ORDER
K.A. Thanikkachalam, Judicial Member
1. This appeal is directed against the order of the Commissioner (Appeals), dated 4-7-1983, passed in IT Appeal No. 6/KII of 1982-83 for the assessment year 1979-80.
2. According to the facts of this case, the assessee carried on business in purchase and sale of wines. The accounting period ended on 31-3-1979. With regard to the status, the assessment was made as under:
The assessee firm filed Form No. 12 on 17-7-1979, requesting the ITO to allow continuation of registration for the assessment year 1979-80. It was found from the records of the excise authorities that the licence was issued in the name of Shri B. Raju, proprietor, Ganesh Happy Wine Stores, Tuni. But Shri Raju formed into a partnership concern without taking permission from the excise authorities, which tantamounts the violation of the Excise rules. In the light of the Punjab and Haryana High Court decision in the case of CIT v. Hardit Singh Pal Chand & Co. [1979] 120 ITR 289, I refuse to grant continuation of registration to the firm for the assessment year 1979-80. Hence, the status of the assessee-firm is treated as ‘unregistered firm’.
Aggrieved, the assessee filed an appeal before the Commissioner (Appeals) contending that the ITO erred in refusing to grant continuation of registration and in case he wanted to treat it as an unregistered firm, he should have passed separate order under Section 186 of the Income-tax Act, 1961 (‘the Act’), cancelling the original registration. Further, it was contended that the ITO erred in holding that the assessee had violated the terms of the Andhra Pradesh Excise Rules, 1969. According to the assessee, the State Excise Rules prohibit only a transfer of licence and do not question the formation of a partnership by taking others as partners for providing funds or for enabling the effective running of the business. Reliance was also placed upon an earlier decision of the Tribunal in support of the contention put forward by the assessee. The Commissioner (Appeals) held that the contentions put forward by the assessee are well founded. Accordingly, he held that the assessee has not violated the Andhra Pradesh Excise Rules. Hence, he held that there is no illegality attached to the assessee-firm carrying on the business making use of the licence standing in the name of one of the partners. Therefore, he directed the ITO to grant continuation of registration.
3. Not satisfied with the order passed by the Commissioner (Appeals), the department is in appeal before us. The learned departmental representative contended that the Commissioner (Appeals) ought to have confirmed the order of the ITO refusing to grant renewal of registration to the firm for the year 1979-80. It was further submitted that the Commissioner (Appeals) ought to have held that the firm violated the rules framed under the Andhra Pradesh Excise Act, 1968. In particular, the Commissioner (Appeals) should have held that the firm violated Rules 38 and 39 of the Foreign Liquor and Indian Liquor Rules, which prohibit formation of partnership without the permission of the concerned excise authorities. It was also submitted that the Commissioner (Appeals) erred in basing his judgment of Rule 19(1) and (2) of the Arrack and Toddy Licences General Conditions Rules, which are not applicable to the present case. Accordingly, it was pleaded that the order passed by the Commissioner (Appeals) may be cancelled and the order of the ITO may be restored.
4. On the other hand, the learned counsel appearing for the assessee supported the order passed by the Commissioner (Appeals).
5. We have heard the rival submissions made by the parties. The fact remains that the assessee carried on business in purchase and sale of wines. The assessee-firm filed Form No. 12 on 17-7-1979 for continuation of registration for the assessment year 1979-80. The licence was issued in the name of one Shri B. Raju, proprietor Ganesh Happy Wine Stores, Tuni. Shri Raju formed a partnership concern for exploiting the licence granted in his favour. The learned Commissioner (Appeals) in his order has observed that as per section 184(7) of the Act which is mandatory in effect, where registration is granted to any firm for any assessment year, it shall have effect for every subsequent year, provided there is no change in the constitution of the firm or of the profit sharing ratios of the partners and the firm furnished a declaration to that effect in Form No. 12. If one such declaration as per proviso (ii) to section 184(7) is filed, the ITO has no option except to continue the registration. Therefore, the Commissioner (Appeals) came to the conclusion that the ITO’s order refusing to grant continuation of registration on the plea that there is contravention of Excise Rules and, therefore, no continuation should be granted is without jurisdiction. In other words, the Commissioner (Appeals) held that the ITO has no alternative but to grant continuation of registration under Section 184(7). However, the learned departmental representative pointed out that where a firm was not constituted in accordance with the requirements of law, the firm is not entitled to the benefits of Section 184(7) merely because registration was granted for the first year’s assessment of the firm. He relied upon a decision of the Andhra Pradesh High Court in CIT v. Badjanapara Salt Co. 1974 Tax LR 19. In that case, the Andhra Pradesh High Court held that any registration that is erroneously granted to such a firm in the past cannot enure to its benefit for the subsequent assessment years under Section 184(7) as, in such circumstances, there would be no firm at all that could be treated as a registered firm. The learned departmental representative also relied upon a decision of the Andhra Pradesh High Court in the case of Addl. CIT v. Chekka Ayyanna [1977] 106 ITR 313, wherein the Andhra Pradesh High Court was of the view that Section 185(1)(b) of the Act brings within its purview not only applications filed for the first time for registration but also cases where continuity of previous registration is refused for subsequent years. Hence, an order passed by the ITO under Section 184(7) refusing to allow continuation of registration to a firm is appealable to the AAC under Section 246(j) of the Act, since it amounts to refusal to grant registration.
6. A reading of Section 185 would reveal that on receipt of an application for registration of a firm either for the first time or for the subsequent assessment year as envisaged in Section 184(7), the object of enquiry under Section 185 is to find out ultimately whether the firm is genuine or not, and whether its constitution is as specified in the instrument or not, and it is only with this idea that the ITO makes an inquiry into the application along with the documents filed therewith. If the ITO is satisfied that there is or was during the previous year in existence a genuine firm with the constitution as specified in the partnership deed he would register the firm for the assessment year. Therefore, we are of the view that even though registration was granted in the earlier years, the ITO is entitled to inquire into the existence of a genuine firm even for continuation of registration under Section 184(7). This view was taken by us in view of the judgment of the Andhra Pradesh High Court in Chekka Ayyanna’s case (supra) and Badjanapara Salt Co’s case (supra).
7. Now let us consider whether the ITO was justified in refusing to grant continuation of registration in the present case. The contention of the learned departmental representative was that the firm violated Rules 38 and 39 of the Andhra Pradesh Foreign Liquor and Indian Liquor Rules, which prohibit formation of partnership without permission of the concerned excise authorities. Sections 38 and 39 run as under:
38. (1) No licensee shall, except with the prior permission of the Commissioner, transfer his licence in favour of any other person. The Commissioner may allow such transfer subject to the transferee binding himself to all the conditions of licence and such other conditions as the Commissioner may impose in a particular case:
Provided that instead of permitting a licence to be transferred, the Commissioner may require the transferee to take out a fresh licence on payment of fee.
(2) In any case where a licence is transferred such transfer will not have the effect of extending the validity of the licence beyond the period for which it was originally granted.
39. No licensee shall, except with the prior permission of the licensing authority, get any other person included as a partner to his business, or get an existing partner excluded.
Rule 19 of the Andhra Pradesh Excise Rules reads as under:
19. (1) The licensee shall not transfer the licence for the sale of arrack or toddy to any other person.
(2) Whereas licence is granted jointly, no licensee shall include or exclude any partner except with the previous permission of the licensing authority. Such permission may be granted by the licensing authority on an application made by the partners together with a fee equal to one per cent of the monthly rental of the shop or group of shops. On receipt of application the licensing authority may make such enquiry for verification of the details stated in the application, and the solvency of the persons concerned and for any other matter, as he deems fit and where he is satisfied about the solvency and other matters, he may permit the inclusion or exclusion of partners.
Rule 38(1) of the Rules under the Andhra Pradesh Excise Act, and Rule 19(1) under the said Act are similar in nature. Rule 19(1) came up for consideration before the Andhra Pradesh High Court in CIT v. Nalli Venkataramana [1984] 145 ITR 759. In considering Rule 19, the Andhra Pradesh High Court held that Rule 19(2) of the Andhra Pradesh Excise Rules requires that whenever a new partner is introduced or excluded, the previous permission of the licensing authority should be obtained. But if such permission is not obtained, the partnership is not rendered illegal. As between partners it continues to be valid and entitled to registration under the Income-tax Act. The partnership agreement has to be construed in such a way as to make it legal, and, so that, the partners would act in accordance with the Act, and the Rules and with an intention not to violate the same. It further held that such partnership agreement does not violate any public policy and does not offend Section 23 of the Indian Contract Act. It further summarises the legal position that Rule 19(1) directs that a licensee shall not transfer the licence to any other person. However, When a licensee enters into a partnership with others for sharing the profits and losses arising out of the use of the licence, there is, in the eye of law, no transfer of the licence. Consequently, there is no contravention of Rule 19(1). The position cannot be compared with a situation where the licensee-partner actually transfers the licence in favour of a third party.
8. There were also decisions of the Tribunal in the case of R. Narayana Goud v. ITO [IT Appeal No. 1064 (Hyd.) of 1973-74, dated 25-6-1975] and in the case of ITO v. Nallamillini Krishna Reddy [IT Appeal Nos. 1011, 1072, 1275 and 1276 (Hyd.) of 1981, dated 22-9-1982] to the effect that there was no contravention of Rule 19(1) and (2) if the partnership business was for exploitation of licence standing in the name of one of the partners. Since Rules 19(1) and 38 under the Andhra Pradesh Excise Act are similar in spirit, we hold by following the ratio of the judgment of the Andhra Pradesh High Court in Nalli Venkataramana’s case (supra) that when a licensee enters into a partnership with others for sharing the profits and losses arising out of the use of the licence, in the eye of law there is no transfer of the licence. Consequently, there is no contravention of Rule 38 under the Andhra Pradesh Excise Act.
9. So far as Rule 39 is concerned, the learned departmental representative pointed out that this question was not before the Andhra Pradesh High Court while deciding the case of Nalli Venkataramana’s case (supra). He pointed out that the judgment of the Supreme Court in Govinda Rao v. Nathmal [Civil Appeal No. 30 of 1960, dated 11-4-1962] will be applicable insofar as matter relating to Rule 39 is concerned. In Govinda Rao’s case (supra) the Supreme Court laid emphasis on Section 3(1) of the C.P. and Berar Food Grains Control Order, 1945, which prohibited any person to deal in foodgrains without a licence. The words ‘deal in foodgrains’ were defined as under:
To engage in the business of purchase, sale or storage for sale of food-grains whether on one’s own account or on account of or on any partnership….
While considering the above said judgment of the Supreme Court in the case of Govinda Rao (supra), the Andhra Pradesh High Court in Nalli Venkataramana’s (supra) observed that:
A reading of the above judgment of the Supreme Court would clearly show that in that case there was a specific prohibition against the formation of a partnership by the licensee-partner. It is also important to note that even with the permission of the competent authority a licence in the name of one partner could not be used by the partnership and it was necessary that the partnership itself, as a unit, was to have a licence in its own name as pointed out by Chandurkar J. in Vasantha Rao’s case [1970] 72 BLR 333.
On considering the judgment of the Supreme Court in Govinda Rao’s case (supra), the Andhra Pradesh High Court further held that:
…judgment of the Supreme Court in Govinda Rao’s case (Civil Appeal No. 30/1960–11-4-1962 of the Supreme Court) is clearly distinguishable inasmuch as in that case there was a specific prohibition against a partner using his licence for the purpose of a partnership of which he was a partner and as the partnership itself was liable to hold a licence in its own name. There was no provision for the conversion of the partner’s licence even with permission for the purpose of being used by the partnership firm.
Accordingly, the Andhra Pradesh High Court further held that:
…we are of the opinion, that a firm is not a juristic entity and under the Andhra Pradesh Excise Act and Rules, the firm need not take out a licence in its own name.
Therefore, it is clear that only after considering the judgment of the Supreme Court in Govinda Rao’s case (supra), the Andhra Pradesh High Court came to the above said conclusion.
10. The next question that came up for consideration is whether the partnership becomes illegal if Rule 39 of the Andhra Pradesh Excise Rules has been violated. Rule 39 states that no licensee shall, except with the prior permission of the licensing authority, get any other person included as a partner in his business or get an existing partner excluded. It does not say that the violation of this rule will render the partnership illegal. Therefore, we are of the opinion that Rule 39 requires that whenever a new partner is introduced or excluded, the previous permission of the licensing authority should be obtained. But if such permission is not obtained, the partnership is not rendered illegal. As between partners, it continues to be valid and entitled to registration under the Act. Further, we have also seen in the partnership deed, the object of the firm has been stated in Clause (2). Clause (2) runs as under:
The object of the firm is to deal in the same business of all varieties of Indian and Foreign Liquor and any other commodities which they feel profitable or a bearing to the main line of the above trade.
Therefore, the partnership firm is formed not only for the sale of liquor but also to deal with other commodities which they feel profitable or a bearing to the main line of the trade. This also supports the assessee’s case that if Rule 39 is violated that will not render the partnership illegal. It was also brought to our notice that the fact that the excise authorities have not exercised their power to cancel or sustaining the disallowance is also an important circumstance in favour of the assessee–P.C. Kapoor v. CIT [1973] 90 ITR 172 (All.) (FB) and A.D. Thiagaraja Pillai v. CIT [1965] 55 ITR 419 (Mad.). This view is also taken by the Andhra Pradesh High Court in Nalli Venkataramana’s case (supra). The ITO relied upon a decision of the Punjab and Haryana High Court in the case of CIT v. Hardit Singh Pal Chand& Co. [1979] 120 ITR 289. In this case, the names of eight persons, who were strangers to the licence, were not endorsed on the licence in terms of the rules. In that case, the Punjab and Haryana High Court held that the firm was not entitled to registration under the Act, as it was carrying on business in violation of the Punjab Excise Act and the Rules. But, in the present case, the facts are different. Here the licence was standing in the name of one of the partners and the liquor business was carried on by the firm. Therefore, there is neither transfer of licence nor violation of the excise Rules. Therefore, the ruling of the Punjab and Haryana High Court in Hardit Singh Pal Chand & Co.’s case (supra) is not applicable to the facts of this case.
11. Considering the earlier orders of the Tribunal on this point and also the facts of this case, we hold that there is no transfer of licence as contemplated under Rule 38 and no violation has been made in terms of Rule 39 as contended by the department in the present case. Accordingly, inasmuch as the licence granted in the name of one of the partners was being exploited by the partnership firm will not amount to violation of Andhra Pradesh Excise Rules, we are not inclined to interfere with the order passed by the Commissioner (Appeals).
12. In the result, the appeal filed by the department is dismissed.