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TMI Blog1976 (4) TMI 12X X X X Extracts X X X X X X X X Extracts X X X X ..... main partner is a partner in the main partnership firm known as " Nizamabad Group Sendhi Contractors ". As the Tribunal adopted the facts in I.T.A. No. 1031 of 1969-70 as typical of the facts in all the seven appeals and disposed of the appeals by a common order, we prefer to refer to the facts of that appeal in detail. For the assessment year 1964-65, the corresponding accounting year being Fasli year 1962-63 (period commencing from October 1, 1962, and ending with September 30, 1963) a partnership by name " Nizamabad Group Sendhi Contractors ", was formed under a deed of partnership dated October 15, 1962, with 17 partners, one of whom, Rampuram Ganga Goud, having 10% share. On August 27, 1963, Ganga Goud and 11 others had executed a partnership deed to the effect that Ganga Goud, after becoming a partner in the Nizamabad Sendhi Group Contractors, found it difficult to contribute the required capital towards his share and, therefore, the other 11 partners agreed to provide the finance on their being taken as partners in respect of his 10% share in the main partnership. There are, no doubt, two minor partners, who are entitled only to share in the profits but not liable for loss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ners of those firms are deriving profits from the business of abkari without obtaining licence in their names. To put it differently the 1st partner, Rampuram Ganga Goud, alone is the licensee and the other eleven persons in that sub-partnership are admittedly non-licensees and by the first partner the others too have a share in 10% of the profits in the main firm of which he is a partner. The sub-partnership must be held to be in contravention of section 14 of the Andhra Pradesh (Telangana Area) Abkari Act, 1314 Fasli, read with read 23 of 1353 Fasli and, therefore, void and non est in law. This claim of the department is resisted by Mr. N. V. Ranganadham, the learned counsel for the assessee, contending, inter alia, that the business of the main firm is different from the sub-partnership, that the other eleven partners of the sub-partnership have nothing to do with the main firm and its business and the business of the sub-partnership is to finance one of the partners of the main firm whose business is abkari business, and, therefore, section 14 of the Abkari Act has nothing to do with the distribution of profits of the abkari business after allotment of the same to the share of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a 2 annas share therein. It was further observed : " He would have been answerable for the profits pertaining to his share to the divided members of the family, but it would not have affected the validity or genuineness of the partnership.....we do not see why a different result should flow if instead of one member of the divided family two members thereof under some arrangement between the said members of the family took 10 annas share in the partnership. " The partnership deed in that case was found to be genuine and, therefore, it was held that a divided member or some of the divided members of an erstwhile joint family can certainly enter into a partnership with, third parties under some arrangement among the members of the divided family and their shares in the partnership depend upon the terms of the partnership and the shares of the members of the divided family in the interest of their representative in the partnership depend upon the terms of the partition deed, and answered the question in favour of the assessee. The next case that requires to be noticed is that in Commissioner of Income-tax v. V. A. Abdul Rahim and Co. [1965] 55 ITR 651 (SC), wherein it was held that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (SC) for determining the question whether a principal amount is or is not an income. The learned judge observed thus : " Where by the obligation income is diverted before it reaches the assessee, it is deductible ; but where the income is required to be applied to discharge an obligation after such income reaches the assessee, the same consequence, in law, does not follow. It is the first kind of payment which can truly be excused and not the second. The second payment is merely an obligation to pay another a portion of one's own income, which has been received and is since applied. The first is a case in which the income never reaches the assessee, who even if he were to collect it, does so, not as part of his income, but for and on behalf of the person to whom it is payable. " Applying the aforesaid principles enunciated by the Supreme Court, it admits of no doubt that it is open to a partner of a registered firm either to earn an income that falls to his share by himself and enjoy the entire income or make himself liable for the losses, if any, or, in the alternative, agree to divert a portion of his income or loss to other strangers provided they agree to be as sub-partners b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent with four others for contribution of his share capital of Rs. 25,000 and agreed for sharing the profits and losses in proportion to their individual contribution. His share of income in the main partnership was Rs. 14,661 and his share in the sub-partnership was Rs. 5,864. The court held that the income of Rs. 14,661 belonged to the sub-partnership and it did not reach the assessee who was entitled only to Rs. 5,864 from and out of Rs. 14,661. Hence, he was liable to be assessed on his share of profits of the sub-partnership firm as that was the real income. The learned judge, S. T. Desai J., observed at page 24 : " ...it is the real income of the partner which alone can be taxed whatever may be the machinery that may be employed by the revenue. " After referring to the decision of the Punjab High Court in Commissioner of Income-tax v. Laxmi Trading Company [1953] 24 ITR 173 (Punj), the learned judge proceeded to observe thus : " ... it is competent to persons, who may be said to be in the position of sub-partners under one of the partners, to insist upon being recognised by the income-tax department and to insist upon registration of the sub-partnership firm. In such a case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of a sub-partnership, the sub-partnership creates a superior title and diverts the income before it becomes the income of the partner. In other words, the partner in the main firm receives the income not only on his behalf but on behalf of the partners in the sub-partnership........Under the law of partnership it is the benamidar who would be entitled to receive the profits from the other partners but for income-tax purposes it does not mean that it is the benamidar alone who can be assessed in respect of the income received by him. " This decision is an authority for the proposition that a valid sub-partnership can be entered into by a partner of the main firm with some strangers to share the income or loss receivable by him from the main partnership and a sub-partner has definite enforceable rights to claim a share in the profits accrued to or received by the partner in the original partnership, and such sub-partnership is entitled to registration and it creates a superior title and diverts the income from the main firm before it becomes the income of the partner. Next question that falls for consideration is whether a partner of the main firm who deals in liquor, opium, tobac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 52 and 1952-53, the assessee-firm submitted returns and also applied for registration under section 26A of the Income-tax Act. The registration was refused on the ground that more than twenty persons had participated in the division of profits whereas the partnership deed shows only 17 persons as partners. The other persons were representing the other firms. As the appeals to the Income-tax Officer and the Appellate Assistant Commissioner were not successful a reference was made to the High Court under section 66(2) of the Act. The High Court opined that the main partners were less than 20 and the others only must be construed to be sub-partners and sub-partners are distinct from the main partners and the firm is entitled to registration under section 26A. The learned judge Ansari J. (as he then was), speaking for the court, observed at pages 334 and 335 thus : " .......... the proposition is well-established that unless privity of contract be established between persons constituting a partnership and those who are partners of a partner in a partnership, they do not become partners. It is equally clear that sharing profits or advancing money to a partner for purposes of his paying ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of the Madras High Court in Velu Padayachi v. Sivasooriam Pillai, AIR 1950 Mad 444 [FB] is an authority for the proposition that a partnership entered into for the purpose of conducting a business in arrack or toddy on a licence granted or to be granted to only one of the partners is void ab initio irrespective of the fact whether the contract was entered into before the licence was granted or afterwards, and even if a partnership is lawful at its inception because it is not intended to infringe any provision of the Contract Act, it nevertheless becomes unlawful when it intends to conduct the business jointly on a licence granted to one only of the partners, and, therefore, a suit filed for recovery of any amount due on settlement of accounts of such illegal partnership is not maintainable. In Commissioner of Income-tax v. Krishna Reddy [1962] 46 ITR 784 (AP), a Division Bench of this court held that the contract of partnership in respect of the liquor business was void as being opposed to public policy. To the same effect is the later decision of this court in Dinshawji v. Abdul Rasool Khan, AIR 1967 AP 119. Therein a contract between A and B to run the business of supplying l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch business. The pertinent question that arises in the present case, is whether the sub-partnership has intended to do and in fact did business in liquor in the accounting year. If the sub-partnership also had indulged in the business of liquor without the requisite licence in the name of the sub-partnership or in the names of all the partners of the sub-partnership, the sub-partnership, on the application of the principles referred to above, must be held to be void ab initio and non est as it intended to do business in liquor without the requisite licence. If, on the other hand, the business of the sub-partnership is not the sale of liquor or dealing in liquor or doing anything in connection with the purchase and sale of liquor in any manner, it cannot be said that those sub-partnerships are illegal and void and non est. We, therefore, have to look to the object and intendment of the sub-partnership as indicated from the several clauses of the deed of sub-partnership and the other material on record. Though the Income-tax Officer and the Appellate Assistant Commissioner were of the view that the business of the sub-partnership is also the business of the main partnership, viz., N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ejected by the Tribunal, it cannot be validly argued that the sub-partnerships formed by some of the partners of the main firm with strangers are prohibited under section 14 of the Abkari Act as they did not do any business of liquor. We may add that there is absolutely no material to hold that the sub-partnerships had at any time during the entire accounting period purchased or sold or dealt with in any manner in liquor so as to attract the provisions of the Abkari Act and the rules made thereunder. The question of obtaining licence for liquor business by the sub-partnerships would arise only if they intended to do liquor business or in fact did liquor business but not otherwise. As long as the sub-partnerships confined their business to only sharing the profits from one of the partners of the main partnership doing abkari business in lieu of their capital investment for the share of that partner, it cannot be said that such sub-partnerships are prohibited in law. As pointed out earlier, sub-partnership can validly be formed for the purpose of doing any business other than those prohibited by law without the requisite permission or licence. For these reasons, we have no hesitation ..... 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