TaxTMI 
TaxTMI 
2010 (9) TMI 766
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....ership firm, admitting to an income of Rs. 10,130. An order of assessment, under section 143(1) of the Income-tax Act, was passed on January 19, 2000. Thereafter the Income-tax Officer, relying on rule 39 of the A. P. Indian and Foreign Liquor Rules, 1970 and following the judgment of the Supreme Court in Bihari Lal Jaiswal v. CIT [1996] 217 ITR 746 (SC), reopened the assessment on the ground that there was escapement of income in the form of remuneration to partners and interest on partner's capital. He held that, as the assessee had not obtained permission from the Excise Department before entering into the partnership, such a partnership was prohibited under the A. P. Excise Act and, therefore, the status of the assessee could not be treated as a firm. As a result, the remuneration paid to the partners for Rs. 48,000, and interest on capital of Rs. 1,44,000, was added and the total income of the assessee was assessed at Rs. 2,02,130. 3. Aggrieved thereby, the assessee preferred an appeal to the Commissioner of Income-tax (Appeals). In his order the Commissioner, after referring to the judgments of the Supreme Court in Bihari Lal Jaiswal [1996] 217 ITR 746 (SC), Moti Lal ....
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....ce placed on the judgments of the Supreme Court, wherein the provisions of the unamended sections 184 and 185 were considered, was misplaced ; reopening of the assessment was, therefore, erroneous ; and the assessees were entitled to be assessed as firms, and for the benefits of allowances and salaries as well interest paid to partners of the firm on their capital. Aggrieved thereby, the present appeals before this court by the Revenue. 5. Both Sri S. R. Ashok, learned senior counsel and Sri J. V. Prasad, learned standing counsel appearing on behalf of the Income-tax Department would submit that a firm, contravening the provisions of the A. P. Excise Act and the IMFL Rules, would be acting contrary to public policy, and would not be a legal and valid partnership for the purposes of the Income- tax Act ; this position remained unchanged even after sections 184 and 185 were amended by the Finance Act 18 of 1992 ; while the enquiry regarding the genuineness of the firm, under the pre-amended sections 184 and 185, was to confer certain benefits on a registered partnership firm, the distinction between a registered and an unregistered firm was done away with post-amendment ; the....
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....tnership firm is a partnership at will and is valid even without registration ; the Revenue was not empowered to look into the validity of the partnership firm in the light of the amended sections 184 and 185, more so when the partnership firm was constituted even prior to the licence being obtained ; the amended sections 184 and 185 do not admit of any comparison between the Income-tax Act on the one hand and the A.P. Excise Act and the Indian Contract Act on the other ; and the orders of the Tribunal do not necessitate interference in these appeals. 7. The Andhra Pradesh Excise Act, 1968, (A. P. Act) is a consolidating law, inter alia, relating to production, manufacture, possession, transport, purchase and sale of intoxicating liquor and drugs, and to provide for matters connected therewith. Section 15 of the A. P. Act prohibits any per-son from selling or buying intoxicants except under the authority, and in accordance with the terms and conditions, of a license granted in their favour. Chapter VI deals with licences and permits. Sections 28 and 31(1)(a) and (b) of the A.P. Act are relevant, and read thus : 28. Form and conditions of licence etc.-(1) Every permi....
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....usiness. Condition No. 8 thereof is to the effect that a licence is not transferable. Rule 39 of the IMFL Rules requires a licensee not to declare any person to be or not to be his partner. 9. It is evident from section 15 of the A. P. Act that except under the authority, and in accordance with the terms and conditions, of a licence granted in their favour, no one can carry on business in trading in liquor in the State of Andhra Pradesh. In addition, a person who has been granted a licence has to ensure compliance with the terms and conditions prescribed therein. As the business of trading in intoxicating liquor is res extra commercium, a high degree of control is exercised by law to ensure that the business of trading in liquor is carried on strictly in accordance with the provisions of the A. P. Excise Act, the rules made thereunder, and the terms and conditions of the licence granted in favour of the licensee. Violation of any of the conditions would entail suspension/cancellation of licence under section 31 of the A. P. Act. In cases where a licence is granted in favour of an individual it is only he, and no other, who is entitled to carry on business of trading in into....
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....reme Court held (page 757) : "In our opinion, the correct position appears to be this (we are confining ourselves to partnerships entered into with respect to a licence/permit granted under the State Excise enactments) : these enactments deal with intoxicating liquor, that is to say, the production, manufacture, possession, transport, purchase and sale of intoxicating liquors (entry 8 of List II of the Seventh Schedule to the Constitution) and other noxious substances besides providing for duties of excise referred to in entry 51 of the said List. It has been held by this court repeatedly that no person has a fundamental right to deal or trade in intoxicating liquors and that the State is entitled to prohibit and/or closely regulate their production, manufacture, possession, transport, purchase and sale . . . Take the Madhya Pradesh Act, with which we are concerned herein. Clause VI of the General Licence Conditions-it is not disputed that these conditions are statutory in character-provides expressly that a holder of a licence/privilege shall not enter into a partnership for the working of such privilege in any way or manner without the written permission of the Collector,....
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....e such an agreement . . . The context-that it is an excise enactment-should not be forgotten. The grant of registration under the Income-tax Act, it must be remembered, confers a substantial benefit upon the partnership firm and its members. There is no reason why such a benefit should be extended to persons who have entered into a partnership agreement prohibited by law. One arm of law can-not be utilised to defeat the other arm of law. Doing so would be opposed to public policy and bring the law into ridicule. It would be wrong to think that while acting under the Income-tax Act, the Income-tax Officer need not look to the law governing the partnership which is seeking registration. It would probably have been a different matter if the Income-tax Act had specifically provided that registration can be granted notwithstanding that the partnership is violative of any other law-but it does not say so.We may clarify that our holding does not mean that such an illegal partnership cannot be taxed. It is certainly bound to be taxed either as an unregistered partnership firm or as an association of persons. . . . " (emphasis supplied) 13. In CIT v. Circar Enterprises [1998....
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....cence which the High Court found had been violated in the appellant's case is condition 13 which reads : '13. Licensee shall not lease out, sell or otherwise transfer his licence without the written consent of the Excise Commissioner.' The settled law is that no registration can be granted to a firm under section 184(1) of the Income-tax Act, 1961, if the firm has been formed or is continuing in violation of the Excise Rules. The issue in this case is whether the licensee had 'otherwise transferred' his licence to the appellant-firm by allowing the firm to utilize the licence in violation of the condition of his licence within the meaning of condition- 13 of the licence . . . We do not read the decision in Jaiswal's case as laying down, as seems to have been assumed by the High Court, that irrespective of the fact that the statutory provision may not expressly prohibit the formation of a partnership by a licence holder, nevertheless a general provision regarding the prohibition or transfer of a licence could be read as such an express provision. The condition of licence in this particular case does not contain any such express provision as there was in Jaiswal's ca....
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....exclusion of a person as partner on payment of Rs. 10,000 (rupees ten thousand only) in all such cases, which are not covered by the provisions under rule 38(5) of these rules, and on payment of Rs. 10,000 for each case of inclusion or exclusion of the partner subject to production of certificate to the effect that no cases involving contravention of the Excise Act and Rules framed there under are pending against him/her. 16. On a conjoint reading of section 15 of the A. P. Act, and rule 39 of the IMFL Rules, it is clear that no licensee can, except with the prior permission of the Commissioner of Prohibition and Excise (Licensing Authority), include any other person as his partner to carry on business in the sale and purchase of intoxicating liquor. It is the law laid down in Bihari Lal Jaiswal [1996] 217 ITR 746 (SC) which would apply to the facts of the present case, and not the judgment in Grand Enterprises. 17. Counsel for the respondents would, however, contend that all the judgments referred to hereinabove dealt with cases of assessees, carrying on business of trading in intoxicating liquor, prior to the amendment of sections 184 and 185 by the Finance Act 18....
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....gal representative of any such partner who is deceased. (3) Where a firm is assessed as such for any assessment year, it shall be assessed in the same capacity for every subsequent year if 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 assessment as a firm was first sought. (4) Where any such change had taken place in the previous year, the firm shall furnish a certified copy of the revised instrument of partnership along with the return of income for the assessment year relevant to such previous year and all the provisions of this section shall apply accordingly. (5) Notwithstanding anything contained in any other provision of this Act, where, in respect of any assessment year, there is on the part of a firm any such failure as is mentioned in section 144, the firm shall be so assessed that no deduction by way of any payment of interest, salary, bonus, commission or remuneration, by whatever ame called, made by such firm to any partner of such firm shall be allowed in computing the income chargeable under the head 'Profits and gains of business or profession' and such intere....
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....t or not ; in the case of a registered firm, the firm paid tax on its total income according to the rates prescribed in the Schedule for registered firms ; an unregistered firm was taxed at the rates applicable to individuals, with the share income included in the hands of the partners for rate purposes only ; as there was a consistent demand for removal of the double taxation, a new scheme of assessment of firms was being introduced from the assessment year 1993-94 ; a firm would henceforth be taxed as a separate entity (sections 184 and 185) ; there would be no distinction between registered and unregistered firms ; after allowing remuneration and interest to the partners, the balance income of the firms would be subject to the maximum marginal rate of tax ; partners would not be liable to tax in respect of their share of income from the firm; remuneration and interest allowed to partners would be charged to income-tax in their respective hands ; the share of the partner in the income of the firm would not be included in computing his total income ; interest, salary, bonus, commission or any other remuneration allowed by the firm to a partner would be liable to be taxed as busine....