Income Tax Appellate Tribunal - Bangalore
S.B. Gowdiah And Sons vs Deputy Commissioner Of Income-Tax on 3 October, 1994
Equivalent citations: [1995]52ITD158(BANG)
ORDER
A.V. Balasubramanyam, Judicial Member
1. The question of granting registration to .the assessee (firm) is the subject-matter of this appeal. The assessment year is 1987-88. The assessee is a firm which, at the relevant time, consisted of two partners. The business of the assessee was taking excise contracts. It was also running an oil mill and a petrol pump. During the previous year there was no income from petrol pump and, it appears, it was not functioning. So also the oil mill.
2. The assessee had done toddy business in the districts of Gulbarga and Mysore during the year of account. The income earned from that business had been offered to tax. The Assessing Officer made an assessment under Section 143(3) in which he came to make additions. The assessee had filed a return in the status of firm and Form No. 12 had been filed. The firm had been constituted in 1971 and registration was being granted from year to year. Therefore, Form No. 12 was filed for continuation of registration and there was no change in the constitution. The assessment was made in the status of URF. The Assessing Officer passed a separate order declining registration for this year.
3. The assessee had appealed from that order to the Commissioner of Income-tax (Appeals). There was also a quantum appeal filed by the assessee. Both the appeals were conjoined and a single order was passed by the Commissioner (Appeals) whereby the action of the Assessing Officer was upheld in regard to status. The instant appeal is one directed against the order of the Commissioner (Appeals) affirming the status of URF.
4. The order of the primary authority purports to be one passed under Section 185(1)(b). Section 185 applies to a case where registration has to be granted at the inception. Here, the assessee was a firm constituted way back in 1971, and being continued from year to year. There was no change in the constitution during the year of account. This was a case of continuation of registration and, therefore, Form No. 12 was filed by the assessee. Though the order of the Assessing Officer says that it was passed under Section 185(1)(b), the discussion made in the order goes to show that he was not granting registration for this year for a particular reason. With regard to the validity of the reason, we will take up that point at a later stage. For the present, we may point out that a firm which had been granted registration for any assessment year shall have the effect for every subsequent year unless there is a case for application of the proviso mentioned in Section 184(7). The assessee had met the requirement of filing Form No. 12 so there was no procedural lapse.
5. Registration can be cancelled if a case is made out under Section 186(1). Therefore, the order of the primary authority had to be examined from the point of the condition engrained in Section 186(1). The wrong mentioning of the provision by the Assessing Officer does not detract from the position that the assessee would be entitled to registration unless a case is made out under Section 186(1). We now proceed to the merits.
6. As mentioned earlier, toddy business was the main source of income during the year of account. One Puttaraju is an employee of the firm (assessee). He was the successful bidder in the excise auction for the areas in which the assessee had done toddy business. The case made out by the Assessing Officer is like this.
7. On the basis of the licence granted to Puttaraju the assessee had carried on toddy business contrary to Excise regulations. Therefore, the business carried on was illegal. As the business itself was illegal, the Assessing Officer held that the partnership was illegal. That was the reason for holding that the firm was not entitled to registration.
8. The Assessing Officer seems to have relied upon the decision of the Madras High Court in the case of A.D. Thiagaraja Pillai v. CIT [1965] 55 ITR 419. There is also reference to an earlier decision of the same High Court in the case of D. Mohideen Sahib & Co. v. CIT [1950] 18 ITR 200. The Commissioner (Appeals) has practically agreed with the Assessing Officer to hold that the business of toddy, as conducted by the assessee, was illegal. The appellate order makes reference to the Full Bench decision of the Rajasthan High Court in the case of Motilal Chunnilal v. CIT [1987] 168 ITR 650.
9. It is necessary to make a brief reference to the material provisions of the Karnataka Excise Act which have a bearing to the issue under consideration. "Toddy" is "liquor", according to the definition in Section 2(18) of the Karnataka Excise Act, 1965. It is, therefore, an intoxicant under Section 2(16) of the said Act. No person can tap toddy from a tree, or bottle it for sale, except on the authority of a licence granted by the authority designated under the Karnataka Excise Act.
Section 13(2) reads :
A licence granted under this section shall extend to and include servants and other persons employed by the licensee and acting on his behalf.
The State Government has power to impose restrictions while granting licence or permit under the Karnataka Excise Act. The Government can cancel the licence or permit in the event of breach of any duty or obligation imposed upon the licensee; vide Section 29.
For transporting or manufacturing, collecting or possessing any intoxicant, contrary to the provisions of the Karnataka Excise Act, even prosecution can be launched. Under the Karnataka Excise (Lease of the Right of Retail Vend of Liquors) Rules, 1969, lease of a right of retail vending of liquor cannot be transferred by the lessee except with the permission of the State Government; vide Rule 16A.
10. The case law relied upon by the revenue, firstly, is the Full Bench decision of the Rajasthan High Court in the case of Motilal Chunnilal (supra). The Assessing Officer has referred to the decision of the Madras High Court in the case of A.D. Thiagaraja Pillai (supra) to hold that the partnership is illegal. We were also referred to the decision of the Madras High Court in the case of D. Mohideen Sahib & Co. (supra). All these cases are, no doubt, related to firms which carried on business in liquor or toddy which were subjected to Excise Duty and in contravention of Excise law. It was declared that the partnership so conducted was illegal and void, and, therefore, not entitled to registration. But one aspect in all those cases was that those firms had sought registration for the first time either under Section 184, read with Section 185(1), of the 1961 Act or Section 26A of 1922 Act. In the appeal before us we are concerned with a case of cancellation to which Section 186(1) is the provision applicable.
11. A firm formed for an illegal purpose is void from the inception and the question of granting registration under Section 184, read with Section 185(1), does not arise at all. A firm which was valid in its inception may also become void on account of indulgence in acts of illegality or which are opposed to public policy. In the instant case, the firm, as originally constituted, was not only legal but genuine also. That is why registration was granted until assessment year 1986-87.
12. Registration once granted has the effect of continuation for subsequent assessment years under Section 184(7) unless provisos (i) and (ii) apply. In this case, there was no change in the constitution and Sub-clause (i) is not attracted. The assessee had filed Form No. 12 and the requirement of Clause (ii) is fulfilled. Prima facie, the assessee's claim for continuation of registration is good.
13. The profit of every business in liquor is not tainted with illegality merely because there was some breach here and there. In the case of a firm which was once granted registration, cancellation can only be under Section 186(1). We may pause to mention one contention urged by Shri Prasad.
14. Section 186(1) contemplates that the assessee should be given a reasonable opportunity of being heard before any order is passed. It was stated that the Assessing Officer had not given the assessee a notice specifically in that behalf. Para 6 of the order passed by the Assessing Officer shows that the chartered accountant appearing for the assessee had been heard. That aspect of Section 186(1), in our view, has been complied with.
15. To return to the subject, this is a case which is to be examined from the point of Section 186(1). All that the Assessing Officer required to do is to see whether there was, during the previous year, no "genuine" firm in existence. There is no finding by the Assessing Officer in this year that the firm was not genuine. The objection of Shri Prasad is correct. Even the Commissioner (Appeals) does not find anywhere that the firm (assessee) was not genuine. All that the authorities below say is that the firm was illegal and, therefore, not entitled to registration for this year.
16. There is a subtle distinction between the words "genuine" and "invalid" and this has been shown by the Karnataka High Court in the case of CIT v. Kirana Traders [1986] 161 ITR 726. In this case, the firm had been constituted in March 1978 and registration had been granted for assessment year 1978-79. But later it was sought to be cancelled. The authority of the Income-tax Officer was examined in the context of Section 186(1). To quote the relevant passage :
The emphasis in the provision is with regard to the satisfaction of the Income-tax Officer as to the non-existence of a genuine firm during the previous year. There is thus a limitation imposed by the Legislature for cancellation of registration. It has been confined to one ground only, that is, the firm that existed during the relevant year was not genuine. Such a power cannot be equated with a power to grant registration. For the purpose of granting registration to a firm under the Act, it is now not in dispute, that there shall be a firm valid in law and also in fact. The concept of the firm being valid in law is distinct from its factual genuineness and for the purpose of granting registration, both the aspects are relevant and must be present and one without the other will be insufficient (see S.P. Gramophone Co. v. CIT [1986] 158 ITR 313(SC).
but these two requirements need not be present for purpose of cancelling the registration once granted. If the Income-tax Officer wants to cancel the registration under Section 186(1), all that he has got to know is whether there was during the previous year no genuine firm in existence as registered. The word 'genuineness' appears to have been used in contradistriction to the words 'sham', 'bogus or not real'. Our view finds support from the decision of the Allahabad High Court in CIT v. Bajaj & Co. [1983] 143 ITR 218 and the decision of the Andhra Pradesh High Court in CIT v. Badjanappara Salt Company [1974] Tax LR 19.
The Income-tax Officer had not formed an opinion that there was no genuine firm in existence in the previous year. It must, therefore, be held that cancellation was wrong.
17. Whether it is continuation of registration or cancellation of registration granted, the source of power is only Section 186(1). For grant of registration not only the authority must be satisfied that there was a genuine firm but also that the firm was valid in law. A firm which is not valid in law does not exist in the sight of law. Therefore, the question of granting registration to an entity which does not exist in the eye of law does not arise. Apart from legality or otherwise, the firm must be genuine also to be entitled to registration at the inception. Genuineness is one which embraces the reality of the body which, for that purpose, exists. When partners do not really intend to constitute a firm but a firm is apparently brought into existence by going through certain formalities, a real firm is not established, but a sham or bogus one. That is a case of a firm being not genuine. While legality of the firm is one of law, genuineness has nexus to realm of facts. It is in this context we have to insist upon a finding of the primary authority in regard to existence or otherwise of a genuine firm. As already stated there is no finding by the Assessing Officer that there existed no genuine firm. The finding of the Assessing Officer that the partnership was illegal does not satisfy the condition of Section 186(1).
18. Puttaraju in whose favour the licence had been granted was working with the assessee on salary. He was a servant though his exact designation is not apparent from the record. Puttaraju had executed a power of attorney in favour of one Prabhakar who was the manager of the firm (assessee). It is on this authority the firm had tapped toddy and sold in retail. According to Section 13(2), Karnataka Excise Act, a licence granted under this section to a person to tap toddy or bottle toddy for sale would extend to and include "servants and other persons employed by the licensee and acting on his behalf. The word "servant", no doubt, connotes persons hired by the licensee himself. But in juxtaposition we also find "persons employed by the licensee". The word "employed" does not mean persons with whom the licensee has established the relationship of master and servant. The word "employed", in the ordinary sense, would take in its sweep persons who are occupied in the performance of work or duty. It plainly means that persons with whom there is no relationship of master and servant can also be "employed". These words followed by "acting on his behalf give a meaning that a person holding power of attorney could also be a person who would fall within the authority of Section 13(2), Karnataka Excise Act. Power of attorney given to Prabhakar cannot be taken to have been given in his personal capacity. For all that he must have represented the assessee being its manager. Furthermore, the assessee was the guarantor for Puttaraju for the grant of the lease.
19. When the assessee had carried on business in more than one area it cannot be said that the excise authorities had no notice or knowledge. If there was any breach, the authority under the State Government would have taken action against Puttaraju and cancelled the licence granted to him. Perhaps, action was even possible against the assessee for vending toddy against the provisions of Excise law. When excise authorities had not taken any action either against Puttaraju or the assessee, it is difficult to think that there was clandestine exploitation of the licence by the assessee of a permit not granted to it. This is important factor which should be taken note of particularly when the authorities below do not hold that the firm was not genuine.
20. If the assessee was a firm to which legal recognition could not be given, then it must be held to be a void firm. A void firm is one which does not exist in the contemplation of law. When the entity itself does not exist the question of making an assessment on such firm is illusory. If the conclusion of the authorities below that the partnership was illegal is carried to its logical end, then there should have been no assessment against this firm even in the status of URF. The Assessing Officer, perhaps, in that situation, was required to make a protective assessment and proceeded to make a substantive assessment against the partners in the status of AOP. No return in that status had been filed, much less a notice had been issued for filing of the return by the AOP. When once a case is not made out under Section 186(1) inasmuch as there is no finding that there was no genuine firm, registration cannot be refused. Reversing the orders of the authorities below, we direct that the assessment be made against the assessee in the status of registered firm.
21. The appeal by the assessee is allowed.