COMMISSIONER OF INCOME TAX Vs. NALLI VENKATARAMANA

JUDGEMENT

(1.) THESE two references at the instance of the Commissioner of Income-tax, Andhra Pradesh, raise certain common questions of law and can be disposed of together.

(2.) WE shall first advert to the facts mentioned in R.C. No. 241/80. The assessee is a firm consisting of 11 partners constituted by a partnership deed November 12, 1973, with effect from October 1, 1973. The partnership was to remain in force for one year up to September 30,1974. One of the partners of the assessee-firm was the successful bidder in the auction conducted under the A.P. Excise (Lease of right to sell liquor in retail) Rules, 1969 (hereinafter called "the Rules"), which were framed under the A.P. Excise Act, 1968 (hereinafter called "the Act"). As per the preamble of the partnership deed the said successful bidder who obtained the licence to carry on the business of buying in bulk and selling in retail, required manpower to assist him in the conduct of the said business and also to contribute the required capital. Hence the partnership firm was constituted. Clause 2 of the partnership deed says that the business of the firm shall be the sharing of the profit or loss arising out of the arrack business conducted at Salipet under the licence held by the aforesaid successful bidder. Clause 4 of the said deed mentions the capital that was contributed by the partners. The successful bidder was not required to contribute any capital. Clause 6 of the deed states that the first partner, viz., the aforesaid successful bidder, will have a share of 1% of the net profits and the remaining 99% of the profit or loss shall be divided between the partners in the ratio of their capital contribution. It, therefore, follows that the first partner is entitled to one per cent of the profit but was not to suffer any loss because the ratio of his capital contribution was "nil". Clause 8 is an important clause. It lays down that the first partner, viz., the successful bidder, in whose name the licence stood, should lift the arrack and conduct the sale with the assistance of the other partners strictly complying with the provisions of the Excise Act. It further says that the other partners shall assist the first partner in the conduct of the business and the management of the shop. They were also required to assist the first partner in the matter of the business. The first partner was also to supervise the entire business carried on by the assessee-firm. It may be stated that as many as 32 other partnership-firms were formed on the above lines with the same successful bidder as the first partner in every case but with varying number of other partners. The different partnership related to different shops.

(3.) THE assessee appealed to the AAC. He came to the conclusion that the firm was a genuine firm and that the ITO should have given a chance to the assessee to correct the discrepancy in the profit sharing ratio mentioned in the partnership deed and the Form No. 11 application. Coming to the legality of the partnership the AAC held that the rulings relied upon by the ITO did not apply to the facts of the case. He placed reliance among other cases, on the judgments of the Supreme Court in Umacharan Shah and Bros. v. CIT and Jer andamp; Co. v. CIT [1971] 79 ITR 546, and came to the conclusion that the formation of a partnership by the licensee was not prohibited, even though the licence was in the name of one of the partners. He also pointed out that in contrast to s. 15 and r. 19 of the Rules there were other provisions in the A.P. Denatured Spirit and Denatured Spirituous Preparation Rules, 1970, Condition No. 9, under r. 5(2) of the A.P. Indian Liquor and (Storage in Bond) Rules, 1969, and r. 39 of the A.P. Foreign Liquor and Indian Liquor Rules, 1970, prohibiting the formation of a partnership whereas there was no such prohibition in s. 15 or r. 19 of the Arrack and Toddy Rules, 1969, with which we are concerned. He found that the intention of the partners was that the sale and purchase of liquor should always be carried on in a lawful manner, i.e., by or on behalf of the licensee alone. He, therefore, held that the firm was not void ab initio and he directed the ITO to grant registration to the assessee-firm :