The
Commissioner of Income Tax, Andhra Pradesh. Vs. M/S. B. Posetty & Co [1996]
INSC 1390 (5 November
1996)
K.S.
Paripoornan, Sujata V. Manohar Paripoornan. J.
ACT:
HEAD NOTE:
1. The
Revenue has filed this appeal against the judgment of the High Court of Andhra
Pradesh dated 22.8.1977 rendered in Case Referred No.45 of 1975. The High Court
granted a certificate under Section 261 of the Income Tax Act to appeal to this
Court, in S.C.L. Petition No.57 of 1978. The assessee is the respondent in this
appeal.
Since
the respondent (assessee) was not represented, we requested Sri V.A. Bobde
(senior counsel) to assist us. We heard counsel for the Revenue Sri. J.
Ramamurthy and Sri V. A. Bobde.
2. The
short question involved in this Appeal is :- Whether the respondent-assessee
firm is entitled to registration under Income Tax Act for the year 1966-67? The
Income Tax Officer by his order passed under Section 185 of the Income-tax Act,
1961, dated 28.12.1970, held that the respondent-assessee -- sub-partnership --
contravenes the provisions of Section 14 of the Andhra Pradesh (Telangana Area)
Abkari Act (hereinafter referred to as 'the Abkari Act') and so, the sub
partnership should be considered as void and illegal. Section 14 of the Act is
to the following effect :
"No
lessee shall, except with the Permission of Government, any person to be his
partner; and such partner shall not be competent to act as such until he has
obtained a licence to that effect from the Collector or any other competent
officer." Registration was refused. The said order was confirmedin appeal
by the Appellate Assistant Commissioner by order dated 28.2.1972. In further
appeal, the Income tax Appellate Tribunal (the Tribunal) in I.T.A. No.210 (Hyd)/1972-73
by order dated 31.12.1973, held that the firm (sub-partnership) is valid and
entitled to registration. In rendering the said order, the Tribunal noticed
that another Bench of the Tribunal in I.T.A. No.1028 (Hyd) of 1969-70 and
connected appeals had by an earlier order dated 30.6.1972, held that a
sub-partnership on identical lines was not hit by section 14 of the Abkari Act.
Concurring with the said view, the Tribunal further held that the business of
sub partnership was not the same as that of the main partnership and all the
insignia of a valid partnership are present in this case and so, it is valid
and entitled to registration.
It is
thereafter, at the instance of the Revenue, the Appellate Tribunal referred the
following question of law for the decision Of the Andhra Pradesh High Court.
"Whether
on the facts and in the circumstances of the case, the subpartnership is
entitled to the benefits of registration under the Income-tax Act, 1961 for the
assessment year 1966-67?" By the time the said reference came up for final
hearing before the High Court, the reference made by the Tribunal of an
identical question in the connected cases arising from I.T.A No. 1028 (Hyd) of
1969-70 was heard and decided by the High Court, holding that the
sub-partnership in the said case, is valid and entitled to registration, vide
judgment in Additional Income Tax Commissioner, Hyderabad v. D.G.G. Ramakishan
& Co. [(1) 1977 TLR 244 = 111 ITR 93]. When the instant reference came up
before the High Court, the earlier decision on the identical matter was noticed
and the High Court answered the question in the affirmative and in favour of
the assessee vide judgment dated 22.8.1977. It is thereafter, the Revenue moved
the High Court in SCL Petition No.57/1978 under section 261 of the Income tax
Act and having obtained a certificate to appeal to this Court vide order dated
10.3.1978 has tiled the above appeal.
4. At
this stage, one fact deserves to be noticed. The decision of the Andhra Pradesh
High Court rendered in Additional Income Tax Commissioner, Hyderabad v. D.G.G. Ramakishan & Co. [(1)
1971 TLR 244 = 111 ITR 93], came up in appeal before this Court, in Additional
Commissioner of Income Tax v. Degaon Ganga Reddy G. Ramakrishna and Co. and
Others [1995 (214) ITR 650), and a Bench of this Court affirmed the said decision.
If was noticed that this Court had in Muralidhar Himatsingka vs. CIT (62 ITR
323) held 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 such sub-partnership is entitled to registration
and then proceeded to state thus at (214 ITR 650) pages 653 to 655 :- "The
High Court then proceeded to consider the next question, namely, whether a
partner of the main firm who deals in liquor.....
or any
other prohibited article which requires a specific permission of the State
Government .... can validly enter into a sub- partnership with strangers in
respect of his share in the main partnership. This question arises because of
the prohibition contained in section 14 of the Abkari Act against carrying on
business in liquor without a licence granted for the purpose.
The
High Court rightly pointed out that the partners of the sub- partnership would
not become partners of the main partnership- firm and this position would not
be altered in any manner even if the business of the main firm were to deal in
liquor or any other prohibited article since the partners of the
sub-partnership would be entitled only to share the profits and losses, as the
case may be, that accrue or fall to the share of the partner in the main firm.
Accordingly, the members of the sub-partnership do not become partners of the
main firm, the two being different and distinct entities for the purpose of the
Income-tax Act. The High Court, then proceeded to state thus (at page 105):
"All
the decisions relied upon by the Revenue are applicable only if it is found as
a fact that the sub- partnership had carried on the business of liquor,
tobacco, opium or any other prohibited article without the requisite permission
or the State Government or the Collector, as the case may be....
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 in
liquor without the requisite licence in the name of the sub-partnership or in
the name 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...." "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 earned by one of the partners of the
main partnership doing abkari business in lieu of their capital invested for
the share of that partner and, therefore, it cannot be said that such a sub-partnership
is prohibited in law......
"......there
can be no doubt that the sub-partnerships formed by individual partners of the
main partnership which were lessees, with some others merely to finance the
business of a partner of the main firm doing abkari business and share the
profits and losses accrued to or received by him from the main firm, were not
in violation of Section 14 of the Abkari Act. For this reason, there is no
basis to hold that the sub- partnerships were in violation, of section 14 of
the Abkari Act and, therefore, illegal. The Tribunal was right in holding that
in the facts and circumstances of the case, the assessee-sub-partnerships being
found to be genuine were entitled to be registered under the Income-tax
Act." In the normal circumstances, the aforesaid decision of this Court
reported in [1995 (214) ITR 650], should govern the decision in this case also.
But, when the instant appeal came up for hearing before a Bench of two-Judges,
after referring to the decision in Bihari Lal vs. CIT (217 ITR 746) it was
observed :- "......... As the profits of the business to be shared by the
sub- partners were the profits of the main business, namely, abkari business,
Section 14 of the Abkari Act squarely got attracted and made even the sub-partnership
for sharing at least a part of the main partnership profits illegal as Section
14 of the Abkari Act was admittedly not complied with." and so referred
the matter for appropriate decision by a larger Bench of three-Judges (see AIR
1996 SC 1091- Income Tax Commissioner vs. B. Posetty). This is how the matter
has come up before this Bench. A few facts to decide the question of law
involved in this appeal may be stated. A partnership by name M/s. Nizamabad
Group Sendhi Contractors, was formed evidenced by a Partnership Deed dated
15.10.1962, consisting of 17 partners. On 27th of August, 1963, Sri Ganga Goud,
one of the partners in the said firm, and 11 others executed a Partnership Deed
to the effect that Shri Ganga Goud after becoming a partner in the Nizamabad
Group Sendhi Contractors, the main partnership, found it difficult to
contribute the required capital towards his share and, therefore, the other 11
partners of the sub-partnership agreed to provide the finance on their being
taken as partners in respect of Ganga Goud's 10 per cent share in the main
partnership. The registration of the said sub- partnership was refused by the
Income Tax Officer. It is the case of the said sub-partnership which finally
reached this Court in the decision rendered in Additional Commissioner of
Income Tax v. Degaon Ganga Reedy G. Ramakrishna and Co. and Others [1995 (214)
ITR 650]. Similarly, in this case, Sri B. Posetty had 11 per cent share in the Nizamabad
Group Sendhi Contractors. He found it difficult to contribute the required
capital for the said share in the main firm. So, B. Posetty along with 9 others
formed a sub-partnership as "B.Posetty & Company" on condition
that they would provide the requisite finance on allotting certain share to
them out of Sri B. Posetty's income in the main firm. The main partnership,
M/s. Nizamabad Group Sendhi Contractors, is a registered firm under the
Income-tax Act. They are lessees who were the highest bidders in the auction
held by the Excise authorities. The sub-partnership "B. Posetty &
Company "is evidenced by Deed dated 20.1.1965 which specified the shares
of each partner. This firm filed the application for registration for the
assessment year 1966- 67. On 30.9.1963, it returned an income, admitting 11 per
cent share income of Sri B.Posetty in the firm Nizamabad Group Sendhi
Contractors. The Income Tax Officer refused registration to the sub-partnership
on the ground that the sub-partnership contravened the provisions of Section 14
of the Abkari Act, and so, void and unenforceable. It was affirmed in appeal.
But, the Tribunal as well as the High Court granted registration.
6. The
sole question that arises for consideration in this appeal is, whether the
sub-partnership contravened Section 14 of the Abkari Act ?
7.
Section 14 of the said Act runs thus:
"No
lessee shall, except with the permission of Government, declare any person to
be his partner; and such partner shall not be competent to act as such until he
has obtained a licence to that effect from the Officer." (emphasis
supplied) It will be appropriate to quote the relevant provisions of the
Income-tax Act, 1961, dealing with registration as they existed during the
relevant period: - Section 184 "(1) An application for registration of a
firm for the purposes of this Act may be made to the Assessing 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.
(2)
Such application may, subject to the provisions of this section, be made either
during the existence of the firm or after its dissolution.
"(5)
The application shall be accompanied by the original instrument evidencing the
partnership, together with a copy thereof:
(6)
The application shall be made in the prescribed form and shall contain the
prescribed particulars.
(7)
Where registration is granted or is deemed to have been granted to any firm for
any assessment year, it shall have effect for every subsequent assessment year:
Provided
that- (i) there is no change in the constitution of the firm or the shares of
the partners as evidenced by the instrument of partnership on the basis of
which the registration was granted; and (ii) the firm furnishes, before the
expiry of the time allowed under sub-section - (1) of section 139 for
furnishing the return of income for such subsequent assessment year, a
declaration to that effect, in the prescribed form and verified in the
prescribed manner, so, however, that where the Assessing Officer is satisfied
that the firm was prevented by sufficient cause from furnishing the declaration
within the time so allowed, he may allow the firm to furnish the declaration at
any time before the assessment is made.
"
Procedure on receipt of application 185. (1) On receipt of an application for
the registration of a firm, the Assessing 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 refusing to register
the firm." We should remember that it is the main partnership, i.e., Nizamabad
Group Sendhi Contractors who were lessees being the highest bidders in the
auction held by the Excise authorities for the relevant year. The said
partnership was registered by the Income Tax Department under the Income-tax
Act. In the instant case, the Tribunal found the business of the
sub-partnership is not the same as that of the main partnership and all the
insignia of a valid partnership are present in the case and so, it is valid and
entitled to registration. The said findings were not questioned before High
Court by framing an appropriate question in that regard. In the instant case,
the High Court followed its earlier decision reported in [111 ITR 93] wherein
after noticing section 14 of the Abkari Act, the High Court held thus:
"All
the decisions relied upon by the Revenue are applicable only if it is found as
a fact that the sub partnership had carried on the business of liquor, tobacco,
opium or any other prohibited article without the requisite permission of the
State Government or the Collector, as the case may be...
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 as
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....." The High
Court further held that the sub-partnership had financed and owned the capital
invested by one of its partners in the main firm and the sub-partnership
confined its business to only sharing the profits earned by one of the partners
of the main partnership doing abkari business in lieu of their capital invested
for the share of that partner and such a sub-partnership is not prohibited by
law.
8.
Dealing with sub-partnership and its validity S.T. Desai on The Law of
Partnership in India (6th Edn.) at page 152, states the
law, thus:
"Sub-partnership
may arise when as a result to an agreement between a partner in a firm and a
stranger the latter becomes jointly interested that partner so far as his share
in the firm is concerned.
Such
mutual interests may amount to a partnership, but it is not a partnership in
the main firm, but what is called a sub-partnership.
Such an
agreement with not have the effect of making the stranger a partner of the main
firm. He will have no demand against that firm, nor will he be entitled to ask
for accounts of its business so long as it continues to trade. It would hardly
be questioned that a sub- partner is not liable to the creditors of the main
firm for any of its debts.
Sub-partnerships
have been recognised in India both before and after the present
Act came into force. In Murlidhar v. Income Tax Commissioner (AIR 1967 SC 383 =
62 ITR 323 ) the Supreme Court quoted with approval the following statement of
the law from Lindley on Partnership : A sub-partnership is, as it were, a
partnership within a partnership; it presupposes the existence of a partnership
to which it is itself subordinate. An agreement to share profits only consitutes
Partnership between the parties to the agreement therefore, several persons are
partners and one of them agrees to share the profits derived him with a
stranger, this agreement does not make the stranger a partner in the original
firm. The result of such an agreement is to constitute what is called a
sub-partnership, that is to say, it makes the parties to it partner inter se;
but it in no way affects the other members of the principal firm." (emphasis
supplied) In this case, the lessee is Nizamabad Group Sendhi Contractors (main
firm). The sub-partnership is a distinct and different firm. It is one recognised
by law and it is not a partnership with the main firm. It will not have the
effect of making the partners in the sub-partnership, partners of the main
firm. In other words, the main firm, the lessees and the sub partnership are
distinct and different. In the light of the above legal position, it cannot be
said that either the sub-partnership in the instant case, or any of its
partners as a partner, became a partner of the main firm, Nizamabad Group Sendhi
Contractors. The inhibition contained in Section 14 of the Abkari Act will
apply only in a case where the lessee declares any person as its partner. Here,
the lessees, M/s. Nizamabad Group Sendhi Contractors, had not declared either
the sub- partnership or any other person, as its partner. In such
circumstances, the inhibition contained in Section 14 of the Abkari Act cannot
apply. It is true that Sri Posetty and 10 others formed the sub-partnership,
"B. Posetty & Co." -- for a legitimate business purpose, to
provide the requisite finance, on condition of allotment of certain shares to
them out of Mr. Posetty's share in the main firm.
The
sub-partnership financed one of its partners to make a capital investment in
the main firm. Such an arrangement or agreement between persons who formed a
distinct and different firm, is valid in law and to such a situation Section 14
of the Abkari Act is not attracted; nor is there any basis to hold that there
was any contravention of the provisions of the said Act. Law recognises
formation of 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. We are of the view that
on the facts similar to one in the instant case, the earlier decision of this
Court in Additional Commissioner of Income Tax v. Degaon Ganga Reddy G.
Ramakrishna and Co. and Others [214 ITR 650], has properly considered the
entire matter and a reconsideration of the same is not called for. We should
state that this Court in Bihari Lal's case (217 ITR 746) was dealing entirely
with a different situation wherein clause VI of the General Licence conditions
prescribed by Madhya Pradesh Excise Rules, 1960, quoted at p. 750 of the
report, was of very wide import and interdicted transfer or sub- lease of the licence
or formation of partnership of the licence obtained by an individual in any
manner or form.
Such a
situation is not present herein. The said decision is clearly distinguishable.
In our view, the High Court was justified in law in answering the question
referred to it, in the affirmative and in favour of the assessee. This appeal
is without merit and is dismissed. There shall be no order as to costs.
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