Biharilal
Jaiswal Vs. The Commissioner of Income Tax [1995] INSC 690 (16 November 1995)
Jeevan
Reddy, B.P. (J) Jeevan Reddy, B.P. (J) Kirpal B.N. (J) B.P. Jeevan Reddy, J.
CITATION:
1996 SCC (1) 443 JT 1995 (8) 257 1995 SCALE (6)508
ACT:
HEAD NOTE:
These
appeals are preferred against the judgment and order of the Madhya Pradesh High
Court rejecting the applications filed by the assesside under Section 256(2) of
the Income Tax Act, 1961. The assessee had requested the High Court to direct
the Tribunal to state the following question of law for its opinion:
"Whether
on the facts and in the circumstances of the case, the applicant could be
refused registration under section 185 of the Income-tax Act, 1961 on the
ground that its constitution was illegal for breach of the provisions of clause
VI of the General License Conditions made under the Excise Rules, although no
action was taken by the Collector for cancellation of the license under clause
14 of the License in Form C.S.3, inspite of written intimation, dated 27.4.1967
about its constitution." The High Court rejected the applications on the
ground that the question sought to be raised by the assessee was concluded
against it by two decisions of that Court, viz., Commissioner of Income Tax.
Madhya Pradesh v. Sheonarayan Harnarayan [1973 Tax Law Reporter 1186 = (1975)
100 I.T.R.213] and Commissioner of Income Tax, Madhya Pradesh v. Pagoda Hotel
and Restaurant [(1974) 93 I.T.R.2710.
A license
for retail sale of country spirit under supply system in form C.S.No.3 of the
Madhya Pradesh Excise Rules, 1960 was obtained by Biharilal Jaiswal in respect
of twenty two out-stall shops in Tehsil Sarangarh, District Raigarh in the
public auction held in January, 1968. The license was effective for the period
commencing on April 1,
1968 and ending with March 31, 1969. Biharilal Jaiswal entered into a
Partnership with ten other persons to conduct the business under the said license.
The partnership is evidenced by the deed dated August 30, 1968. An application for grant of registration to the said firm
under Sections 184 and 185 of the Act was filed in Formell. 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 License
Conditions Prescribed by the Madhya Pradesh Excise Rules is illegal and cannot,
therefore, claim registration under the Income Tax Act. On appeal, the
Appellate Assistant Commissioner directed the Income Tax Officer to grant
registration as prayed for, against which order the Revenue appealed to the
Tribunal.
The
Tribunal reversed the order of the Appellate Assistant Commissioner and
restored the order of the Income Tax Officer. Thereupon, the assessee applied
to the Tribunal to refer two questions under Section 256(1) of the Act which
was refused. The application to the High Court under Section 256(2) to refer
the aforesaid (consolidated) question was also rejected, as stated above.
Clause
(VI) of the General License Conditions Prescribed by the Excise Rules reads
thus:
"VI.
TRANSFER OR SUBLEASE OF LICENSE: NO privilege of supply or sale shall be sold, transferred
or sub-leased, nor shall 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, which shall be endorsed on the license. A
partner, sub-lessee, transferee shall be bound by all the conditions of the license,
but the original licensee also shall continue to be responsible to the State
Government for the due payment of the license fees and proper working of the
shop, except that in the case of a transfer his responsibility shall case as
soon as the transfer is endorsed on the license." Another condition of license,
viz., clause (14) provided that "on breach of any of the conditions of
this license or of any of the provisions of the Madhya Pradesh Excise Act,
1915, or the Rules made thereunder, this license may be cancelled by the
Collector." A few clauses in the partnership deed may also be noticed. the
preamble to the partnership deed reads:
"WHEREAS
Shri Girdharilal son of Buddhulal Jaiswal of Ambikapur has secured the excise
contract of two Liquor shops Goda Chawk and Talaiya in Bhopal in Gehore
District for Rs.3,05,000,00 and 1,50,000.00 in his name in the open auction
held on 31st January, 1968 for the period from Ist April 1968 to 31st March
1969 and whereas as agreed between the aforesaid persons and as he alone unable
to execute the same contract individually for want of funds and whereas the
parties No.1 to 8 named above having agreed to carry on the above contract
business in partnership with effect from 1.4.68 desire to reduce in writing and
place in a legal form the terms and conditions under which they have agreed to
carry on the partnership business, they do hereby declare and stipulate that
they have been partners in the firm named and styled as GIRDHARILAL JAISWAL
LIQUOR
CONTRACTOR BHOPAL on the terms and conditions as detailed below:" Clause
(7) of the partnership deed provided that:
"No
partner shall be entitled to any remuneration for taking part in the conduct of
the firms and that all the partners shall carry on the same to the common
advantage, be just and faithful to each other and shall render the accounts and
full information of all things effective the firms business." In Pagoda
Hotel and Restaurant, a Division Bench of the Madhya Pradesh High Court had
opined that the prohibition contained in clause (VI) of the General License
Conditions is absolute and is couched in wide terms. Since the said clause
expressly prohibited the entering into partnership for working the
business/privilege under the license, it was held, no partnership could have
been entered into with respect to the said business. Accordingly, it was held that
no registration can be granted under Section 26(A) of the Indian Income Tax
Act, 1922 to such an invalid partnership.
The
High Court distinguished the decisions of the Bombay and Patna High Court in Champsey
v. Gordhandas (A.I.R.1917 Bom.250), Commissioner of Income Tax v. Prakash Ram
Gupta [(1969) 72 I.T.R.366 (Patna)] and Commissioner of Income Tax v. Mandal
(N.C.) & Co. [(1969) 72 I.T.R.767 (Patna)] on the ground that the statutory
provisions concerned in those cases merely prohibited the transfer of the
privilege but did not contain a prohibition against entering into partnership
whereas the Madhya Pradesh Rules expressly prohibited the entering into
partnership as well. This decision was followed in Sheonarayan Harnarayan. The
Division Bench rejected the contention put forward by the assessee that the
decision in pagoda Hotel and Restaurant must be deemed to have been overruled
by the decision of this Court in Jer and Company v. Commissioner of Income Tax
[(1971) 79 I.T.R.546). The High Court pointed out that the statutory provision
concerned in Jer and Company was altogether different from the one contained in
the Madhya Pradesh Excise Rules. The correctness of the said decisions, which
have been followed in the order under appeal, are questioned in these appeals.
Sub-section
(1) of Section 184 (the other sub-sections being not relevant for the present
purpose are not referred to) read as follows at the relevant time:
"184.
Application for registration.-- (1) An application for registration of a firm
for the purposes of this Act may be made to the Income Tax Officer on behalf of
any firm, if-- (i) the partnership is evidenced by an instrument; and (ii) the
individual shares of the partners are specified in that instrument."
Sub-section (1) of section 185, which too is relevant for our purpose, read
thus at the relevant time:
"185.
Procedure on receipt of application,--(1) On receipt of an application for the
registration of a firm, the Income Tax Officer, shall inquire into the
genuineness of the firm and its constitution as specified in the instrument of
partnership, and-- (a) if he is satisfied that there is or was during the
previous year in existence a genuine firm with the constitution so specified,
he shall pass an order in writing registering the firm for the assessment year,
(b) if he is not so satisfied, he shall pass an order in writing reusing to
register the firm." The position emerging from the above two sub-section
is this: and application for registration of a firm for the purposes of the Act
could be made on behalf of any firm if the partnership was evidenced by
instrument and that instrument specified the individual shares of the partners.
On
such application being filed, the Income Tax Officer was obliged to enquire
into the genuineness of the firm and its constitution as specified in the
instrument of partnership and if, on such enquiry, he was satisfied that a
genuine firm with the constitution as specified in the instrument of
partnership was in existence during the relevant previous year, he was obliged
to grant registration. If, however, he was not so satisfied, he was to reject
the application.
In the
present case, the partnership was evidenced by an instrument of partnership
which specified the individual shares of the partners. The truth of the
partnership agreement was not disputed by the Revenue
__________________________________________________________
*
An
explanation was added to sub-section (1) of Section 185 by the Taxation Laws
(Amendment) Act, 1970 with effect from April 1, 1971, which reads thus:
"Explanation.--For the purposes of this section and section 186, a firm
shall not be regarded as a genuine firm if any partner of the firm was, in
relation to the whole or any part of his share in the income or property of the
firm, at any time during the previous year, a benamidar of any other person to
whom the first-mentioned partner does not stand in the relationship of a spouse
or minor child." Though this explanation was not there during the
assessment year concerned herein, it is yet indicative of Parliament's
thinking. The explanation frowned upon benami partners. It declared that
existence of a benami partner renders the partnership not genuine within the
meaning of Section 185(1), unless, of course, such benami partner happened to
be the spouse or minor child. The said explanation was substituted by a more
elaborate one with effect from April 1, 1976
by the Taxation Laws (Amendment) Act, 1975. We need not refer to it for the
purpose of this case, since it merely eludicates the pre-existing explanation.
nor
was it disputed that the partners as specified in the instrument of partnership
did the business under the excise license for the relevant excise
year/financial year. It is equally not in dispute that the written permission
of the Collector was not obtained for entering into such partnership, though
the assessee says that they had applied for the same. The only question is
whether such a partnership could not be called a genuine partnership and
whether such a partnership was dis-entitled to registration under the Act
because of the fact that it was entered into without obtaining the written
permission of the Collector.
In
other words, the question is whether a partnership which is prohibited by the
law governing the license and the business under the license can yet be granted
registration under the Income Tax Act. We have set but hereinbefore clause (VI)
of the General Conditions of License. It provided that (a) the privilege of
supply or sale granted to the licensee shall not be sold, transferred or
sub-leased without the written permission of the Collector which shall be
endorsed on the license, (b) the holder of such license/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 shall be endorsed on the license,
and (c) a partner, sub-lesses or a transferee shall be bound by all the
conditions of license but that did not mean that the original licensee was free
of any obligations under the license. The original licensee continued to be
responsible to the State Government for the due payment of the license fees and
proper working of the shops except in the case of a transfer of license in
which case the responsibility of the original licensee cased as soon as the
transfer was endorsed on the license. Clause (14) of the License further
provided that on breach of any of the conditions of license or any of the
provisions of the Madhya Pradesh Excise Act or the Rules made thereunder, the license
may be cancelled by the Collector.
The
contention of Sri Pramod Swarup, learned counsel for the appellant is that the
prohibition contained in clause (VI) of the General License Conditions Provided
by the Madhya Pradesh Excise Rules has no relevance in the matter of grant of
registration under Section 184 and 185 of the Income Tax Act. May be, the
learned counsel says, the said partnership would not be recognised by, and may
not be able to enforce any of their rights against, the Excise Department but
so far as the Income Tax Act is concerned, such a partnership existed in fact
and did actually do the business during the relevant previous year. In other
words, the learned counsel says, the partnership was a genuine partnership. It
was evidenced by an instrument of partnership specifying the individual shares
of the partners and, therefore, entitled to grant of registration. The learned
counsel for the Revenue, on the other hand, submits that since the excise law
in force in Madhya Pradesh at the relevant time prohibited the entering into of
partnership for the working of the privilege granted under the license without
the written permission of the Collector, no such partnership can be recognised
in law. What is prohibited by one enactment cannot be recognised or sanctioned
by another enactment. This should be so, he says, even if the enactment
prohibiting the partnership is a State enactment and the Act where under
registration is sought is a parliamentary enactment; otherwise, it would be
opposed to public policy.
The
learned counsel submits that an illegal partnership cannot be characterised as
a genuine partnership within the meaning of Section 185(1). Section 23 of the
Contract Act, the learned counsel points out, declares that every agreement of
which the object or consideration is unlawful is void. Section 23 provides,
inter alia, that where "the object of an agreement is......of such a
nature that if permitted, it would defeat the provisions of any law", it
is an unlawful agreement and accordingly void.] The Income Tax Act cannot
sanction, recognize or grant registration to such a partnership agreement, he
says.
The
question concerned herein has been the subject- matter of consideration by this
Court as well as several High Courts in the country. We shall first refer to
the decisions of this Court.
In Umacharan
Shaw & Bros. v. Commissioner of Income Tax, West Bengal [(1959) 37 I.T.R.271], the question arose with reference to
Section 26A of the Indian Income Tax Act. 1922. Section 42(1)(a) of the Bengal
Excise Act provided that "subject to such restrictions as the State
Government may prescribe, the authority who granted any license, 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". The
Tribunal had, of course, denied the registration not on the ground of
illegality of partnership but on the ground that a genuine partnership had not
come into existence. Even so, this Court referred to the said provision of the
Bengal Excise Act and observed, "(T)here was no evidence that the excise licenses
were transferred or sub-let. The three shops, it appears, were managed
separately and their accounts were kept distinct. There was thus nothing which
militated against the partnership and it cannot be said that this affected the
genuineness of the agreement." Having thus observed, this Court went into
the material relevant on the question of genuineness of the partnership and
held that there was no material upon which the Income Tax Officer could come to
the conclusion that the firm was not genuine. We may mention that this decision
is not really relevant on the question arising in these appeals, yet we have
referred to it because it happened to be the first decision relied upon by the
learned counsel for the assessee appellant.
The
next decision relied upon is in Jer and Company. It was a case of the licensee
entering into a partnership with others for doing the business under the licenses.
Though the High Court had proceeded on the footing that the excise license
concerned therein was governed by Rule 322, which prohibited the holder of the license
from entering into a partnership with another person, this Court found, as a
matter of fact, that the license concerned therein was not governed by Rule 322
but by a different rule in the Uttar Pradesh Excise Rules. The license was
issued in Form FL-II.
It did
not prohibit the licensee from entering into partnership with respect to the
business under the license.
It
merely provided that the licensee shall not sub-let or transfer the license. In
this view of the matter, this Court held that the question whether the
partnership was illegal did not arise in that case and the firm was entitled to
registration. This is what the Court said:
"The
Commissioner and the High Court proceeded on the footing that the license was
governed by rule 322 which prohibited the holder of the license from entering
into a partnership with another person. But the license, it is clear from the
record, was in Form FL II issued under the U.P.Excise Manual. The license does
not prohibit the holder from entering into partnership by the holder of the license;
it merely provides that the license shall not be sub-let or transferred. Since
there is no prohibition against entry by the holder of the license 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 license 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." The learned
counsel for the Revenue understands the said decision as laving down that a
partnership prohibited by the excise law cannot be granted registration under
the Income Tax Act, while the learned counsel for the assessees reads it
differently. Be that as it may, the fact remains that the rule concerned in the
said decision did not prohibit entering into partnership by the licensee with
respect to the business under the license. It was for the said reason, this
Court held that the partnership cannot be called illegal and cannot be refused
registration.
So far
as the High Courts are concerned, their decisions turned upon the particular
language of the statutory provisions concerned in each case. Several of these
decision have been referred to in an exhaustive decision of the Andhra Pradesh
High Court in Commissioner of Income Tax. Andhra Pradesh-IV v. Nalli Venkataramana
& Ors. [(1984) 145 I.T.R.759] rendered with reference to Andhra Pradesh
Excise Rules. Rule 19(1) of the Andhra Pradesh Excise Rules, 1969 provided that
"(1) the licensee shall not transfer the license for the sale of arrack
and toddy to any other persons". At the same time, sub-rule (2) of Rule 19
provided that "(2) where a license is granted jointly, no licensee shall
include or exclude any partner except with the previous permission of the licencing
authority." In both the cases considered in the said decision, the license
was granted in the name of an individual who in turn entered into a partnership
with others for conducting and carrying on the business under the said license.
The High Court took the view that so far as sub-rule (1) of Rule 19 is
concerned, it did not prohibit entering into a partnership with respect to the
business under the license and that it merely prohibited the transfer of the license.
On this basis, the High Court held that the partnership entered into by the licensee(s)
in the cases before them cannot be said to be opposed to or violative of
sub-rule (1) of Rule 19. So far as sub-rule (2) of Rule 19 is concerned, the
High Court construed it as not applicable to a case where the license was
granted in the name of a single person. The High Court opined that sub-rule (2)
applied only where the license was granted jointly in the name of two or more
persons, i.e., to a partnership, in which case, it held, the sub-rule provided
that no partners shall be excluded or included without the previous permission
of the licencing authority. In the words of the High Court, the position under
Rule 19(2) is this:
"Rule
19(2) requires that whenever a new partner is introduced or excluded, the
previous permission of the licencing authority should be obtained. But if such
permission is not obtained, the partnership is not rendered illegal. As between
the partners it continues to be valid and entitled to registration under the I.T.Act."
On the above reasoning, the High Court held that the two partnership agreements
before them did not violate either sub-rule (1) or sub-rule (2) of Rule 19 and
cannot be refused registration under Section 185 of the Income Tax Act. The
correctness of the interpretation placed by the High Court on Rule 19(2) does
not fall for our consideration herein. Even so, we must say that the
proposition, quoted by us hereinabove, is unacceptable as will be evident from
the following discussion.
In our
opinion, the correct position appears to be this we are confining ourselves to
partnerships entered into with respect to a license/permit granted under the
State Excise enactments): these enactments deal with indicating liquor, that is
to say, the production, manufacture, possession, transport, purchase and sale
of intoxicating liquors (Entry 8 of List-II of the Seventh Schedule to the
Constitution) and other noxious substances besides providing for duties of excise
referred to in Entry 51 of the said List. It has been held by this Court
repeatedly that no person has a fundamental right to deal or trade in
intoxicating liqdors and that the State is entitled to prohibit and/or closely
regulate their production, manufacture, possession, transport, purchase and
sale. It is enough to refer to the recent Constitution Bench judgment in Khoday
Distilleries Ltd. & Ors. v. State of Karnataka & Ors. (1995 (1) S.C.C.574) wherein all the earlier decisions of
this Court have been referred and the proposition aforesaid affirmed.
The
right of a citizen to deal in these intoxicating liquors is only to the extent
it is provided for and permitted by the Act and the Rules made thereunder. Take
the Madhya Pradesh Act, with which are concerned herein. Clause (VI) of the
General License Conditions - it is not disputed that these conditions are
statutory in character - provides pressly that a holder of a license/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 license. This condition is binding upon the license.
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 license.
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 license 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 health and
morals of the members of the society close control is envisaged and provided
over the business carried on under the license. 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 and consequently deleterious to public interest. It is for this very
reason that transfer or sub-letting of license is uniformly prohibited by
several State Excise enactments. It, therefore, follows that any agreement whereunder
the license is transferred, sub-let or a partnership is entered into with
respect to the privilege/business under the said license, contrary to the
prohibition contained in the relevant excise enactment, is an agreement
prohibited by law. The object of such an agreement must be held to be of such a
nature that if permitted it would defeat the provisions of the excise law
within the meaning of Section 23 of the Contract Act. Such an agreement is
declared by Section 23 to be unlawful and void. The question is whether such an
unlawful or void partnership can be treated as a genuine partnership within the
meaning of Section 185(1) and whether registration can be granted to such a
partnership under the provisions of the Income Tax Act and the Rules made thereunder.
We think not. When the law prohibits the entering into a particular partnership
agreement, there can be in law no partnership agreement of that nature. The
question of such an agreement being genuine cannot, therefore, arise. Where, of
course, the statutory provisions or the conditions of license do not prohibit
the antering into of partnership, it is obvious, such a partnership cannot be
held to be illegal, unlawful or void, as held by this Court in Jer and Company.
But where there is a specific prohibition as in the case before us, any
partnership entered into would be unlawful and void agreement within the
meaning of Section 23 and no other law, whether State or Central, can recognize
such an agreement. The fact that such a partnership can be permitted by the
Collector does not detract from the mandatory character of the clause. As
pointed out above, License Condition No.14 expressly provides that for breach
of any condition of license or of the Act or the Rules made thereunder, the license
may be cancelled. The context - that it is an excise enactment - should not be
forgotten. The grant of registration under the Income Tax Act, it must be
remembered, confers a substantial benefit upon the partnership firm and its
members. There is no reason who, such a benefit should be extended to persons
who have entered into a partnership agreement prohibited 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 thing 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 registration can be granted notwithstanding that the partnership
is violative of any other law - but it does not say so.
We may
clarify that our holding does not mean that such an illegal partnership cannot
be taxed. It is certainly bound to be taxed either as an unregistered
partnership firm or as an association of persons. The only question considered
herein is its right to claim registration under the Income Tax Act.
For
the above reasons, the appeals are allowed. The application(s) under Section
256(2) filed by the assessee are allowed. The consequent reference is withdrawn
to this Court and answered in the affirmative, i.e., against the assessee and
in favour of the Revenue.
No
costs.
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