2010 (11) TMI 563 - HC - Income Tax

Transfer of the licence - It is a case where a partnership firm was carrying on liquor business - On account of the death of one of the partners, the partnership firm came to an end and it was reconstituted - Without a licence, they could not have continued to carry on the liquor business in partnership - Therefore, they agreed to apply for a licence either in the name of the firm or in the name of a partner making it clear that even if the licence is obtained in the name of the partner, the licence belongs to the partnership firm - Held that - it is clear that there is no intention on behalf of these partners to contravene the law - It is not camouflaged to contravene the law - It is a case of genuine partnership carrying on business in liquor after obtaining licence in the name of one of the partners, treating the said licence as partnership asset - No transfer is involved - Decided in favour of assessee.

Issues Involved:
1. Legality of using a liquor licence issued to an individual by a partnership firm.
2. Applicability of Section 23 of the Indian Contract Act to the use of such a licence.
3. Distinguishing the judgment of the Supreme Court in Commissioner of Income-tax vs. Rangeelaram & Others.
4. Validity of the partnership firm under the Karnataka Excise Act.
5. Transferability of a liquor licence as an asset of the firm under Section 2(2) of the Partnership Act.

Detailed Analysis:

1. Legality of using a liquor licence issued to an individual by a partnership firm:
The primary issue was whether a partnership firm could use a liquor licence issued to one of its partners. The Tribunal held that the firm complied with Section 194 and was entitled to deductions under the Income-tax Act, 1961. The revenue challenged this, arguing that the firm could not use a licence not legally transferred to it.

2. Applicability of Section 23 of the Indian Contract Act to the use of such a licence:
The revenue contended that the partnership firm's use of the licence was prohibited under Section 23 of the Contract Act, as it was against public policy and statutory provisions. The firm argued that the licence was obtained in the partner's name but was treated as a partnership asset, with no transfer involved.

3. Distinguishing the judgment of the Supreme Court in Commissioner of Income-tax vs. Rangeelaram & Others:
The revenue cited the Supreme Court's decision in Commissioner of Income-tax vs. Rangeelaram & Others, which held that a liquor licence could not be transferred to a partnership firm. However, the Tribunal distinguished this case, noting that the licence was treated as a partnership asset from the beginning and not transferred later.

4. Validity of the partnership firm under the Karnataka Excise Act:
The Tribunal found that the partnership firm was valid and had not violated the Karnataka Excise Act. The firm was carrying on its business with a licence obtained in the name of one of the partners, which was treated as a partnership asset.

5. Transferability of a liquor licence as an asset of the firm under Section 2(2) of the Partnership Act:
The Tribunal held that a licence obtained in a partner's name could be treated as a partnership asset if expressly stated in the partnership deed. The firm paid the licence fee, and the licence was not transferred but obtained for the partnership business.

Conclusion:
The Karnataka High Court upheld the Tribunal's decision, stating that the partnership firm did not violate any legal provisions. The licence was treated as a partnership asset from the beginning, and no transfer was involved. The court distinguished the cited Supreme Court judgments, noting that the facts of this case did not involve any prohibited transfer or violation of public policy. The appeal was dismissed, and all substantial questions of law were answered in favor of the assessee.

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