The Commissioner of Income Tax vs Swarna Bar Restaurant, Managing Partner Jogi Ramesh

Ramesh Ranganathan, J.—These ITT As are preferred by the Revenue against the orders of the Income Tax Appellate Tribunal whereby the Respondent-assesses were held entitled to be assessed as partnership firms, and for consequential benefits of payment of salaries, interest on the capital of partners, etc.

It would suffice for the disposal of these appeals if the facts in I.T.T.A. No. 323 of 2006 are noted. I.T.T.A. No. 323 of 2006 is filed against the order of the Income Tax Appellate Tribunal, Visakhapatnam in I.T.A. No. 455/Viz/2004. For the assessment year 1999-2000 the Assessee firm was carrying on business in trading of Indian made Foreign Liquor having obtained a license from the Andhra Pradesh Excise Department in the name of one of the partners, in his individual status. A return was filed on 31.12.1999, in the status of a partnership firm, admitting to an income of Rs. 10,130/-. An order of assessment, u/s 143(1) of the Income Tax Act, was passed on 19.01.2000. Thereafter the Income tax Officer, relying on Rule 39 of the A.P. Indian and Foreign Liquor Rules, 1970 and following the judgment of the Supreme Court, in Bihari Lal Jaiswal v. CIT (1996) 217 ITR 746, reopened the assessment on the ground that there was escapement of income in the form of remuneration to partners and interest on partner''s capital. He held that, as the Assessee had not obtained permission from the Excise department before entering into the partnership, such a partnership was prohibited under the A.P. Excise Act and, therefore, the status of the Assessee could not be treated as a firm. As a result, the remuneration paid to the partners for Rs. 48,000/-, and interest on capital of Rs. 1,44,000/-, was added and the total income of the Assessee was assessed at Rs. 2,02,130/-.

Aggrieved thereby, the Assessee preferred an appeal to the Commissioner of Income Tax (Appeals). In his order the Commissioner, after referring to the judgments of the Supreme Court in Bihari Lal Jaiswal. (1996) ITR 217 746, CIT v. Motilal Chunnilal (1987)234 ITR 472 and Maddi Venkataraman and Co. (P) Ltd. Vs. Commissioner of Income Tax, observed that the assessing authority had rightly treated the Assessee as an association of persons. The Commissioner rejected the contention, urged on behalf of the Assessee, that there was a change in law for the assessment year 1993-1994, and the judgments relating to the assessment years prior thereto could not be applied. He held that, since the provisions of the A.P. State Excise Act had been violated by the Assessee, and the written permission of the licensing authority had not been obtained, the Assessee was not entitled to be treated as a partnership firm; and the decision of the Supreme Court in Bihari Lal Jaiswal (1996)217 ITR 746 related to violation of public policy and not to any procedural aspects under the Income Tax Act.

Aggrieved thereby, the Assessee preferred an appeal to the Income Tax Appellate Tribunal, Visakhapatnam. The Tribunal held that the point for consideration arose after the year 1992 when Finance Act 18 of 1992 amended Sections 184 and 185 of the Income Tax Act; after the amendment, the CBDT had issued Circular No. 636 dated 31.08.1992; the judgment of the Supreme Court, in Bihari Lal Jaiswal (1996)217 ITR 746, had considered the provisions of Sections 184 and 185 of the Income Tax Act prior to their amendment by Finance Act 18 of 1992; the statutory provisions and the Circular of the Circular No. 636 dated 31.08.1992) made it clear that, prior to the amendment, Section 185 empowered the assessing officer to enquire into the genuineness of the firm and its constitution; consequent to the amendment, the distinction between a registered firm and an unregistered firm had been removed, and a firm would be assessed as a firm if it was evidenced by an instrument of partnership, wherein the individual shares of partners was specified, and the said instrument was enclosed to the return filed by the firm; there was no enabling provision empowering the assessing authority to examine the genuineness of the partnership and its constitution; it was not the case of the department that the Assessee had not filed the instrument of partnership specifying the individual share of the partners; reliance placed on the judgments of the Supreme Court, wherein the provisions of the un amended Sections 184 and 185 were considered, was misplaced; reopening of the assessment was, therefore, erroneous; and the Assessees were entitled to be assessed as firms, and for the benefits of allowances and salaries as well interest paid to partners of the firm on their capital. Aggrieved thereby, the present appeals before this Court by the Revenue.

Both Sri S.R. Ashok, Learned Senior Counsel and Sri J.V. Prasad, Learned Standing Counsel appearing on behalf of the Income Tax department would submit that a firm, contravening the provisions of the A.P. Excise Act and the IMFL Rules, would be acting contrary to public policy, and would not be a legal and valid partnership for the purposes of the Income Tax Act; this position remained unchanged even after Sections 184 and 185 were amended by Finance Act 18 of 1992; while the enquiry regarding the genuineness of the firm, under the pre-amended Sections 184 and 185, was to confer certain benefits on a registered partnership firm, the distinction between a registered and an unregistered firm was done away with post amendment; the power of the Income Tax Officer, to ascertain whether there was a valid partnership in law, was not taken away pursuant to the amendment of Sections 184 and 185 of the Income Tax Act; an entity claiming certain benefits should comply with the law; an illegal firm, opposed to public policy, could not be permitted to claim benefits under the Income Tax Act; in the absence of prior permission being obtained, from the Commissioner of Prohibition and Excise, there was no legally constituted partnership entitled to carry on business of trading in liquor; and, therefore, the partners of the so called firm were required to be assessed only as an association of persons.

On the other hand, Sri A.V. Krishna Koundanya, Sri Y. Subrahmanyam and Smt. K. Neeraja, appearing for the Respondent-Assessees, would submit that the Circular No. 636 dated 31.08.1992 was binding on the Revenue u/s 119 of the Income Tax Act; the decision of the Supreme Court, prior to the amendment of Sections 184 and 185 of the Income Tax Act by Finance Act 18 of 1992, had no relevance as the requirement of an enquiry into the genuineness of the firm, u/s 184 and 185 of the Income Tax Act, had been done away with after their amendment; under the amended Section 185, irrespective of status of the firm whether it was registered or not, a firm had to be assessed as such; after amendment of Sections 184 and 185 of the Income Tax Act, a partnership firm did not require registration under the Income Tax Act; on a true construction of Section 184, if a partnership firm was evidenced by an instrument, it was required to be assessed as such; in some of these appeals a partnership deed had been executed and the partnership firm constituted even prior to a license being obtained under the A.P. I.M.F.L. Rules; the partnership deed authorized any one of the partners to obtain such a license to be used by the firm for carrying on business of trading in Indian made foreign liquor; after the license was obtained there was no sub-letting, leasing or transfer of the license by the firm; the Assessee had not violated the provisions of the A.P. Excise Act, the Rules made there under or Section 23 of the Indian Contract Act; Rule 39 of A.P. I.M.F.L. Rules is not applicable as there was no similar condition in their license; the partnership firm is a partnership at will and is valid even without registration; the Revenue was not empowered to look into the validity of the partnership firm in the light of the amended Sections 184 and 185, more so when the partnership firm was constituted even prior to the license being obtained; the amended Sections 184 and 185 do not admit of any comparison between the Income Tax Act on the one hand and the A.P. Excise Act and the Indian Contract Act on the other; and the orders of the Tribunal do not necessitate interference in these appeals.

The Andhra Pradesh Excise Act, 1948, (A.P. Act) is a consolidating law, inter alia, relating to production, manufacture, possession, transport, purchase and sale of intoxicating liquor and drugs, and to provide for matters connected therewith. Section 15 of the A.P. Act prohibits any person from selling or buying intoxicants except under the authority, and in accordance with the terms and conditions, of a license granted in their favour. Chapter VI deals with licenses and permits. Sections 28 and 31(1)(a) and (b) of A.P. Act are relevant, and read thus:

Form and conditions of license etc:

(1) Every permit issued or license granted under this Act shall be issued or granted on payment of such fees, for such period, subject to such restrictions and conditions, and shall be in such form and shall contain such particulars, as may be prescribed.

(2) The conditions prescribed under Sub-section (1) may include provisions of accommodation by the licensee to Prohibition & excise officers at the licensed premises on the payment of rent or other charges for such accommodation at or near the licensed premises and the payment of the costs, charges and expenses (including the salaries and allowances of the Prohibition and Excise Officers) which the Government may incur in connection with the supervision to ensure compliance with the provisions of this Act, the rules made there under and the license.

Power to cancel or suspend license, etc:

(1) Subject to such restrictions as may be prescribed, the authority granting any license or permit under this Act may cancel or suspend it irrespective of the period to which the license or permit relates.

(a) if any duty or fee payable by the holder thereof is not duly paid; or

(b) in the event of any breach by the holder thereof or by any of his servants or by any one acting on his behalf with his express or implied permission, of any of the terms and conditions thereof; or

(c) to (e) omitted

A bare perusal of these Sections would show that a person or a firm or a company cannot carry on business in intoxicants without obtaining a license, and without complying with the conditions of such license. In exercise of its powers u/s 72 read with Sections 9, 11 to 15 and 28 of the A.P. Act, the Government of Andhra Pradesh made the Andhra Pradesh Indian Liquor and Foreign Liquor Rules, 1970 (IMFL Rules), which apply for import, export, transport and sale of Indian Liquor and Foreign Liquor (IMFL). Rule 23 of the IMFL Rules enumerates different categories of licenses. The license in Form-IL 24 is issued for retail liquor shops. Rules 23 (iii) and (xiii) of the IMFL Rules require the holder of such a license to be permitted to sell IMFL in sealed or capsuled bottles not exceeding the specified quantity of liquor. The license in Form-IL 24 contains eleven special conditions in addition to the general conditions applicable to all IMFL and Beer licenses subject to which a licensee can carry on retail business. Condition No. 8 thereof is to the effect that a license is not transferable. Rule 39 of the IMFL Rules requires a licensee not to declare any person to be or not to be his partner.

It is evident from Section 15 of the A.P. Act that except under the authority, and in accordance with the terms and conditions, of a license granted in their favour, no one can carry on business in trading in liquor in the State of Andhra Pradesh. In addition, a person who has been granted a license has to ensure compliance with the terms and conditions prescribed therein. As the business of trading in intoxicating liquor is res extra commercial, a high degree of control is exercised by law to ensure that the business of trading in liquor is carried on strictly in accordance with the provisions of the A.P. Excise Act, the rules made there under, and the terms and conditions of the license granted in favour of the licensee. Violation of any of the conditions would entail suspension/cancellation of license u/s 31 of the A.P. Act. In cases where a license is granted in favour of an individual it is only he, and no other, who is entitled to carry on business of trading in intoxicating liquor. By his act of entering into a partnership, a licensee would have permitted the other partners also to carry on business of trading in intoxicating liquor. Such a partnership agreement would not only fall foul of, and defeat, the provisions of the A.P. Excise Act but would, u/s 23 of the Indian Contract Act, also be an agreement opposed to public policy and, hence, unlawful and void.

Rule 39 of the IMFL Rules prohibits a licensee, except with the prior permission of the licensing authority, to get any person included as a partner to his business or get an existing person excluded there from. It is not in dispute that in none of these appeals, which form part of this batch of ITT As, has the licensee obtained prior permission of the Commissioner of Prohibition and Excise (Licensing Authority) to get any person included as a partner to his business. In the absence of such prior permission being obtained, the partnership firm, which has been formed to carry on business of trading in intoxicating liquor, would be an illegal partnership both under the Partnership Act, 1932 and the A.P. Excise Act, and the Partnership agreement opposed to public policy. Such a firm cannot be treated as a valid partnership for the purposes of the Income Tax Act.

In this context it would be appropriate to refer to the judgments of the Supreme Court and the Division bench of this Court. In Commissioner of Income Tax Vs. Rangila Ram and Others, the Supreme Court held:

... 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...."

(emphasis supplied)

In Bihari Lal Jaiswal and Others Vs. Commissioner of Income Tax and Others, a license for retail sale of country spirit, under supply system in Form CS No. 3 of the Madhya Pradesh Excise Rules, 1960, was obtained by Biharilal Jaiswal in respect of twenty-two shops in a public auction. He entered into a partnership with ten others to carry on business under the said license. The partnership was evidenced by a partnership deed. It is in this factual matrix that the Supreme Court held:

... In our opinion, the correct position appears to be this (we are confining ourselves to partnerships entered into with respect to a license/permit granted under the State Excise enactments): these enactments deal with intoxicating liquor, that is to say, the production, manufacture, possession, transport, purchase and sale of intoxicating liquors (Entry 8 of List II of the Seventh Schedule to the Constitution) and other noxious substances besides providing for duties of excise referred to in Entry 51 of the said List. It has been held by this Court repeatedly that no person has a fundamental right to deal or trade in intoxicating liquors and that the State is entitled to prohibit and/or closely regulate their production, manufacture, possession, transport, purchase and sale.

Take the Madhya Pradesh Act, with which we are concerned herein. Clause VI of the General License Conditions - it is not disputed that these conditions are statutory in character - provides expressly that a holder of a license/privilege shall not enter into a partnership for the working of such privilege in any way or manner without the written permission of the Collector, which permission shall be endorsed on the license. This condition is binding upon the licensee. If so, he cannot enter into a partnership nor can there be, in law, a partnership with respect to the privilege (business) granted under the license. No person, and no licensee, can claim any right contrary to the said provision. The object underlying the said clause is self-evident. Since the license is granted for dealing in intoxicating liquors, the business wherein is res extra commercial - and also because they are supposed to be harmful and injurious to health and morals of the members of the society - close control is envisaged and provided over the business carried on under the license. This object will be defeated if the licensee is 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. The object of such an agreement must be held to be of such a nature that if permitted it would defeat the provisions of the excise law within the meaning of Section 23 of the Contract Act. Such an agreement is declared by Section 23 to be unlawful and void.

When the law prohibits the entering into a particular partnership agreement, there can be in law no partnership agreement of that nature. The question of such an agreement being genuine cannot, therefore, arise. Where, of course, the statutory provisions or the conditions of license do not prohibit the entering into of partnership, it is obvious, such a partnership cannot be held to be illegal, unlawful or void, as held by this Court in Jer and Co. But where there is a specific prohibition as in the case before us, any partnership entered into would be unlawful and void agreement within the meaning of Section 23 and no other law, whether State or Central, can recognise such an agreement.

The context - that it is an excise enactment - should not be forgotten. The grant of registration under the Income Tax Act, it must be remembered, confers a substantial benefit upon the partnership firm and its members. There is no reason why such a benefit should be extended to persons who have entered into a partnership agreement prohibited by law. One arm of law cannot be utilised to defeat the other arm of law. Doing so would be opposed to public policy and bring the law into ridicule. It would be wrong to think that while acting under the Income Tax Act, the Income Tax Officer need not look to the law governing the partnership which is seeking registration. It would probably have been a different matter if the Income Tax Act had specifically provided that registration can be granted notwithstanding that the partnership is volatile of any other law -- but it does not say so.

We may clarify that our holding does not mean that such an illegal partnership cannot be taxed. It is certainly bound to be taxed either as an unregistered partnership firm or as an association of persons....

(emphasis supplied)

In Commissioner of Income Tax, Visakhapatnam Vs. Circar Enterprises, originally an individual was carrying on business in liquors, wine and beer after obtaining FL 16 license from the State Excise Authorities. The license was, however, exploited by a firm of four partners formed under a partnership deed. The Managing Partner of the firm applied to the licensing authorities for inclusion of three partners in the license and, accordingly, their names were included in the license granted by the State Excise authorities. Subsequently, three more persons were added as partners thereby increasing the total number of partners to seven. However the firm of seven partners did not obtain permission, for the inclusion of the three new partners, from the licensing authority to enable inclusion of their names also in the license granted in Form FL-16. It is in this factual background that the Division Bench of this Court held:

... In so far as the State of Andhra Pradesh is concerned, the relevant excise enactment is the Andhra Pradesh Excise Act, 1968 and the rules made there under which includes Andhra Pradesh (Foreign Liquor and Indian Liquor) Rules, 1970. Rule 39 of the said Rules makes it clear that inclusion of a person as a partner is prohibited, unless prior approval of the licensing authority is obtained.... Rule 39 of the Rules clearly mandates that approval of the licensing authority is required for inclusion of a person as a partner. Though it is contended on behalf of the Assessee-firm that the licensing authority has been intimated on 29-8-81 about the induction of three members as partners, mere intimation is not sufficient and approval of the licensing authority has to be obtained. As the licensing authority, admittedly, has not accorded its approval for the induction of three more partners to the existing four member partnership firm, we are inclined to hold that the seven member partnership firm which was constituted in contravention of Rule 39 of the Rules, is an agreement prohibited by law and has no legal sanctity and it cannot be registered under the Income Tax Act....

(emphasis supplied)

Reliance is, however, placed by the counsel for the Respondents on the judgment of the Supreme Court in Grand Enterprises, Kerala v. The Commissioner of Income Tax, Kerala (Judgment in Civil Appeal Nos. 1317-1319 of 2001 dated 4.12.2002). In Grand Enterprises (Judgment in Civil Appeal Nos. 1317-1319 of 2001 dated 4.12.2002), the Supreme Court observed:

... The condition of the license which the High Court found had been violated in the Appellant''s case is condition 13 which reads:

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

The settled law is that no registration can be granted to a firm u/s 184(1) of the Income Tax Act, 1961, if the Firm has been formed or is continuing in violation of the Excise Rules. The issue in this case is whether the licensee had "otherwise transferred" his license to the Appellant-firm by allowing the firm to utilize the license in violation of the condition of his license within the meaning of condition 13 of the license....

... We do not read the decision in Jaiswal''s case as laying down, as seems to have been assumed by the High Court, that irrespective of the fact that the statutory provision may not expressly prohibit the formation of a partnership by a license holder, nevertheless a general provision regarding the prohibition or transfer of a license could be read as such an express provision. The condition of license in this particular case does not contain any such express provision as there was in Jaiswal''s case. Clause (VI) of the General license conditions in Jaiswal''s case expressly said that "a holder of a license/privilege shall not enter into a partnership for the working of such privilege in any way of manner without the written permission of the Collector which permission shall be endorsed on the license....

... In other words, while it cannot be said as a proposition of law that the mere entering into a partnership agreement by a license holder would amount to a transfer, the entering into the partnership in a particular set of facts by such license holder may tantamount to a transfer....

...A condition expressly prohibiting the entry into a partnership by a license holder would operate even if there were no transfers in fact. But when all that is forbidden is a transfer then this must be factually established....

(emphasis supplied)

Condition 13, which fell for consideration in Grand Enterprises (Judgment in Civil Appeal Nos. 1317-1319 of 2001 dated 4.12.2002), required the licensee not to lease, sell or otherwise transfer his license without the written consent of the Excise Commissioner. The Supreme Court held that, merely because the licensee had entered into a partnership, it would amount to a transfer of the license by him to the partnership. Unlike Condition No. 13, in Grand Enterprises (Judgment in Civil Appeal Nos. 1317-1319 of 2001 dated 4.12.2002), Rule 39 of the IMFL Rules requires a licensee not to declare any person to be or not to be his partner. The said Rule, both prior to and after its amendment by G.O. Ms. No. 1106 dated 16.12.2002 and G.O. Ms. No. 632 dated 26.5.2003, reads thus:

Prior to amendment

After amendment by Notifications vide G.O. Ms. No. 1106, dated 16.12.2002, and G.O. Ms. No. 632, dated 26.05.2003.

Licensee not to declare any person to be or not to be his partner: No licensee shall, except with the prior permission of the licensing authority get any other person included as partner to his business, or get an existing partner excluded:

Licensee not to declare any person to be or not to be his partner:

No licensee shall except with the prior permission of the Commissioner of Prohibition and Excise include any other person as partner in the licence or get any existing partner excluded from the business.

Provided that where there was dissolution of partnership, it shall be notified to the Commissioner.

(1) The Commissioner of Prohibition and Excise may allow such inclusion or exclusion of a person as partner on payment of Rs. 10,000/- (Rupees ten thousand only) in all such cases, which are not covered by the provisions under Rule 38(5) of these rules, and on payment of Rs. 10,000/- for each case of inclusion or exclusion of the partner subject to production of Certificate to the effect that no cases involving contravention of Excise Act and rules framed there under are pending against him/her.

(2) xxxx

On a conjoint reading of Section 15 of the A.P. Act, and Rule 39 of the IMFL Rules, it is clear that no licensee can, except with the prior permission of the Commissioner of Prohibition and Excise (Licensing Authority), include any other person as his partner to carry on business in the sale and purchase of intoxicating liquor. It is the law laid down in Bihari Lal Jaiswal and Others Vs. Commissioner of Income Tax and Others, which would apply to the facts of the present case, and not the judgment in Grand Enterprises (Judgment in Civil Appeal Nos. 1317-1319 of 2001 dated 4.12.2002).

Counsel for the Respondents would, however, contend that all the judgments referred to hereinabove dealt with cases of assesses, carrying on business of trading in intoxicating liquor, prior to the amendment of Sections 184 and 185 by Finance Act 18 of 1992; and, while the pre-amended Sections 184 and 185 required the assessing authority to cause an enquiry into the genuineness of the firm, the requirement of holding such an enquiry has been deleted by Sections 184 and 185 after its amendment by Finance Act 18 of 1992. It is necessary, therefore, to refer in juxta-position to Sections 184 and 185 of the Income Tax- Act both prior to, and after, their amendment by Finance Act 18 of 1992.

Sections 184 and 185 prior to amendment by Finance Act 1992

Sections 184 ad 185 after amendment by Finance Act 18 of 1992

"184. Application for registration -

(1) An application for registration of a firm for the purpose of this Act may be

"184. (1) A firm shall be assessed as a firm for the purposes of this Act, if--

made to the Income Tax Officer on behalf of any firm if:

(i) the partnership is evidenced by an instrument; and

(i) the partnership is evidenced by an instrument; and

(ii) the individuals shares of the partners are specified in that instrument.

(ii) the individual/ shares of the partners are specified in that instrument"

"185. Procedure on receipt of application-

(2) A certified copy of the instrument of partnership referred to in Sub-section (1) shall accompany the return of income of the firm of the previous year relevant to the assessment year commencing on or after the 1st day of April, 1993 in respect of which assessment as a firm is first sought.

(1) On receipt of an application for the registration of a firm, the Income Tax Officer, shall inquire into the genuineness of the firm and its constitution as specified in the instrument of partnership, and-

(a) if he is satisfied that there is or was during the previous year in existence a genuine firm with the constitution specified, he shall pass an order in writing registering the firm for the assessment year;

Explanation.--For the purposes of this Sub-section, the copy of the instrument of partnership shall be certified in writing by all the partners (not being minors) or, where the return is made after the dissolution of the firm, by all persons (not being minors) who were partners in the firm immediately before its dissolution and by the legal representative of any such partner who is deceased.

if he is not so satisfied, he shall pass an order in writing refusing to register the firm"

(3) Where a firm is assessed as such for any assessment year, it shall be assessed in the same capacity for every subsequent year if there is no change in the constitution of the firm or the shares of the partners as evidenced by the instrument of partnership on the basis of which the assessment as a firm was first sought.

(4) Where any such change had taken place in the previous year, the firm shall furnish a certified copy of the revised instrument of partnership along with the return of income for the assessment year relevant to such previous year and all the provisions of this section shall apply accordingly.

(5) Notwithstanding anything contained in any other provision of this Act, where, in respect of any assessment year, there is on the part of a firm any such failure as is mentioned in Section 144, the firm shall be so assessed that no deduction by way of any payment of interest, salary, bonus, commission or remuneration, by whatever name called, made by

such firm to any partner of such firm shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession" and such interest, salary, bonus, commission or remuneration shall not be chargeable to income tax under Clause (v) of Section 28.

Assessment when Section 184 not complied with:

Notwithstanding anything contained in any other provision of this Act, where a firm does not comply with the provisions of Section 184 for any assessment year, the firm shall be so assessed that no deduction by way of any payment of interest, salary, bonus, commission or remuneration, by whatever name called, made by such firm to any partner of such firm shall be allowed in computing the income chargeable under the head ''Profits and gains of business or profession" and such interest, salary, bonus, commission or remuneration shall not be chargeable to income tax under Clause (v) of Section 28 "

While Parliament intends that an enactment shall remedy a particular mischief, it is presumed that Parliament intends that the Court, while considering in relation to the facts of a case which of the opposing constructions of the enactment corresponds to its legal meaning, should find a construction which applies the remedy provided by it in such a way as to suppress that mischief. For a true interpretation of statutes, four things are to be discerned and considered: (1) what was the common law before the making of the Act; (2) what was the mischief and defect for which the common law did not provide; (3) what remedy Parliament has resolved and appointed to cure the disease; and (4) the true reason of the remedy. The Judge has always to make such construction as shall suppress the mischief and advance the remedy (Halsbury''s Laws of England (Statutes Vol. 44(1), fourth reissue para 1474 pp 9806-07)).

To understand the purpose for which Sections 184 and 185 of the Income Tax Act were amended by Finance Act 18 of 1992 it is useful to refer to the Circular No. 636 dated 31.8.1992. The said circular records that, before the changes made by the Finance Act 1992, the system of levy of tax on firms involved double taxation; the firm as such was taxed in respect of its total income at rates varying from 5% to 18%; after deducting the tax payable by the firm, the balance income was distributed amongst the partners and they were again taxed at the appropriate rates; the tax liability of the firm and its partners depended on the question whether the firm was granted registration under the Income Tax Act or not; in the case of a registered firm, the firm paid tax on its total income according to the rates prescribed in the Schedule for registered firms; an unregistered firm was taxed at the rates applicable to individuals, with the share income included in the hands of the partners for rate purposes only; as there was a consistent demand for removal of the double taxation, a new scheme of assessment of firms was being introduced from the assessment year 1993-94; a firm would henceforth be taxed as a separate entity (Sections 184 & 185); there would be no distinction between registered and unregistered firms; after allowing remuneration and interest to the partners, the balance income of the firms would be subject to the maximum marginal rate of tax; partners would not be liable to tax in respect of their share of income from the firm; remuneration and interest allowed to partners would be charged to Income Tax in their respective hands; the share of the partner in the income of the firm would not be included in computing his total income; interest, salary, bonus, commission or any other remuneration allowed by the firm to a partner would be liable to be taxed as business income in the partner''s hand; remuneration or interest which was disallowed in the hands of the firm would not suffer taxation in the hands of the partner; the payment of remuneration only to a working partner was allowable and only individuals were capable of being working partners; under the new scheme, firms were to be treated as a separate entity and the losses suffered by them would be allowed to be carried forward in their hands only; although the distinction between a registered and unregistered firm was removed, a partnership would be assessed as a firm only if (i) the partnership is evidenced by an instrument; (ii) the individual shares of the partners are specified in that instrument; and (iii) a copy of the partnership instrument duly certified accompanies the return of income for the relevant year for which assessment as a firm was first sought; where a firm did not comply with the provisions of Section 184 for any assessment year, the firm would be assessed for the assessment year in the same manner as an association of persons, and all the provisions of the Act would, accordingly, be applicable.

It is evident from the circular No. 636 dated 31.08.1992 that the purpose, for which Sections 184 and 185 of the Income Tax Act were amended by Finance Act 18 of 1992, is mainly to avoid double taxation once on the firm and again on each of the partners; to do away with the distinction between a registered and an unregistered partnership; and to, henceforth, tax the partnership firms as a separate entity. The power of the assessing authority to ascertain, whether or not the partnership firm has been constituted in accordance with law, has not been taken away, and the power which endured in the assessing authority before amendment remains unchanged even after the amendment of Sections 184 and 185 of the Income Tax Act, 1961 by Finance Act 18 of 1992. The Tribunal erred in holding that, after the amendment, the assessing authority no longer had the power to enquire into the constitution of the partnership firm.

As noted hereinabove, Section 15 of the A.P. Excise Act prohibits any person from selling or purchasing intoxicating liquor except in accordance with the terms and conditions of a license granted in their favour. Admittedly, a license was granted only in favour of an individual and it is only he who is entitled to carry on business in the purchase and sale of intoxicating liquor and, as provided for in Rule 39, no partnership firm can carry on such business save with the prior permission of the Commissioner of Prohibition and Excise. It matters little that the partnership firm was constituted prior to a license being granted, in Form IL-24, in favour of one of the partners; subsequent to the grant of license there has been no change in the constitution of the partnership firm; the partnership deed authorizes any one of the partners to obtain a license; and requires such a license to be used by the partnership firm to carry on business in purchase and sale of intoxicating liquor.

The orders of the Tribunal, assailed before us in this batch of appeals, are set aside and the I.T.T. As. are, accordingly, allowed.