TMI Blog2010 (9) TMI 766X X X X Extracts X X X X X X X X Extracts X X X X ..... RAMESH RANGANATHAN, JJ. JUDGMENT Ramesh Ranganathan J. These Income-tax Tribunal Appeals are preferred by the Revenue against the orders of the Income-tax Appellate Tribunal whereby the respondent-assessees were held entitled to be assessed as partnership firms, and for consequential benefits of payment of salaries, interest on the capital of partners, etc. 2. It would suffice for the disposal of these appeals if the facts in I. T. T. A. No. 323 of 2006 are noted. I. T. T. A. No. 323 of 2006 is filed against the order of the Income-tax Appellate Tribunal, Visakhapatnam in I. T. A. No. 455/Viz/2004. For the assessment year 1999-2000 the assessee-firm was carrying on business in trading of Indian made foreign liquor having obtained a licence from the Andhra Pradesh Excise Department in the name of one of the partners, in his individual status. A return was filed on December 31, 1999, in the status of a partnership firm, admitting to an income of Rs. 10,130. An order of assessment, under section 143(1) of the Income-tax Act, was passed on January 19, 2000. Thereafter the Income-tax Officer, relying on rule 39 of the A. P. Indian and Foreign Liquor Rules, 1970 and fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Finance Act 18 of 1992 ; the statutory provisions and the circular of the Central Board of Direct Taxes (Circular No. 636 dated August 31, 1992) made it clear that, prior to the amendment, section 185 empowered the Assessing Officer to enquire into the genuineness of the firm and its constitution ; consequent to the amendment, the distinction between a registered firm and an unregistered firm had been removed, and a firm would be assessed as a firm if it was evidenced by an instrument of partnership, wherein the individual shares of partners was specified, and the said instrument was enclosed to the return filed by the firm ; there was no enabling provision empowering the assessing authority to examine the genuineness of the partnership and its constitution ; it was not the case of the Department that the assessee had not filed the instrument of partnership specifying the individual share of the partners ; reliance placed on the judgments of the Supreme Court, wherein the provisions of the unamended sections 184 and 185 were considered, was misplaced ; reopening of the assessment was, therefore, erroneous ; and the assessees were entitled to be assessed as firms, and for the be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome-tax Act, a partnership firm did not require registration under the Income-tax Act ; on a true construction of section 184, if a partnership firm was evidenced by an instrument, it was required to be assessed as such ; in some of these appeals a partnership deed had been executed and the partnership firm constituted even prior to a license being obtained under the A. P. I. M. F. L. Rules ; the partnership deed authorized any one of the partners to obtain such a licence to be used by the firm for carrying on business of trading in Indian made foreign liquor ; after the licence was obtained there was no sub-letting, leasing or transfer of the licence by the firm ; the assessee had not violated the provisions of the A. P. Excise Act, the Rules made thereunder or section 23 of the Indian Contract Act ; rule 39 of A.P. I.M.F.L. Rules is not applicable as there was no similar condition in their licence ; the partnership firm is a partnership at will and is valid even without registration ; the Revenue was not empowered to look into the validity of the partnership firm in the light of the amended sections 184 and 185, more so when the partnership firm was constituted even prior to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ining a licence, and without complying with the conditions of such licence. In exercise of its powers under section 72 read with sections 9, 11 to 15 and 28 of the A. P. Act, the Government of Andhra Pradesh made the Andhra Pradesh Indian Liquor and Foreign Liquor Rules, 1970 (IMFL Rules), which apply for import, export, transport and sale of Indian liquor and foreign liquor (IMFL). Rule 23 of the IMFL Rules enumerates different categories of licences. The licence in Form IL 24 is issued for retail liquor shops. Rules 23(iii) and (xiii) of the IMFL Rules require the holder of such a licence to be permitted to sell IMFL in sealed or capsuled bottles not exceeding the specified quantity of liquor. The licence in Form IL 24 contains eleven special conditions in addition to the general conditions applicable to all IMFL and beer licences subject to which a licensee can carry on retail business. Condition No. 8 thereof is to the effect that a licence is not transferable. Rule 39 of the IMFL Rules requires a licensee not to declare any person to be or not to be his partner. 9. It is evident from section 15 of the A. P. Act that except under the authority, and in accordance with the te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The basic principle, as it seems to us, is that the liquor business is res extra commercium. No one may deal in liquor without express permission. It is only the licensee who is granted such permission. If he enters into a partnership to deal in liquor, all the other partners would, as partners, also be dealing, in liquor and holding the same. This would be contrary to the basic principle and illegal. (emphasis supplied) 12. In Bihari Lal Jaiswal [1996] 217 ITR 746 (SC) a licence for retail sale of country spirit, under supply system in Form CS No. 3 of the Madhya Pradesh Excise Rules, 1960, was obtained by Biharilal Jaiswal in respect of twenty-two shops in a public auction. He entered into a partnership with ten others to carry on business under the said licence. The partnership was evidenced by a partnership deed. It is in this factual matrix that the Supreme Court held (page 757) : In our opinion, the correct position appears to be this (we are confining ourselves to partnerships entered into with respect to a licence/permit granted under the State Excise enactments) : these enactments deal with intoxicating liquor, that is to say, the production, manufacture, pos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it would defeat the provisions of the excise law within the meaning of section 23 of the Contract Act. Such an agreement is declared by section 23 to be unlawful andvoid.. . When the law prohibits the entering into a particular partnership agreement, there can be in law no partnership agreement ofthat nature. The question of such an agreement being genuine cannot, therefore, arise. Where, of course, the statutory provisions or the conditions of licence do not prohibit the entering into of partnership, it is obvious, such a partnership cannot be held to be illegal, unlawful or void, as held by this court in Jer and Co. s case [1971] 79 ITR 546. But where there is a specific prohibition as in the case before us, any partnership entered into would be unlawful and void agreement within the meaning of section 23 and no other law, whether State or Central, can recognise such an agreement . . . The context that it is an excise enactment should not be forgotten. The grant of registration under the Income-tax Act, it must be remembered, confers a substantial benefit upon the partnership firm and its members. There is no reason why such a benefit should be extended to persons who have entere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 29, 1981 about the induction of three members as partners, mere intimation is not sufficient and approval of the licensing authority has to be obtained. As the licensing authority, admittedly, has not accorded its approval for the induction of three more partners to the existing four member partnership firm, we are inclined to hold that the seven member partnership firm which was constituted in contravention of rule 39 of the Rules, is an agreement prohibited by law and has no legal sanctity and it cannot be registered under the Income-tax Act. (emphasis supplied) 14. Reliance is, however, placed by the counsel for the respondents on the judgment of the Supreme Court in Grand Enterprises v. CIT (judgment in Civil Appeal Nos. 1317-1319 of 2001 dated 4-12-2002). In Grand Enterprises, the Supreme Court observed : . . . The condition of the licence which the High Court found had been violated in the appellant s case is condition 13 which reads : 13. Licensee shall not lease out, sell or otherwise transfer his licence without the written consent of the Excise Commissioner. The settled law is that no registration can be granted to a firm under section 184(1) of the Incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amendment After amendment by Notifications vide G.O. Ms. No. 1106, dated 16-12-2002, and G. O. Ms. No. 632, dated 26-5-2003. 39. Licensee not to declare any person to be or not to be his partner. No licensee shall, except with the prior permission of the licensing authority get any other person included as partner to his business, or get an existing partner excluded : Provided that where there was dissolution of partnership, it shall be notified to the Commissioner. 39. Licensee not to declare any person to be or not to be his partner. No licensee shall except withthe prior permission of the Commissioner of Prohibition and Excise include any other person as partner in the licence or get any existing partner excluded from the business. (1) The Commissioner of Prohibition and Excise may allow such inclusion or exclusion of a person as partner on payment of Rs. 10,000 (rupees ten thousand only) in all such cases, which are not covered by the provisions under rule 38(5) of these rules, and on payment of Rs. 10,000 for each case of inclusion or exclusion of the partner subject to production of certificate to the effect that no cases involving contravention of the Excise Act and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (i) the partnership is evidenced by an instrument ; and (ii) the individuals shares of the partners are specified in that instrument. (2) A certified copy of the instrument of partnership referred to in sub-section (1) shall accompany the return of income of the firm of the previous year relevant to the assessment year commencing on or after the 1st day of April, 1993, in respect of which assessment as a firm is first sought. Explanation. For the purposes of this sub-section, the copy of the instrument of partnership shall be certified in writing by all the partners (not being minors) or, where the return is made after the dissolution of the firm, by all persons (not being minors) who were partners in the firm immediately before its dissolution and by the legal representative of any such partner who is deceased. (3) Where a firm is assessed as such for any assessment year, it shall be assessed in the same capacity for every subsequent year if there is no change in the constitution of the firm or the shares of the partners as evidenced by the instrument of partnership on the basis of which the assessment as a firm was first sought. (4) Where any such change had take ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 19. To understand the purpose for which sections 184 and 185 of the Income-tax Act were amended by the Finance Act 18 of 1992 it is useful to refer to the Central Board of Direct Taxes Circular No. 636 dated August 31, 1992. The said circular records that, before the changes made by the Finance Act, 1992, the system of levy of tax on firms involved double taxation ; the firm as such was taxed in respect of its total income at rates varying from 5 per cent. to 18 per cent. ; after deducting the tax payable by the firm, the balance income was distributed amongst the partners and they were again taxed at the appropriate rates ; the tax liability of the firm and its partners depended on the question whether the firm was granted registration under the Income-tax Act or not ; in the case of a registered firm, the firm paid tax on its total income according to the rates prescribed in the Schedule for registered firms ; an unregistered firm was taxed at the rates applicable to individuals, with the share income included in the hands of the partners for rate purposes only ; as there was a consistent demand for removal of the double taxation, a new scheme of assessment of firms was being in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... forth, tax the partnership firms as aseparate entity. The power of the assessing authority to ascertain whether or not the partnership firm has been constituted in accordance with law, has not been taken away, and the power which enured in the assessing authority before amendment remains unchanged even after the amendment of sections 184 and 185 of the Income-tax Act, 1961 by the Finance Act 18 of 1992. The Tribunal erred in holding that after the amendment,the assessing authority no longer had the power to enquire into the constitution of the partnership firm. 21. As noted hereinabove, section 15 of the A. P. Excise Act prohibits any person from selling or purchasing intoxicating liquor except in accordance with the terms and conditions of a licence granted in their favour. Admittedly, a licence was granted only in favour of an individual and it is only he who is entitled to carry on business in the purchase and sale of intoxicating liquor and, as provided for in rule 39, no partnership firm can carry on such business save with the prior permission of the Commissioner of Prohibition and Excise. It matters little that the partnership firm was constituted prior to a licence bein ..... X X X X Extracts X X X X X X X X Extracts X X X X
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