NALLI VENKATARAMANA COMMISSIONER OF INCOME TAX ANDHRA PRADESH II Vs. P THIRUPATHI RAO AND COMPANY

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 12/11/1973, with effect from 1/10/1973. The partnership was to remain in force for one year up to 30/09/1974. 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-firm applied for registration under s. 185 of the I.T. Act, 1961, and filed an application in Form No. 11. The ITO took a sworn statement from the successful bidder on 18/12/1976, and came to the conclusion that the firm was not a genuine one. He also observed that the assessee-firm was formed illegally and so it was void ab into. He referred to r. 19(1) of the Rules which prohibits the transfer of the licence by the licensee to any other person. Then he referred to r. 19(2) of the Rules which states that no licensee can include or exclude any partner except with the previous permission of the licensing authority. He observed that the formation of a partnership was no doubt allowed under the rules for doing the aforesaid business but that it was necessary for the partners to disclose their partnership before the licence was issued. Since the existence of the firm was not disclosed to the licensing authority the licence must be deemed to have been issued only to the successful bidder in whose name the licence stood. He also referred to s. 15 of the Excise Act which states that no person shall or buy any intoxicant except under the authority and in accordance with the terms and conditions of a licence granted in this behalf. The ITO was of the opinion that the partnership entered into for the purpose of conducting a business in arrack or toddy on a licence granted only to one of the partners was void ab into because such a partnership either involves a transfer of a licence which is prohibited under r. 19 or because s. 15 was being violated by the unlicenced partners who sell the arrack or toddy.