Income Tax Appellate Tribunal - Cochin
Thodupuzha Wines vs Dy. Commr. Of Income-Tax on 25 May, 2005
Equivalent citations: (2006)99TTJ(COCH)786
ORDER
R.S. Padvekar, Judicial Member
1. The Assessee has preferred these four appeals against the common order of the CIT(Appeals)-II, Kochi dated 16.1.2003 and the Assessment Years involved are 1993-94, 1994-95, 1995-96 and 1996-97. The grounds taken by the Assessee are common and the issue is also identical in all these appeals. Hence, we have decided to dispose of all these four appeals by this consolidated order for the sake of brevity.
2. The factual matrix leading to the controversy are necessary to be stated in brief. The Assessee-firm is engaged in the business of purchase and sale of liquor, i.e. arrack. The Assessee-firm filed its returns of income in the status of a Firm for all the relevant assessment years. The returns filed by the Assessee-firm were processed under Section 143(1)(a). It was noticed by the Assessing Officer that licence for doing the liquor business was in the name of one of the partners of the Assessee-firm and the assessee-firm did not hold the requisite liceese to carry on the liquor business and the firm was exploiting the liceese which was in the name of one of the partners and doing the business. The Assessing Officer was of the view that the Assessee-firm has violated the provisions of Kerala Abkari Act and the relevant Rules. After considering the decision of the Hon'ble Kerala High Court in the case of Narayanan & Co. v. CIT, reported in 223-ITR-209, the A.O. was of the opinion that the transfer of Abkari licence is illegal, and in such circumstances it cannot be considered that the Assessee-firm was in existence. He accordingly completed the assessment of the Assessee under Section 143(3) read with Section 147 of the I.T. Act, treating the Assessee-firm as an A.O.P., and in consequence he disallowed the salary and remuneration paid to the partners while determining the total income of the Assessee. While completing the assessment of the Assessee-firm in the status of an AOP, the A.O. applied the maximum marginal rate to the total income computed and in addition to the tax, he also charged interest under Section 234A and Section 234B.
3. The Assessee challenged the impugned orders of the A.O. before the CIT(Appeals) for all the Assessment years under consideration, but the Assessee did not find favour as far as their contentions were concerned, which were reiterated before the CIT(Appeals). Before the CIT(Appeals), the Assessee has challenged the reopening of the assessments as well as treating the Assessee as an AOP for the purpose of levy of tax. The CIT(Appeals) was of the opinion that the Assessee-firm had been constituted to carry on the business of trading in arrack. The licence to carry on the arrack business had been granted to one of its partners and the said partnership was constituted to exploit the liceese, which was in the name of the partner. After considering the observations of their Lordships of the Hon'ble High Court of Kerala in the case of Narayanan & Co. (supra), the CIT(Appeals) was of the opinion that an assessee-firm exploiting an Abkari licence granted under the Abkari Act and Rules and the conditions of the licence by entering into a partnership cannot be held to be a valid partnership under the Contract Act. The CIT(A) was of the view that as per the provisions of Section 184, as amended with effect from A.Y. 1993-94, there has to be a firm which can be assessed as a firm for the purpose of the Act when it has complied with certain requirements as specified in Section 184 of the amended Act. After considering the facts of the case, then CIT(Appeals) concluded that there was no valid firm in existence and hence, the Assessee-firm can only be assessed as an AOP, and he upheld the action of the A.O. holding the status of the Assessee as an A.O.P.
4. The Assessee has challenged the order of the CIT(Appeals) before us and has taken the following grounds:
"1. The CIT(Appeals) erred in sustaining the order of the assessing officer in taking the status of your petitioner as Association of Persons.
2. Your petitioner was a partnership firm constituted under a deed of partnership showing the names of partners, share of partners etc. and have duly complied, with the provisions of Section 184 and 186 and have filed return along with copies of the deed of partnership duly signed as provided in the Act.
3. The status was declared as a firm and the assessing officer or the CIT(A) has shown no reason in changing the status declared by your petitioner.
4. Provisions for assessment of the partnership firm has changed radically by the Finance Act 92 with effect from 93-94 and the Act clearly state the provision under which the firm is to be assessed as a firm.
5. There was no default committed by your petitioner to come under the provisions of Section 186 to be assessed as an AOP and refusal of registration of the firms started only in the Kerala High Court decision of Narayanan & Co. which was subsequently confirmed by the apex court. But a recount decision in a SLP the Apex court had admitted the petition on the question of registration on the same point. As such the merits as well as on a legal, issue the CIT(Appeals) went wrong in taking the status as AOP.
6. Other grounds that may be allowed at the time of hearing."
5. The only issue involved for our adjudication is, whether on the facts and circumstances of the case, the Assessee is entitled to be assessed as a firm as such.
6. We have heard the learned A.R. for the Assessee and the ld.D.R. for the Revenue at length. The ld.A.R. has filed a Hearing Note as well as copy of an unreported decision of the Hon'ble Supreme Court in the case of Grand Enterprises, Kerala v. CIT (Appeal Nos. 1317-1319 of 2001 dated 4,1,2.2002), and also copies of the orders of the CIT(Appeals)-V, Kochi in the case of M/s Kerala Beverage Company, and M/s Anand Bar & Restaurant. The ld.A.R. reiterated the arguments which he had made before the CIT(Appeals). the sum and substance of the arguments advanced by the ld.A.R. is that there is a substantial change is the assessment procedure of the firm from the A. Y. 1993-94 and Sections 184 and 185 of the I.T. Act have undergone major changes vide Finance Act, 1992. He submitted that the decision relied on by the CIT(Appeals) in the case of Narayanan & Co. (supra) is in respect of the Asstt. Year 1981-82 when there was the concept of Registered and Unregistered firm in existence and hence, the principle laid down by the Hon'ble High Court of Kerala in the case of Narayanan & Co. has no application from the assessment year 1993-94 onwards. He further submitted that mere is a substantial difference in the concept of firm assessing as a Registered Firm or Unregistered Firm or assessing the firm as an AOP. He further submitted that according to the newly amended Section 184, which is applicable from the AY 1993-94 onwards, the firm shall be assessed as such, (1) if the partnership is evidenced by the instrument of partnership, (2) wherein the individual shares of the partners are specified, and (3) certified copy of the said deed of partnership is filed along with the first return of income. He further submitted that once the firm is assessed as a firm in any assessment year, then as per the provisions of Section 185(3) it shall continue to be assessed as such for the subsequent assessment year, unless there is a change in the constitution of the firm or in the shares of the partners. He further submitted that in the identical facts, the Hon'ble Supreme Court in the case of Grand Enterprises(supra) has held that the mere fact that a license in the name of the partner is utilized by the firm it cannot be said to be transfer of the said license, which violates the provisions of the Abkari Act. In this case also, there is no transfer of the license and hence, the principles laid down by the Hon'ble Supreme Court in the case of Grand Enterprises are clearly applicable in the Assessee's case. On the other hand, the learned D.R. supported the order of the CIT(Appeals).
7. We have considered the facts of the case as per record before us. Sections 184 and 185, which regulates the assessment of the Assessee, have undergone major changes by the Finance Act, 1992, which are applicable from the A.Y. 1993-94. From the Asstt. Year 1993-94, a Firm is taxed as a separate entity. The distinction between the Registered and Unregistered Firm has been done away with. As per the amended provisions of Sections 184 and 185 of the I.T. Act , with which we are concerned, the Firm is assessed as a Finn, if the three basic conditions are fulfilled, namely (1) the Firm is evidenced by instrument, (2) the individual shares of the partners are specified in that instrument, and (3) a certified copy of the instrument of partnership shall accompany the return of income of the previous year relevant to the assessment year 1993-94, or subsequent year in respect of which the assessment of the Firm is first time sought. Apart from the fulfillment of the above basic conditions, there are some additional conditions which a Firm has to satisfy to get the status of partnership firm as such, which are (1) whenever during the previous year a change has taken place in the constitution of the firm or in the profit sharing ratio of the partners, a certified copy of the revised instrument of partnership shah be submitted along with the return of income of the concerned assessment year, and (2) there should not be any violation on the part of the firm as is specified in Section 144 of the Act. Hence, from the A.Y. 1993-94 the Firm is to be assessed as a Firm only, but there are certain bar for assessing the Firm as a Firm, more particularly in Sections 184(5) and Section 185 of the Act. In the circumstances specified therein the Firm can be considered as an AOP for the purpose of assessment and accordingly it can be taxed. As far as sub-sec. 184(5) is concerned, it is as under:
184.(1) A firm shall be assessed as a firm for the, purposes of this Act, if-
(2)...
(3)...
(4)...
(5) Notwithstanding anything contained in then foregoing provisions of this section, where, in respect of any assessment year, there is on the part of a firm any such failure as is mentioned in Section 144, the firm shall not be assessed as such for the said assessment year and, thereupon, the firm shall be assessed in the same manner as an association of persons, and all the provisions of this Act shall apply accordingly."
8. As far as Section 184(5) is concerned, it is in the nature of non-obstante provision which is applicable only in case where the assessment of the firm is completed under Section 144 of the I.T. Act. Section 144 of the Act deals with best judgment assessment if any person (a) fails to make the return required under Sub-section (1) of Section 139 and has not made a return or a revised return under Sub-section (4) or Sub-section (5) of that section, or (b) fails to comply with all the terms of a notice issued under Sub-section (1) of section 142 or fails to comply with a direction issued under Sub-section (2A) of that section, or (c) having made a return, fails to comply with all the terms of a notice issued under Sub-section (2)of section 143, the Assessing Officer, after taking into account all relevant material which the A.O. has gathered, make the assessment of the total income or loss to the best of his judgment and determine the sum payable by the assessee on the basis of such assessment. Hence, from the circumstances given in Section 144(1)(a), (b) and (c), we are of the opinion that those circumstances were not inexistence for treating the Assessee-firm as an AOP. Moreover, Section 185 of the Act bars the assessee to be assessed as a firm if the conditions mentioned in Section 184 have not been complied with. Hence, in our considered opinion, there is very limited scope for the A.O. to treat the firm as an AOP, save in the circumstances specified in Section 184(5) read with Section 144 of the Act, or Section 185 of the Act. In the old provisions, the A.O. had to determine the genuineness of the firm and the conditions requisite were also totally different. Incase the AO was satisfied, then he has to pass an order granting registration to the firm and treating it as a registered firm, and if he is not satisfied regarding the genuineness of the firm, then he used to assess the Firm as an Unsregistered firm. That was the legal position under the old provisions of Section 184 and 185. Considering the newly inserted provisions of section 184 and 185, and also the circular issued by the Central Board of Direct Taxes (Circular No. 636 dated 31.8.1992) explaining the provisions of taxation of income of the firm, more particularly para 48 of the said circular, we are of the considered opinion that there is very limited scope to the AO to make the assessment of the firm, if it is so, by treating the same as an AOP.
9. Now we turn to the CIT(Appeals)'s reasoning for upholding the action of the A.O. treating the assessee as an AOP. The CIT(A) has discussed the observations of the Hon'ble High Court of Kerala in the case of Narayanan & Co. (supra). The CIT(A) has quoted the observations of the Hon'ble High Court on page 4, which are as under:
".....The law stated by their Lordships make it clear that the licensee when entering into a partnership for exploiting the licence will be parting with his exclusive right under the licence in favour of the other partners. In other words, he transfers a portion of his exclusives privilege to deal in liquor covered by the licence in favour of his partners. Such a transfer is hit by the provision in Rule 6(22) of the Rules. Consequently, the partnership is against the Abkari Act and the Rules, because the licence which originally belonged solely to the licensee now become subject to the rights of other partners to the partnership. Thus, the liensee by entering into a partnership transfers a portion of his privilege under the licence in favour of other partners. So, the partnership that has been entered into for sharing the privilege in dealing in liquor with other partners is a prohibited one. Such a contract of partnership is void under Section 23 of the Contract Act. Such a void contract of partnership cannot be recognized as a genuine partnership under the Income tax Act, 1961...".
10. There were References before the Hon'ble High Court of Kerala in the case of Narayana & Co.(supra) and other assessees. The following questions were referred to the Hon'ble High Court by the I.T.A.T., Cochin Bench:
1. Whether, on the facts and in the circumstances of the case, the firm was entitled to registration under Section 185(1)(a) of the Income-tax Act, 1961, for the assessment year 1981-82?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that forming a partnership by an abkari licensee and exploiting the licence amounts to transfer of licence making the business of the firm illegal?
3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that forming a partnership by an abkari licensee and exploiting the licence making the business of the firm illegal?
4. Whether, on the facts and in the circumstances of the case, the firm was entitled to registration under Section 185(1)(a) of the Income-tax Act, 1961, for the assessment years 1980-81, 1981-82 and 1982-83?
11. It is clear from the facts of the case before the Hon'ble High Court that the issue was relating to registration of the firm under the old Section 185(1)(a) of the I.T. Act and whether forming a partnership by an Abkari licensee and exploiting the licence amount to transfer of licence, making the business of the firm illegal. The short facts involved in the said case were that there were two different assessee-firms. During the accounting period relevant to the A.Y, 1981-82 the said firms carried on Abkari business exploiting the licence granted in the name of one of the partners of the said firm. The said firms applied for registration Under Section 184 of the Act The ITO was of the view that there was transfer of the licence obtained in the name of one of the partners when the firm was allowed to exploit the licence. The ITO refused to register the partnership under the I.T. Act, because in his opinion, the said action on the part of the firm was in violation of the provisions contained in Section 15 of the Abkari Act. On appeal, the CIT(Appeals) took the view that there was absolutely no prohibition against carrying on a business in liquor by more than one person forming themselves into a partnership, since the prohibition under the Act was in respect of transfer of the licence and not against the exploitation of the licence in partnership with another. The Revenue appealed to the Tribunal questioning the decision of the A.A.C./CIT(A). The Tribunal went into the question as to whether entering in to a partnership by the licensee will amount to sale or otherwise transfer of the licence. It was of the opinion that prohibition in the Abkari Act against the sale or otherwise transfer of the licence was an embargo which was of a very wider amplitude and the Tribunal quashed the order of the AAC/CIT(A) and restored the order passed by the ITO. In the said decision, the Hon'ble High Court of Kerala has interpreted Section 15 and Rule 6(22) of the Kerala Abkari Shops (Disposal in Auction) Rules, 1974, which prohibits the sale of liquor or intoxicating drugs without licence granted by the Excise Commissioner. The Hon'ble High Court also considered the decision of the Hon'ble Supreme Court in the case of Addanki Narayanappa v. Bhaskara Krishnappa, . Their Lordships were of the view that when the licensee went entering into a partnership for exploiting the licence will be parting with his exclusive right under the licence in favour of the other partner and hence, such transfer is hit by the provisions in Rule 6(22) of the Rules. Hence, Their Lordships held that the partnership is against the Abkari Act and Rules, because the licence which originally belonged solely to the licensee now becomes subject to the rights of other partners of the partnership, and in the opinion of Their Lordships, such contract of partnership is void under Section 23 of the Contract Act and such void partnership cannot be recognized as a genuine partnership under the Income tax Act.
12. By reversing the order of the Hon'ble Kerala High Court in the case of Grand Enterprises (supra), after discussing the provisions of the Kerala Abkari Act and relevant Rules, the Apex Court held that mere entering into a partnership agreement by licence-holder would not amount to transfer of the licence, thereby violating the conditions on which the licence is granted. It is further held that as held in the case of Jer and Co. , the word "transfer" did not amount to an express prohibition of the entry by the holder of the licence into partnership. At the same time the said decision did not hold that the entry into partnership by licence-holder may not amount to transfer in certain circumstances. A condition expressly prohibiting the entry into a partnership by licence-holder would operate even if there were no transfer in fact. But when all that is forbidden is a transfer, that must be factually established. The Hon'ble Apex Court further held that "apart from the fact of mere utilization of the licence, nothing further has been recorded by the High Court to come to the conclusion that there has been a transfer of the licence or any rights thereunder to the appellant-firm. 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 byway of his capital contribution to the partnership assets. Merely forming the partnership would not tantamount to a transfer without something more".
13. In this case also, nothing has been brought on record by the A.O. as well as by the CIT(A) to show that there was a factual transfer of the licorice or its privileges by the partner in the name of the Assessee-firm. The reassessment proceedings was initiated only on the basis of the decision of the Hon'ble Kerala High Court in the case of Narayanan & Co. (supra), in which it is held that transfer of Abkari licence is illegal, without further investigation whether there was a factual transfer of the said licence or whether the said licence formed part of the partnership property. Hence, after considering the facts of the present case and respectfully following the legal; propositions of the Hon'ble Supreme Court in the case of Grand Enterprises (supra), we are of the considered opinion that the Assessee-firm is entitled to be treated as a Firm as such as an entity under the Income tax Act for assessment purposes. Hence, we cancel and set aside the order of the CIT(Appeals) treating the Assessee as an AOP for all the assessment years and direct the A.O. to treat the assessee as a Firm as such under Section 184 of the I.T. Act for assessment purpose.
14. In the result, the Assessee's appeals are allowed. Order accordingly.