Income Tax Appellate Tribunal - Cochin
Income-Tax Officer vs Raveendra Engineering Construction ... on 27 December, 1991
ORDER
1. This appeal is directed against the order of the Appellate Assistant Commissioner of Income-tax, Trivandrum, directing the Income-tax Officer to grant registration under Section 185(1) of the Income-tax Act, 1961, to the asses see-firm.
2. When the appeal came up for hearing before -this Bench of the Tribunal, it was found that there was an order of the Tribunal dated April 30, 1989, in I. T. A. No. 155/(Coch) of 1985 in the case of Narayanan and Co., Edappally, wherein it was held that, when a person who has obtained a licence under the Abkari Act carries on that business in partnership with others, it was in violation of the prohibition in the Abkari Act pertaining to transfer of licence with the consequence that the constitution of me firm was void and registration cannot be granted to it. This Bench of the Tribunal was of the prima facie view that that decision required reconsideration in the light of the decision of the Supreme Court in the case of Jer and Co. v. CIT [1971] 79 ITR 546, as well as subsequent decisions of the Andhra Pradesh High Court. The Bench, accordingly, referred the following questions for consideration by a Special Bench of the Tribunal :
" (1) Where a partnership firm is formed for carrying on several businesses and even if one of the businesses is held to be illegal, whether registration can be rightly refused to the firm ?
(2) Where the partnership deed is silent as to whether a partner has brought into the partnership firm the licence or privilege which he might have obtained in his personal capacity but the firm is earning income out of the privilege or licence thus obtained by one of its partners in his personal capacity, whether it can be held 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?
(3) If the answer to the second question is in the affirmative, whether such a transfer is prohibited under the provisions of Section 15 of the Abkari Act (Kerala) read with Rule 6(22) of the Kerala Abkari Shops (Disposal in Auction) Rules, 1974, and the restrictions, conditions and Rules framed under Section 29 of the Abkari Act ?
(4) Whether the decision of the Hon'ble Kerala High Court in CIT v. Union Tobacco Co. [1961] 41 ITR 115, in the context of the Cochin Tobacco Act would still be applicable to cases under the Abkari Act in the context, of the decision of the Supreme Court in Jer and Co. [1971] 79 ITR 546 ? "
3. This special Bench was, therefore, constituted by the President under Section 255(4) of the Income-tax Act, 1961, to consider the same.
4. The admitted facts of the case are as follows :
The assessee is a registered firm constituted under a deed of partnership dated September 12, 1979, with ten partners. The managing partner of the firm is Shri K. R. Raveendranathan. The deed recited that the firm was carrying on business from the first day of April, 1978, and had been reconstituted. The name of the partnership was Messrs. Raveendra Engineering Construction Company and the stated business in Clause 3 was to undertake contracts of construction work, maintenance work and also for supply of materials to Government and other parties. Clause 5 stated that the partnership shall, besides the contract work, carry on such other businesses as the partners may decide. Under this constitution, the assessee had been granted registration for the earlier assessment year 1980-81. In the previous year ended on March 31, 1982, corresponding to the present assessment year 1982-83, Shri Raveendranathan obtained a licence under the Kerala Abkari Act. In pursuance of that licence, the firm carried on the business of Abkari contracts. In the return of income filed, the assessee showed a net loss of Rs. 4,02,788. However, the assessment was completed by an addition of Rs. 5,19,600 under the head " arrack business" by disallowing a disputed kist payment and an addition of Rs. 63,816 in respect of P. W. D. contracts thus determining the total income at Rs. 1,80,628. It is stated that the assessee has lost the litigation in respect of the liability to pay kist with the consequence that, in the appeal pending against the determination of the income, it is likely that the result of the business would be accepted as a loss. The assessee had filed a declaration in Form No. 12 on July 28, 1982. The Income-tax Officer noted that, since the abkari business had been treated as the business of the firm which, according to him, was in contravention of the provisions of the Kerala Abkari Act and Rules, the assessee was not entitled to registration. He, accordingly, passed an order under Section 185(1) of the Income-tax Act, 1961, on July 30, 1984, refusing registration for the assessment year 1982-83.
5. On appeal, the Appellate Assistant Commissioner of Income-tax, Trivandrum, noted that the Abkari Act did not require that every partner should obtain a separate licence in order that the firm can carry on the business in arrack and, consequently, the business carried on by the firm under the licence issued to one of its partners was not in violation of the provisions of that Act. He was also of the view that it did not amount to transfer of the licence by the partner to the firm and hence there was no illegality in the constitution of the firm for which the assessee could be denied registration. He, accordingly, directed the Income-tax Officer to grant registration.
6. The Revenue is in appeal. Shri C. Abraham, arguing for the Revenue, contended that the licence granted under the Abkari Act was personal to the individual as, otherwise, the object of the statute to prevent undesirable persons from obtaining the licence would be defeated. It was argued that even the firm referred only to the individual and, therefore, the individual licence could not be treated as a licence to the firm and, consequently, the business carried on by the firm was in violation of the terms of the licence granted to the individual partner. Secondly, it was argued that the carrying on of the business by the firm amounted to transfer of the licence by the partner to the firm which was in violation of the conditions of the licence and the Rules. Relying on the decision of the Kerala High Court in the case of CIT v. Union Tobacco Co. [1961] 41 ITR 115, it was submitted that the provisions of the Abkari Act were in pari materia with the Cochin Tobacco Act considered in that case with the result that the transfer of the licence by a partner to the firm in contravention of the Rules was against public policy and void and, therefore, the partnership itself is illegal and should not be granted registration. It was further argued that the expression in the Rules was that the licence should not be sold or otherwise transferred which was of a wide import and took into account the exploitation of the licence of the individual partner by the firm. Reliance was also placed on the decision of the Rajasthan High Court (Full Bench) in Motilal Chunnilal v. CIT [1987] 168 ITR 650. It was submitted that, in the circumstances, the order of the Appellate Assistant Commissioner of Income-tax should be reversed and that the order of the Income-tax Officer refusing to grant registration should be restored.
7. On the other hand, it was argued by Mr. Abdul Rahiman for the assessee that, in the present case, there was no transfer of the licence at all because there was no document assigning the licence to the firm. According to him, the exploitation of the licence by the firm was only a matter of financial arrangement and the carrying on of the business by the other persons as agents of the partner who was granted the licence and did not amount to a transfer. It was pointed out that the Allahabad High Court, in the case of Jer and Co. v. CIT [1966] 60 ITR 335, had relied on the decision of the Kerala High Court in the case of CIT v. Union Tobacco Co. [1961] 41 ITR 115, and, therefore, when the decision of the Allahabad High Court was reversed by the Supreme Court, vide its decision reported in [1971] 79 ITR 546, it must be taken to have reversed the decision of the Kerala High Court also. He placed before us the observations of the Andhra Pradesh High Court in CIT v. Nalli Venkataramana [1984] 145 ITR 759, wherein it was held that the decision of the Supreme Court had the effect of impliedly overruling the Kerala High Court decision reported in CIT v. Union Tobacco [1961] 41 ITR 115 and similar observations of the Patna High Court in CIT v. Narpati Khan and Co. [1974] 97 ITR 645 at page 651. According to the assessee, there was no transfer of a licence and even if the exploitation of the licence by the firm was considered to be a transfer, it did not amount to violation of the rules and could not be regarded as affecting the legality of the partnership. Reliance was placed on the decision of the Andhra Pradesh High Court in CIT v. Three Aces [1989] 176 ITR 160, wherein it was observed that, even if there was a violation of the provisions under the Excise Act, it would not be a relevant or adequate reason for refusing registration or grant of renewal of registration under the Income-tax Act. Lastly, it was pointed out that the business had ended in a loss and, therefore, the issue itself was academic.
8. Shri V. Ramachandran, appearing for the intervener, argued that, even if a partnership was constituted in order to provide funds for a partner who had obtained a liquor licence without obtaining permission under the Abkari Act, it would not invalidate the firm and it was entitled to registration as held by the Andhra Pradesh High Court in CIT v. Uppala Rameswar Rao and Co. [1991] 187 ITR 653. It was pointed out that the Supreme Court had dismissed the special leave petition against that judgment (see [1990] 186 ITR (St.) 24). It was also argued that, if the argument of the Revenue that the carrying on of the business by the firm on the basis of a licence granted to a partner is taken to be a transfer of the licence in violation of the Abkari Rules is accepted as making the agreement void under Section 23 of the Contract Act, it would lead to the consequence that the formation of the firm itself was void and such a non-existent firm cannot be assessed to tax in the status of an unregistered firm because it would require the stipulation that there was an agreement to carry on the business either by a firm or by an association of persons which was in contradiction to the stand taken by the Revenue itself.
9. Shri Sivarajan, appearing for another intervener, pointed out that the decision of the Kerala High Court in CIT v. Union Tobacco Co. [1961] 41 ITR 115, relied on by the Madras High Court in Vein Padayachi's case, AIR 1950 Mad 444 [FB], for the proposition that the mere entering into partnership amounts to transfer of the licensee's right and this proposition was specifically overruled by the Supreme Court in Jer and Co. v. CIT [1971] 79 ITR 546. It was also argued that the Allahabad High Court had relied on the same decision of the Madras High Court and, since that was overruled, this proposition itself must be taken to be no longer good law. Reliance was placed on the observations of the Andhra Pradesh High Court in CIT v. Nalli Venkataramana [1984] 145 ITR 759 at pages 784 and 785, that the Madras High Court judgment referred to above did not deal with the question of public policy and proceeded to hold that there is no violation of public policy in the formation of a firm by a licence-holder. The second point stressed was that the meaning of the word " transfer " in the Abkari Rules must be in accordance with the meaning obtaining in the general law inasmuch as the enlarged definition of the word in the Income-tax Act could not be resorted to. Reliance was placed on the decisions reported in Vania Silk Mills P. Ltd. v. CIT [1991] 191 ITR 647 (SC), P. J. Jacob v. T. J. Jacob, [1977] KLT 224, Madras Bangalore Transport Co. (West) v. Inder Singh, AIR 1986 SC 1564 and Helper Girdharbhai v. Saiyed Mohmad Mirasaheb Kadri, AIR 1987 SC 1782, to contend that sub-letting was not considered to be transfer and since the word " transfer " occurs in the phrase " sale or otherwise transfer", it must be considered to be a complete divestiture of all rights unlike subletting where only possession is given. In other words, the argument was that the exploitation of the licence by the individual licensee in partnership with others did not amount to a transfer at all and was not in violation of the Abkari Act so as to make the partnership ineligible for registration.
10. In reply, it was contended on behalf of the Revenue that the Supreme Court had held in 1957 SC 527 (sic) that the expression " otherwise transferred " should be considered to be of wider import and in the case of Sunil Siddharthbhai v. CIT [1985] 156 ITR 509 (SC), the bringing in of an asset into the firm was accepted as a transfer.
11. We have considered the submissions and we have perused the records of the case. We must find whether there was in fact a transfer of the licence granted to Shri Raveendranathan to the partnership firm. Admittedly, there is no document effecting such a transfer. Nor is there any entry in the accounts to indicate that his licence was brought into the firm as contribution of his capital. We have, therefore, necessarily to proceed on the basis that the partnership firm only provided funds to the partner who had obtained the licence and assisted him in carrying on the liquor business sharing the profits arising therefrom. Such an arrangement has been held to be valid by the Andhra Pradesh High Court in CIT v. Uppala Rameswar Rao and Co. [1991] 187 ITR 653. The Andhra Pradesh High Court held that, in such circumstances, registration cannot be refused to the firm. It has to be noted that this view has become final since the Supreme Court has refused to grant the special leave petition against that decision.
12. Since the Revenue strenuously relies on the decision of the Kerala High Court in the case of Union Tobacco Co. [1961] 41 ITR 115, which was followed by the Tribunal in the case of another assessee, we have to consider whether that decision would in any way support the rejection of registration to the assessee. That case related to a licence granted under the Cochin Tobacco Act which provided that the licencee shall not lease out, sell or otherwise transfer the subject-matter of his contract or licence without the written consent of the Excise Commissioner. Significantly, in the statement of the case, the Appellate Tribunal had pointed out that the decision of the Madras High Court in D. Mohideen Sahib and Co. v. CIT [1950] 18 ITR 200, referred to by the Income-tax Officer dealt with provisions of the Abkari Act which differed materially from the provisions of the Excise Act. According to the Tribunal, " it would be illegal for a person to sell arrack or toddy unless he is a renter of the shop whereas, in the case of excise, it would be an offence on the part of a person selling tobacco without taking out a licence. The first one is tainted with illegality while the second one is a punishable offence ". Dealing with this, the Kerala High Court observed that (at page 124): " It is always a question of construction whether the punishment is intended by the Legislature to make the act expensive or to prohibit it, and where the conclusion is reached that the intention is to prohibit the act, the contract to do it would be void. A working test for finding whether the intention be to prohibit is to ascertain whether the punishment is repeated at each act and where that be done the act would be treated as forbidden (vide Buckley J. in Victorian Daylesford Syndicate Ltd. v. Dott [1905] 2 Ch. 624. Counsel for the assessee has not been able to satisfy us about the incorrectness of the aforesaid test and, applying it to Section 6 of the Act, it is clear that a person is punished for each act contrary to the provisions of the Act or Rules. It follows that the act is forbidden and that the contract to do so is void ". On this reasoning, the Kerala High Court held that the formation of a firm to exploit the licence under the Cochin Tobacco Act was void. If we apply the same test to the provisions of the Kerala Abkari Act which, as already noted in that decision, are quite different from Cochin Tobacco Act, we find that the conclusion has to be different. We do not find any provision under the Kerala Abkari Act for punishing the licensee when he transfers his licence. Firstly, Section 15 only provides that no liquor shall be sold without a licence though a person having a licence to manufacture toddy may purchase toddy from a person who does not have a licence. The Section uses the expression "person" which is defined in the Kerala Interpretation and General Clauses Act in Section 2(26) as including an association of individuals, whether incorporated or not. Since there is nothing to prohibit grant of a licence to a firm and since the use of the singular in the form must be regarded as referring also to the plural, we cannot accept the view of the Revenue that the Act intended to grant the licence only to individuals.
13. Rule 6(22) states that " the licensee shall not sell or otherwise transfer his contract or licence without the written consent of the Assistant Excise Commissioner concerned. No licensee shall lease out or sub-rent the whole or any portion of the privilege granted to him under the licence ". Section 26 provides that, in the event of any breach by the holder of a licence of any of the terms and conditions of such licence, the Commissioner may cancel or suspend the licence. In the present case, it is not in dispute that the licence of the assessee was not cancelled for any violation of the Rules and the assessee was allowed to carry on the business and to earn income therefrom. Section 55 provides for penalties and we do not find any penalty provided for transferring the licence without the consent of the Excise Commissioner. Section 56 provides for punishment for misconduct by a licensee including a case where a licensee wilfully does or omits to do anything in breach of any of the conditions of his licence or permit, not otherwise provided for in that Act. But this offence cannot include the act of transfer of licence since such a transfer is permissible with the consent of the Excise Commissioner unlike leasing out or sub-letting the privilege which is completely prohibited under Rule 6(22). In the circumstances, even within the ratio of the decision of the Kerala High Court in CIT v. Union Tobacco Co. [1961] 41 ITR 115, there is no provision in the Act treating the transfer as a punishable offence and it cannot,, therefore, be regarded as forbidden so as to make the agreement void. The Revenue relied on the decision of the Rajasthan High Court in Motilal Chunnilal v. CIT [1987] 168 ITR 650 [FB], wherein it was held that, where there is an express prohibition of a partnership without written permission, such a partnership is forbidden by law and, therefore, it is unlawful rendering it ineligible for registration. However, a close reading of the decision shows that the court had particularly noted that the Rajasthan Excise Law not only renders the licences liable to cancellation on breach of the conditions of the licence but Sections 54 and 58(c) make it punishable with imprisonment or fine (see [1981] 168 ITR 650 at page 698). In contrast, as we have already noted, there is no such provision in the Kerala Abkari Act making the transfer of licence without permission a punishable offence.
14. For the sake of completeness, we may consider the impact of the other decisions cited before us. In the case of Jer and Co. v. CIT [1966] 60 ITR 335 (All), it was noted that, Rule 322 of the Excise Manual laid down that an excise licence is personal to the licensee to whom it is granted and a Collector should not allow a transfer or sub-lease or partnership of an excise licence without the prior approval of the Excise Commissioner, (emphasis * supplied). The licence itself was granted in Form No. F. L. 2. The Supreme Court pointed out in Jer and Co. v. CIT [1971] 79 ITR 546, 548 that "The licence does not prohibit the holder from entering into partnership by the holder of the licence : it merely provides that the licence shall not be sub-let or transferred. Since there is no prohibition against entry by the holder of the licence into a partnership the question whether the partnership was illegal does not arise. The firm was entitled on that account to registration ". These observations have been understood by the Andhra Pradesh High Court in CIT v. Natli Venhataramana [1984] 145 ITR 759, and by the Patna High Court, in the case of CIT v. Narpati Klian and Co. [1974] 97 ITR 645, to mean that where the licence for trading in liquor stood in the name of one partner and he formed a partnership to run the liquor business, it did not amount to a transfer of the licence in violation of the Abkari Rules and there was no illegality in the partnership so as to be denied registration. Moreover, it has been held by the Andhra Pradesh High Court in CIT v. Three Aces [1989] 176 ITR 160, 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. Thus, in any view of the matter, we are convinced that the assessee was entitled to registration and we, accordingly, confirm the order of the Appellate Assistant Commissioner.
15. Our answers to the questions referred are in the negative. In the result, the appeal is dismissed.