Commissioner Of Income Tax, Vijayawada v. $ M/S. Swarna Bar & Restaurant

*THE HON’BLE SRI JUSTICE V.V.S.RAOAND * THE HON’BLE SRI JUSTICE RAMESH RANGANATHAN + I.T.T.A. Nos. 613, 614, 616, 617, 618, 636, 637, 719, 356, 357, 360, 367,382, 383, 385, 389, 391, 392, 393, 394, 395, 397, 398, 400, 427, 429, 485,486, 487, 557, 558, 576, 577, 579, 580, 635, 707, 708, 723 AND 737 of 2006AND 114 AND 201 OF 2007 AND 45, 96, 98, 101, 115, 118, 137, 138, 139,140, 141, 231 AND 244 OF 2008 I.T.T.A. No.613 of 2006: % Dated 09-09-2010 Commissioner of Income Tax, Vijayawada Vs. ….Appellant $ M/s. Swarna Bar & Restaurant …. Respondent ^ Counsel for the Respondent: - <GIST: > HEAD NOTE: ? Cases referred [1] Vol. 217 (1996) ITR 7462 Vol. 234 (1987) ITR 472 3 Vol. 229 ITR 5344 Vol. 234 (1998) ITR 628 (APHC DB) 5 (Judgment in Civil Appeal Nos.1317-1319 of 2001 dated 4.12.2002) 6 (Halsbury’s Laws of England (Statutes Vol. 44(1), fourth reissue para 1474 pp 9806-07)) THE HON'BLE SRI JUSTICE V.V.S.RAOAND THE HON'BLE SRI JUSTICE RAMESH RANGANATHAN I.T.T.A. Nos. 613, 614, 616, 617, 618, 636, 637, 719, 356, 357, 360, 367,382, 383, 385, 389, 391, 392, 393, 394, 395, 397, 398, 400, 427, 429, 485,486, 487, 557, 558, 576, 577, 579, 580, 635, 707, 708, 723 AND 737 of 2006AND 114 AND 201 OF 2007 AND 45, 96, 98, 101, 115, 118, 137, 138, 139,140, 141, 231 AND 244 OF 2008 COMMON ORDER:(Per Hon’ble Sri Justice Ramesh Ranganathan) These ITTAs are preferred by the Revenue against the orders ofthe Income Tax Appellate Tribunal whereby the respondent-assesseswere held entitled to be assessed as partnership firms, and forconsequential benefits of payment of salaries, interest on the capital ofpartners, etc. It would suffice for the disposal of these appeals if the facts inI.T.T.A. No.323 of 2006 are noted. I.T.T.A. No.323 of 2006 is filedagainst the order of the Income Tax Appellate Tribunal,Visakhapatnam in I.T.A. No.455/Viz/2004. For the assessment year1999-2000 the assessee firm was carrying on business in trading ofIndian made Foreign Liquor having obtained a license from the AndhraPradesh Excise Department in the name of one of the partners, in hisindividual 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 ofassessment, under Section 143(1) of the Income Tax Act, was passedon 19.01.2000. Thereafter the Income tax Officer, relying on Rule 39of the A.P. Indian and Foreign Liquor Rules, 1970 and following thejudgment of the Supreme Court, in Bihari Lal Jaiswal v. CIT[[1]],reopened the assessment on the ground that there was escapement ofincome in the form of remuneration to partners and interest on partner’scapital. He held that, as the assessee had not obtained permissionfrom the Excise department before entering into the partnership, such apartnership 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 oncapital of Rs.1,44,000/-, was added and the total income of theassessee was assessed at Rs.2,02,130/-. Aggrieved thereby, the assessee preferred an appeal to theCommissioner of Income Tax (Appeals). In his order theCommissioner, after referring to the judgments of the Supreme Court inBihari Lal Jaiswal[1], CIT v. Motilal Chunnilal[[2]]and MaddiVenkataraman & Co. (P) Ltd. v. CIT[[3]], observed that the assessingauthority had rightly treated the assessee as an association ofpersons. The Commissioner rejected the contention, urged on behalfof the assessee, that there was a change in law for the assessmentyear 1993-1994, and the judgments relating to the assessment yearsprior thereto could not be applied. He held that, since the provisions ofthe A.P. State Excise Act had been violated by the assessee, and thewritten permission of the licensing authority had not been obtained, the Aggrieved thereby, the assessee preferred an appeal to theCommissioner of Income Tax (Appeals). In his order theCommissioner, after referring to the judgments of the Supreme Court inBihari Lal Jaiswal[1], CIT v. Motilal Chunnilal[[2]]and MaddiVenkataraman & Co. (P) Ltd. v. CIT[[3]], observed that the assessingauthority had rightly treated the assessee as an association ofpersons. The Commissioner rejected the contention, urged on behalfof the assessee, that there was a change in law for the assessmentyear 1993-1994, and the judgments relating to the assessment yearsprior thereto could not be applied. He held that, since the provisions ofthe A.P. State Excise Act had been violated by the assessee, and thewritten permission of the licensing authority had not been obtained, the assessee was not entitled to be treated as a partnership firm; and thedecision of the Supreme Court in Bihari Lal Jaiswal[1]relatedtoviolation of public policy and not to any procedural aspects under theIncome Tax Act. Aggrieved thereby, the assessee preferred an appeal to theIncome Tax Appellate Tribunal, Visakhapatnam. The Tribunal heldthat the point for consideration arose after the year 1992 when FinanceAct 18 of 1992 amended Sections 184 and 185 of the Income Tax Act;after the amendment, the CBDT had issued Circular No.636 dated31.08.1992; the judgment of the Supreme Court, in Bihari LalJaiswal[1], had considered the provisions of Sections 184 and 185 ofthe Income Tax Act prior to their amendment by Finance Act 18 of1992; the statutory provisions and the Circular of the CBDT (CircularNo.636 dated 31.08.1992) made it clear that, prior to the amendment,Section 185 empowered the assessing officer to enquire into thegenuineness of the firm and its constitution; consequent to theamendment, the distinction between a registered firm and anunregistered firm had been removed, and a firm would be assessed asa firm if it was evidenced by an instrument of partnership, wherein theindividual shares of partners was specified, and the said instrumentwas enclosed to the return filed by the firm; there was no enablingprovision empowering the assessing authority to examine thegenuineness of the partnership and its constitution; it was not the caseof the department that the assessee had not filed the instrument ofpartnership specifying the individual share of the partners; relianceplaced on the judgments of the Supreme Court, wherein the provisionsof the unamended 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 thebenefits of allowances and salaries as well interest paid to partners ofthe firm on their capital. Aggrieved thereby, the present appeals beforethis Court by the Revenue. misplaced; reopening of the assessment was, therefore, erroneous;and the assessees were entitled to be assessed as firms, and for thebenefits of allowances and salaries as well interest paid to partners ofthe firm on their capital. Aggrieved thereby, the present appeals beforethis 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 IncomeTax department would submit that a firm, contravening the provisionsof the A.P. Excise Act and the IMFL Rules, would be acting contrary topublic policy, and would not be a legal and valid partnership for thepurposes of the Income Tax Act; this position remained unchangedeven after Sections 184 and 185 were amended by Finance Act 18 of1992; while the enquiry regarding the genuineness of the firm, underthe pre-amended Sections 184 and 185, was to confer certain benefitson a registered partnership firm, the distinction between a registeredand an unregistered firm was done away with post amendment; thepower of the Income Tax Officer, to ascertain whether there was a validpartnership in law, was not taken away pursuant to the amendment ofSections 184 and 185 of the Income Tax Act; an entity claiming certainbenefits should comply with the law; an illegal firm, opposed to publicpolicy, could not be permitted to claim benefits under the Income TaxAct; in the absence of prior permission being obtained, from theCommissioner of Prohibition and Excise, there was no legallyconstituted partnership entitled to carry on business of trading in liquor;and, therefore, the partners of the so called firm were required to beassessed 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 CBDT Circular No.636 dated31.08.1992 was binding on the Revenue under Section 119 of theIncome Tax Act; the decision of the Supreme Court, prior to theamendment of Sections 184 and 185 of the Income-Tax Act byFinance Act 18 of 1992, had no relevance as the requirement of anenquiry into the genuineness of the firm, under Section 184 and 185 ofthe Income-Tax Act, had been done away with after their amendment;under the amended Section 185, irrespective of status of the firmwhether 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, apartnership firm did not require registration under the Income Tax Act;on a true construction of Section 184, if a partnership firm wasevidenced by an instrument, it was required to be assessed as such; insome of these appeals a partnership deed had been executed and thepartnership firm constituted even prior to a license being obtainedunder the A.P. I.M.F.L. Rules; the partnership deed authorized any oneof the partners to obtain such a license to be used by the firm forcarrying on business of trading in Indian made foreign liquor; after thelicense was obtained there was no sub-letting, leasing or transfer ofthe license by the firm; the assessee had not violated the provisions ofthe A.P. Excise Act, the Rules made thereunder or Section 23 of theIndian Contract Act; Rule 39 of A.P. I.M.F.L. Rules is not applicable asthere was no similar condition in their license; the partnership firm is apartnership at will and is valid even without registration; the Revenuewas not empowered to look into the validity of the partnership firm in the light of the amended Sections 184 and 185, more so when thepartnership firm was constituted even prior to the licence beingobtained; the amended Sections 184 and 185 do not admit of anycomparison 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 ofthe Tribunal do not necessitate interference in these appeals. the light of the amended Sections 184 and 185, more so when thepartnership firm was constituted even prior to the licence beingobtained; the amended Sections 184 and 185 do not admit of anycomparison 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 ofthe Tribunal do not necessitate interference in these appeals. The Andhra Pradesh Excise Act, 1948, (A.P. Act) is aconsolidating law, inter alia, relating to production, manufacture,possession, transport, purchase and sale of intoxicating liquor anddrugs, and to provide for matters connected therewith. Section 15 ofthe A.P. Act prohibits any person from selling or buying intoxicantsexcept under the authority, and in accordance with the terms andconditions, of a license granted in their favour. Chapter VI deals withlicenses and permits. Sections 28 and 31(1)(a) and (b) of A.P. Act are relevant, and read thus:- 28. Form and conditions of licence etc:- (1) Every permit issued or licence granted under this Act shall beissued or granted on payment of such fees, for such period, subjectto such restrictions and conditions, and shall be in such form andshall contain such particulars, as may be prescribed. (2) The conditions prescribed under sub-section (1) may includeprovisions of accommodation by the licensee to Prohibition & exciseofficers at the licensed premises on the payment of rent or othercharges for such accommodation at or near the licensed premisesand the payment of the costs, charges and expenses (including thesalaries and allowances of the Prohibition and Excise Officers) whichthe Government may incur in connection with the supervision toensure compliance with the provisions of this Act, the rules madethereunder and the licence. 31. Power to cancel or suspend licence, etc:- (1) Subject to such restrictions as may be prescribed, the authoritygranting any licence or permit under this Act may cancel or suspendit irrespective of the period to which the licence or permit relates.(a) if any duty or fee payable by the holder thereof is not dulypaid; or (b) in the event of any breach by the holder thereof or by anyof his servants or by any one acting on his behalf with his express orimplied 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 ora firm or a company cannot carry on business in intoxicants withoutobtaining a licence, and without complying with the conditions of suchlicence. In exercise of its powers under Section 72 read with Sections9, 11 to 15 and 28 of the A.P. Act, the Government of Andhra Pradeshmade the Andhra Pradesh Indian Liquor and Foreign Liquor Rules,1970 (IMFL Rules), which apply for import, export, transport and sale ofIndian Liquor and Foreign Liquor (IMFL). Rule 23 of the IMFL Rulesenumerates different categories of licenses. The licence in Form-IL 24is issued for retail liquor shops. Rules 23 (iii) and (xiii) of the IMFLRules require the holder of such a license to be permitted to sell IMFLin sealed or capsuled bottles not exceeding the specified quantity ofliquor. The license in Form-IL 24 contains eleven special conditions inaddition to the general conditions applicable to all IMFL and Beerlicenses subject to which a licensee can carry on retail business. Condition No.8 thereof is to the effect that a licence is not transferable. Rule 39 of the IMFL Rules requires a licensee not to declare anyperson to be or not to be his partner. It is evident from Section 15 of the A.P. Act that except underthe authority, and in accordance with the terms and conditions, of alicence granted in their favour, no one can carry on business in tradingin liquor in the State of Andhra Pradesh. In addition, a person who hasbeen granted a licence has to ensure compliance with the terms andconditions prescribed therein. As the business of trading inintoxicating liquor is res extra commercium, a high degree of control isexercised by law to ensure that the business of trading in liquor is carried on strictly in accordance with the provisions of the A.P. ExciseAct, the rules made thereunder, and the terms and conditions of thelicence granted in favour of the licensee. Violation of any of theconditions would entail suspension/cancellation of licence underSection 31 of the A.P. Act. In cases where a licence is granted infavour of an individual it is only he, and no other, who is entitled tocarry on business of trading in intoxicating liquor. By his act ofentering into a partnership, a licensee would have permitted the otherpartners 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, under Section 23 ofthe Indian Contract Act, also be an agreement opposed to public policyand, hence, unlawful and void. Rule 39 of the IMFL Rules prohibits a licensee, except with theprior permission of the licensing authority, to get any person includedas a partner to his business or get an existing person excludedtherefrom. It is not in dispute that in none of these appeals, which formpart of this batch of ITTAs, has the licensee obtained prior permissionof the Commissioner of Prohibition and Excise (Licensing Authority) toget any person included as a partner to his business. In the absenceof such prior permission being obtained, the partnership firm, whichhas been formed to carry on business of trading in intoxicating liquor,would be an illegal partnership both under the Partnership Act, 1932and the A.P. Excise Act, and the Partnership agreement opposed topublic policy. Such a firm cannot be treated as a valid partnership forthe purposes of the Income Tax Act. In this context it would be appropriate to refer to the judgmentsof the Supreme Court and the Division bench of this Court. InCommissioner of Income-tax v. Rangila Ram: 254 ITR 230, theSupreme Court held:- “……..The basic principle, as it seems to us, is that the liquor business is resextra commercium. No one may deal in liquor without express permission. Itis only the licensee who is granted such permission. If he enters into apartnership to deal in liquor, all the other partners would, as partners, also bedealing, in liquor and holding the same. This would be contrary to the basicprinciple and illegal………” (emphasis supplied) In Bihari Lal Jaiswal[1]a licence for retail sale of country spirit,under supply system in Form CS No. 3 of the Madhya Pradesh ExciseRules, 1960, was obtained by Biharilal Jaiswal in respect of twenty-two shops in a public auction. He entered into a partnership with tenothers to carry on business under the said licence. The partnershipwas evidenced by a partnership deed. It is in this factual matrix thatthe Supreme Court held:- In Bihari Lal Jaiswal[1]a licence for retail sale of country spirit,under supply system in Form CS No. 3 of the Madhya Pradesh ExciseRules, 1960, was obtained by Biharilal Jaiswal in respect of twenty-two shops in a public auction. He entered into a partnership with tenothers to carry on business under the said licence. The partnershipwas evidenced by a partnership deed. It is in this factual matrix thatthe Supreme Court held:- “……..In our opinion, the correct position appears to be this (we are confiningourselves to partnerships entered into with respect to a licence/permit granted underthe State Excise enactments): these enactments deal with intoxicating liquor, that isto say, the production, manufacture, possession, transport, purchase and sale ofintoxicating liquors (Entry 8 of List II of the Seventh Schedule to the Constitution) andother noxious substances besides providing for duties of excise referred to in Entry 51of the said List. It has been held by this court repeatedly that no person has afundamental right to deal or trade in intoxicating liquors and that the State is entitledto prohibit and/or closely regulate their production, manufacture, possession,transport, purchase and sale. Take the Madhya Pradesh Act, with which we are concerned herein. ClauseVI of the General Licence Conditions - it is not disputed that these conditionsare statutory in character - provides expressly that a holder of a licence/privilegeshall not enter into a partnership for the working of such privilege in any way ormanner without the written permission of the Collector, which permission shallbe endorsed on the licence. This condition is binding upon the licensee. If so,he cannot enter into a partnership nor can there be, in law, a partnership withrespect to the privilege (business) granted under the licence. No person, and nolicensee, can claim any right contrary to the said provision. The objectunderlying the said clause is self-evident. Since the licence is granted fordealing in intoxicating liquors, the business wherein is res extra commercium -and also because they are supposed to be harmful and injurious to health andmorals of the members of the society - close control is envisaged and providedover the business carried on under the licence. This object will be defeated if the licensee is permitted to bring in strangers into the business, which wouldmean that instead of the licensee carrying on the business, it would be carriedon by others - a situation not conducive to effective implementation of theexcise law and consequently deleterious to public interest. It is for this veryreason that transfer or sub- letting of licence is uniformly prohibited by severalState excise enactments. It, therefore, follows that any agreement whereunderthe licence is transferred, sub-let or a partnership is entered into with respect tothe privilege/business under the said licence, contrary to the prohibitioncontained 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 ifpermitted it would defeat the provisions of the excise law within the meaning ofSection 23 of the Contract Act. Such an agreement is declared by Section 23 tobe unlawful and void. When the law prohibits the entering into a particular partnershipagreement, there can be in law no partnership agreement of that nature. Thequestion of such an agreement being genuine cannot, therefore, arise. Where, ofcourse, the statutory provisions or the conditions of licence do not prohibit theentering into of partnership, it is obvious, such a partnership cannot be held to beillegal, unlawful or void, as held by this court in Jer and Co. But where there is aspecific prohibition as in the case before us, any partnership entered into wouldbe unlawful and void agreement within the meaning of Section 23 and no otherlaw, whether State or Central, can recognise such an agreement. When the law prohibits the entering into a particular partnershipagreement, there can be in law no partnership agreement of that nature. Thequestion of such an agreement being genuine cannot, therefore, arise. Where, ofcourse, the statutory provisions or the conditions of licence do not prohibit theentering into of partnership, it is obvious, such a partnership cannot be held to beillegal, unlawful or void, as held by this court in Jer and Co. But where there is aspecific prohibition as in the case before us, any partnership entered into wouldbe unlawful and void agreement within the meaning of Section 23 and no otherlaw, whether State or Central, can recognise such an agreement. The context - that it is an excise enactment - should not be forgotten. Thegrant of registration under the Income Tax Act, it must be remembered, confers asubstantial benefit upon the partnership firm and its members. There is no reasonwhy such a benefit should be extended to persons who have entered into apartnership agreement prohibited by law. One arm of law cannot be utilised todefeat the other arm of law. Doing so would be opposedto public policy andbring the law into ridicule. It would be wrong to think that while acting under theIncome Tax Act, the Income Tax Officer need not look to the law governing thepartnership which is seeking registration. It would probably have been a differentmatter if the Income Tax Act had specifically provided that registration can be grantednotwithstanding that the partnership is violative of any other law -- but it does not sayso. We may clarify that our holding does not mean that such an illegal partnershipcannot be taxed. It is certainly bound to be taxed either as an unregistered partnershipfirm or as an association of persons. ………” (emphasis supplied) I n Commissioner of Income-tax v. Circar Enterprises[[4]], originally an individual was carrying on business in liquors, wine andbeer after obtaining FL 16 licence from the State Excise Authorities.The licence was, however, exploited by a firm of four partners formedunder a partnership deed. The Managing Partner of the firm applied tothe licensing authorities for inclusion of three partners in the licenceand, accordingly, their names were included in the licence granted bythe State Excise authorities. Subsequently, three more persons were added as partners thereby increasing the total number of partners toseven. However the firm of seven partners did not obtain permission,for the inclusion of the three new partners, from the licensing authorityto enable inclusion of their names also in the licence granted in FormFL-16. It is in this factual background that the Division Bench of thisCourt held:- “……… In so far as the State of Andhra Pradesh is concerned, the relevant exciseenactment is the Andhra Pradesh Excise Act, 1968 and the rules made thereunderwhich includes Andhra Pradesh (Foreign Liquor and Indian Liquor) Rules, 1970. Rule39 of the said Rules makes it clear that inclusion of a person as a partner isprohibited, unless prior approval of the licensing authority is obtained………. Rule 39of the Rules clearly mandates that approval of the licensing authority is required forinclusion 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 ofthree members as partners, mere intimation is not sufficient and approval of thelicensing authority has to be obtained. As the licensing authority, admittedly, hasnot accorded its approval for the induction of three more partners to the existingfour member partnership firm, we are inclined to hold that the seven memberpartnership 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 beregistered under the Income Tax Act………” (emphasis supplied) Reliance is, however, placed by the counsel for the respondentson the judgment of the Supreme Court in Grand Enterprises, Kerala Reliance is, however, placed by the counsel for the respondentson the judgment of the Supreme Court in Grand Enterprises, Kerala v. The Commissioner of Income Tax, Kerala[[5]]. In Grand Enterprises[5],the Supreme Court observed:- “……The condition of the licence which the High Court found had been violatedin the appellant’s case is condition 13 which reads: “13. Licensee shall not lease out, sell or otherwise transfer his licencewithout the written consent of the Excise Commissioner.” The settled law is that no registration can be granted to a firm under Section184(1) of the Income Tax Act, 1961, if the Firm has been formed or is continuing inviolation of the Excise Rules. The issue in this case is whether the licensee had“otherwise transferred” his licence to the appellant-firm by allowing the firm toutilize the licence in violation of the condition of his licence within the meaningof condition 13 of the licence……. ………We do not read the decision in Jaiswal’s case as laying down, as seems tohave been assumed by the High Court, that irrespective of the fact that the statutoryprovision may not expressly prohibit the formation of a partnership by a licenceholder, nevertheless a general provision regarding the prohibition or transfer of alicence could be read as such an express provision. The condition of licence in this particular case does not contain any such express provision as there was in Jaiswal’scase. Clause (VI) of the General licence conditions in Jaiswal’s case expressly saidthat “a holder of a licence/privilege shall not enter into a partnership for the working ofsuch privilege in any way of manner without the written permission of the Collectorwhich permission shall be endorsed on the licence……. ……….In other words, while it cannot be said as a proposition of law that themere entering into a partnership agreement by a licence holder would amountto a transfer, the entering into the partnership in a particular set of facts by suchlicence holder may tantamount to a transfer……… ………..A condition expressly prohibiting the entry into a partnership by alicence holder would operate even if there were no transfers in fact. But whenall that is forbidden is a transfer then this must be factuallyestablished……….”(emphasis supplied) Condition 13, which fell for consideration in Grand Enterprises[5], required the licensee not to lease, sell or otherwisetransfer his license without the written consent of the ExciseCommissioner. The Supreme Court held that, merely because thelicensee had entered into a partnership, it would amount to a transferof the license by him to the partnership. Unlike Condition No.13, inGrand Enterprises[5], Rule 39 of the IMFL Rules requires a licenseenot 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 dated16.12.2002 and G.O.Ms. No.632 dated 26.5.2003, reads thus:- Prior to amendmentA f t e r amendment by NotificationsvideG.O.Ms.No.1106,dated16.12.2002,and G.O.Ms.No.632,dated 26.05.2003. 39. Licensee not to declare anyperson to be or not to be hispartner:-No licenseeshall, except with the priorpermission of the licensing authorityget any other person included aspartner to his business, or get anexisting partner excluded: Provided that where there wasdissolution of partnership, it shall benotified to the Commissioner. Prior to amendmentA f t e r amendment by NotificationsvideG.O.Ms.No.1106,dated16.12.2002,and G.O.Ms.No.632,dated 26.05.2003. 39. Licensee not to declare anyperson to be or not to be hispartner:-No licenseeshall, except with the priorpermission of the licensing authorityget any other person included aspartner to his business, or get anexisting partner excluded: Provided that where there wasdissolution of partnership, it shall benotified to the Commissioner. 39.Licensee not to declare any person tobe or not to be his partner:-Nolicensee shall except with the priorpermission of the Commissioner ofProhibition and Excise include any otherperson as partner in the licence or get anyexisting partner excluded from thebusiness.(1) The Commissioner of Prohibition andE x c i s e may allow such inclusion orexclusion of a person as partner onpayment of Rs.10,000/- (Rupees tenthousand only) in all such cases, which arenot covered by the provisions under Rule38(5) of these rules, and on payment ofRs.10,000/- for each case of inclusion orexclusion of the partner subject toproduction of Certificate to the effect that nocases involving contravention of Excise Actand rules framed there under are pendingagainst him/her.(2) xxxx On a conjoint reading of Section 15 of the A.P. Act, and Rule39 of the IMFL Rules, it is clear that no licensee can, except with theprior permission of the Commissioner of Prohibition and Excise(Licensing Authority), include any other person as his partner to carryon business in the sale and purchase of intoxicating liquor. It is thelaw laid down in Bihari Lal Jaiswal[1]which would apply to the facts ofthe present case, and not the judgment in Grand Enterprises[5]. Counsel for the respondents would, however, contend that allthe judgments referred to hereinabove dealt with cases of assesses,carrying on business of trading in intoxicating liquor, prior to theamendment of Sections 184 and 185 by Finance Act 18 of 1992; and,while the pre-amended Sections 184 and 185 required the assessingauthority to cause an enquiry into the genuineness of the firm, therequirement of holding such an enquiry has been deleted by Sections 184 and 185 after its amendment by Finance Act 18 of 1992. It isnecessary, therefore, to refer in juxta-position to Sections 184 and 185of the Income Tax- Act both prior to, and after, their amendment byFinance Act 18 of 1992. Sections 184 and 185 amendment by Finance Act 1992 prior to Sections 184 ad 185 after amendmentby Finance Act 18 of 1992 “184. Application for registration –(1) An application for registration of afirm for the purpose of this Act may bemade to the Income Tax Officer onbehalf of any firm if: (i)the partnership is evidenced byan instrument; and(ii)the individual/shares of thepartners are specified in that instrument” “185. Procedure on receipt of -application (1)On receipt of an application forthe registration of a firm, theIncome Tax Officer, shallinquire into the genuineness ofthe firm and its constitution asspecified in the instrument ofpartnership, and-(a)if he is satisfied that thereis or was during theprevious year in existence agenuine firm with theconstitution specified, heshall pass an order inwriting registering the firmfor the assessment year;if he is not so satisfied, he shall pass anorder in writing refusing to register thefirm” “184. (1) A firm shall beassessed as a firm for the purposesof this Act, if—(i) the partnership isevidenced by aninstrument; and (ii) the individualsshares of the partners arespecified in thatinstrument. (2) A certified copy of theinstrument of partnership referred toi n sub-section (1) shall accompanythe return of income of the firm oft he previous year relevant to theassessment year commencing on orafter the 1st day of April, 1993 inrespect of which assessment as afirm is first sought. “184. (1) A firm shall beassessed as a firm for the purposesof this Act, if—(i) the partnership isevidenced by aninstrument; and (ii) the individualsshares of the partners arespecified in thatinstrument. (2) A certified copy of theinstrument of partnership referred toi n sub-section (1) shall accompanythe return of income of the firm oft he previous year relevant to theassessment year commencing on orafter the 1st day of April, 1993 inrespect of which assessment as afirm is first sought. Explanation.—For the purposesof this sub-section, the copy of theinstrument of partnership shall becertified in writing by all the partners(not being minors) or, where thereturn is made after the dissolutionof the firm, by all persons (not beingminors) who were partners in thefirm immediately before itsdissolution and by the legalrepresentative of any such partnerwho is deceased. (3) Where a firm is assessed assuch for any assessment year, its hall be assessed in the samecapacity for every subsequent yearif there is no change in theconstitution of the firm or the sharesof the partners as evidenced by theinstrument of partnership on thebasis of which the assessment as a firm was first sought. (4) Where any such change hadtaken place in the previous year, thefirm shall furnish a certified copy ofthe revised instrument ofpartnership along with the return ofincome for the assessment yearrelevant to such previous year andall the provisions of this sectionshall apply accordingly. (5) Notwithstanding anythingcontained in any other provision ofthis Act, where, in respect of anyassessment year, there is on thepart of a firm any such failure as ismentioned in Section 144, the firmshall be so assessed that nodeduction by way of any payment ofinterest, salary, bonus, commissionor remuneration, by whatever namecalled, made by such firm to anypartner of such firm shall be allowedin computing the income chargeableunder the head “Profits and gains ofbusiness or profession” and suchinterest, salary, bonus, commissionor remuneration shall not bechargeable to income tax underclause (v) of section 28. Assessment when Section 184 notcomplied with: 185. Notwithstanding anythingcontained in any other provision of thisAct, where a firm does not comply withthe provisions of Section 184 for anyassessment year, the firm shall be soassessed that no deduction by way ofany payment of interest, salary, bonus,commission or remuneration, bywhatever name called, made by suchfirm to any partner of such firm shall beallowed in computing the incomechargeable under the head ‘Profits andgains of business or profession” andsuch interest, salary, bonus,commission or remuneration shall not bechargeable 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 theCourt, while considering in relation to the facts of a case which of theopposing constructions of the enactment corresponds to its legalmeaning, should find a construction which applies the remedyprovided by it in such a way as to suppress that mischief. For a trueinterpretation of statutes, four things are to be discerned andconsidered: (1) what was the common law before the making of theAct; (2) what was the mischief and defect for which the common lawdid not provide; (3) what remedy Parliament has resolved andappointed to cure the disease; and (4) the true reason of the remedy.The Judge has always to make such construction as shall suppressthe mischief and advance the remedy[[6]]. particular mischief, it is presumed that Parliament intends that theCourt, while considering in relation to the facts of a case which of theopposing constructions of the enactment corresponds to its legalmeaning, should find a construction which applies the remedyprovided by it in such a way as to suppress that mischief. For a trueinterpretation of statutes, four things are to be discerned andconsidered: (1) what was the common law before the making of theAct; (2) what was the mischief and defect for which the common lawdid not provide; (3) what remedy Parliament has resolved andappointed to cure the disease; and (4) the true reason of the remedy.The Judge has always to make such construction as shall suppressthe mischief and advance the remedy[[6]]. To understand the purpose for which Sections 184 and 185 ofthe Income Tax Act were amended by Finance Act 18 of 1992 it isuseful to refer to the CBDT Circular No.636 dated 31.8.1992. The saidcircular records that, before the changes made by the Finance Act1992, the system of levy of tax on firms involved double taxation; thefirm as such was taxed in respect of its total income at rates varyingfrom 5% to 18%; after deducting the tax payable by the firm, thebalance income was distributed amongst the partners and they wereagain taxed at the appropriate rates; the tax liability of the firm and itspartners depended on the question whether the firm was grantedregistration under the Income-tax Act or not; in the case of a registeredfirm, the firm paid tax on its total income according to the ratesprescribed in the Schedule for registered firms; an unregistered firmwas taxed at the rates applicable to individuals, with the share incomeincluded in the hands of the partners for rate purposes only; as there was a consistent demand for removal of the double taxation, a newscheme of assessment of firms was being introduced from theassessment year 1993-94; a firm would henceforth be taxed as aseparate entity (sections 184 & 185); there would be no distinctionbetween registered and unregistered firms; after allowing remunerationand interest to the partners, the balance income of the firms would besubject to the maximum marginal rate of tax; partners would not beliable to tax in respect of their share of income from the firm;remuneration and interest allowed to partners would be charged toincome-tax in their respective hands; the share of the partner in theincome of the firm would not be included in computing his total income;interest, salary, bonus, commission or any other remuneration allowedby the firm to a partner would be liable to be taxed as business incomein the partner’s hand; remuneration or interest which was disallowed inthe hands of the firm would not suffer taxation in the hands of thepartner; the payment of remuneration only to a working partner wasallowable and only individuals were capable of being workingpartners; under the new scheme, firms were to be treated as aseparate entity and the losses suffered by them would be allowed tobe carried forward in their hands only; although the distinction betweena registered and unregistered firm was removed, a partnership wouldbe assessed as a firm only if (i) the partnership is evidenced by aninstrument; (ii) the individual shares of the partners are specified in thatinstrument; and (iii) a copy of the partnership instrument duly certifiedaccompanies the return of income for the relevant year for whichassessment as a firm was first sought; where a firm did not comply withthe provisions of Section 184 for any assessment year, the firm would be assessed for the assessment year in the same manner as anassociation of persons, and all the provisions of the Act would,accordingly, be applicable. be assessed for the assessment year in the same manner as anassociation of persons, and all the provisions of the Act would,accordingly, be applicable. It is evident from the CBDT circular No.636 dated 31.08.1992that the purpose, for which Sections 184 and 185 of the Income TaxAct were amended by Finance Act 18 of 1992, is mainly to avoiddouble taxation once on the firm and again on each of the partners; todo away with the distinction between a registered and an unregisteredpartnership; and to, henceforth, tax the partnership firms as a separateentity. The power of the assessing authority to ascertain, whether ornot the partnership firm has been constituted in accordance with law,has not been taken away, and the power which enured in theassessing authority before amendment remains unchanged even afterthe amendment of Sections 184 and 185 of the Income Tax Act, 1961by Finance Act 18 of 1992. The Tribunal erred in holding that, after theamendment, the assessing authority no longer had the power toenquire into the constitution of the partnership firm. As noted hereinabove, Section 15 of the A.P. Excise Actprohibits any person from selling or purchasing intoxicating liquorexcept in accordance with the terms and conditions of a licencegranted in their favour. Admittedly, a licence was granted only infavour of an individual and it is only he who is entitled to carry onbusiness in the purchase and sale of intoxicating liquor and, asprovided for in Rule 39, no partnership firm can carry on such businesssave with the prior permission of the Commissioner of Prohibition andExcise. It matters little that the partnership firm was constituted prior toa licence being granted, in Form IL-24, in favour of one of the partners; subsequent to the grant of licence there has been no change in theconstitution of the partnership firm; the partnership deed authorizesany one of the partners to obtain a licence; and requires such a licenceto be used by the partnership firm to carry on business in purchase andsale of intoxicating liquor. The orders of the Tribunal, assailed before us in this batch ofappeals, are set aside and the I.T.T.As. are, accordingly, allowed. ______________ V.V.S.RAO, J Date: .09.2010 Note: L.R. copy to be marked. B/o MRKR/ASP ____________________________ RAMESH RANGANATHAN,J [1]Vol. 217 (1996) ITR 746[2]Vol. 234 (1987) ITR 472[3]Vol. 229 ITR 534[4]Vol. 234 (1998) ITR 628 (APHC DB) [5](Judgment in Civil Appeal Nos.1317-1319 of 2001 dated 4.12.2002) [6](Halsbury’s Laws of England (Statutes Vol. 44(1), fourth reissue para 1474 pp 9806-07))