A.D. Thiagaraja Pillai vs Commissioner of Income Tax, Madras

S. Ramachandra Iyer, C.J.

(1) The question for decision in this reference is whether the application filed by the assessee under S. 27 of the Income Tax Act was within the

time permitted by the section. The reference relates to the individual assessment of A. D. Thiagaraja Pillai made by the Income Tax Officer,

Cuddalore, on 25-4-1953 for the year 1948--49. Thiagaraja Pillai and none Kalyanasundara Nadar were members of a firm, which had engaged

itself in taking Abkari contracts and vending toddy in the South Arcot Dt. They had been doing such business for a number of years till 1-10-1948,

when prohibition was introduced by the State Government in that District. The year of account adopted by the firm was the financial year. Returns

of income were, after the introduction of prohibition therefore, submitted on behalf of the firm for two periods: (1) from 1-4-1947 to 31-3-1948

and (2) from 1-4-1948 to 30-9-1948. The returns disclosed an income of Rs. 9144 and Rs. 5000 respectively for the two periods referred to

above. For some reason, not discoverable in the record, the Income Tax Officer did not take up the assessment of the firm till the year 1953. Early

that year, he called upon Kalyanasundara Nadar to file his wealth statement for three years prior to the date of return. There was no response to

that requisition. The officer then informed Kalyanasundara Nadar of his intention to proceed against the firm under S. 23(4) of the Act; even then

the latter did not move. On 11-3-1953, the Income Tax Officer completed the assessment fixing the business income of the firm at Rs. 2,00,000.

Notice of demand for the tax was served on Kalyanasundara Nadir on 20-3-1953.

(2) The Income Tax Officer, then took up the personal assessment of the other partner. A. D. Thiagaraja Pillai, (with whom we are concerned)

and included in his individual assessment a half share of the business profits ascertained above, namely, Rs. 1,00,000. Notice of demand in respect

of this assessment was served on Thiagaraja Pillai on 25-3-1953, a copy of the order of assessment on the firm was furnished to him on 16-4-

1953.

(3) Thiagaraja Pillai stated that it was only on receipt of the order on the later date that he came to know that he firm had been assessed under S.

23(3) of he Act. He, therefore, applied to the Income Tax Officer on 21-4-1953, under S. 27 of the Act, for cancellation of the assessment. The

Income Tax Officer rejected his application as barred by limitation. In his view, the application must have been filed within 30 days after the service

of the assessment order on Kalyanasundaram. This view was affirmed on appeal and on further appeal by the Appellate Assistant Commissioner

and the Income Tax Appellate Tribunal respectively.

(4) T. S. Raghavachariar appearing for Thiagaraja Pillai has contended that inasmuch as the partnership now in question was formed to exploit a

license to vend toddy obtained by certain benamidars, it should be regarded as an illegal one and the assessment in the circumstances, must be held

to have been made on an association of persons consisting of Thiagaraja Pillai and Kalyanasundara Nadar. On this assumption learned counsel

proceeded to contend that as notice for proceeding under S. 23(4) was not served on nay principal officer of the association according to the

learned counsel, the assessment must be regarded as illegal and the time, for the purpose of an application under S. 27 should be reckoned from

25-3-1953, on which date Thiagaraja Pillai received notice of demand for payment of tax. This contention is based on more than one assumption

for which there are at case that the license for the toddy contract was taken benami in the name of others and that the name s taken over and

exploited by Thiagaraja Pillai and Kalyanasundara Nadar is a new one. Even in the application to this court under S. 66(2) of the Act. Thiagaraja

Pillai only stated;

This association had taken up toddy contract in the South Arcot Dt. and it had been trading in the same for a number of years.

This statement clearly implies that the contract for vending toddy was taken by the firm itself.

(5) Learned counsel then argued that even if it were to be taken that the partnership took the contract, such partnership must be regarded as illegal

on the principle accepted in certain decisions of this court, to which we shall presently made reference. In other words, the contention advanced

before us went to the extent that every partnership doing business in arrack and toddy., should necessarily be regarded as an illegal one. Support

of this contention was sought from K.P.G.B.U.G.M.S.S.A. Mohamad Abdul Kareem and Co. and Another Vs. The Commissioner of Income

Tax, where a partnership between two persons, one who had taken a lease of an arrack shop and the other a toddy shop, to run the tow

businesses for their joint benefit, was held to be illegal; and the firm was held liable to be assessed as an association of persons. In In Re: Bavaji

alias Abdul Muhammad, Full Bench of this court declared that a partnership entered into for the purpose of conducting business in arrack or toddy

on a license granted or to be granted to only one of them would be void ab initio and there would be no difference in the application of this

principle whether the contract of partnership was entered into before the license was granted or afterwards. The underlying basis of this decision

was that such a partnership would amount to a breach of the provisions contained S. 15 of the Abkari act. which would be punishable under S. 55

of that Act. Section 15 of the Abkari Act States:

No liquor or intoxicating drug shall be sold without license form the Collector,

Section 55 and 56 of the Act render punishable the sale of liquor or intoxicating drug is contravention of the Act, or of any rule or order made, or

of any license or permit obtained there under. A license issued under the Act generally contains a clause that no privilege of supply or vend shall be

sold, transferred, or subrented without the Collector''s previous permission. It was held by the Full Bench that the formation of a partnership to

exploit a license granted in favour of one of the partners would amount to a contravention of the provision of S. 15 of the Abkari Act or of the

terms of the license referred to above.

(6) But obviously there can be no such illegality if there had been a full disclosure to the Revenue authorities of the position, namely, that the

partnership was to take the benefit of the contract in the name of one of them; in such a case permission of the authorities can be presumed. In J.D.

Italia Vs. D. Cowasjee and Others, this court had to consider that problem. In that case two partners entered into an agreement of partnership for

the purpose of acquiring a license for carrying on business in toddy. One of them obtained the license in his own name. It was found that the

Revenue authorities were fully aware of the arrangement between the partners that the license issued in the name of one was to be used for the

benefit of the partnership; evidence revealed that he Revenue Authorities were agreeable to the business being carried on in partnership, with the

license in the name of one of them. On these facts, this court held that so long as that position lasted, i.e., the concurrence of the authorities to that

act of the partners, the partnership could not be regarded as illegal.

There can, therefore, be no doubt, on he decisions of this court that it cannot be taken as a matter of assumption or presumption that partnership

formed of doing Abkari business is illegal. if the license had been taken in he name of the firm itself, its business would be perfectly valid. Even if

the licence is not found to be so taken, but issued in the name of only one of the partners, the partnership would still be legal, if there had been a full

disclosure to the Government at the relevant time that the licence was to be used by the firm itself. The terms of the licence, which we have set out

above do not require any particular form for the Governmental permission. The question whether in a particular case a partnership firm for the

purpose of doing Abkari business is legal or not will have therefore to depend on the facts of each case.

(7) If, on the principles stated above, the partnership is found to be a legal one, an assessment to Income Tax can be made on it as a firm. If, on

the contrary, it is found to be illegal, such assessment can only be made on the partners as an association of persons. The rule will be the same,

continuance of the partnership or association of persons. There will be the same, whether the assessments to be dame during the continuance of the

partnership or association of persons, or after its dissolution. In Commissioner of Income Tax, Hyderabad Vs. Sri Rajareddy Mallaram, the

Supreme Court held that an order of assessment made subsequent to the dissolution of an association of persons, after serving a notice upon one

of its members, in accordance with S. 63(2) o the Act, could be enforced against the other members who were not served.

(8) The question, therefore, in each case will turn on its facts and it cannot be assumed as a matter or law that every partnership formed with a

view to do business in toddy under a licence taken in the name of one or a few amount the Thiagaraja Pillai in the instant case has himself admitted

in his application under S. 66(2) ""that the association"" had taken up toddy contract in the South Arcot Dt.-the word association being used

designedly for the purpose of the petition. That would imply that he licence was taken in the name of ""the association"". If that were so, the would

be no question of any illegality in the constitution of the firm.

(9) Secondly, even assuming that the licence was taken only in the name of one of the partners, or taken up by an individual and later transferred to

a partnership of which he was a member or that it was taken it in the name of certain benamidars, the question has still to be investigated whether

that was done with the knowledge and concurrence of the Government. If there were such concurrence, there would be no illegality in the

partnership. But, unfortunately, in the instant case, booth the department as well as the Tribunal have proceeded to dispose of Thiagaraja Pillai''s

application under S. 27 without investigating whether the partnership was a legal or an illegal one. For example the Appellate Assistant

Commissioner stated:

The appellant has tried to raise and argue several issues such as whether the status should both have been an ''association of persons'' whether a

''Principal officer'' should not have been appointed, whether notices should not have been served on both the persons, as the partnership or other

association, whichever it may be, had been dissolved etc. It may be necessary to go into some or all of such issues, if the appeal were against the

assessment itself or were against an order under S. 27 on merits. Here the application under S. 27 was rejected as being out of time and the

Income Tax Officer has not even power to condone the delay"". We are unable to see how the application of Thiagaraja Pillai could be disposed of

without considering those questions referred to by the Appellant Assistant Commissioner. If, for example, on an investigation of facts, it is found

that the partnership between Thiagaraja Pillai and Kalyanasundara Nadar is a legal one the service of notice on Kalyanasundara Nadar, one of the

partners, would bind the other partner as well and there would be no case for cancellation of the assessment under S. 27 of the Act except by an

application filed within 30 days of notice to the party. This would be so even if the partnership had been dissolved. If, it were to be found that the

partnership was illegal, then the assessment cold be made as on an association of person. Even to such a case, S. 44 of the Act would apply; such

an association would be deemed to continue even after its dissolution, for the purpose of assessment, and the procedure for assessment, after

dissolution, of income received prior thereto, would be the same as when it existed during the continuance of the association. Section 63(2)

provides hat notice under the Act in the case of an association of persons may be addressed to the principal officer thereof. Section 2(12) defined

as principal officer thereof. In order to find out whether a notice served on one of the former mambas of an association of persons will bind

another, it has to be seen whether the former was a principal officer, within the definition preferred to above. But it has not been ascertained in the

present case whether Kalyanasundara Nadar, on whom notices relating to the assessment were served, was a principal officer of the association or

not.

(10) The Income Tax Officer rejected Thiagaraja Pillai''s application under S. 27 on the mere ground that it was filed more than 30 days after 20-

3-1953, when notice was served on Kalyanasundara Nadar. In so holding the officer assumed that Kalyanasundara Nadar and Thiagaraja Pillai

were partners. It does not appear form the order of the Appellate Assistant Commissioner either that he was alive to the importance to the

distinction between a partnership and an association of persons in the matter of the validity of service of notice. Again the question whether in the

instance case the assessment was made as on a firm or an association of persons would depend on the legality of the partnership. The Tribunal too

did not consider any of the relevant matters it assumed that the service of notice of the assessment proceedings on Kalyanasundara Nadar would

be binding on Thiagaraja Pillai. In its statement of the case, it assumed the partnership to be a mere association of persons. But strangely enough,

while referring to the demand notice served on Kalyanasundara Nadar, it described him as one of the ""partners."" We are unable to see how the

Tribunal without arriving at a finding on the two questions namely, (1) whether the partnership between Thiagaraja Pillai and Kalyanasundara

Nadar was legal, and (ii) if not, whether Kalyanasundara Nadar was recognised as the principal office of the association of persons, can sustain the

rejection of Thiagaraja Pillai''s application under S. 27 of he Act.

(11) We, therefore, answer the question referred to us in this manner, namely, the Tribunal was not justified in holding that he application of

Thiagaraja Pillai under S. 27 was out of time without deciding the question whether the notice to Kalyanasundara Nadar would be sufficient notice

to bind Thiagaraja Pillai. We consider that, in the circumstances of the case, there should be no order as to costs.

(12) Answer accordingly.