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TMI Blog1965 (4) TMI 129X X X X Extracts X X X X X X X X Extracts X X X X ..... ecuted between the two brothers on 1st August 1954. Under the agreement the two brothers shared equally the profits and losses of the partnership business which according to the deed consisted mainly of Bus plying and Cinema exhibition. The partnership business commenced from 1st August 1954. Clause 3 of the agreement between the two brothers stated: . . Prior to the formation of firm Motor Bus and Truck plying business at Barwani was being carried on by Shri Dayabhai as a proprietary concern. But due to lack of proper administration, the business was running in losses and to improve efficiency in management he admitted Shri Chhotabhai Poonambhai as a partner and agreed to carry on the business of bus plying and Cinemas in partnership and accordingly, this partnership firm has been constituted. According to the deed the capital contributed by the partners was to be credited to their respective accounts. It said nothing about the transfer to the partnership firm of any permits held by Dayabhai or of any assets including buses and trucks belonging to him. In the statement of the case sent up by the Tribunal it has been said that on the formation of the firm on 1st Augus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all these contentions relying on AIR1957Mad620 and an earlier decision of its own. It took the view that there was necessarily a transfer of vehicles and permits in contravention of the provisions of the Motor Vehicles Act referred to above when the firm carried on the transfer business on permits issued to Dayabhai. and consequently the partnership was illegal. In the view it took of the matter the Tribunal did not consider the effect of the terms of the partnership deed dated 1st August 1954, or determine the question whether Dayabhai's brother Chhotabhai took any part in the conduct of the business; and if so, what; or give any finding on the material before it whether there was in fact any transfer of vehicles and permits by Dayabhai to the firm in contravention of Sections 31 and 59 of the Motor Vehicles Act, 1939. It has been stated by the Tribunal in the statement of the case that in the appeal filed by the assessee no ground was raised in regard to cinema business. a. Before us also, the arguments advanced on behalf of the assessee were confined to the validity of partnership in relation to transport business. It was urged by Shri Chitale, learned counsel appearing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the line of reasoning adopted by the learned Judges of the Madras High Court in AIR 1957 Mad 620 : ILR (1950) Mad 987 : AIR 1950 Mad 444 and Varadarajulu v. Thavasi Nadar AIR 1903 Mad. 413 in support of their conclusion that an agreement of partnership, which entails a transfer of a permit granted by the Government when there is an express provision prohibiting such a transfer, is illegal and void ab initio; and. therefore, a partnership in respect of transport business involving a transfer of permit is illegal and void and in contravention of Section 59(1) of the Motor Vehicles Act, 1939. Learned Advocate General said that here the partnership firm was formed for taking over Dayabhai's business in contravention of the Motor Vehicles Act. that the firm was bound to take out a permit under the Motor Vehicles Act for doing the transport business and in the absence of any such permit having been granted to the firm it must be held that the object of the partnership was unlawful: and that in any case even if it was not unlawful from the beginning, the partnership became unlawful when it operated stage carriages and buses on the basis of permits issued to Dayabhai. The precise i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the permission of the transport authority which granted the permit. Without such permission the person to whom a vehicle covered by a permit is transferred does not get the. right to use that vehicle in the manner authorized by the permit. It is clear enough from these provision's that they do not make a partnership formed with the object of carrying on the transport business illegal. The question is whether when such a partnership business is carried on by a partner on the strength of permits obtained by him and with vehicles belonging to him or the firm there is necessarily a violation of the above provisions In connection with this question it is very important to note the rule of the law of partnership that it is not necessary that partnership business must be, carried on only with the properly of the firm. Persons may be partners in a business and vet the properly by means of which the business is carried on may not be the property of the firm, but mar be the separate property of one or more of the partners (See Fromont v. Coupland (1824) 2 Bin 170: 130 ER 271; Pocock v. Carter. 1912 1 Ch. 663 and Miles v. Clarke, 1953 1 All ER 779. Another principle which must be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss is carried on by a partner on the strength of permits obtained and held by him and with vehicles belonging to him or to the partnership firm. Such a partnership agreement cannot also he held to be void as against public policy. It does not fall under the well-settled classes of contracts which have been ruled by authority as contrary to public policy and it cannot be declared to he a contract opposed to public policy by inventing a new head of public policy. The view, which we have expressed above, of the matter is supported by many cases. The first is the decision of the Supreme Court in [1959]37ITR271(SC) . There a partnership was entered into between a person and his two nephews in respect of three liquor shops which were held in different names of the partners. The claim for registration was rejected by the Income Tax Officer and the Appellate Assistant Commissioner of Income lax. While upholding the decision of the Appellate Assistant Commissioner and the Income tax Officer the Tribunal observed: A partnership is an artificial legal entity 14 the partnership among the three partners is one which could not be disclosed to the very authorities under whom licences a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held by a partner. This is clear from the Supreme Court's observations in Shaw's case 1950 37 ITR 271 that there was no evidence that the excise licence had been transferred and that there was nothing which militated against the partnership. This decision of the Supreme Court is, in our judgment determinative of the reference before us. The other case in AIR 1917 Bom 250, where a licensee under Section 11 of the Bombay Salt Act, 1890, admitted some members of his family and others as partners in the business to share profits. The partners did not take any part in the manufacture of salt. It was held by the Bombay High Court that the arrangement did net infringe the terms of the licence or Section 11 of the Bombay Salt Act which only prohibited the licensee from sub-letting the whole or part of the privilege and that the admission of partners to share the profits could not be considered as sub-letting or alienation of a part of the privilege unless there was an agreement directly transferring to the partners or attempting to transfer to the partners a part of the right to manufacture or vend. This decision of the Bombay High Court was upheld by the Privy Council in AIR 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 26A of the Income Tax Act was rejected by the Income Tax Officer on the ground that the partnership was carrying on business in mica without itself holding a dealer's licence in the name of the partnership, and, therefore, the provisions of the Bihar Mica Act were contravened and the partnership was unlawful. The Appellate Tribunal held that the partnership was not unlawful and allowed the application for registration. The Patna High Court upheld the decision of the Appellate Tribunal holding that the Bihar Act did not require a partnership as such to take out a dealer's licence before carrying on the business of dealing in mica; and that there was no provision in the Bihar Act prohibiting a partnership from carrying on the business so long as the partner who actually dealt in mica had a dealer's licence. All these cases fully support the view that where the relevant statute does not prohibit a licensee or a permit-holder from taking a partner hut simply prohibits a transfer or a sub-lease of the licence or the permit, then the licensee or the permit-holder by merely admitting a partner or partners in the business to which the licence or the permit relates d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ases it has been held that there is a violation of the provision against transfer because if the licensed partner carries on the partnership business, then the unlicensed partner by himself or through his agent, the other partner, carries on the business in direct violation of the prohibition. As to this it is sufficient to say that when, as we have endeavoured to point out earlier, a partnership business can be carried on by a partner with property belonging to the firm or to himself or to the other partner on the strength of a permit or licence held by him and the relevant statute does not require a partnership as such to take out a licence for carrying on the business, then there is no question of the unlicensed partner by himself or through his agent, the other partner, carrying on the partnership business without a licence It may be mentioned that in A. D. Thiagaraja Pillai v. Commissioner of Income Tax [1965]55ITR419(Mad) a Division Bench of the Madras High Court did not take the decision in ILR (1950) Mad 987 : AIR 1950 Mad 444 as laying down that where a business can be carried only under a licence and the licence cannot be transferred except with permission of the compe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me of the firm itself, its business would be perfectly valid. Even if the licence is not found to be so taken but issued in the name of only one of the partners, the partnership would still be legal if there had been a full disclosure to the Government at the relevant time that the licence was to be used by the firm itself. Thus, the question whether a licence was or was not transferred without the permission of the competent authority was treated by the Madras High Court in Thiagaraja Pillai's case [1965]55ITR419(Mad) as one depending upon the facts of each case and not one concluded by the fact that the person holding a licence has admitted some persons as partners in the business carried on with the licence. Here, the partnership deed nowhere said anything about the transfer of permits held by Dayabhai or of the vehicles owned by him to the partnership firm. It did not provide that Dayabhai's permits would stand transferred to the firm and would become a privilege of the firm. The Tribunal found that in the balance-sheets as on 31st March 1955 and 31st March 1956 the vehicles owned by Dayabhai before the formation of the partnership were shown as assets of the fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not hold any permit. To assume that Chhotabhai carried on the business is really, in the present case, to presume the illegality of the partnership. In fact, no such assumption can be made when Clause 3 of the partnership deed clearly stated that Dayabhai had agreed to lake Chhotahhai as a partner and agreed to carry on the business of bus plying and Cinemas in partnership The underlined there into ' ') words agreed to carry on only show that according to the deed the business was to he carried on by Dayabhai and that Chhotabhai was not to participate in the working of the permit by taking actual part in the business. The present case is, therefore. fully governed by the decision of the Bombay High Court in AIR 1917 Bom 250 affirmed by the Privy Council in AIR 1921 PC 137 and the decision in ILR (1956) Nag 774 : AIR 1956 Nag 225. For the foregoing reasons, our conclusion is that the assessee-firm wax not illegal and was entitled to registration under Section 20A of the Indian Income tax Act. 1922. for the assessment year 1950 57. The question propounded by the Tribunal is. therefore, answered in the affirmative. In the circumstances of the case, there will be no ..... X X X X Extracts X X X X X X X X Extracts X X X X
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