Kerala High Court
Commissioner Of Income-Tax vs Grand Enterprises on 11 December, 1997
Equivalent citations: [1999]235ITR594(KER)
JUDGMENT P. Shanmugam, J.
1. The following questions of law were referred at the instance of the Revenue :
"(1) Whether, on the facts and in the circumstances of the case and where a partner obtains a licence in favour of a firm in which he is a partner and carries on the business of Abkari contracts, the Tribunal is right in law in holding--
(i) 'it cannot be said that the concerned partner has transferred the licence or the privilege to and in favour of the partnership firm of which he is a partner' ?
(ii) 'such transfer, if any, is not prohibited under the Abkari Act' ?
(2) Whether, on the facts and in the circumstances of the case, the assessee is entitled to be treated as a registered firm under the Income-tax Act ?"
2. The respondent assessee is a partnership firm consisting of three partners running a hotel and a bar. The licence for running the bar was granted to one of the partners, Shri K. J. Joseph. The said licence was utilised for running the bar. The firm is a registered firm with the Income-tax Department. But their continuance of registration for the assessment years 1983-84, 1986-87 and 1990-91 was refused by the Assessing Officer on the ground that the bar licence was in the name of one of the partners and not in the name of the firm, though the firm was carrying on the business without the proper transfer of licence. Following the decision of the Tribunal, Cochin Bench, in Narayanan and Co., Edappally in ITA No. 155/Coch. of 1985 dated April 30, 1989, the Assessing Officer held that the assessee was not entitled to registration under the Income-tax Act, in view of the violation of the Abkari Regulations. On appeal, the Commissioner (Appeals) following the decision of the Special Bench of the Tribunal (Cochin Bench) in ITO v. Raveendra Engineering Construction Co, [1992] 198 ITR (A. T.) 32 allowed the appeals of the assessee. On further appeal by the Department before the Tribunal, the order of the Commissioner was upheld. The present reference was, therefore, made at the instance of the Department.
3. Learned senior counsel appearing on behalf of the Department submits that, in the light of the Full Bench decision in Narayanan and Co. v. CIT [1997] 223 ITR 209 (Ker) the question has to be answered in favour of the Revenue. It is further contended that the assessee-firm does not possess any licence to run the abkari business which is a clear violation of Section 15 of the Abkari Act. According to counsel, the order of the Tribunal in ITA No. 155/Coch. of 1985 which was followed by the Assessing Officer is confirmed by the Full Bench and hence the reference must be answered accordingly.
4. Learned counsel appearing on behalf of the assessee, on the other hand, sought to distinguish the Full Bench judgment. According to him, the assessee is not applying for registration afresh, and secondly, the assessee is an existing partnership firm, doing hotel business. The running of a bar is only one of the many businesses. According to him, a rejection to continue the registration would make the other business also suffer and, therefore, the ratio would not apply to the facts of the case. He submits that the Full Bench was concerned with a case of an assessee who is running an abkari business exclusively on the basis of the licence obtained by one of the partners. He further contends that even assuming that one of the several objects of the firm is illegal in view of the fact that the said object being severable, the whole object of the firm cannot be held to be illegal so as to deny registration.
5. We have heard counsel at length. The facts are not in dispute, viz., that the assessee is a partnership firm consisting of three partners running a hotel and a bar. The licence for the bar has been granted under the Kerala Abkari Act to Shri K. J. Joseph, one of the partners of the firm. This licence was being utilised by the firm for running the said bar. Section 24 of the Kerala Abkari Act provides for granting of licence subject to such restrictions and on such conditions. Rule 19 of the Foreign Liquor Rules states as follows :
"19. Under no circumstance shall any licence obtained under this notification, be sold, transferred or sub-rented without the previous sanction of the Excise Commissioner."
6. The licence was issued in Form No. FL 3, Hotel (Restaurant) Licence.
7. Condition No. 13 of the statutory Form No. FL 3 licence states as follows :
"13. Licensee shall not lease out, sell or otherwise transfer his licence without the written consent of the Excise Commissioner."
8. Condition No. 27 states that infraction of any of the rules or the conditions of the licence shall entail cancellation of the licence and penalties.
9. Section 56 of the Act penalises a licensee, who wilfully does any breach of any of the conditions of the licence with imprisonment for a term which may extend to six months or with fine or with both.
10. A reading of the provisions of the Act and the conditions imposed in the licence granted to the licensee, clearly prohibits the licensee to lease out, sell or otherwise transfer his licence. The violation of the rules and conditions of the licence is made punishable. Of course, there is a provision for a written permission for such a transfer.
11. Apart from the Full Bench which has decided on the identical question which is binding on us, the Supreme Court in Bihari Lal Jaiswal v. CIT [1996] 217 ITR 746 has held that the assessee could be refused registration on the ground that its constitution was illegal, for breach of the provisions of the Excise Rules. The observations of the Supreme Court in the said decision are in the following terms (page 759) :
"There is no reason why 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 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."
12. The Full Bench has taken the view that the transfer of a privilege to deal with liquor covered by the licence in favour of the partners is hit by the provision under rule 6(22) of the Abkari Shops (Disposal in Auction) Rules. Such a contract of partnership is void under Section 23 of the Contract Act. Such a void contract of partnership cannot be recognised as a genuine partnership under the Income-tax Act, 1961.
13. Learned counsel for the assessee referred to the decision in Jer and Co. v. CIT [1971] 79 ITR 546 (SC) in support of his contention that the partnership cannot be called illegal and, therefore, cannot be refused registration. But as rightly pointed out by learned counsel for the Revenue the relevant Rules which the Supreme Court was dealing with did not prohibit the entering into a partnership by the licensee, whereas the rules we are concerned with prohibit such a transfer and make it an offence punishable.
14. Learned counsel for the assessee referred to the decision in CIT v. Three Aces [1989] 176 ITR 160 (AP) wherein, the Andhra Pradesh High Court took the view that if, out of several activities of a firm, one activity turns out to be illegal, that would not render the constitution of the firm illegal or disentitle it to registration or renewal of registration under the Income-tax Act. In that case, the main business of the firm was running a restaurant. The Excise Licence which was granted to the earlier firm was utilised by the new firm. According to the High Court, the illegality would be only in support of the incidental business and not the main business. In this context, the Andhra Pradesh High Court followed the decision in CIT v. Nalli Venkataramana [1984] 145 ITR 759 (AP) as binding on them. The said decision was not approved by the Supreme Court in Bihari Lal Jaiswal's case [1996] 217 ITR 746. The Supreme Court held while laying down the correct position, that there cannot be, in law, a partnership with respect to the privilege/business granted under the licence without a permission to transfer in writing. The object of having a close control over the business would 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 subletting of licences is uniformly prohibited by several State excise enactments. 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 to be unlawful and void by Section 23 of the Contract Act. 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 does not arise. Therefore, the argument of learned counsel for the assessee that there is no legal bar under Section 23 of the Contract Act, cannot be sustained. Section 23 of the Indian Contract Act, 1872, states that the consideration or object of an agreement is lawful, unless it is forbidden by law ; or is of such a nature that, if permitted, it would defeat the provisions of any law. The licensee permitting others to participate in the business is a situation not conducive to effective implementation of excise law and is against public interest. It follows that the contract would be defeating the excise laws. Such an agreement is declared by Section 23 to be unlawful and void. Therefore, the unlawful partnership cannot be treated as genuine under the Income-tax Act.
15. The decision in Oudh Cocogem and Provision Stores v. CIT [1968] 69 ITR 819 of the Allahabad High Court is to the effect that, as the deed of partnership was not void, the firm is entitled to registration. In that case, under the U. P. Excise Rules (Rule 344(c)), in no case, shall more than two persons be permitted to hold licence jointly. The petitioner firm consists of three partners. In that context, it was held that the deed of partnership need not fail in its entirety simply because three brothers proposed to sell wines in addition to provisions and medicines. The court held that the partnership is partly invalid. The question of genuineness of the partnership was not considered in the light of the prohibition against transfer.
16. The argument of learned counsel that the objectionable part of the contract may be severed and the valid one enforced cannot be countenanced. Pollock and Mulla Indian Contract and Specific Relief Acts, 11th edition, at page 389, deals with the severance of illegality in contracts. The learned authors have stated that two underlying principles appear to have guided the courts on the application of the doctrine of severance :
(i) The courts will not make a new contract for the parties by rewriting the existing contract or by basically altering its nature ;
(ii) The courts will not sever the unenforceable parts of a contract unless it accords with policy to do so.
17. The conducting of liquor trade and the transfer of the licence are held to be opposed to public policy and defeat the object of the Act. Therefore, the courts cannot come to the rescue of an assessee to sustain a contract which is opposed to the public policy.
18. It is not the case of the assessee that he would stop the liquor business so as to continue the lawful trade in hotel. Even if there is a possibility of severance, the assessee should be in a position to intimate his discontinuance. That being purely academic and not having taken place, there is no scope for continuance of registration during the relevant period.
19. In the light of the decision of the Supreme Court in Bihari Lal Jaiswal's case [1996] 217 ITR 746 and the Full Bench decision in Narayanan and Co.'s case [1997] 223 ITR 209 (Ker), there is no scope for distinguishing them from the facts of the case. The ratio would also apply to the case on hand.
20. For the aforesaid reasons, we hold that the firm had started to carry on the business in liquor with the licence in the name of one of the partners in violation of the Abkari Act and Rules and, therefore, the partnership was not entitled to registration under the Income-tax Act.
21. The Tribunal was, therefore, not right in holding that there was no transfer. There is a transfer and the same is prohibited and, therefore, the assessee is not entitled to registration.
22. The two questions referred to us by the Tribunal are answered in the negative, against the assessee.
23. A copy of this judgment under the seal of this court and the signature of the Registrar shall be sent to the Income-tax Appellate Tribunal, Cochin Bench.