JUDGMENT
Ajit K. Sengupta, J.
1. In this reference under Section 256(1) of the Income-tax Act, 1961, the following question of law has been referred to this court :
“Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the object of the partnership was not illegal and in upholding the order of the Appellate Assistant Commissioner directing the Income-tax Officer to grant continuance of registration to the assessee-firm for the assessment years 1966-67 to 1972-73 ?”
2. The consolidated reference relates to the assessment years 1966-67 to 1972-73 involving the question of registration of the respondent as a partnership firm under Section 185 of the Income-tax Act, 1961. Shortly stated, the facts are that a private limited company known as Messrs. Salkia Transport Agency Ltd. was owning and operating a fleet of buses. For the purpose of running 23 of its buses on route Nos. 51, 54 and 56 on the strength of stage carriage permits granted to it by the transport authorities, it entered into an agreement, styled as an “agency agreement”, with four members of the Khanna family (hereinafter referred to as the “Khannas”). For the purpose of carrying on the business of running the buses on the aforementioned routes, in pursuance of the agency agreement, the Khannas entered among themselves into a partnership agreement dated March 15, 1964. It was under this partnership agreement that the assessee-firm, known as “Salkia Transport Associates”, came into being with effect from March 29, 1963, the date on which the Khannas had commenced business under the agency agreement referred to above. It was not in dispute that, since the partnership came into being, the assessee-firm had been operating the buses on the strength of the stage carriage permits which did not stand in its name but in the name of the aforementioned limited company. When the limited company owning the buses and previously operating the buses went into liquidation, the partners of the assessee-firm filed an application in the High Court in the year 1969 for a direction to the provisional liquidator not to interfere with their running of the 23 buses under the aforesaid agency agreement and with the running of another 11 buses taken by them from the same company under an earlier agreement. That application was dismissed by the High Court by its judgment dated October 10, 1969. In that judgment, the scope of the agency agreement and the right of the Khannas in the buses covered by the agency agreement were considered by the High Court. It was held that though the agreements were styled as agency agreements, they were in reality contracts for hire of the 34 buses with their stage carriage permits. On the question of title to the buses, the High Court held in those proceedings that the ownership of the 34 buses vested in the limited company only.
3. The assessee-firm applied for initial registration for the assessment year 1964-65 and for continuance of registration for the subsequent assessment years including the assessment years now under reference (1966-67 to 1972-73). One of the grounds on which the Income-tax Officer refused initial registration for the assessment year 1964-65 was that the object of the partnership was unlawful, being violative of the provisions of the Motor Vehicles Act. In his view, the stage carriage permits granted under the Motor Vehicles Act would be available only to the person to whom it was granted, that the operation of the stage carriage permits by anybody other than the persons to whom they were granted was not sanctioned by the Motor Vehicles Act and hence illegal and that the object of the partnership, i.e., running of the motor vehicles by the assessee-firm under the stage carriage permits granted to the limited company was unlawful. Since initial registration was refused for the assessment year 1964-65, the Income-tax Officer refused continuance of registration for the subsequent assessment years, sought by the assessee on the basis of the declarations filed in the prescribed form along with the returns.
4. Aggrieved by the refusal of continuance of registration for the assessment years under reference, the assessee-firm preferred appeals before the Appellate Assistant Commissioner. The appeals for the assessment years 1966-67 to 1970-71 were originally rejected by the Appellate Assistant Commissioner as incompetent in the view that no appeal lay against refusal of continuance of registration, as contradistinguished from refusal of initial registration. Against that order of the Appellate Assistant Commissioner, the assessee preferred appeals before the Tribunal. By its consolidated order dated March 31, 1975, the Tribunal held that the orders of refusal of continuance of registration were appealable under Section 246(j) of the Income-tax Act and restored the appeals for the assessment years 1966-67 to 1970-71 to the file of the Appellate Assistant Commissioner with a direction to dispose of the appeals afresh in the light of the final result of the appeal for the assessment year 1964-65. The appeal of the Department against the order of the Appellate Assistant Commissioner directing the grant of initial registration for the assessment year 1964-65 also came before the Tribunal for decision. By order dated April 30, 1975, the Tribunal restored the appeal relating to the assessment year 1964-65 also to the Appellate Assistant Commissioner with a direction to dispose of that appeal afresh in the light of the directions given by the Tribunal in that order. The appeal for the initial assessment year 1964-65 and the appeals for the assessment years 1966-67 to 1970-71 thus went back to the Appellate Assistant Commissioner for fresh disposal.
5. The appeals for the assessment years 1966-67 to 1972-73 were redecided by the Appellate Assistant Commissioner in the light of the direction given by the Tribunal in the order dated March 31, 1975, referred to above. This time the Appellate Assistant Commissioner took note of the fact that, in the appeal for the assessment year 1965-66, his predecessor, by his order dated July 27, 1972, had directed the Income-tax Officer to treat the assessee as a registered firm for the assessment year 1965-66. Taking his predecessor’s order into consideration, the Appellate Assistant Commissioner held that the declarations filed by the assessee for the assessment years 1966-67 to 1972-73 for continuance of registration were in order. Since the question of legality or otherwise of the partnership was left open by his predecessor in the appeals for the assessment years 1964-65 and 1965-66, the Appellate Assistant Commissioner considered that aspect in the appeals for the assessment years 1966-67 to 1970-71. Following the decision of the Madhya Pradesh High Court in the case of Dayabhai and Co. v. CIT [1966] 59 ITR 364 and of the Madras High Court in the case of T.K.P.R. Ramanatha Chettiar and Bros. v. CIT [1969] 73 ITR 811, the Appellate Assistant Commissioner held that the partnership could not be regarded as illegal merely because the object was to operate the buses on the strength of the stage carriage permits that stood in the name of the limited company and not in the name of the assessee-firm. Having held that the partnership was legal and that there was a valid declaration required for continuance of registration, the Appellate Assistant Commissioner directed the Income-tax Officer to grant continuance of registration for the assessment years 1966-67 to 1970-71. The decision taken in those appeals was followed by him in the appeals for the assessment years 1971-72 and 1972-73, disposed of by a subsequent order.
6. Aggrieved by the aforesaid orders of the Appellate Assistant Commissioner directing the Income-tax Officer to grant continuance of registration to the assessee-firm for the assessment years 1966-67 to 1972-73, the Department preferred appeals before the Tribunal. All those appeals were disposed of by the Tribunal by its consolidated order dated April 23, 1977. After setting out the contentions urged before it by the Departmental Representative on the one side and the assessee’s counsel on the other hand, the Tribunal discussed the case law on the point and recorded the following finding in paragraphs 9 and 10 of its order :
“Section 31 of the Motor Vehicles Act does not prohibit the transfer of a motor vehicle by one person to another. All that the section says is that where the ownership of a motor vehicle is transferred, the transferor and the transferee shall report the transfer to the transport authority in the manner laid down in the said Act. If the transferor and the transferee have failed to report the transfer and thus contravened the provisions of Section 31 of the Act, they may be prosecuted for that offence but that does not render the partnership between the transferee and others for the purpose of carrying on the business of running the transferred vehicle illegal. Mere transfer of a motor vehicle from one person to another does not by itself amount to transfer of the permit to operate the vehicle so as to amount to contravention of Section 42(1) of the Motor Vehicles Act, as laid down by the Madhya Pradesh High Court in Dayabhai and Co. v. CIT [1966] 59 ITR 364. The Motor Vehicles Act, no doubt, prohibits the transfer of a permit granted to a person for operating a stage carriage or a goods vehicle but there is no prohibition in that Act against a permit-holder taking another person as his partner in the business of exploiting that permit. So long as there is no transfer of the permit itself, a partnership formed for the purpose of running the stage carriage for which the permit stands in the name of somebody else does not render the object of the partnership illegal and registration cannot be refused to the partnership on the ground of illegality of the object of partnership. This is the principle laid down by the Madhya Pradesh High Court in Dayabhai and Co. v. CIT [1966] 59 ITR 364 and by the Madras High Court in Ramanatha Chettiar (T.K.P.R.) and Bros. v. CIT [1969] 73 ITR 811 and in National Roadways v. CIT , while dealing with claim for registration of firms formed for the purpose of carrying on the business of running stage carriages or goods vehicles on the strength of permits granted under the Motor Vehicles Act to the erstwhile owners which were not validly transferred to the partnership. Relying upon the ruling of the Supreme Court in Umacharan Shaw and Bros. v. CIT , a distinction had been drawn in all these cases between illegality of partnership and illegality of acts done in the course of partnership business.”
7. The Tribunal finally concluded that, in the present case, there was no transfer of ownership of the buses for the operation of which the assessee-firm was formed. The ownership of the vehicles continued to remain with the limited company that went into liquidation. As held by the High Court in the proceedings referred to above, without transferring the stage carriage permits granted for operating the buses, the company merely transferred possession of those vehicles to the Khannas and conferred upon the latter the right to ply those vehicles on the strength of the permit obtained by the company from the transport authority. If the operation of those vehicles by the assessee-firm on the strength of permits held by the limited company had been illegal and violative of the provisions of the Motor Vehicles Act, the transport authorities would have taken action against the assessee-firm for such contravention of law. It is not shown that the transport authorities had taken any such action against the assessee-firm. The Tribunal further held that there is distinction in law between the illegality of the partnership itself and illegality of the acts done in the course of the partnership business and, in support of this principle, cited the decisions of the Madhya Pradesh High Court and the Madras High Court (supra). Thus, in the view of the Tribunal, the object of the partnership was not illegal and registration for the assessee-firm could not be refused on the ground of the illegality of the objects of the partnership.
8. For the reasons mentioned in its consolidated order, the Tribunal upheld the orders of the Appellate Assistant Commissioner directing the Income-tax Officer to allow continuance of registration to the assessee-firm for the assessment years 1966-67 to 1972-73.
9. The case of the Income-tax Officer is that the illegality of the object of the partnership affects the assessee’s case for registration as a firm. Where its object is opposed to law or public policy, the firm cannot be treated as a genuine firm. Here the partnership was constituted for the purpose of exploiting commercially the bus permits and the buses of which the holder is a company, a stranger to the partnership. The appellate authority including the Tribunal, however, found that there was no illegality about the object of the partnership and the disentitlement from the benefit of registration under Section 185 of the Income-tax Act, 1961, was unwarranted. The whole question thus turns on the issue whether, in the conduct of the respondent-firm, there is any taint of illegality. If the business itself is such as is not countenanced by law, the entire partnership is to be treated as illegal and declared void ab initio. This position emanates from this principle well-entrenched under the Partnership Act.
10. The Revenue’s question assails the concurrent finding of the two appellate authorities that the business carried on by the partnership, i.e., the arrangement whereby the partnership plied the buses on the strength of the route permits is lawful, notwithstanding that both belonged to a company and the company is no constituent part of the partnership.
11. This directly brings in the provisions of the Motor Vehicles Act. Unless the Revenue shows that there is a clear prohibition in the Motor Vehicles Act against commercial exploitation of the route permit by an agency other than the” agency to which the route permit is granted, the Revenue cannot be said to have a case. The Tribunal, however, addressed itself to the task of examining the provisions of the Motor Vehicles Act with reference to the set of facts present here. The Tribunal has held that Section 31 of the said Act does not prohibit the transfer of a vehicle by one person to another. The section requires merely that, upon such transfer, both parties, i.e., the transferor and the transferee, are under obligation to report the transfer to the transport authority in the manner prescribed by the said Act. The omission is a culpable act. The Department contended that a partnership carrying on motor transport business on the basis of permits under the Motor Vehicles Act, 1939, is an illegal partnership even though the vehicles stood in the name of one partner only. This was the situation in Dayabhai and Co. v. CIT [1966] 59 ITR 364 (MP). The other cases cited on behalf of the Revenue relate to the exploitation of the permit for selling foreign liquor, country liquor and other excisable goods. Such cases are not of aid here because those cases relate to the provisions of different Acts. Whether the provisions of the excise law are analogous to those under the Motor Vehicles Act is a question which we need not enter into. Anyway, the decision of the Madhya Pradesh High Court is clearly in favour of the Revenue.
12. The ratio in Dayabhai and Co.’s case [19661 59 ITR 364 (MP) shall apply in the assessee’s case with greater force because, as already noticed by us here, the permit-holder is not a partner of the firm. The permit-holder is a stranger to the partnership. It is a company which allowed the partnership to utilise the route permit for gains of business. Therefore, here is a case of utilisation of the route permits of the buses by another party which is an outside party without however knowledge or consent of the transport authority.
13. There is difference of opinion amongst the High Courts as to whether a firm carrying on business on the strength of the permit or licence standing in the name of one of the partners is tainted with illegality. That question is ruled out in the present case. Here the holder of the permit is not a partner of the partnership firm using the permit for its business. Therefore, the controversy amongst the High Courts on the legal position arising from that particular contingency has no bearing on the issue before us. The Tribunal has set great store by the decision of the Supreme Court in Umacharan Shaw and Bros. v. CIT [1959] 37 ITR 271. There the Supreme Court has held that the carrying on of a business on the strength of a permit or licence held by an individual member of the partnership is not tainted with any illegality and such act leaves no scope for holding that the partnership is illegal. But, as already stated, this is not relevant for our purpose as the permit-holder in the case is not a partner, but a stranger company. In this connection, we can refer to T.K.P.R. Ramanatha Chettiar and Bros. v. CIT . The assessee-firm in that case purchased the vehicles from others but the permits were not transferred which continued in the names of the transferors during the years under consideration. The refusal of registration by the Income-tax Officer was on the ground that the firm was engaged in the unlawful activity of plying the vehicles without a valid permit in its name and thus contravening Section 42 of the Motor Vehicles Act, 1939. The Madras High Court held that though the firm was the owner of the lorries and was operating them, the partnership cannot be regarded as illegal merely because the permits in regard to them stood in the names of the original owners. Similar view has been taken by the Madras High Court in a later decision in National Roadways v. CIT [1975] 99 ITR 97. The Madras view in this case, however, lends support to the Tribunal’s decision.
14. The Tribunal, however, appears to have been guided principally by a decision of this court pronounced on a petition moved by the respondent herein in connection with the liquidation proceedings relating to the company whose buses and route permits the assessee was utilising for its business of plying buses. The company, i.e., the permit-holder, went into liquidation and, in connection with the liquidation proceedings, the respondent-assessee set up a claim of interest in the vehicles and the route permits under the so-called agency agreement between the respondent-assessee and the said company in liquidation. In the decision on the said application, this court held that the assessee was merely a hirer of the buses and the route permits and, therefore, could not have claimed interest in the vehicles or the route permits. From this, the Tribunal drew the conclusion that there was no transfer of the buses and the route permits attracting any of the prohibitory provisions of the Motor Vehicles Act. But we are not in agreement with the Tribunal’s reading of the implication of the said decision of this court dated October 10, 1969. It was the claim before the court that the agency agreement whereunder the assessee was utilising the buses and the route permits is a managing agency agreement and the court dismissed the claim and held that, for all practical purposes, the assessee was the transferee in respect of 34 motor buses. Section 59 of the Motor Vehicles Act prohibits the transfer of stage carriage permits without the permission of the transport authority that grants the permit and provides that, without such permission, such transfer would not confer upon the transferee of such vehicles covered by the permit any right to use the vehicles in accordance with the permit or any manner authorised by the permit. Therefore, no agreement under the agency agreement between the assessee and the company in liquidation came to be conferred upon the partnership. This court held that the partnership had no legal right to ply the said buses in accordance with the provisions of law. Thus, before this court in the said proceedings the major issue was whether the assessee could acquire any right in the buses or route permits. The court, finding that law does not permit a third party to acquire any such right, held that whatever be the agreement, no right as regards the buses and the route permits was conferred upon the firm.
15. The pertinent point that emerges as a logical consequence is that the use of the route permit and the vehicle by the assessee-firm for the business was unlawful. In this connection, reliance can be placed on the Madras High Court decision in N. Doraswami Mudaliar v. S.V. Natesa Mudaliar, . At page 456 of the Reports, the following observation occurs :
“The permit granted in respect of a stage carriage is first in relation to a particular vehicle and next in relation to a particular individual. Even as the present controversy will have made apparent, the qualifications of the individual are of primary importance. In fact, very often these qualifications will be decisive in determining whether a permit should be granted to X or Y. When such is the case, if X could obtain a permit and thereafter Y could run the vehicle the result will really be to make X a benamidar of Y. The Motor Vehicles Act does not sanction arrangements of this kind. On the other hand, the whole scheme of the Act is to make the permit available only to the person to whom it has been granted.
The matter does not rest on broad consideration alone. Section 123 of the Motor Vehicles Act is comprehensive enough to penalise a person who operates a bus or a stage carnage on the strength of a permit obtained by someone else. Even if Section 123 of the Motor Vehicles Act had not been there, the same result would ensue by the application of the ordinary law of abatement in relation to Section 43. If X obtains a permit and then hands over the vehicle to Y and allows him to run it, the position would be as if X and Y had conspired to commit an offence made punishable under Section 42 of the Act.”
16.In the present case, the most noteworthy fact is, therefore, that the partnership carried on its business in contravention of the express provisions of the Motor Vehicles Act. It can be said that the company falsely represented itself as the owner and falsely obtained route permit in its name and allowed the true owner who had no permit to conduct the business. There can be no worse violation of the basic requirements of the Motor Vehicles Act.
17. When this court held on the assessee’s application in the liquidation proceeding relating to the permit-holding company that there was no transfer of the vehicles or for that matter, the permits, it implied that no lawful transfer was effected and the assessee could not lawfully claim any interest or right in the vehicles or the permits. There is a clear pronouncement in that order against the legality of the assessee’s arrangement with the company in liquidation.
18. Now, there is one aspect of the matter very much highlighted by learned counsel for the assessee, i.e., the principle that a partnership cannot be held illegal unless the purpose itself is tainted with illegality. It was only in carrying out the object of the partnership, i.e., the business of transportation, that the assessee committed an illegal act. The question may arise whether such illegality bears down on the very object of the partnership contemplated at the time of its formation. Here, circumstantially, we can see that the business of partnership had as its only source of sustenance the so-called agency agreement with the permit-holder. The partnership came into being on March 15, 1963, while the agency agreement with the company holding the permit was entered into on March 29, 1963. The very substratum or the base for formation of the partnership was this agency agreement. As a matter of fact, the partnership deed itself refers to the arrangement with the aforesaid company in its recital part to be the prelude to its formation. Curiously though dated March 15, 1963, the recitals in the instrument of partnership refers to agency agreement which is anachronistically dated March 29, 1963. Anyway, the partnership was formed with the very purpose of commercially exploiting the buses and the route permits of the buses of a stranger and for no other purpose. Therefore, the Tribunal was not correct. The Tribunal’s reading of the decision of this court on the application of the assessee-firm in the course of liquidation proceedings of the permit-holding company is erroneous. Besides, there appears to be some lack of circumspection as to the state of law governing the use of motor vehicles.
19. The business as also the object of the partnership being illegal, the partnership agreement is ab initio void and non est. The Income-tax Officer was right in refusing the registration under Section 185 of the Income-tax Act, 1961. Accordingly, we answer the question in the negative, against the assessee and in favour of the Revenue.
20. There will he no order as to costs.
K.M. Yusuf, J.
21. I agree.