Karnataka High Court
The Commissioner Of Income Tax vs M/S S B Pannalkar & Co on 2 November, 2010
Bench: N.Kumar, Subhash B Adi
_ BIJAEPUR. V
IN THE HIGH COURT or KARNATAKA cincvlfr'
AT GULBARGA __
Dated this the 2"" day of N0vembe_r.~ V
pREsENf'
THE HON'BLE MR,JUsT1cr;"N.KUM4éR:v': 1
THE HON'BLE MR.,.1JUsi*i¢'E' 1' SiIBHASHV "I3.AD1
ITA
BETWEEN :
THE COMMISSJQNER OF 'INQQME jimx
KH1MJIBr--I0T1'COMMERCW. COMPLEX
opp. CIVIL_HOS.P1TAL -- . '
BELGA'UM--'590'O0.'1-._ "
THE I;\Icc5'M_E" TAX .o'F*F£c1i:R
WARI).--2 ' '-
. APPELLANTS
' ' .(;§4Y Sm KUMAR DESHPANDE, ADV.)
'V V' 1').I3LIVER;E}I) THE FOLLOWING;
ix.)
AND:
M/S SB. PANNALKAR 8: CO..
BIJAPUR ROAD
JAMKHANDI.
{BY SR1. ASHOK KULKARNI, -AAD:\fu.' -I?OR"-- "
SRI. K.R. I:>RASAD',,A::x_v.) "
THIS INCOME TAX APPEAL-IS FIL.EI)«UNDER§ SECTION
260--A OF' IT. ACT, 195.1 ARIS-I-NG*0U'_F OF 'O-RD.ER DATED
30-06-2006 PASSED IN __ITA NO.3623._/BANG/2004, FOR THE
ASSESSMENT YEAR 2001-I02, ':?RAI;'1NOjO_TIIAT THIS HON'BLE
COURTMAY BE PLEASED TO; j
i} FORMULATE THE SUBS. QUESTIONS OF LAW
SATED THEIREIN'g_.'~ _ _
1'1) ALLOW THE AP;REAI,'A.ND.'SE'I'"'ASIDE THE ORDER PASSED
BY ITAT "'i:::I:SAI~IGALORE----V" BENCH 'B' IN ITA
NO.3623/BANG/'.2002;-I DATED 30-06-2006 AND CONFIRM
ORDER PASSED THVE---.ASISESSING AUTHORITY, IN THE
INTERESTS' OF JUSTICE-.AN--.t_)"EQU1TY.
. APPEAL COMENG ON FOR HEARING, N.KUMAR, J.,
"
JUDGMENT
The revenue has preferred this appeal order passed by the Tribunal which held complied with the provisions of Section and entitled to the benefit of deduction 1961.
2. The assessee_fij'.\/I/:03 lB--.__'~.¥?'annalkar & Co., a partnership firm is carr_yingV..Von__ the""'busl£tiess of liquor on wholesale bas_lils.'l5f_Thel31iquor~licence stood in the name of one of the partners." fih'c..plilc-fence"-was".not transferred to the name of the assessee andilit Vcontinueld to be in the name of the partner. '0 lffhe "a.s:seissee'i-- zcarI*ied'"mon this wholesale business using the "ii..¢e;._;§;e' by the firm and therefore the Assessing Autliority dislallolxred the remuneration paid to the partners and the interest on capital, vide order dated 23.03.2004. Aggrieved same, the assessee filed an appeal before the ___"'l«.Cofnmissioner of income Tax (Appeals) Belgaum. The appeal came to be allowed by order dated 18.09.2004. Aggz~iev'ed by the same, the Revenue preferred an appeal before which came to be dismissed affirming the order"p_e1ssed Appellate Tribunal. Aggrieved by sanfiet t1f:eAlV'E"{everi.{,l1e h before this Court.
3. The appeal was admpititeldohl'*2§§.02.t2GO.7..to consider the following substantial 0[uelst:to11_sf'ot7 1ei§2'v::?_ " 1) t.:Appelldte"Authority and Vc.3W=ih_iilnt1Z u)I:«:sV.co--rrect in "holding that a licence to uend lViqz;or. an individual can be used by thefi'r'rnlutnd/or__lit';="partners when there being no le_gal' trans fer of the licence ?
l 'Whetherlllthe First Appellate Authority and it 0. correct in holding that though issued to an individual to mend in J utilised by a third party firm, the same it v1;;l)uld not attract Section 23 of the Contract Act ?
3) Whether the First Appellate Authority and--_ Tribunal was correct in distinguishing judgment of the Hon'ble Supreme Court_r-e;o'o'rtefcl--. 9' in 2002 (254) rm 230 (so) «M Comr_niss_ioner.:'o_f 3 Income Tax vs. Rangeelararji Otheits ?;
4) Whether the First Appellate' Aut'hott'iyl'and'j'§ . Tribunal was justfied in. holding tbat"At.h;e a valid firm despite mefgitt that it haasv-violated the provisions :E::cise Act in conducting liquor uitthouft fjayment of transfer u2'i_thottt"havinglj'licence of its ownond 'act Qf thefinn being opposed 1 S'?
A Whethe'r.:theticence issued to an individual A « , for v4endirtg.7liquor be transferred as an asset the firrn under Section 2(2) of the Partnership _Act*and ij' so, would it not amount to violation of it licence conditions, thus affecting the provisions of Section 23 of the Indian Contract 1' ,. lA_ct V?"
4. Learned Counsel for the Revenue assailingp the impugned order passed by the Tribunal contendedV..t.h'at':
under the Karnataka Excise Act, a liquor"
transferred with the permission ;'3:fmVU'l'3 p_ admittedly in this case, no such is could not have carried on liquorc:'p:b1isine.ss_ of the licence which stood in the na1r1eVp_:'of "-one of "they partners. Secondly, he contended thlatain laid down by the Apex Court, a partner 'transfer the licence standing in t.l_i.eD'1a.anie ltvhelllpartnership firm, on the basis of whiich the.partnership firm carries on the business in liquor, which is eleariyuproliiibited. A contract entered into in this regard isuuhipt 133.?' Section 23 of the Contract Act as it is 'opposed totheppublicvlllpolicy as well as the express provision in th"eVstatrL!,t"e»...r_pd in 'those Circumstances, the Assessing Officer was justified in .disvalllouring the deduction to the firm wherein the 'salary paid'i~to the partners and the interest paid are treated as expenditure and given the benefit. Therefore, he RX"
submits that the order passed by the Tribunal as well as the appellate authority is liable to the set aside.
5. Per contra, the learned Counsel assessee submitted that in the instant case. _ti1cr.e: tranisier of licence. The partnership firm liquor l' business. After the firm came into_V:e'xistence;_; carry on business, it had to obtain itiiwas agreed between the partners obtained either in the name of the firm or o--f~th'e.:'pbartners. If obtained in the name of Vth.e«i.p4artners;--.itwould be an asset of the firm. In those circurnstances; licence was applied in the name of the partner. the firs paid out of the partnership firm and it stood in the name of the partner. it was the VAi'assetVplAovfT':thve partnership firm and there was no transfer of licence partner to the firm involved in this case. The ' "judgn1entt'relied on are not attracted to the facts of this case and the appellate authority as well as the Tribunal held that it/r the firm is entitieci to the benefit of deduction. 'Fh~e"refore'.,he submits that no case for interference is made out,_."*'
6. The Apex Court in the of, JAISWAL Vs. CIT, has held as arider:
" A iicensee coald.. nofihlbelei to in strangers into the :I,'I:)hf'i1fA'c',l1fi1;i._?OltlCi mean that instead licensee on the busine§ss,fi;ii'_Vivoillci be by others a V _ R" V" i not it ieonoiueitget' V to effective l excise law and :':__conset;;ViteI1tlg;j"riehteterioiisl to public interest. It is for this my "that transfer or sab--letiing of _ license prohibited by several State excise enaetrrients. It, therefore, follows that any where under the license is transferred, a partnership is entered into with to the privilege business under the said contrary to the prohibition Contained in the relevant excise enactment', is an agreement V H prohibited by law. "
Again the Supreme Court in the Case of CIT Vs. PAL CHAND AND CO., held that the liquor 1aceA1a3seéA:'1;:'g3£' enter into a partnership without p1'tor_permiss_£o191.""rid _ .g Again in the case of CIT Vs. DEGAON SHNA AND CO., the Apex chm-f'1:as heicl " In view of the clewfiraaiiigs of 'recorded by the Tribunal; .no--..doubtu't'hat the subsparmershipslfonrted. partners of the main'--p_artners'i"ti;:§": u)hi_ch_ lessees, with some to finance the business of a partnerV'~'oj7._ 'matn.g_firr:1 doing abkart business and and losses accrued to or received the main firm, were not in i it :.>:o1atzc$h~ ofsechon 14 of the Abkart act. For this theremts no basis to hold that the sub-
" l. were in violation of Section 14 of the and, therefore, illegal. The Tribunal right in holding that in the facts and H »ci:'rcumstances of the case, the assessee sub-
partnerships being found to be genuine were bl/.
entitled to be registered under the Act.
7. The Apex Court had said question in the ease of PATIALA Vs. RANGILA RAM in l_(lé5<i3 ITR 230 (SC). In the said Case, doxishrnhlthe law as under:
" principle, to us, is that the are: commercial. No _Oine_ ;,:_ ll without express pef'7Al1:9's.ior1,_l:'It is,only the licensee who is granted sueh "he.~~enters into a partnership to debit.' liduolr,'._vdll.._l~~the other partners would, as l 'V partners-, be dealing in liquor and holding the 5»-sarrtes Thiswlwould be contrary to the basic _ "and illegal."
.8. »._' T'i1"e1'efo1'e, ultimately it is the intention of the as" gathered from the facts of the case which would l.l_«i&detvelrn1'ine the eligibility for deduction. No person can carry on it, liquor business without a licence or permission. Such; granted is not transferable. Even if transferable'; subject to conditions. A partnershipifirrnto it needs a licence or perrnision Excise Act. if an individual Viransfersfhe to partnership firm, it has to law.
Otherwise the transfer __Section 23 of the indian Contract Act, and a 'partnership firm chooses to obtain in the ofpne of its partner and the licence ipéréated as the partnership asset expresslvx even before acquiring such licneiggand firm pays the fee for obtaining such licence, the..sAaid"'licence granted is a partnership asset and .is=noV't*thelpersonal property of such partner. No transfer is i'nybJ_x_;ed- =s_u'ch=aftransaction. It is not a case of a person who has obtained Zaglirliuor licence is inducted into a partnership as a dz"-'..__partner," .vvl1o brings in the said licence as his capital coritiribtttion and makes available the licence to the partnership to carry on liquor business and thus circumvent the law [Licence ..{General Conditions) Rules 1967, reads as under: 12
prohibiting transfer of such licence. Thus the should acquire the licence to carry on liquor __i;i.1siness~--eii*i-.--.Taab manner known to law to be eligiblefQf__C1ec13;1ctionsundécr the heading business expenditure 1JI1Cl(31:'.:4S€3f'.3'l.if_1:[1 'oflthleliilnconie Tax Act. 1961. V V '_
9. It is not in dispute thiunder the Karnataka Excise Act, Section 15 deals witl1._i:he sal'eo_f'eiécisable« 'articles without licence is prohibited.
'cf '-excisabie articles without Iicence.. ' ' }. ir1toitttjcin.£..'ishall be sold except under the duthiorityiand subject to the terms and congiitionsvllllllof a licence granted in that The rule found in 1703) of the Karnataka Excise I3 " I 7MB. Transfer of licence in other cases.-- U)» Notwithstanding anything contained in -1- 2, licences issued, --
(i) for sale of Indianiziiquor arrack) or Foreign Liquor in No. R' CLAI (Wholesale licen_ce)... or {retail licenses) or CL--7 (Hotel"'and_VBoarding' "Rouse Licenses} or roolnli (Bar) Licence under {Sale of Indian and Foreign. Liquoifsj I 968; or {ii} of:Beer_"u.nder----the Karnataka 'Q:fl"R,_l'_ghi of Retail Vend of Beer)
-K'-.Rules. -- R' Commissioner may on an tA.applicaiion by the licensee and subject to * ;,,,"l4hai;rrri,ent vofwltransfer fee equivalent to the 'V=._annuai--.licence fee specified in Rule 8 of the Excise [Sale of Indian and Foreign Liquors) Rules, 1968 or Rule 5 of the " Kamaiaka Excise {Lease of Right of Retail Vend of Beer, Rules, 1976, as the case mag 14 be, and with the prior approval of the Excise' Commissioner, transfer such licence in_ '7' of any person named by such licence, .
person is eligible for grant; ofa .li_cence« the Karnataka Excise 'lorlldii"»'»'?"'. it made thereunder. V _ .
[2] Nothing in 'fl1i,T$z"'ful€' transfer of licence uni -"r l ' E
10. From the reading. provisions it is clear that no intoxicant licence granted in that lbehe_1fA.xV'l'vfThel:'«Rules"-also.' provide for transfer of such licence in favotir 'per'son::named by such licensee, if such persorris _ eligible for of licence, under the Karnataka 1965 Rules made therein. Therefore, there is no;-totaled'prohibition for transfer of the excise licence.
11.} 'Corning to the facts of this case, the preamble to 'the Paittne.rship Deed dated 04"' November 1997 reads as
-1 , .. .. W//1 _.
" WHEREAS, the above said parties of then". _ 15* to 6*" parts along with Late GANGABAI W/o BABURAO PANALKAR.' L"
were carrying on business .of"Fareig7n V in partnership till 2.1 name and style of M/s 1 2 CC), at Jamkhandi the it deed dated 1.4.1992. ' _V AND the §g;:i¢:..,_s;§it.oanguba:
W/ o Baburao ..j:o.rr1lchandi expireciion.2.1:1.l99%. V 2 _ « _» the remaining 'pal-tners._ eoritintieéi "the said business as in partnership with effect from '3.V11.1'9£'7....._911 the following terms and V o renditions."
xclalluésel3vvo£_'t£1elV.Péirtnership Deed is of utmost importance. It reacisas u:1.der_; 'T
9. 16
" 3. THAT the business of partnership: shall be that of dealing in foreign Liquor agici or. . it any other business that the partners.__j may it 1' decidefrom time to time." .
Clause 15 reads thus:
" 15. THAT the licencex:'t0_ the said business may beflobtc-iinedeither'in the name of any partner or in. to suit the conuedraienceiwofi laujj-unu:ier.V'tohich such lice'nc§e, twflowever, the licen_ce::_ _belorigs firth only. =.
12. Frorn recital in the partnership deed, It is clear that though Athisftnartnership came into existence on 1' Ath 1'Jiover;--1ber,A 19957' 'fer« the reasons set out above, the business =1i«cjuor" xvasV"e3;r1iled on by the partnership from the year 1992. The said bu-sijneiss cannot be carried on without a licence being 'VVobtai'ned:'«§Nh1ch is to be renewed every year. it is In that A Clause 15 provides for iicence which may be obtained either in the name of any partner or in the name of the firm. E7 However, the licence belongs to the firm only. It dispute that after the formation of such . licence was obtained in the name of one V» Therefore the business of the licence. Therefore it is not a case a licence and enters into a partnership firrn contributes licence as his capital aidlofllvwhich the partnership carries on the provisions of is prohibited.
Similarly, this 'the' licence is transferred without authorities, when the statute provides This is a case where a Pa1"tne§r':-yhip on liquor business. On account V. of the one partners, the partnership firm came to reconstituted. Without a licence, they could not *--.have.~ ~coi.itinued to cany on the liquor business in ' 'partnership. Therefore, they agreed to apply for a licence either it 'thelname of the firm or in the name of a partner making it clear that even if the licence is obtained in the name of the 18 partner, the licence belongs to the partnership; Therefore, it is not a case of transfer of licence to' _ firrn nor transfer of licence to a partnership withoiit:j*pgei'ri'iission " V» of the authorities. The very licence is obtaiiiedghbyl the' the name of a partner, to carry -on theV_plartnee.rs'iiip_business_it'; which they were carrying on for than prior to the constitution of the .A " If it if
13. 'Hit? is no intention on behalf of these the law. It is not camoufla_gecl_' Therefore the appellate authority Aaspwell were justified in holding that the afoi'esaid of Apex Court has no application to It is a case of genuine partnership in liquor after obtaining licence in the narnelof v_ the partners, treating the said licence as
- '««___lpartnersi1_i_p asset. No transfer is involved.
14. In fact, the Apex Court in an unreported _§vuti~grrIent in the case of GRAND ENTERPRISES {T _ COMMISSIONER OF INCOME TAX, ~m.~ .:'jcj:Itz§iIf:Appeg:ciI-« .. No.1 31 711319/01, disposed of on flit' 2r4)'Of£:;V--II,_'Vai£*§eI' referring to the aforesaid judgments ofV'"the"Ape:;"'C',o:.irt under:
" A condition expressivgh the entry into agvptzrthership a'«.iiee_tfiCVe_' hjoider would ope:'afe if _Lvere:InOV fer in fact. that "ail: Q) is a transfer, th<'2F1tttVti»5?V be;]7O;:t:Iaily established. h 'In the fact of mere utiiisgdiionh "the'..:iieence, nothing further has i it been recorded the High Court to come to the . 7"eOntch,tIsion there has been a transfer of or of any rights thereunder to the Neither the partnership deed »__'nOr:'any other facts have been brought on " record which would Show that the liquor licence and the privileges thereunder were brought in by the licence holder by way of his capital contribution to the partnership assets'."».l We have already held that merely forTnin_g§'_:the--«l --- » A4 partnership firm would not tantamo_antfl"to L. transfer without something' mrnore'. In absence Of an express sl"1fi4"$l5Tyll 15lr'OU'£»"'l§nll' prohibiting the format1'o'n- of a parfi1ershtpl'l-Eaylial licence holder, the Hig'i1.V:lV.Court haoel addressed itself to then-'qLiestto~n whether the licence formed of property or not, Unless the answered in the§.va_f,tr'inati§tA_)e, Htgh_j--Couift, I could not draw' the there a transfer of the the condition on hadlloeen granted to the Therefore it clear .that"inl'the instant case there is no statutory 'l V' "prQvilsiori..A'prohibitingthevformation of a partnership by a licence l"'ho'Id&er; did not contribute the licence as a captial c0n't1filjutior1't:tet::the partnership assets. On the contrary, the licence," from the inception, was treated as partnership asset by R. words in the partnership deed.
2]
15. In that View of the matter, the aforesaid of the Apex Court have no appIicati_.on.._' It inuu connection with express statutory "p1foV:'is1oVn on" the \,?ar.ioi3.s State enactment. in question w1iiei--:._.proVisions ate n_0t...t.h.ere inf' the enactment in question In that_o_f the mattervvfwe do not see any merit in this appeal,' the substantia} questions of iaw in faVou3"*v.ofoth€¢and against the revenue. Accorétinéjifi, tltc cipjaeqi Vistttiiisifitissed. = '¢,"a*.W .' judge .....
Vfim 'ksp/nu. 2