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TMI Blog1983 (4) TMI 39X X X X Extracts X X X X X X X X Extracts X X X X ..... retail, required manpower to assist him in the conduct of the said business and also to contribute the required capital. Hence the partnership firm was constituted. Clause 2 of the partnership deed says that the business of the firm shall be the sharing of the profit or loss arising out of the arrack business conducted at Salipet under the licence held by the aforesaid successful bidder. Clause 4 of the said deed mentions the capital that was contributed by the partners. The successful bidder was not required to contribute any capital. Clause 6 of the deed states that the first partner, viz., the aforesaid successful bidder, will have a share of 1% of the net profits and the remaining 99% of the profit or loss shall be divided between the partners in the ratio of their capital contribution. It, therefore, follows that the first partner is entitled to one per cent. of the profit but was not to suffer any loss because the ratio of his capital contribution was " nil ". Clause 8 is an important clause. It lays down that the first partner, viz., the successful bidder, in whose name the licence stood, should lift the arrack and conduct the sale with the assistance of the other partners s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e matter he refused the assessee's claim for registration under s. 185 of the I.T. Act. The assessee appealed to the AAC. He came to the conclusion that the firm was a genuine firm and that the ITO should have given a chance to the assessee to correct the discrepancy in the profit sharing ratio mentioned in the partnership deed and the Form No. 11 application. Coming to the legality of the partnership the AAC held that the rulings relied upon by the ITO did not apply to the facts of the case. He placed reliance among other cases, on the judgments of the Supreme Court in Umacharan Shah and Bros. v. CIT [1959] 37 ITR 271 and Jer Co. v. CIT [1971] 79 ITR 546, and came to the conclusion that the formation of partnership by the licensee was not prohibited, even though the licence was in the name of one of the partners. He also pointed out that in contrast to s. 15 and r. 19 of the Rules there were other provisions in the A.P. Denatured Spirit and Denatured Spirituous Preparation Rules, 1970, Condition No. 9, under r. 5(2) of the A.P. Indian Liquor (Storage in Bond) Rules, 1969, and r. 39 of the A. P. Foreign Liquor and Indian Liquor Rules, 1970, prohibiting the formation of a partne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich provided that the licensee-partner alone should lift the arrack and conduct the sale. They also pointed out that there has been no action taken by the excise authorities against the licensee for infringement of the Excise Act or the Rules in view of his taking other partners. Even if the other partners sold the liquor it was obvious that they were acting as mere agents of the licensee. They agreed with the AAC that so far as these transactions are concerned there was no prohibition for forming partnership as in the case of certain other intoxicants for which different rules were made expressly prohibiting the formation of a partnership. They, therefore, held that s. 15 of the Act was not violated. They also incidentally referred to the practice in Visakhapatnam and its suburbs where there were similar partnership firms and, therefore, confirmed the order of the AAC. On the above facts the Tribunal framed the following three points for the decision of this court : (1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the assessee-firm is entitled to the benefits of registration ? (2) Whether, on the facts and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be refused on the ground that some illegality was committed during the conduct of the business and subsequent to the formation of the partnership itself. After referring to various cases including the case of Umacharan Shah Bros. v. CIT [1959] 37 ITR 271 (SC), decided by the Supreme Court and the case of Jer Co. [1971] 79 ITR 546 (SC), decided by the Supreme Court, they came to the conclusion that rule 19(1) or rule 19(2) of the Rules were not violated. They also pointed out that punishment under s. 36(c) of the Act was only in respect of wilful contraventions. In a case where the excise authority did not choose to cancel the licence, the licensee will be entitled to carry on his business under the licence and that this indicated that the Excise Act did not intend to prohibit such a partnership. They made a distinction between the penal provisions in any enactment imposing a punishment once for all in contradistinction to cases where punishment was imposed in recurring manner. They held that the present cases fell in the first category and an inference of total prohibition cannot be made. On the above basis the Tribunal allowed the appeal of the assessee. The Tribunal framed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndment of sub-clause (2) detailing the procedure for obtaining permission is not being extracted as it does not affect the discussion). From the aforesaid rival contentions the following questions arise for consideration : (1) Whether the formation of a partnership by a person having licence under the A.P. Excise Act amounts to a transfer of the licence in favour of the partner within rule 19(1) of the Rules. (2) Whether the prohibition mentioned in section 15 of the A.P. Excise Act applies to the non-licensee partners so as to make the partnership illegal ? (3) Whether there is any violation of rule 19(2) of the rules making the partnership illegal. (4) Whether s. 23 of the Indian Contract Act invalidated the partnership. The question of public policy has also been adverted to by the learned counsel for the Department and we shall deal with that question incidentally. Though counsel on both sides have cited a good number of rulings before us, we feel it will be convenient to deal initially with the following cases: (1) Gordhandas Kessowji v. Champsey Dossa, AIR 1921 PC 137. (2) Umacharan Shah Bros. v. CIT [1959] 37 ITR 271 (SC). (3) Jer Co. v. CIT [1971] 79 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Act read as follows : 1. " Subject to such restrictions as the State Government may prescribe, the authority who granted any licence, permit or pass under this Act, may cancel or suspend it; ...... (a) if it is transferred or sub-let by the holder thereof without the permission of the said authority." In that case, there were three brothers who formed a joint family under the Dayabhaga law and carried on business in the sale of foreign liquor. The licences for the three shops were in the different names of the brothers but not in the name of the family. One brother died in 1945 and his son was taken as a partner. Another brother died in 1947 and his son also was taken as a partner. A fresh partnership deed was executed between these two new entrants and the last of the three brothers. The partnership deed executed on April 10, 1947, provided that the capital of the partnership was the amount as found to the credit of the parties, that the banking account will be opened in the firm-name or in other names as agreed upon. For the year 1948-49 two returns were filed showing the income from the business as having been received in the status of an HUF and a third return was f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the footing that the licence was governed by rule 322 (of the Excise Rules) which prohibited the holder of the licence from entering into a partnership with another person, But the licence, it is clear from the record, was in Form FL. It issued under the U.P. Excise Manual. The licence does not prohibit the holder from entering into partnership by the holder of the licence: it merely provides that the licence shall not be sub-let or transferred. Since there is no prohibition against entry by the holder of the licence into a partnership, the question whether the partnership was illegal does not arise. The firm was entitled on that account to registration. It is somewhat unfortunate that the attention of the Commissioner and the High Court was not invited to the form in which the licence was issued by the excise authorities. They proceeded to decide the case on the footing that rule 322 of the Excise Manual applied. But that rule has no application here." This decision of the Supreme Court would make it absolutely clear that the view expressed in Umacharan's case [1959] 37 ITR 271 (SC), had been reiterated by their Lordships when they held that formation of partnership by a lic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me-tax v. Krishna Reddy [1962] 46 ITR 784 (AP), the partnership entered into by the licensee with other persons was held to be invalid or void..." " In the case of Velu Padayachi, AIR 1950 Mad 444, the High Court of Madras had to deal with the Madras Excise Act and Rules having similar provisions to our Excise Act and Rules ......", and the passage approving the final conclusion of Horwill J. in the Madras Full Bench as follows, stating what Horwill J. observed at page 324 (of [1950] 1 MILL 315 ; AIR 1950 Mad 444, 449)): "...partnership entered into for the purpose of conducting a business in arrack or toddy on a licence granted ... to only one of them is void ab initio ... in that it either involves a transfer of the licence, which is prohibited under rule 27 and punishable under section 56, or a breach of section 15 ... punishable under section 55, because the unlicensed partner, by himself or through his agent, the other partner, sells without a licence. (emphasis supplied). The above three passages from the judgment of the Allahabad High Court (60 ITR 335) show that (a) the Allahabad High Court followed the Madras Full Bench (AIR 1950 Mad 444) ; (b) it also followed t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sented from the judgment of the Madras High Court in A. V. Varadarajulu Naidu v. K. V. Thavasi Nadar, AIR 1963 Mad 413, in para. 10 of their judgment. An examination of Varadarajulu Naidu's case, AIR 1963 Mad 413, of the Madras High Court would show that the Madras High Court relied upon Velu Padayachi's case, AIR 1950 Mad 444, for coming to the conclusion that a partnership for carrying on transport business with the permit obtained in the Dame of one of the partners was invalid. In para. 9 (at page 417) of Varadarajulu Naidu's case, AIR 1963 Mad 413, the Madras High Court observed: " The second defendant was a partner, and as a partner, he became an agent of the partnership as well as the other partner, and the running of the lorry with the permit of the 2nd defendant, involved a contravention of the Motor Vehicles Act, namely, the user of the lorry by the owner, namely, the partnership, who had no licence in its name. The view in Velu Padayachi's case, ILR 1950 Mad 987; AIR 1950 Mad 444 [FB], is still good law, and therefore, we are of the opinion that the partnership in this case was an illegal one ....... .." and as this judgment has been expressly dissented from by thei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... judgments of the Madras, Andhra Pradesh, Kerala and earlier Punjab cases referred to and followed by the Allahabad High Court in Jer Co. [1966] 60 ITR 335. In Young v. Bristol Aeroplane Co. Ltd. [1946] 1 All ER 98 (HL), the second proposition laid down by the House of Lords was as follows: " The court is bound to refuse to follow the decision of its own, which, though not expressly overruled, cannot, in its opinion, stand with a decision of the House of Lords." The above proposition of law has recently been applied by a Division Bench of this court in Kodanda Rao v. Government of A.P. [1981] 2 ALT 280, by Madhava Reddy J. (as he then was) and Raghuvir J. for not following certain judgments of this court in view of certain other judgments of the Supreme Court on the same point taking a different view. For all the above reasons, and applying the Supreme Court judgments in: (a) Umacharan's case [1959] 37 ITR 271 (SC), (b) Jer Co.'s case [1971] 79 ITR 546 (SC), (c) Viswanatha Pillai's case, AIR 1969 SC 493, we are of the view-and we say so with great respect, that the reversal of the judgment of the Allahabad High Court, i.e., Jer Co. [1966] 60 ITR 335 and the dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 15 does not use the words licence " granted to him " nor is there any other specific provision either requiring the partnership to take out licence or making the formation of a partnership illegal. It may also be noted that the Revenue has not produced the relevant licence to point out which particular term or condition of the licence has been contravened. We may also point out that s. 15 of the A.P. Excise Act is similar to para. 3 of the West Bengal Rice and Paddy Control Order, 1960, which reads as follows: " No person shall carry on business as a dealer except under and in accordance with a licence granted under the Act. " The permit holder entered into a partnership in CIT v. Manick Chandra Dey [1977] 106 ITR 860 (Cal), and the question arose whether the partnership was illegal and not entitled to registration under the I.T. Act. Speaking for the Division Bench and construing para. 3 of the Control order and after referring to the three Supreme Court judgments in Umacharan's case [1959] 37 ITR 271 (SC), Jer Company [1971] 79 ITR 546 (SC) and Viswanatha Pillai's case, AIR 1969 SC 493, Sabyasachi Mukherji, J. (as he then was) observed (p. 864): " In this case, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... peal No. 30/60, dt. 11-4-62 of the Supreme Court). That was an appeal from the judgment of the Bombay High Court reported in Govinda Rao v. Nathmal [1957] Nag LJ 214 and the facts of the case can be culled out from that judgment of the Bombay High Court. The judgment of the High Court as well as the Supreme Court on appeal have been considered in detail by justice Chandurkar of the Bombay High Court in Vasantha Rao Shesh Rao v. Devi Prasad Mahadeo [1970] 72 BLR 333 and have been distinguished and were held to be not in conflict with the decision of the Privy Council in Gordhandas Kessowji's case, AIR 1921 PC 137, or of the Supreme Court judgment in Umacharan's case [1959] 37 ITR 271. We also agree that Govinda Rao's case (Civil Appeal No. 30/60, dt. 11-4-62 of Supreme Court) is clearly distinguishable. There, the Supreme Court laid emphasis on s. 3(1) of the C.P. and Berar Food Grains Control Order, 1945, which prohibited any person to deal in foodgrains without licence. The words " deal its food grains " were defined as follows : " To engage in the business of purchase, sale, or storage for sale of foodgrains whether on one's own account or on account of or any partnership..." ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f being used by the partnership firm. It is, therefore, not necessary for us to discuss the case in Budh Ram Balak Ram v. Dhuri Co-operative-cum-Marketing-cum-Processing Society, AIR 1972 P H 185, which followed Govinda Rao's case (Civil Appeal No. 30160, dt. 11-4-62 of Supreme Court). Learned counsel for the Department also contended that a partnership firm is a juristic person and that in Govinda Rao v. Nathmal, the Supreme Court held that a partnership was a juristic person liable to take out a licence in its own name. We have already pointed out that the special statutory provisions in Govinda Rao's case required the partnership itself to take a licence and it is in that context that it was so decided. In Mandalsa Devi v. M. Ramnarain Pvt. Ltd., AIR 1965 SC 1718, and in Dulichand's case [1956] 29 ITR 535 (SC), the Supreme Court held that (sic) two Supreme Court judgments and the other Supreme Court judgments already referred to, we are of the opinion, that a firm is not a juristic entity and under the Andhra Pradesh Excise Act and Rules, the firm need not take out a licence in its own name. For the aforesaid reasons, we are of the opinion, on questions (1) and (2) fra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecision of the same court in Udhoodass v. Prem Prakash, AIR 1964 All 1 [FB], where a Full Bench of the Allahabad High Court held that a contract of tenancy entered into without the permission of the concerned authority under the U.P. Control of Rent and Eviction Act was not void even though the statute penalised the landlord for letting out the premises in contravention of the provisions of the Act. As between the parties to the contract, the tenancy was held to be valid. After referring to the said Full Bench in Udhoodass's case, AIR 1964 All 1, the Full Bench in Kapoor's case [1973] 90 ITR 172 (All), while holding the partnership to be valid and directing registration observed as follows (p. 184) : " It follows that the wide proposition that, whenever a contract which results in breach of some provision of law, is entered into and the contracting party becomes liable to be punished under the law, it necessarily is a contract which is forbidden by law and is as such void, cannot be accepted." The decision of the Allahabad Full Bench in Udhoodass's case, AIR 1964 All 1, has since been approved by the Supreme Court in Murlidhar Agarwal v. State of Uttar Pradesh, AIR 1974 SC 1924 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct, 1948, under which a mining lease was to be in accordance with r. 37 of the Mineral Concessions Rules, 1949. Though the said rule provided that lessee may make a transfer of the lease only with the previous sanction of the State Government, it was held by the Mysore High Court that the transfer and the consequential partnership formed by the transferee did not make either the transfer or the partnership void and that the partnership was entitled to registration under the I.T. Act. It was held that there was no express prohibition against transfer or formation of partnership and that r. 37 was only an enabling provision. The above rulings are directly applicable to the facts of the present case and following the same, we hold that the partnership is valid as between the partners. In CIT v. Sheonarayan Harnarayan [1975] 100 ITR 213 (MP), CIT V. Pagoda Hotel and Restaurant [1974] 93 ITR 271 (MP) and Mohapatra Bhanday v. CIT [1965] 58 ITR 671 (Orissa), relied upon by the Revenue, the relevant rules only required the permission of the competent authority for the licensee-partner forming a partnership and there was no express prohibition making the partnership illegal. The partner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ahabad High Court in Kapoor's case [1973] 90 ITR 172, stated that it did not necessarily follow that the non-licensee-partner claimed a right to sell liquor. He participates in the business in a manner permissible by the law. In CIT v. K. C. S. Reddy [1960] 38 ITR 560, the Patna High Court also held that the licensee-partner had the option to decide who should conduct the business of purchasing and selling mica. In CIT v. Prakash Ram Gupta [1969] 72 ITR 366 (Pat), the Patna High Court considered a partnership-deed which contained a provision that the non-licensing partner shall supervise and be in charge of the business. Still it held that he could not sell or purchase and the deed was to be construed in such a way so as to make it valid. Similarly, in Md. Warasat Hussain v. CIT [1971] 82 ITR 718, the Patna High Court was considering a partnership deed in which cl. (6) stated that the management of the business shall be in the hands of all the partners. It was observed that there was no evidence that the non-licensee partner carried on the actual business (p. 728) : " The management of the business ...... does not mean handling of the excisable commodities. The unlicensed partner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the Act of 1960 that may have occurred in the conduct of the business after the establishment of partnership cannot, in these circumstances have any bearing on the validity of the partnership agreement. " To a like effect are the observations of the Mysore High Court in Sree Ramakrishna Mining Co.'s case [1967] 64 ITR 197, where the said High Court followed Marles v. Philip Trant and Sons Ltd. [1954] 1 QB 29 (CA). In that decision Singleton and Denning L. J. (Hodson L. J., dissenting) pointed out the distinction between illegality of a contract and illegality in its performance. We respectfully agree with the above rulings, and hold that the subsequent acts of the partners cannot make the partnership illegal. Coming to the public policy under s. 23 of the Contract Act, it was argued for the Department that the Madras Full Bench in Velu Padayachi's case, AIR 1950 Mad 444, based its conclusion on public policy also and that public policy was very much relevant under the Excise Acts relating to liquor. We pointed out to the learned counsel for the Revenue, that the two cases, in Umacharan's case [1959] 37 ITR 271 (SC) and Jer Co.'s case [1971] 79 ITR 546 (SC), decided by th ..... 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