 of the Act, the authority granting licence requires execution of a counterpart agreement in conformity with the tenor of the licence. A contract with a minor is void as he is incompetent to contract. The Tribunal has referred to CIT v. Pagoda Hotel and Restaitrant, : [1974]93ITR271(MP) in support of the proposition that if a contract is entered into by violating one of the excise rules, the contract would be void. The bidding at auctions by the minor was expressly forbidden, under Rule 63(4) of the Rules. The Tribunal has quoted from Pollock and Mulla's Indian Contract and Specific Relief Acts, ninth edition, the following from the head 'Fraudulent' (p. 215) under Section 22 of the Act:

' Where the object of an agreement between A and B was to obtain a contract from the Commissariat Department for the benefit of both, which could not be obtained for both of them without practising fraud on the Department, it was held that the object of the agreement was fraudulent, and that the agreement was, therefore, void. '

17. It is clear that a valid firm had not come into existence under Sections 4, 5 and 6 of the Partnership Act and Sections 184 and 185 of theAct were considered in Addl. CIT v. Rehmat Khan Faizukhan, and it was held that the following conditions are essential for the registration of a firm under Section 185 of the Act (p. 680) :

' (i) An application on behalf of the firm should be made to the Income-tax Officer before the end of the accounting year and the application should comply with the requirements of Section 184 and Rules 22 to 24.

(ii) The firm should be evidenced by an instrument of partnership.

(iii) The instrument should specify the individual shares of the partners.

(iv) The partnership should be valid and genuine and should actually be constituted as specified in the instrument. '

18. It is clear that for registration the partnership should be valid and genuine and should also be constituted as mentioned in the Partnership Act. The precise question is whether there was no valid firm in existence in 1967-68. Under Section 2(23) of the Act, the expressions 'Firm', 'Partner' and 'Partnership' have the meanings respectively assigned to them in the Indian Partnership Act, 1932, but the expression ' Partner ' shall also include any person who, being a minor, has been admitted to the benefits of partnership. Section 4 of the Partnership Act defines ' Partnership ' and the persons who have entered into partnership with one another are called individually 'Partners' and collectively 'a Firm'. It is, therefore, clear that a partnership is the result of a contract between the partners. Section 11 of the Contract Act provides that every person is competent to contract who is of the age of majority according to the law to which he is subject and who is of sound mind and is not disqualified from contracting by any law to which he is subject. It is correct that Lalu Khan being a minor could be admitted to the benefits of the partnership but in view of Rule 63(4) of the Excise Rules, the firm of which Lalu Khan was represented as a major, he being a minor, could not bid at the auctions. It is well settled that contracts violating the provisions of the Excise Act or the Rules made thereunder are illegal within Section 23 of the Contract Act. There are a catena of cases of the various High Courts on the point. The Income-tax Officer was right when he held that the firm formed by the persons to secure liquor licence was invalid as the firm was not entitled to obtain liquor licence as Lalu Khan was a minor at the relevant time. In these circumstances, the firm formed for obtaining the liquor licences for 1967-68 cannot be said to be a valid firm within the meaning of Section 186(1) of the Act and the Tribunal was justified in holding that on account of violation of Rule 63(4) of the Excise Rules, a valid firm has not come into existence in view of Section 23 of the Contract Act.

Re. Question No. 2 :

19. As question No. 1 has been answered in the affirmative, for the very same reasons, it follows that the Tribunal was justified in coming to the conclusion that the benefit of continuation of registration granted to the assessee-firm earlier by the Income-tax Officer could be cancelled by him under Section 186 of the Act in respect of the assessment year 1967-68.

Re. Question No. 3 :

20. Similar is the position in respect of the assessment year 1968-69. For the reasons mentioned while answering question No. 1, we are of opinion that the Tribunal was justified in holding that the benefit of continuation of registration could not be allowed in respect of the assessment year 1968-69.

Re. Question No, 4 :

21. It is clear from the information supplied by the assessee-firm that Lalu Khan was a minor and has not attained majority at the time of obtaining the licence. The Tribunal was justified in holding that the excise licence obtained in respect of the financial year 1968-69 corresponding to the assessment year 1969-70 was obtained by a fraudulent representation by the two major partners and the minor partner of the firm and that any agreement entered into with a view to share the gains of such a contract would be void even though the minor had become major during the course of the year and a new partnership deed has been executed on October 29, 1968, on the minor attaining the majority. It is well settled that a contract by a minor is void and has no existence in the eye of law. It is a nullity. The contract from its very inception was void and so could not become a valid contract even after Lalu Khan had become major during the course of the year.

Re. Question No. 5 :

22. When question No. 4 has been answered in the affirmative, the necessary consequence is that the Tribunal was justified in holding that the benefit of registration could not be made available to the assessee-firm in respect of the assessment year 1969-70.

23. Thus, questions Nos. 1 to 5 referred to us by the Tribunal should be answered in the affirmative, i.e., in favour of the Department and against the assessee-firm.

24. We answer accordingly.

25. In the circumstances of the case, the parties are left to bear their own costs of this reference. Let a copy of the judgment be sent to the Tribunal in accordance with Section 260 of the Act.


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