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Judgment
N. Kumar, J.—The revenue has preferred this appeal challenging the order passed by the Tribunal which held that the firm has complied with the provisions of Section 194 and accordingly is entitled to the benefit of deduction under the Income Tax Act, 1961.
The Assessee M/s S.B. Pannalkar & Co., a partnership firm is carrying on the business of liquor on wholesale basis. The liquor license stood in the name of one of the partners. The license was not transferred to the name of the Assessee and it continued to be in the name of the partner. The Assessee carried on this wholesale business using the license not owned by the firm and therefore the Assessing Authority disallowed the remuneration paid to the partners and the interest on capital, vide order dated 23.03.2004. Aggrieved by the same, the Assessee filed an appeal before the Commissioner of Income Tax (Appeals) Belgaum. The appeal came to be allowed by order dated 16.09.2004. Aggrieved by the same, the Revenue preferred an appeal before the Tribunal, which came to be dismissed affirming the order passed by the Appellate Tribunal. Aggrieved by the same, the Revenue is before this Court.
The appeal was admitted on 28.02.2007 to consider the following substantial questions of law:
1) Whether the First Appellate Authority and Tribunal was correct in holding that a license to vend liquor issued to an individual can be used by the firm and/or its partners when there being no legal transfer of the license ?
2) Whether the First Appellate Authority and Tribunal was correct in holding that though license was issued to an individual to vend in liquor, if utilized by a third party firm, the same would not attract Section 23 of the Contract Act ?
3) Whether the First Appellate Authority and Tribunal was correct in distinguishing the judgment of the Hon''ble Supreme Court reported in Commissioner of Income Tax Vs. Rangila Ram and Others, ?
4) Whether the First Appellate Authority and Tribunal was justified in holding that the firm is a valid firm despite the fact that it has violated the provisions of Karnataka Excise Act in conducting liquor business without payment of transfer fee and without having license of its own and thus such act of the firm being opposed to the public policy ?
5) Whether the license issued to an individual for vending liquor can be transferred as an asset of the firm u/s 2(2) of the Partnership Act and if so, would it not amount to violation of the license conditions, thus affecting the provisions of Section 23 of the Indian Contract Act?
Learned Counsel for the Revenue assailing the impugned order passed by the Tribunal contended that though under the Karnataka Excise Act, a liquor license can be transferred with the permission of the authorities, when admittedly in this case, no such permission is sought, the firm could not have carried on liquor business making use of the license which stood in the name of one of the partners. Secondly, he contended that in view of the law laid down by the Apex Court, a partner of a firm cannot transfer the license standing in his name in the name of the partnership firm, on the basis of which the partnership firm carries on the business in liquor, which is clearly prohibited. A contract entered into in this regard is hit by Section 23 of the Contract Act as it is opposed to the public policy as well as the express provision in the statute. In those circumstances, the Assessing Officer was justified in disallowing the deduction to the firm wherein the salary paid to the partners and the interest paid are treated as business expenditure and given the benefit. Therefore, he submits that the order passed by the Tribunal as well as the appellate authority is liable to the set aside.
Per contra, the learned Counsel appearing for the Assessee submitted that in the instant case, there is no transfer of license. The partnership firm was formed to carry on liquor business. After the firm came into existence, to carry on business, it had to obtain license. At that stage, it was agreed between the partners that license should be obtained either in the name of the firm or in the name of the partners. If obtained in the name of the partners, it would be an asset of the firm. In those circumstances, when license was applied in the name of the partner, the fees was paid out of the partnership firm and license, though it stood in the name of the partner, it was the asset of the partnership firm and there was no transfer of license by the partner to the firm involved in this case. The judgment relied on are not attracted to the facts of this case and rightly the appellate authority as well as the Tribunal held that the firm is entitled to the benefit of deduction. Therefore he submits that no case for interference is made out.
The Apex Court in the case of Bihari Lal Jaiswal v. CIT, has held as under:
A licensee could not be "permitted to bring in strangers into the business, which would mean that instead of the licensee carrying on the business, it would be carried on by others a situation not conducive to effective implementation of the excise law and consequently deleterious to public interest. It is for this very reason that transfer or sub-letting of license is uniformly prohibited by several State excise enactments. It, therefore, follows that any agreement where under the license is transferred, sub-let or a partnership is entered into with respect to the privilege business under the said license, contrary to the prohibition contained in the relevant excise enactment, is an agreement prohibited by law.
Again the Supreme Court in the case of CIT v. Hardit Singh Pal Chand and Co., held that the liquor licensee may not enter into a partnership without prior permission.
Again in the case of CIT v. Degaon Ganga Reddy G. Ramakrishna and Co., the Apex Court has held as under:
In view of the clear findings of fact recorded by the Tribunal there can be no doubt that the sub-partnerships formed by individual partners of the main partnership which were lessees, with some others, merely to finance the business of a partner of the main firm doing abkari business and share the profits and losses accrued to or received by him from the main firm were not in violation of Section 14 of the Abkari Act. For this reason, there is no basis to hold that the sub-partnerships were in violation of Section 14 of the Abkari Act and, therefore, illegal. The Tribunal was right in holding that in the facts and circumstances of the case, the Assessee sub-partnerships being found to be genuine were entitled to be registered under the Income Tax Act.
The Apex Court had an occasion to consider the said question in the case of Commissioner of Income Tax Vs. Rangila Ram and Others, . In the said case, the Supreme Court laid down the law as under:
The basic principle, as it seems to us, is that the liquor business is res extra commercial. No one may deal in liquor without express permission. It is only the licensee who is granted such permission. If he enters into a partnership to deal in liquor, all the other partners would, as partners, also be dealing in liquor and holding the same. This would be contrary to the basic principle and illegal.
Therefore, ultimately it is the intention of the parties as gathered from the facts of the case which would determine the eligibility for deduction. No person can carry on liquor business without a license or permission. Such license granted is not transferable. Even if transferable, it would be subject to conditions. A partnership firm to carry on business needs a license or permission from the authority under the Excise Act. If an individual transfers the said license to a partnership firm, it has to be in accordance with law. Otherwise the transfer would be contrary to Section 23 of the Indian Contract Act, and is void. However, if a partnership firm chooses to obtain a license in the name of one of its partner and the license granted to such partner is treated as the partnership asset expressly in the partnership deed even before acquiring such license and the partnership firm pays the fee for obtaining such license, the said license granted is a partnership asset and is not the personal property of such partner. No transfer is involved in such a transaction. It is not a case of a person who has obtained a liquor license is inducted into a partnership as a partner, who brings in the said license as his capital contribution and makes available the license to the partnership firm to carry on liquor business and thus circumvent the law prohibiting transfer of such license. Thus the partnership should acquire the license to carry on liquor business in a manner known to law to be eligible for deductions under the heading business expenditure u/s 37 of the Income Tax Act, 1961.
It is not in dispute that under the Karnataka Excise Act, Section 15 deals with the sale of excisable articles without license is prohibited.
Sale of excisable articles without license prohibited.-
(1) No intoxicant shall be sold except under the authority and subject to the terms and conditions of a license granted in that behalf.
The corresponding rule found in 17(B) of the Karnataka Excise License (General Conditions) Rules 1967, reads as under:
17-B. Transfer of license in other cases.- (1) Notwithstanding anything contained in Rule 2, licenses issued,-
(i) for sale of Indian Liquor (other than arrack) or Foreign Liquor or both, in Form No. CL-1 (Wholesale license) or CL-2 (retail shop licenses) or CL-7 (Hotel and Boarding House Licenses) or CL-9 (Refreshment room (Bar) License under the Karnataka Excise (Sale of Indian and Foreign Liquors) Rules, 1968; or
(ii) for sale of Beer under the Karnataka Excise (Lease of Right of Retail Vend of Beer) Rules, 1976;
The Deputy Commissioner may on an application by the licensee and subject to payment of transfer fee equivalent to the annual license fee specified in Rule 8 of the Karnataka Excise (Sale of Indian and Foreign Liquors) Rules, 1968 or Rule 5 of the Karnataka Excise (Lease of Right of Retail Vend of Beer, Rules, 1976, as the case may be, and with the prior approval of the Excise Commissioner, transfer such license in favour of any person named by such license, if such person is eligible for grant of a license under the Karnataka Excise Act, 1965 or the rules made there under.
(2) Nothing in this rule shall apply to transfer of license under Rule 17A.
From the reading of the aforesaid provisions it is clear that no intoxicant shall be sold without a license granted in that behalf. The Rules also provide for transfer of such license in favour of any person named by such licensee, if such person is eligible for grant of license, under the Karnataka Excise Act, 1965 and the Rules made therein. Therefore, there is no total prohibition for transfer of the excise license.
Coming to the facts of this case, the preamble to the Partnership Deed dated 04th November 1997 reads as under:
WHEREAS, the above said parties of the 1st to 6th parts along with Late Smt. GANGABAI W/O BABURAO PANALKAR, were carrying on business of Foreign Liquor in partnership till 2.11.1997 under the name and style of M/s S.B. PANALKAR & CO., at Jamkhandi as per the partnership deed dated 1.4.1992.
AND WHEREAS, the said Smt. Gangubai W/o Baburao Panalkar of Jamkhandi expired on 2.11.1997.
AND WHEREAS, the remaining partners continued the said business as usual in partnership with effect from. 3.11.1997 on the following terms and conditions.
Clause 3 of the Partnership Deed is of utmost importance. It reads as under:
THAT the business of partnership shall be that of dealing in foreign Liquor and or any other business that the partners may decide from time to time.
Clause 15 reads thus:
THAT the license to canyon the said business may be obtained either in the name of any partner or in the name of the firm to suit the convenience of the law under which such license shall be obtained. However, the license belongs to the firm only.
From the aforesaid recital in the partnership deed, it is clear that though this partnership came into existence on 4th November, 1997 for the reasons set out above, the business of liquor was carried on by the partnership from the year 1992. The said business cannot be carried on without a license being obtained, which is to be renewed every year. It is in that context Clause 15 provides for license which may be obtained either in the name of any partner or in the name of the firm. However, the license belongs to the firm only. It is not in dispute that after the formation of such partnership firm, license was obtained in the name of one of the partners. Therefore the business of the firm continued with the said license. Therefore it is not a case where a person obtains a license and enters into a partnership firm and contributes license as his capital contribution, with the aid of which the partnership carries on the business, thus contravening the provisions of law, where transfer of license is prohibited. Similarly, this is not a case where the license is transferred without the permission of the authorities, when the statute provides for such permission. This is a case where a partnership firm was carrying on liquor business. On account of the death of one of the partners, the partnership firm came to an end and it was reconstituted. Without a license, they could not have continued to carry on the liquor business in partnership. Therefore, they agreed to apply for a license either in the name of the firm or in the name of a partner making it clear that even if the license is obtained in the name of the partner, the license belongs to the partnership firm. Therefore, it is not a case of transfer of license to partnership firm nor transfer of license to a partnership without permission of the authorities. The very license is obtained by the firm in the name of a partner, to carry on the partnership business which they were carrying on for more than 5 years prior to the constitution of the partnership.
Therefore, it is clear that there is no intention on behalf of these partners to contravene the law. It is not camouflaged to contravene the law. Therefore the appellate authority as well as the Tribunal were justified in holding that the aforesaid judgments of the Apex Court has no application to the facts of this case. It is a case of genuine partnership carrying on business in liquor after obtaining license in the name of one of the partners, treating the said license as partnership asset. No transfer is involved.
In fact, the Apex Court in an unreported judgment in the case of Grand Enterprises Kerala v. Commissioner of Income Tax, Kerala, in Civil Appeal No. 1317-1319/01, disposed of on 4th December 2002, after referring to the aforesaid judgments of the Apex Court held as under:
A condition expressly prohibiting the entry into a partnership by a license holder would operate even if there were no transfer in fact But when all that is forbidden is a transfer, then this must be factually established.
In this case, apart from the fact of mere utilization of the license, nothing further has been recorded by the High Court to come to the conclusion that there has been a transfer of the license or of any rights there under to the Appellant-firm. Neither the partnership deed nor any other facts have been brought on record which would show that the liquor license and the privileges there under were brought in by the license holder by way of his capital contribution to the partnership assets. We have already held that merely forming the partnership firm would not tantamount to a transfer without something more. In the absence of an express statutory provision prohibiting the formation of a partnership by a license holder, the High Court should have addressed itself to the question whether the license formed part of the partnership property or not, Unless the question could be answered in the affirmative, the High Court, could not draw the conclusion that there was a transfer of the license in contravention of the condition on which the license had been granted to the partner.
Therefore it is clear that in the instant case there is no statutory provision prohibiting the formation of a partnership by a license holder. The license did not contribute the license as a capital contribution to the partnership assets. On the contrary, the license, from the inception, was treated as partnership asset by express words in the partnership deed.
In that view of the matter, the aforesaid judgments of the Apex Court have no application. It was rendered in connection with express statutory provision on the various State enactment in question which provisions are not there in the enactment in question. In that view of the matter we do not see any merit in this appeal. We answer all the substantial questions of law in favour of the Assessee and against the revenue. Accordingly, the appeal is dismissed.