Commissioner of Income Tax vs Hotel New Indraprastha

C.N. Ramachandran Nair, J.—The question raised in the connected appeals filed by the Revenue is whether the Assessees which are

partnership firms running bar hotels with a single bar licence obtained from the Excise Department in the name of only one of the partners, are

entitled to registration as a firm or could be regarded as genuine firm u/s 185 of the income tax Act, 1961 for the purpose of assessment in the

status of registered firm/firm. We have heard standing counsel appearing for the Appellant and senior counsel Sri V. Ramachandran and advocate

Sri P. Balakrishnan appearing for the Assessee-firms.

There is no controversy on the facts inasmuch as all the Assessee-firms carried on retail business in liquor in the bar hotels run by them with a

single abkari licence (FL-3) obtained by one of the partners and the other partners did not have separate individual licences issued by the excise

authorities. While counsel for the Revenue relied on earlier three-member Bench decision of the Supreme Court in Bihari Lal Jaiswal and Others

Vs. Commissioner of Income Tax and Others, , counsel for the Assessees relied on the later judgment of the Supreme Court in Commissioner of

Income Tax Vs. Rangila Ram and Others, , which was rendered on December 4, 2002 by a two-member Bench. The later decision of the

Supreme Court does not refer to the earlier three-member Bench judgment and so much so, standing counsel for the Revenue contended that the

earlier judgment referred to above should be taken as the law declared by the Supreme Court and if the same is followed, liquor business in bar

hotels carried on by a firm with several persons without licence obtained by all the partners should be treated as illegal business disentitling the

partnership for registration u/s 185 of the Income Tax Act and such firms cannot be treated as even genuine firms for assessment in the status as

firm.

On going through the above two judgments of the Supreme Court, we find that detailed provisions of the Abkari Act and Rules are not stated in

the three-member Bench decision, whereas in the later decision of the two-member Bench, the provisions of the Kerala Abkari Act and Rules are

referred to and the decision is rendered in the context of the abkari laws of Kerala. However, we do not think there is any need for us to consider

which of the above two decisions should be followed in these cases because for the reasons stated hereunder. We are of the view that the

Assessee-firms are entitled to registration u/s 185 and are entitled to be treated as genuine firms which carried on liquor business in bar hotels in

accordance with the provisions of the Abkari Act and Rules, no matter the licence was obtained only by one of the partners of the firms which

carried on the business.

Rule 19 of the Foreign Liquor Rules framed under the Kerala Abkari Act and condition No. 13 of the FL-3 licence issued to bar hotels

constituting the conditions of licence about which violations are alleged by the Department are extracted hereunder:

Rule 19:

Under no circumstances shall any licence obtained under this notification be sold, transferred or sub-rented without the previous sanction of the

Excise Commissioner.

Condition No. 13:

Licensee shall not lease out, sell or otherwise transfer his licence without the written consent of the Excise Commissioner.

The contention of the Department is that when FL-3 licence issued to an individual is exploited for business purposes by a partnership firm

constituted with the licensee along with other individuals as partners, it should be taken as a transfer or sub-renting of licence which is objectionable

under Rule 19. However, the case of the Assessee-firms is that in every case of constitution of the firm and carrying on business in liquor in the bar

hotel by the firm with licence obtained by one of the partners, prior sanction is obtained from the Excise Department and the same is approved by

the Excise Commissioner. In fact, whenever there is a change in constitution of the firm, the same is also approved by the Excise Commissioner.

So much so, the contention of the Assessee-firms is that the exploitation of licence issued in the name of an individual by the firm consisting of

partners with licensee as one of the partners is very well known to the Excise Commissioner and it is with his knowledge and permission that

business is carried on by such firms. There is no dispute on this factual position by the income tax Department If the provisions of the Abkari Act

and Rules are gone into, it is clear that the liquor business is closely monitored by the Excise Department at all stages including verification of

accounts. In fact, this Court itself had occasion to consider several cases pertaining to approval of constitution and reconstitution of the firms for

carrying on business with the licence obtained by one of the partners. All the Assessee-firms in this case have been carrying on business in liquor in

the bar hotels with the licence held by one of the partners and other individual partners do not have separate FL-3 licences. FL-3 licence issued

under the Foreign Liquor Rules is only for one year and it is renewed on an year to year basis on payment of substantial amount towards annual

licence fee. The Excise Commissioner granted renewal to all the Assessee-firms knowing well that each and every partner of the firm does not

have separate individual licences and the firm carries on business with the single licence issued in the name of one of the partners. So much so, the

irresistible conclusion that the business is carried on by the partnership firms with licence held by only one of the partners is known to the Excise

Commissioner and is done with his permission and approval. In view of this factual position, we have to necessarily conclude that the Assessee-

firms are carrying on business strictly in accordance with Rule 13 of the Foreign Liquor Rules and Condition 13 of the FL-3 licence inasmuch as

the constitution of the firm for carrying on business in liquor with the licence held by one of the partners is a permissible activity and the firms so

constituted are genuine firms which are entitled to be assessed in the status of firms and for periods when registration is required u/s 185, the firms

are entitled to be assessed as registered firms subject to their satisfying other conditions. We, therefore, dismiss all the appeals filed by the

Revenue.