2010 (11) TMI 763 - HC - Income Tax

Assessment u/s 184 - whether the assessees which are partnership firms running bar hotels with a single bar licence obtained from the Excise Department in the name of only one of the partners, are entitled to registration as a firm or could be regarded as genuine firm under section 185 for the purpose of assessment in the status of registered firm/firm - Held that - The assessee-firms are carrying on business strictly in accordance with rule 13 of the Foreign Liquor Rules and Condition 13 of the FL-3 licence inasmuch as the constitution of the firm for carrying on business in liquor with the licence held by one of the partners is a permissible activity and the firms so constituted are genuine firms which are entitled to be assessed in the status of firms and for periods when registration is required under section 185, the firms are entitled to be assessed as registered firms subject to their satisfying other conditions - dismiss all the appeals filed by the Revenue.

Issues:
1. Entitlement to registration as a firm for partnership firms running bar hotels with a single bar license.
2. Interpretation of Supreme Court judgments regarding liquor business carried out by firms with a single license holder.
3. Compliance with provisions of the Abkari Act and Rules in the context of partnership firms in the liquor business.

Issue 1: Entitlement to Registration as a Firm
The primary issue in the judgment was whether partnership firms operating bar hotels with a single bar license holder were entitled to registration as a firm under section 185 of the Income-tax Act, 1961. The Revenue contended that such firms should not be considered genuine firms for assessment purposes. The court heard arguments from both sides, with the Revenue relying on a previous Supreme Court decision and the assessees' counsel citing a later Supreme Court judgment.

Issue 2: Interpretation of Supreme Court Judgments
The court analyzed two Supreme Court judgments, one by a three-member Bench and the other by a two-member Bench, regarding the legality of liquor business conducted by firms with a single license holder. The Revenue argued that the earlier judgment should prevail, considering such businesses as illegal. However, the court emphasized that the later judgment referred to specific provisions of the Kerala Abkari Act and Rules, leading to the conclusion that the assessee-firms were entitled to registration and considered genuine firms.

Issue 3: Compliance with Abkari Act and Rules
The judgment delved into Rule 19 of the Foreign Liquor Rules and Condition No. 13 of the FL-3 license, focusing on whether the partnership firms were violating these conditions by operating with a single license holder. The Department contended that this constituted a transfer or sub-renting of the license, which was objectionable. However, the assessees argued that they had obtained prior sanction from the Excise Department for their business operations and any changes in firm constitution were approved by the Excise Commissioner. The court noted that the Excise Department closely monitored liquor business operations, including approving constitution changes in firms operating with a single license holder.

In conclusion, the court dismissed all appeals filed by the Revenue, affirming that the partnership firms were conducting their liquor business in compliance with the Abkari Act and Rules, with the knowledge and approval of the Excise Commissioner. As such, the firms were deemed genuine and entitled to registration and assessment as firms under the Income-tax Act.

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