TMI Blog1998 (7) TMI 81X X X X Extracts X X X X X X X X Extracts X X X X ..... e Andhra Pradesh Excise (Arrack and Toddy Licences General Conditions) Rules, 1969, was applicable?" The facts in brief are as under : Originally, Sri M. B. R. Prasada Reddy was carrying on business in liquors, wine and beer after obtaining FL-16 licence from the State excise authorities. The licence was, however, exploited by a firm of four partners formed under the deed dated October 5, 1978, with effect from May 17, 1978. Sri M. B. R. Prasada Reddy was the managing partner of the said firm. He applied to the licensing authorities for inclusion of three partners under the deed dated October 5, 1978, in the licence granted according permission to sell liquors, wines and beer on wholesale as well as on retail basis at Vijayawada. The names of the other three partners, i.e., M. Madan Mohan Reddy, M. Appi Reddy and T. Padmavathi, were included in the licence granted by the excise authorities by their order dated December 3, 1979, in the proceedings of the Superintendent of Excise, Krishna District, in D. Dis. No. 3116 of 1979. Subsequently, three more persons were added, viz., Smt. T. Nagubhai, Smt. T. Ramanamma and Smt. P. Varahalamma, as partners making the total number of pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income-tax, Visakhapatnam, issued notices to the assessee-firm before passing his revisionary orders. On behalf of the assessee, written arguments were submitted. It was contended before the Commissioner of Income-tax that the induction of three more partners to the existing firm of four partners (total number of partners to seven) was duly intimated to the concerned authorities on August 29, 1981. Though such intimation was sent, neither the licensing authority cancelled the licence nor the assessee-firm was penalised for any contravention of any provision of law, for not obtaining prior permission for inclusion of more partners and, therefore, the partnership deed dated April 2, 1980, is not void ab initio. It is also urged before the Commissioner of Income-tax on behalf of the assessee that the excise authorities have renewed the licence for the year 1982-83 even after induction of three new partners without any objection and it was contended that there was no illegality in the constitution of the partnership firm. On behalf of the assessee, several decisions were cited before the Commissioner of Income-tax, including the decision in CIT v. Nalli Venkataramana [1984] 145 ITR 75 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No. 123/Hyd of 1985. However, the Tribunal rejected R. A. No. 123/Hyd of 1985 by its order dated November 26, 1985. Thereupon, the Revenue preferred I. T. C. No. 36 of 1986 before this court. This court, by an order dated November 26, 1986, disposed of the said I. T. C. No. 36 of 1986 and directed the Tribunal to state the case and refer the abovestated questions of law formulated by the Revenue for the opinion of this court under section 256(2) of the Income-tax Act and thus the present reference has fallen for consideration before us. Though the Revenue has formulated the abovementioned three questions separately, but they centre around rule 39 of the Andhra Pradesh (Foreign Liquor and Indian Liquor) Rules, 1970, and the decision cited in CIT v. Nalli Venkataramana [1984] 145 ITR 759 (AP), and as such they are being answered jointly. We have heard Sri J. V. Prasad, learned standing counsel for the Income-tax Department, and Sri Chalapathi, learned counsel for the assessee. Rule 39 of the Andhra Pradesh (Foreign Liquor and Indian Liquor) Rules, 1970, provides that no licensee shall, except with the prior permission of the licensing authority get any other person included as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act without regard to rule 39 of the rules. The Division Bench of this court in the decision in CIT v. Nalli Venkataramana [1984] 145 ITR 759, was of the view that even if a partner is inducted or excluded by a partnership firm without the permission of the licensing authority (sic., prior permission), the partnership firm will still be legal and could be registered. The Supreme Court in a decision reported in Bihari Lal Jaiswal v. CIT [1996] 217 ITR 746, has considered similar provisions arising out of the Madhya Pradesh Excise Rules. While examining the relevant provisions, the Supreme Court has held thus : "Since the licence is granted for dealing in intoxicating liquors, the business wherein is res extra commercium---and also because they are supposed to be harmful and injurious to the health and morals of the members of the society---close control is envisaged and provided over the business carried on under the licence. This object will be defeated if the licensee is permitted to bring in strangers into the business, which would mean that instead of the licensee carrying on the business, it would be carried on by the others---a situation not conducive to effective imple ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... authority is required for inclusion of a person as a partner. Though it is contended on behalf of the assessee-firm that the licensing authority has been intimated on August 28, 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. Therefore, we hold that the decision of this court in CIT v. Nalli Venkataramana [1984] 145 ITR 759, no longer holds the field and the order of the Tribunal in ITA No. 716/Hyd of 1984 dated March 13, 1985, basing on the said decision of this court ([1984] 145 ITR 759), cannot be sustained. Having regard to the above discussion, we answer the questions of law formulated by the Revenue as under : (a) The Appellate Tribunal is not justified in holding that the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X
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