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PETITIONER: THE COMMISSIONER OF INCOME TAX,ANDHRA PRADESH.

       Vs.

RESPONDENT: M/S. B. POSETTY & CO.

DATE OF JUDGMENT:       05/11/1996

BENCH: K.S. PARIPOORNAN, SUJATA V. MANOHAR

ACT:

HEADNOTE:

JUDGMENT:                       J U D G M E N T      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 S.C.L. Petition No.57 of 1978. The assessee is the respondent in this appeal.      Since the respondent (assessee) was not represented, we requested Sri  V.A. Bobde  (senior counsel) to assist us. We heard counsel  for the Revenue Sri. J. Ramamurthy and Sri V. A. Bobde. 2.   The short question involved in this Appeal is :-      Whether the  respondent-assessee firm  is  entitled  to registration under  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 :      "No lessee  shall, except  with the      Permission   of   Government,   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 confirmedin appeal  by the  Appellate Assistant Commissioner by  order dated 28.2.1972. In further appeal, the Income tax Appellate  Tribunal   (the  Tribunal)   in   I.T.A.   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 I.T.A. No.1028 (Hyd) of 1969-70 and connected appeals  had by  an earlier order dated 30.6.1972,

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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      subpartnership 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  I.T.A 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  Additional   Income  Tax  Commissioner, Hyderabad v. D.G.G. Ramakishan & Co. [(1) 1977 TLR 244 = 111 ITR 93].  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.57/1978 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 tiled the above appeal. 4.   At this  stage, one  fact deserves  to be  noticed. The decision of  the  Andhra  Pradesh  High  Court  rendered  in Additional Income  Tax  Commissioner,  Hyderabad  v.  D.G.G. Ramakishan & Co. [(1) 1971 TLR 244 = 111 ITR 93], came up in appeal before  this Court,  in  Additional  Commissioner  of Income Tax  v. Degaon Ganga Reddy G. Ramakrishna and Co. and Others [1995  (214) ITR  650), and  a Bench  of  this  Court affirmed the  said decision.  If was noticed that this Court had in Muralidhar Himatsingka vs. CIT (62 ITR 323) 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 at (214 ITR 650) pages 653 to 655 :-      "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      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

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    partners of  the main  partnership-      firm and this position would not be      altered 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  (at      page 105):      "All the  decisions relied  upon by      the Revenue  are applicable only if      it is found as a fact that the sub-      partnership  had   carried  on  the      business of  liquor, tobacco, opium      or  any  other  prohibited  article      without the requisite permission or      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  in liquor without the      requisite licence  in the  name  of      the sub-partnership  or in the name      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 assessee 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

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    the business of one of the partners      of  the   main  firm  doing  abkari      business and  share the profits and      losses accruing  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."      In the normal circumstances, the aforesaid decision of this Court  reported in  [1995 (214) ITR 650], should govern the decision in this case also. But, when the instant appeal came up  for hearing  before a  Bench of  two-Judges,  after referring to  the decision  in Bihari  Lal vs.  CIT (217 ITR 746) it was observed :-      "......... As  the profits  of  the      business to  be shared  by the sub-      partners were  the profits  of  the      main   business,   namely,   abkari      business, Section  14 of the Abkari      Act squarely got attracted and made      even   the    sub-partnership   for      sharing at least a part of the main      partnership  profits   illegal   as      Section 14  of the  Abkari Act  was      admittedly not complied with."      and so  referred the matter for appropriate decision by a larger Bench of three-Judges (see AIR 1996 SC 1091- Income Tax Commissioner vs. B. Posetty). This is how the matter has come up  before this  Bench.  A  few  facts  to  decide  the question of  law involved  in this  appeal may  be stated. A partnership by name M/s. Nizamabad Group Sendhi Contractors, was formed evidenced by a Partnership Deed dated 15.10.1962, consisting of  17 partners.  On 27th  of August,  1963,  Sri Ganga Goud,  one of  the partners  in the  said firm, and 11 others executed  a Partnership  Deed to the effect that Shri Ganga Goud  after becoming  a partner in the Nizamabad Group

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Sendhi Contractors, the main partnership, found it difficult to contribute  the required  capital towards  his share and, therefore, the  other 11  partners  of  the  sub-partnership agreed to  provide the  finance  on  their  being  taken  as partners in respect of Ganga Goud’s 10 per cent share in the main  partnership.   The  registration   of  the  said  sub- partnership was refused by the Income Tax Officer. It is the case of the said sub-partnership which finally  reached this Court in the decision rendered in Additional Commissioner of Income Tax  v. Degaon Ganga Reedy G. Ramakrishna and Co. and Others [1995 (214) ITR 650]. Similarly, in this case, Sri B. Posetty had  11 per cent share in the Nizamabad Group Sendhi Contractors.  He   found  it  difficult  to  contribute  the required capital for the said share in the main firm. So, B. Posetty along  with 9  others formed  a  sub-partnership  as "B.Posetty &  Company" on  condition that they would provide the requisite finance on allotting certain share to them out of Sri  B. Posetty’s  income in  the  main  firm.  The  main partnership, M/s.  Nizamabad Group  Sendhi Contractors, is a registered firm  under the  Income-tax Act. They are lessees who were  the highest  bidders in  the auction  held by  the Excise  authorities.   The  sub-partnership  "B.  Posetty  & Company  "is  evidenced    by  Deed  dated  20.1.1965  which specified the  shares of  each partner.  This firm filed the application for  registration for  the assessment year 1966- 67. On  30.9.1963, it  returned an  income, admitting 11 per cent share  income of  Sri B.Posetty  in the  firm Nizamabad Group Sendhi  Contractors. The  Income Tax  Officer  refused registration to  the sub-partnership  on the ground that the sub-partnership contravened  the provisions of Section 14 of the Abkari  Act, and  so, void  and  unenforceable.  It  was affirmed in  appeal. But,  the Tribunal  as well as the High Court granted registration. 6.   The sole question that arises for consideration in this appeal is,  whether the  sub-partnership contravened Section 14 of the Abkari Act ? 7.   Section 14 of the said Act runs thus:      "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 Officer."           (emphasis supplied)      It will be appropriate to quote the relevant provisions of the  Income-tax Act,  1961, dealing  with registration as they existed during the relevant period: -      Section 184      "(1)     An     application     for      registration   of a  firm  for  the      purposes of this Act may be made to      the Assessing  Officer on behalf of      any firm if-      (i) the partnership is evidenced by      an instrument; and      (ii) the  individual shares; of the      partners  are   specified  in  that      instrument.      (2) Such  application may,  subject      to the  provisions of this section,      be made either during the existence      of   the    firm   or   after   its      dissolution.      xxx     xxx     xxx

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    "(5)  The   application  shall   be      accompanied   by    the    original      instrument      evidencing      the      partnership, together  with a  copy      thereof:      (6) The  application shall  be made      in the  prescribed form  and  shall      contain the prescribed particulars.      (7) Where  registration is  granted      or is  deemed to  have been granted      to  any  firm  for  any  assessment      year,  it  shall  have  effect  for      every subsequent assessment year:      Provided that-      (i)  there  is  no  change  in  the      constitution of  the  firm  or  the      shares of the partners as evidenced      by the instrument of partnership on      the basis of which the registration      was granted; and      (ii) the firm furnishes, before the      expiry of  the time  allowed  under      sub-section -  (1) of  section  139      for furnishing the return of income      for  such   subsequent   assessment      year, a declaration to that effect,      in the prescribed form and verified      in  the   prescribed  manner,   so,      however, that  where the  Assessing      Officer is  satisfied that the firm      was prevented  by sufficient  cause      from  furnishing   the  declaration      within the  time so allowed, he may      allow  the   firm  to  furnish  the      declaration at  any time before the      assessment is made.      "   Procedure    on   receipt    of      application 185.  (1) On receipt of      an application for the registration      of a  firm, the  Assessing  Officer      shall inquire  into the genuineness      of the firm and its constitution as      specified  in   the  instrument  of      partnership, and      (a) if  he is  satisfied that there      is or  was during the previous year      in existence  a genuine  firm  with      the constitution  so specified,  he      shall  pass  an  order  in  writing      registering  the   firm   for   the      assessment year;      (b) if  he is  not so satisfied, he      shall  pass  an  order  in  writing      refusing to register the firm."      We should  remember that  it is  the main  partnership, i.e., Nizamabad  Group Sendhi  Contractors who  were lessees being the  highest bidders in the auction held by the Excise authorities for  the relevant year. The said partnership was registered by the Income Tax Department under the Income-tax Act. In the instant case, the Tribunal found the business of the sub-partnership  is not  the same  as that  of the  main partnership and  all the insignia of a valid partnership are present in  the case  and so,  it is  valid and  entitled to registration. The  said findings  were not questioned before High Court  by  framing  an  appropriate  question  in  that

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regard. In  the instant  case, the  High Court  followed its earlier   decision reported  in [111  ITR 93]  wherein after noticing section  14 of  the Abkari Act, the High Court held thus:      "All the  decisions relied  upon by      the Revenue  are applicable only if      it is  found as a fact that the sub      partnership  had   carried  on  the      business of  liquor, tobacco, opium      or  any  other  prohibited  article      without the requisite 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 as  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....."      The High  Court further  held that  the sub-partnership had financed  and owned  the capital  invested by one of its partners in  the main  firm and 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 such a sub-partnership is not prohibited by law. 8.   Dealing with  sub-partnership  and  its  validity  S.T. Desai on  The Law of Partnership in India (6th Edn.) at page 152, states the law, thus:      "Sub-partnership may  arise when as      a result  to an agreement between a      partner in  a firm  and a  stranger      the    latter    becomes    jointly      interested that  partner so  far as      his share in the firm is concerned.      Such mutual interests may amount to      a partnership,  but  it  is  not  a      partnership in  the main  firm, but      what is  called a  sub-partnership.      Such an agreement with not have the      effect of  making  the  stranger  a      partner of  the main  firm. He will      have no  demand against  that firm,      nor will  he be entitled to ask for      accounts of its business so long as      it continues  to  trade.  It  would

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    hardly be  questioned that  a  sub-      partner  is   not  liable   to  the      creditors of  the main firm for any      of its debts.           Sub-partnerships   have   been      recognised in India both before and      after the  present  Act  came  into      force. In  Murlidhar v.  Income Tax      Commissioner (AIR  1967 SC 383 = 62      ITR 323  ) the Supreme Court quoted      with   approval    the    following      statement of  the law  from Lindley      on Partnership  : 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 consitutes Partnership      between   the    parties   to   the      agreement    therefore,     several      persons are  partners  and  one  of      them agrees  to share  the  profits      derived 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      partner inter se; but it in no  way      affects the  other members  of  the      principal firm."           (emphasis supplied)      In this  case, the  lessee is  Nizamabad  Group  Sendhi Contractors (main  firm). The  sub-partnership is a distinct and different  firm. It  is one  recognised by law and it is not a  partnership with  the main firm. It will not have the effect  of  making  the  partners  in  the  sub-partnership, partners of  the main  firm. In  other words, the main firm, the  lessees  and  the  sub  partnership  are  distinct  and different. In  the light  of the  above legal  position,  it cannot be  said  that  either  the  sub-partnership  in  the instant case,  or any of its partners as a partner, became a partner  of   the  main   firm,   Nizamabad   Group   Sendhi Contractors. The  inhibition contained  in Section 14 of the Abkari Act  will apply  only in  a  case  where  the  lessee declares any person as its partner.  Here, the lessees, M/s. Nizamabad Group  Sendhi Contractors, had not declared either the sub- partnership or any other person, as its partner. In such circumstances,  the inhibition  contained in Section 14 of the  Abkari Act cannot apply. It is true that Sri Posetty and 10 others formed the sub-partnership, "B. Posetty & Co." --  for  a  legitimate  business  purpose,  to  provide  the requisite finance,  on condition  of  allotment  of  certain shares to  them out of Mr. Posetty’s share in the main firm. The sub-partnership  financed one  of its partners to make a capital investment  in the main firm. Such an arrangement or agreement  between   persons  who   formed  a  distinct  and different firm,  is valid  in law  and to  such a  situation Section 14  of the Abkari Act is not attracted; nor is there any basis  to hold  that there  was any contravention of the provisions of the said Act. Law recognises formation of sub- partnership. The  main partnership  and the  sub-partnership are,  for   the  purpose  of  law,  distinct  and  different

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entities.  Registration   cannot  be  refused  to  the  sub- partnership on  the ground  that one  of the partners of the main firm  had agreed  to share  the profits received by him from the  firm, with a stranger or strangers (members of the sub-partnership) since  the  agreement  does  not  make  the stranger or strangers or the sub-partnership firm, a partner in the  original firm  and such  an arrangement or agreement does not  affect either  the main firm or its other members, in any  way. Section 14 of the Abkari Act has no application to such  a situation.  We are  of the view that on the facts similar to  one in the instant case, the earlier decision of this  Court  in  Additional  Commissioner  of  Income    Tax v. Degaon Ganga Reddy G. Ramakrishna and Co. and Others [214 ITR 650],  has properly  considered the  entire matter and a reconsideration of  the same  is not  called for.  We should state that this Court in Bihari Lal’s case (217 ITR 746) was dealing entirely  with a  different situation wherein clause VI of  the General  Licence conditions  prescribed by Madhya Pradesh Excise  Rules, 1960, quoted at p. 750 of the report, was of  very wide  import and  interdicted transfer  or sub- lease of  the licence  or formation  of partnership  of  the licence obtained  by an  individual in  any manner  or form. Such a situation is not present herein. The said decision is clearly distinguishable.  In our  view, the  High Court  was justified in  law in  answering the question referred to it, in the  affirmative and  in favour  of  the  assessee.  This appeal is  without merit and is dismissed. There shall be no order as to costs.