B.R. Arora, J. - (1.) THE Tribunal, Jaipur Bench, Jaipur, has referred the following question of law for the opinion of this court : "Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the assessee is entitled to registration?"
(2.) THEKA Sharab, Ajmeri Gate, Jaipur, consisting of two partners, was granted a liquor contract for Jaipur district. Sujankhan, one of the partners in THEKA Sharab, Ajmeri Gate, Jaipur, constituted a sub-partnership firm, Sujankhan Laloo Khan, consisting of Sujankhan Laloo Khan, Razaq Khan and Badroo Khan. This partnership was constituted with effect from April 1, 1974, by a deed which was drawn up on February 26, 1975. The names and shares in the profit and loss of the sub-partnership business are stated to be as under : JUDGEMENT_528_ITR204_1993Html1.htm The main purpose of constituting this sub-partnership-firm was to distribute the share income of Sujankhan derived from or losses incurred to him in the business of Theka Sharab, Ajmeri Gate, Jaipur, amongst the partners of sub-partnership-firm. According to this sub-partnership deed, Sujan Khan became a partner in the original firm on behalf of the assessee-firm. The assessee, Sujankhan Laloo Khan, applied for registration along with Form No. 11 before the Income-tax Officer. The Income-tax Officer, by his order dated March 13, 1978, refused to grant registration to the assessee on the grounds that: (1) no business was carried on by the assessee-firm during the accounting year relating to the assessment year 1975-76, and (2) the agreement contravenes the provisions of the Rajasthan Excise Act. After the refusal of the registration, the assessee preferred an appeal before the Appellate Assistant Commissioner, Jaipur, who, by his order dated May 9, 1979, upheld the order of the Income-tax Officer and dismissed the appeal filed by the assessee by holding that the deed of partnership and the application did not bring into existence any genuine firm. In coming to this conclusion, the learned Appellate Assistant Commissioner took into account the facts that : (i) all the partners are close relatives; (ii) no capital was contributed by Laloo Khan and Razaq Khan though they were given 40 per cent. and 15 per cent. share; (iii) no interest was paid to Jan Mohammed on an advance of Rs. 40,000 while interest was paid to Shri Sujan Khan and Badroo Khan on the capital invested by them; and (iv) these partners never assisted in carrying on the business of the main partnership business. Aggrieved by the order passed by the Appellate Assistant Commissioner refusing to grant registration to the firm, Sujankhan Laloo Khan preferred an appeal before the Tribunal, Jaipur, and the Tribunal, by its order dated October 30, 1980, allowed the appeal filed by the assessee and held that the assessee-firm, as a matter of fact, is a validly constituted partnership firm, and, therefore, the firm is entitled to registration. The Tribunal, therefore, directed the Income-tax Officer to allow registration to the assessee-firm. Dissatisfied with the order passed by the Tribunal, the Revenue moved an application under Section 256(1) of the Income-tax Act, 1961 ("the Act"), requesting the Tribunal to refer the question of law mentioned in the application for the opinion of the High Court. The Tribunal, by its order, dated March 25, 1981, referred the question of law, mentioned in paragraph No. 1 above, for the opinion of this court. We have heard learned counsel for the Revenue as well as learned counsel for the assessee. It has been contended by learned counsel for the Revenue that the sub-partnership in the present case is illegal and void and is not genuine as it is not carrying on any business except distributing the income of Sujankhan in the main partnership firm which firm is deriving profits from the business in liquor which cannot be done without written permission of the competent excise authority. As Sujankhan is the licensee of the liquor business and the other three persons in the partnership are admittedly non-licensees and when they cannot be included in the main partnership firm, they cannot be permitted to share the profits of the firm by forming a sub-partnership. The sub-partnership, therefore, is in contravention of the provisions of the Rajasthan Excise Act and, therefore, void and non est in law. In support of his argument, learned counsel for the Revenue has placed reliance over the Full Bench decision of this court rendered in the case of Motilal Chunnilal v. CIT [1987] 168 ITR 650.
(3.) LEARNED counsel for the respondent, on the other hand, contended that the business of the main firm is different from the sub-partnership and the three partners of the sub-partnership firm have nothing to do with the main firm and its business and the business of the sub-partnership is only to finance one of the partners of the main firm who is doing business in liquor along with the other partner(s) at Jaipur in the name and style of "Theka Sharab, Ajmeri Gate, Jaipur", and , therefore, the provisions of the Rajasthan Excise Act have nothing to do with the distribution of the profits of the excise business after allotment of the same to the share of a partner and the sub-partnership is neither illegal nor void and the sub-partnership firm is, therefore, entitled to registration. LEARNED counsel for the respondent has tried to distinguish the Full Bench decision of this court on the above lines. He has further submitted that the partner(s) of the main registered firm can enjoy the entire income of the firm himself, or, in the alternative, can divert his income or loss to other persons, may be relatives or strangers, provided they agree to be sub-partners by constituting a sub-partnership firm. In support of his case, learned counsel for the respondent has placed reliance on R. C. Mitter and Sons v. CIT [1959] 36 ITR 194 (SC), CIT v. Sivakasi Match Exporting Co. [1964] 53 ITR 204 (SC), Murlidhar Himatsingha v. CIT [1966] 62 ITR 323 (SC), CIT v. R.B. Jodha Mal Kuthiala and Co. [1970] 77 ITR 341 (P & H) and Addl. CIT v. Degaon Gangareddy G. Ramhishan and Co, [1978] 111 ITR 93 (AP). In order to appreciate the scope of the respective contentions of counsel for the parties, it is necessary to briefly refer to the law relating to the concept and/contents of the partnership and sub-partnership and the principles that govern the registration of a firm under the Act. Lindley on Partnership, Twelfth edition, page 99, deals with sub-partnerships as follows : "A sub-partnership is, as it were, a partnership within a partnership; it presupposes the existence of a partnership to which it is itself subordinate. An agreement to share profits only constitutes a partnership between the parties to the agreement. If, therefore, several persons are partners and one of them agrees to share the profits derived by him with a stranger, this agreement does not make the stranger a partner in the original firm. The result of such an agreement is to constitute what is called a sub-partnership, that is to say, it makes the parties to it partners inter se; but it in no way affects the other members of the principal firm." ;