PARIPOORNAN, J. - (1.) THE Revenue has filed this appeal against the judgment of the High Court of Andhra Pradesh dated 22-8-1977 rendered in Case Referred No. 45 of 1975. The High Court granted a certificate under Section 261 of the Income Tax Act to appeal to this Court, in SCL Petition No. 57 of 1978. The assessee is the respondent in this appeal
(2.) SINCE the respondent (assessee) was not represented, we requested Shri V.A. Bobde (Senior Counsel) to assist us. We heard counsel for the Revenue Shri J. Ramamurti and Shri V.A. Bobde The short question involved in this appeal is : Whether the respondent-assessee firm is entitled to registration under the Income Tax Act for the year 1966-67 ? The Income Tax Officer by his order passed under Section 185 of the Income Tax Act, 1961, dated 28-12-1970, held that the respondent-assessee - sub-partnership - contravenes the provisions of Section 14 of the Andhra Pradesh (Telangana Area) Abkari Act (hereinafter referred to as 'the Abkari Act') and so, the sub-partnership should be considered as void and illegal. Section 14 of the Act is to the following effect "14. No lessee shall, except with the permission of Government, declare any person to be his partner; and such partner shall not be competent to act as such until he has obtained a licence to that effect from the Collector or any other competent officer." * Registration was refused. The said order was confirmed in appeal by the Appellate Assistant Commissioner by order dated 28-2-1972. In further appeal, the Income Tax Appellate Tribunal (the Tribunal) in ITA No. 210(Hyd)/1972-73 by order dated 31-12-1973, held that the firm (sub-partnership) is valid and entitled to registration. In rendering the said order, the Tribunal noticed that another Bench of the Tribunal in ITA No. 1028(Hyd) of 1969-70 and connected appeals had by an earlier order dated 30-6-1972, held that a sub-partnership on identical lines was not hit by Section 14 of the Abkari Act. Concurring with the said view, the Tribunal further held that the business of sub-partnership was not the same as that of the main partnership and all the insignia of a valid partnership are present in this case and so, it is valid and entitled to registration. It is thereafter, at the instance of the Revenue, the Appellate Tribunal referred the following question of law for the decision of the Andhra Pradesh High Court "Whether on the facts and in the circumstances of the case, the sub-partnership is entitled to the benefits of registration under the Income Tax Act, 1961 for the Assessment Year 1966-67 ?" * By the time the said reference came up for final hearing before the High Court the reference made by the Tribunal of an identical question in the connected cases arising from ITA No. 1028(Hyd) of 1969-70 was heard and decided by the High Court, holding that the sub-partnership in the said case, is valid and entitled to registration, vide judgment in CIT v. Degaon Gangareddy G. Ramkishan & Co., 1977 TaxLR 244 : 1978 (111) ITR 93 (AP)]. When the instant reference came up before the High Court, the earlier decision on the identical matter was noticed and the High Court answered the question in the affirmative and in favour of the assessee vide judgment dated 22-8-1977. It is thereafter, the Revenue moved the High Court in SCL Petition No. 57 of 1978 under Section 261 of the Income Tax Act and having obtained a certificate to appeal to this Court vide order dated 10-3-1978, has filed the above appeal
(3.) AT this stage, one fact deserves to be noticed. The decision of the Andhra Pradesh High Court rendered in CIT v. D.G.G. Ramakishan & Co. 1977 TaxLR 244 : 1978 (111) ITR 93 (AP)] came up in appeal before this Court, in CIT v. Degaon Ganga Reddy G. Ramakrishna and Co. 1995 (S2) SCC 146 : 1995 (214) ITR 650] and a Bench of this Court affirmed the said decision. It was noticed that this Court had in Murlidhar Himatsingka v. CIT [ 1966 (62) ITR 323 : 1967 AIR(SC) 383] held that a valid sub-partnership can be entered into by a partner of the main firm with some strangers to share the income or loss receivable by him from the main partnership and such sub-partnership is entitled to registration and then proceeded to state thus : (ITR pp. 653-55 : SCC pp. 148-50, paras 4-6)"The High Court then proceeded to consider the next question, namely, whether a partner of the main firm who deals in liquor ... or any other prohibited article which requires a specific permission of the State Government ... can validly enter into a sub-partnership with strangers in respect of his share in the main partnership. This question arises because of the prohibition contained in Section 14 of the Abkari Act against carrying on the business in liquor without a licence granted for the purpose. The High Court rightly pointed out that the partners of the sub-partnership would not become partners of the main partnership firm and this position would not alter in any manner even if the business of the main firm were to deal in liquor or any other prohibited article since the partners of the sub-partnership would be entitled only to share the profits and losses, as the case may be, that accrue or fall to the share of the partner in the main firm. Accordingly, the members of the sub-partnership do not become partners of the main firm, the two being different and distinct entities for the purpose of the Income Tax Act. The High Court, then proceeded to state thus : (ITR p. 105) 'All the decisions relied upon by the Revenue are applicable only if it is found as a fact that the sub-partnership and carried on the business of liquor, tobacco, opium or any other prohibited article without the requite permission of the State Government or the Collector, as the case may be. ... The pertinent question that arises in the present case is whether the sub-partnership has intended to do and in fact did business in liquor in the accounting year. If the sub-partnership also had indulged in the business of liquor without the requisite licence in the name of the sub-partnership or in the names of all the partners of the sub-partnership, the sub-partnership, on the application of the principles referred to above, must be held to be void ab initio and non est as it intended to do business in liquor without the requisite licence. If, on the other hand, the business of the sub-partnership is not the sale of liquor or dealing in liquor or doing anything in connection with the purchase and sale of liquor in any manner, it cannot be said that those sub-partnerships are illegal and void and non est. 'After correctly stating the legal position, the High Court referred to the contents of the deed of sub-partnership and the finding of the Tribunal that the assess - sub-partnership cannot be said to have not carried on any business; that the sub-partnership had financed and owned the capital invested by one of its partners in the main firm; and that the sub-partnership had been formed mainly to finance the business of one of the partners of the main firm doing Abkari business and share the profits and losses accrued to or received by him from the main firm. The High Court also observed that the sub-partnership confined its business to only sharing the profits earned by one of the partners of the main partnership doing Abkari business in lieu of their capital invested for the share of that partner and, therefore, it cannot be said that such a sub-partnership is prohibited in law there can be no doubt that the sub-partnerships formed by individual partners of the main partnership which were lessees, with some others, merely to finance the business of a partner of the main firm doing Abkari business and share the profits and losses accrued to or received by him from the main firm, were not in violation of Section 14 of the Abkari Act. For this reason, there is no basis to hold that the sub-partnerships were in violation of Section 14 of the Abkari Act and, therefore, illegal. The Tribunal was right in holding that in the facts and circumstances of the case, the assessee-sub-partnerships being found to be genuine were entitled to be registered under the Income Tax Act." ;