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TMI Blog1997 (9) TMI 54X X X X Extracts X X X X X X X X Extracts X X X X ..... he Act, holding that the order of the Income-tax Officer was erroneous and prejudicial to the interests of the Revenue. The Commissioner noticed that licences to sell liquor had been actually granted by the Punjab Government in the names of three persons, Jagdish Chand Walia, Amarjit Walia and Harish Chand Walia. The firm was, however, constituted by four partners. The name of the fourth person, Sudhir Walia, was not entered in the licence. Therefore, the firm was held to be not legally constituted and not entitled to registration under the Act. The Commissioner took the view that the licences to sell liquor could not be exploited by four persons, if those were granted in favour of three persons only. The Commissioner held that any contravention of the Punjab Excise Act and the Rules framed thereunder would render the firm illegal. Non-approval of the change in the constitution of the firm by the excise authority would amount to a violation of the excise law. Since L-2 licences had been obtained individually by three persons on March 18, 1976, the subsequent addition of the fourth person to the business was said to be not permissible without sanction from the concerned excise autho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s being carried on by any party on behalf of all the parties to the agreement, with a view to sharing its profits, the provisions of section 4 of the Indian Partnership Act, 1932, will apply. Section 12 of the said Act specifies the provisions in respect of the conduct of the business of the partnership. It reads as under : "12. The conduct of the business.---Subject to contract between the partners,--- (a) every partner has a right to take part in the conduct of the business; (b) every partner is bound to attend diligently to his duties in the conduct of the business; (c) any difference arising as to ordinary matters connected with the business may be decided by a majority of the partners, and every partner shall have the right to express his opinion before the matter is decided, but no change may be made in the nature of the business without the consent of all the partners; and (d) every partner has a right to have access to and to inspect and copy any of the books of the firm." It is manifest from the clauses of section 12 that, subject to the contract, every partner has a right to take part in the conduct of the business and every partner has also an obligation to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ector in that behalf. (4) Prohibition and restriction of possession of intoxicants in certain cases.---Notwithstanding anything contained in the foregoing sub-sections, the State Government may by notification prohibit the possession of any intoxicant, or restrict such possession by such conditions as it may prescribe." It would be, thus, apparent that a person may possess any quantity of any intoxicant under the authority and in accordance with the terms and conditions of a licence. If a person is not a licensee, he cannot possess liquor. Section 26 relates to the sale of intoxicants and it reads as under : "26. Sale of intoxicants.---No liquor shall be bottled for sale and no intoxicant shall be sold except under the authority and subject to the terms and conditions of a licence granted in that behalf, provided that :--- (1) a person licensed under section 20 to cultivate the hemp plant may sell without a licence those portions of the plant from which any intoxicating drug can be manufactured to any person licensed under this Act to deal in the same or to any officer whom the Financial Commissioner may appoint in this behalf; (2) a person having the right to the 'tari ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sales Orders. If the name of the proposed partner is added under the orders of the competent authority or the Collector, such a partner shall be responsible for all the obligations arising from the licence. Shri Sanjay Bansal, counsel for the Department, has argued that rule 7 specifically requires that any new partner may be added only on an application in writing filed before the authority competent to grant or to renew the licence. Shri Bansal has further argued that rule 7 would equally apply to an individual holding a licence if such an individual intended to constitute a partnership firm and wanted certain more persons to run the business as partners. Though rule 7 apparently appears to be referring to the original partners only for the purpose of addition of a new partner to the firm, the intention and object of rule 7 must be kept in view and the rule must be invoked in all cases where a new partner is intended to be added either by individual licensee or by the existing partners holding a licence or licences. Shri Ajay Mittal, counsel for the assessee, has, on the other hand, controverted the plea of the Department with the contention that rule 7 of the Punjab Liquor L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to a change in the constitution of the firm either as a proprietorship business or as a partnership firm. Shri Mittal has further argued that there is no provision specifying any penalty for the breach of rule 7. On a careful examination of rule 7 of the Punjab Liquor Licence Rules, 1956, it would appear that it does require a person holding a liquor licence to make an application in writing to the competent authority seeking permission to add a new partner to his business. It would not be correct to accept the view that rule 7 did not specifically and explicitly lay down a requirement of law. The rule, in specific terms, enjoins upon the original licensee to file an application, seeking permission from the competent authority, to add a partner to his business. It may also be noticed that section 61 of the Punjab Excise Act, 1914, specifies the penalty for unlawful import, export, transport, manufacture or possession of any intoxicant. A person who collects or possesses any intoxicant in contravention of any section of the Punjab Excise Act or of any rule, notification, order, licence, permit or pass granted under the said Act shall be punishable with imprisonment for a term whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... show that, under the partnership agreement, the new partner was debarred from taking part in the conduct of the business and he was introduced to bring finance only. During the course of hearing, S/Shri J. K. Sibal and Mohan Jain, Advocates, who are counsel for other assessees in similar other matters, also advanced arguments. Shri Sibal's main plea was that sections 24 and 26 of the Punjab Excise Act prohibited a person from possessing or selling any intoxicant without a licence. A person who is made a partner in a firm engaged in the business of liquor cannot be said to possess or sell liquor unless there was some material on record to show the same. Shri Sibal has argued that a presumption cannot be raised against a non-licensee partner that he engaged himself actively in the conduct of the business. A partner may be a financing partner or a sleeping partner in a firm and such a partner is not required to participate in the business. The next argument of Shri Sibal is that the specific provision in the State enactment shall govern the rights of the assessee to constitute a firm with strangers. If there was no specific bar in the excise law of a State against the running of bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It may be noticed that sub-rule (26) of rule 37 prohibits a licensee from allowing any person to conduct sales in his behalf unless the name of such person has been previously submitted to the Collector for approval and endorsed by him on the licence. Thus, rule 7 and rule 37(26) governed the conduct of business by a licensee and a non-licensee partner cannot be permitted to conduct business on behalf of the firm. The question about the business in excisable goods was examined by the Patna High Court in Md. Warasat Hussain v. CIT [1971] 82 ITR 718. Two brothers held excise licences in their own names but the business of the licensed shops was carried on jointly. One brother died and after his death, the firm was reconstituted. Two sons of the deceased brother were brought in as partners. Thereafter, the second brother also died and in his place his two sons became the partners of the firm. The firm was later on again reconstituted. The Income-tax Officer refused the renewal of the registration on the ground that the partnership was illegal and it violated the provisions of the Bihar and Orissa Excise Act, 1915, and the rules framed thereunder. The Appellate Assistant Commissione ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cence issued under the Excise Act, was prohibited by law. It was for these reasons that the constitution of the partnership was held to be not illegal. A question of partnership was examined by the Andhra Pradesh High Court in Addl. CIT v. Degaon Gangareddy G. Ramkishan and Co. [1978] 111 ITR 93. That was, however, a case of the constitution of a sub-partnership. One of the partners of the firm holding the licence had constituted a sub-partnership in order to raise the necessary money for the purpose of investing as capital. It was held that the members of the sub-partnership did not become partners of the main firm as a sub-partnership firm was a different and distinct entity. The business of the sub-partnership firm was described in its partnership deed as financing of the capital of the main partner. It is, therefore, a case where the controversy was different and does not directly relate to the question before us. The genuineness of a firm was examined by the same High Court in CIT v. Nalli Venkataramana [1984] 145 ITR 759. After examining the Andhra Pradesh Excise Rules, it was held by the High Court that there was no contravention of the rules when the licensee entered in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The question of genuineness of a firm has also been examined by this court in CIT v. Suraj Bhan and Co. [1983] 144 ITR 943. That was a case where the firm indulged in certain speculation business, which activity was unlawful. The registration under section 185(1)(b) of the Act was refused merely on the ground that the business carried on by the firm was unlawful. It was held that merely because the partners indulged in speculation business, that would not make the firm non-genuine. This decision is also not relevant to the present controversy before us inasmuch as certain activities of the partners were found unlawful in that case. A similar question was again examined by this court in CIT v. Sham Lal Kewal Krishan [1986] 159 ITR 330. The firm was running a liquor contract under licences obtained from the Government. During the course of proceedings under section 132(5) of the Act, the assessee produced a second set of accounts called set No. 2 wherein were recorded certain transactions not finding any place in the books of account seized from the assessee. Those accounts disclosed that the assessee had violated the provisions of the Punjab Excise Act and the Rules made thereun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... initio under the Andhra Pradesh (Telengana Area) Abkari Act. It was held by the court that the members of the sub-partnership did not become partners of the main firm and the two being different and distinct entities for the purposes of the Act, the sub-partnership was entitled to be registered under the Act. This decision is also not directly related to the controversy before us inasmuch as the question of sub-partnership was decided on entirely different facts. The following observations are, however, significant : "After correctly stating the legal position, the High Court referred to the contents of the deed of sub-partnership and the finding of the Tribunal that the assessee-sub-partnership cannot be said to have not carried on any business; that the sub-partnership had financed and owned the capital invested by one of its partners in the main firm; and that the sub-partnership had been formed mainly to finance the business of one of the partners of the main firm doing abkari business and share the profits and losses accruing to or received by him from the main firm. The High Court also observed that the sub-partnership confined its business to only sharing the profits ea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the provisions of the said Act. Law recognises formation of a sub-partnership. The main partnership and the sub-partnership are, for the purpose of law, distinct and different entities. Registration cannot be refused to the sub-partnership on the ground that one of the partners of the main firm had agreed to share the profits received by him from the firm, with a stranger or strangers (members of the sub-partnership) since the agreement does not make the stranger or strangers or the sub-partnership firm, a partner in the original firm and such an arrangement or agreement does not affect either the main firm or its other members, in any way. Section 14 of the Abkari Act has no application to such a situation." The Full Bench of the Kerala High Court in Narayanan and Co. v. CIT [1997] 223 ITR 209, has held that when a licensee entered into a partnership with others, even if there was no sale of his rights to the partners during the subsistence of the partnership, the licensee will not be in a position to deal with the licence as his own. His right became restricted to the share of profits which may fall to his share from time to time. In other words, he transferred a portion of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion to examine the case of registration claimed by a firm doing opium business. It was held that a firm carrying on the opium business under an opium contract taken in the names of some of the partners only was not a validly constituted firm under the provisions of the Opium Act and was not entitled to registration. In that case, the opium contracts were in the name of Lal Chand Mohan Lal. The Tribunal examined Kishori Lal, one of the partners, and was satisfied that persons who were not licensees were actually carrying on the business. It was noticed by the Tribunal that persons other than licensees had acted on behalf of the licensees in contravention of the provisions of the Punjab Excise Act, 1914. There was nothing in the deed of partnership to show that any of the partners was merely a financing or a sleeping partner and was not to actively participate in the business of sale of opium and poppy heads. It was held that the statutory provisions contemplated a partnership carrying on the business of sale of opium only if a licence was taken in the name of the firm. It is, thus, clear that wherever prohibition is found in the statutory provisions against the business by non-licen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iquor in the name of an individual and the condition in the licence expressly prohibited the formation of partnership by the licensee, the partnership firm in violation of such condition was not entitled to registration under the Act. In that case, a licence for retail sale of country spirit had been obtained by one Bihari Lal Jaiswal under the Madhya Pradesh Excise Rules, 1960. Bihari Lal Jaiswal entered into a partnership with 10 other persons to conduct the business under the said licence. The Income-tax Officer rejected the application for registration on the ground that the partnership having been formed in violation of clause (vi) of the General Licence Conditions prescribed by the Madhya Pradesh Excise Rules was illegal and could not claim registration under the Act. Under the said clause, no privilege of supply or sale could be sold, transferred, or sub-leased nor could a holder of any such privilege enter into a partnership for the working of such privilege in any way or manner without the written permission of the Collector. It was found that the written permission of the Collector was not obtained for entering into such partnership, though the assessees said that they ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... statutory in character---provides expressly that a holder of a licence/privilege shall not enter into a partnership for the working of such privilege in any way or manner without the written permission of the Collector, which permission shall be endorsed on the licence. This condition is binding upon the licensee. If so, he cannot enter into a partnership nor can there be, in law, a partnership with respect to the privilege (business) granted under the licence. No person, and no licensee, can claim any right contrary to the said provision. The object underlying the said clause is self-evident. 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 others---a situation not conducive to effective implementation of the excise law ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by law. One arm of law cannot be utilised to defeat the other arm of law. Doing so would be opposed to public policy and bring the law into ridicule. It would be wrong to think that while acting under the Income-tax Act, the Income-tax Officer need not look to the law governing the partnership which is seeking registration. It would probably have been a different matter, if the Income-tax Act had specifically provided that the registration can be granted notwithstanding that the partnership is violative of any other law, but it does not say so." In view of the observations made by the Supreme Court, as reproduced above, it is finally settled that a partnership firm cannot be constituted by a licensee with the help of strangers unless he obtained the requisite prior approval from the competent excise authority. It may further be noticed that sub-rule (26) of rule 37 requires the endorsement of the names of all persons engaged in the business on the licence. In this situation, the constitution of the firm in the case before us is found to be in contravention of rule 7 and rule 37(26) of the Punjab Liquor Licence Rules, 1956. Shri A. K. Mittal has also challenged the order passed ..... X X X X Extracts X X X X X X X X Extracts X X X X
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