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Civil Income‑tax Reference No. 4 of 1959, decided on 25th January 1961.

Income‑tax Act (XI of 1922)------

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S. 26A‑Firm‑Registration‑Unlawful object ‑ Licence for sale of opium‑‑Licence granted to individual‑Formation of firm for carrying on business‑Application for registration‑Maintainability.

Where a person obtained a licence for the sale of opium in his own name and, later on, formed a partnership with others for carrying on the business, and applied for registration of the firm under section 26‑A of the Income‑tax Act 1922.

Held, that in view of the rules regulating the granting of licence for sale of opium, the object of the firm was unlawful and the firm should not be registered under section 26‑A.

Abdullah v. Allah Diya A I .R 1927 Lah. 333 ; Mohideen Sahib & Co. v. Commissioner of Income‑tax (1950) 18 1 T R 200 and Velu Padayachi v. Sivasooriam Pillai (1950) 1 M L J 315 ref.

STATEMENT OF CASE

By this application the Commissioner of Income‑tax requires the Tribunal to refer a question of law which is said to arise out of the Tribunal's order dated October 15, 1957 in I. T. A. No. 817 of 1957‑58. Inasmuch as; in our opinion, a question of law does arise out of the aforesaid order of the Tribunal, we draw up a statement of case and refer it to the High Court of Judicature at Chandigarh under section 66 (1) of the Indian Income‑tax Act.

2. Partners of Messrs Benarsi Das & Co. of Faridkot applied for registration of the firm under section 26‑A of the Indian Income‑tax Act for the assessment year 1955‑56 on the basis of the instrument of partnership dated the 31st day of March 1954. The said partnership deed is annexed hereto as Annexure "A", forming part of the case.

3. The preamble and term (1) of the instrument of partner ship reads as under:

This instrument of partnership made this 31st day of March 1954, between:

(1) Shri Benarsi Das son of Shri Munshi Ram of Faridkot,

(2) Shri Jangir Chand son of Shri Bansi Ram of Faridkot,

(3) Shri Chali Ram son of Shri Assa Ram of Gidar,

(4) Shri Shivcharan Das son of Shri Atma Ram of Faridkot,

(5) Shri Harcharan Dass son of Shri Atma Ram of Farid kot,

(6) Shri Brij Lal Bajaj son of Shri Kirpa Ram of Faridkot,

(7) Shri Bhagwat Sarup son of Shri Mithan Lal of Faridkot, and

(8) Shri Kishan Chand son of Shri Milkhi Ram of Faridkot witnesseth as follows

Whereas the above‑named persons hereinafter called the partners have formed a partnership firm under the name and style of Messrs Benarsi Das & Co. at Faridkot to run the opium con tracts of Faridkot and Ransinghwala taken for Rs. 80,100 and Rs. 8,000 respectively for the year 1954‑55, it is hereby agreed as under:

(1) The said firm "Benarsi Das & Co." shall run the con tracts of Faridkot and Ransinghwala opium for the year 1954‑55 the various partners' shares in the profits and losses of the firm being as under

Said Banarsi Das	0‑1‑6 in a rupee
Said Jangir Chand	0‑4‑0
Said Chali Ram	0‑2‑0
Said Shiv Charan Dass Sethi	0‑1‑3
Said Harcharan Das Sethi	0‑2‑0
Said Brij Lal Bajaj	0‑0‑3
Said Bhagwat Sarup	0‑3‑0
Said Kishan Chand	0‑2‑0

4. Licence for the sale of opium was granted in the name of Benarsi Das on April 28, 1954, and it remained so throughout the relevant year of account.

5. The Income‑tax Officer refused to grant registration to the firm on the ground that the object of the firm was unlawful and the partnership contract under which the firm was constituted was wholly void. In rejecting the assessee's claim the Income‑tax Officer relied on the decision of Madras High Court in the cases of Velu Padayachi v. Sivasooriam Pillai ((1950) 1 M L J 315) and Mohideen Sahib & Co. v. Commissioner of Income‑tax ((1950) 18 I T R 200).

6. The Appellate Assistant Commissioner upheld the rejec tion of registration for the reasons set out in his order dated March 25, 1957, which is annexed hereto as Annexure "B" forming part of the case.

7. The Tribunal, however, accepted the contention of the assessee that Benarsi Das had not transferred the opium licence but had merely utilised the services of seven other persons and rather than engage them on a salary basis had agreed to pay them a share in the profits earned in the business. As the Department had failed to satisfy the Tribunal that there was any prohibition or punishment provided under the Opium Act I of 1878 and the rules thereunder against the transfer or sub‑letting of the licence and the revocation thereof, it held that the Punjab cases reported in 159 P L R 1906 and Abdullah v. Allah Diya (A I R 1927 Lah. 333) were apposite and the Madras case which was under the Excise Act was distinguish able as no punishment under the Opium Act for transfer of licences was provided. Having found that there was no transfer of licence as such by Benarsi Dass the partnership was held not to be illegal. The Tribunal accordingly directed the Income‑tax Officer to allow the assessee's claim for registration. The order of the Tribunal is annexed hereto as Annexure "C" forming part of the case.

8. On the above stated facts, the question of law that arises is:

"Whether on the facts and in the circumstances of the case registration under section 26‑A of the Act was rightly allowed "

9. Draft statement of the case was placed before the parties. The assessee was absent though duly served. The minor suggestion made on behalf of the Commissioner of Income‑tax is accepted. The statement is finalised.

D. N. Awasthy and H. R. Mahajan for the Commissioner.

Nemo for the Assessee.

JUDGEMENT

GROVER, J

.‑A licence for the sale of opium was granted to one Benarsi Das of Faridkot on 28th April 1954. By means of a deed of partnership dated 31st March 1954, the said Benarsi Das entered into a partnership with seven other persons. The partnership firm was to bear the name and style of "Messrs Benarsi Das & Company" and it was expressly stated that it had been formed to run the opium contracts of Faridkot and Ransinghwala taken for Rs. 80,100 and Rs. 8,000 respectively for the year 1954 55. The share of Benarsi Das was to be only one anna and six pies in a rupee. According to clause 3 of the deed, no partner was entitled to draw any salary or remuneration for the work done for the firm. For the assessment year 1955‑56 an application was made for registration of the partnership firm under section 26‑A of the Indian Income‑tax Act. The Income‑tax Officer declined to grant registration on the ground that the object of the firm was unlawful and the partnership contract under which the firm was constituted was wholly void. The Appellate Assistant Commis sioner sustained the order of the Income‑tax Officer but the Tribunal formed the opinion that the partnership could not be said to be illegal and, therefore, the Income‑tax Officer was held to have wrongly refused the claim for registration. On an ap plication of the Commissioner, the following question of law has been referred to us by the Tribunal:

"Whether on the facts and in the circumstances of the case registration under section 26‑A of the Act was rightly allowed "

Under section 4 of the Opium Act, 1878 (to be referred to as the Act) a person can possess or sell opium only in accordance with what is permitted by the Act or by any other enactment relating to opium or by the rules framed under the Act. Section 5 confers powers on the State Government to make rules with regard to these matters. Section 9 prescribed the penalty for possessing or selling opium in contravention of the Act or the rules made thereunder. Under section 5 certain rules have been promulgated which are called the Punjab Opium Orders, 1956. Rule 40 provides for the grant of a licence for the sale of opium by retail. The rule also says that the licence has to be in such form and is subject, in addition to the conditions stated in the rule, to such conditions which are consistent with the provisions of the Act and of the orders as the Excise Commissioner may from time to time prescribe. Condition (t) in the aforesaid rule is as follows:

"The licensee shall not allow any person to conduct sales in his behalf unless the name of such person has been previously submitted to the Deputy Excise and Taxation Commissioner or Excise and Taxation Officer for approval and endorsed by him on the licence. The licensee shall, however, be responsible for all the acts and deeds of the person so approved."

Rule 51 says that the licence may be granted to‑

(a) an individual ;

(b) * * *

(b) * * *

(d) a partnership or firm.

According to rule 54, when a licence is granted to a partner ship or firm not incorporated under any Act, all the individuals comprising the partnership or firm should be specified on the licence. Rule 55 provides that on the application in writing of all the original partners, a partner may at any time be added by authority competent to grant the licence, provided that he is otherwise eligible, in which case he shall be responsible for all obligations incurred or to be incurred under the licence during the period of its currency as if it had originally been granted in his name. Rule 59 (1) (a) is to the effect that any licence may be revoked, cancelled or suspended if it is transferred or sublet by the holder thereof without the permission of the Deputy Excise and Taxation Commissioner.

Now the argument of the learned counsel for the Commis sioner is that the licence had been taken by Benarsi Das in his own name and had been granted to him in his individual capacity. It had not been granted to the partnership firm. By constituting the partnership, what Benarsi Das attempted to do was to get over these rules add further he was guilty of breach of condition (1) in rule 40. It is pointed out that the assessee's own case was that he utilised the services of other seven persons and rather than to pay them on salary basis, he agreed to, pay them a share in the profits earned in his business. It is contended that in this manner by allowing the other persons to possess and sell opium, Benarsi Das was seeking to become a party to contravention of section 4 of the Act by the other partners. It is submitted that the whole object of the partnership being such that violation of the pro visions of the Act and the rules was involved or would necessarily result therefrom, the Income‑tax Officer was fully justified in dis allowing registration. Our attention has been invited to Mohideen Sahib & Co. v. Commissioner of Income‑tax ((1950) 18 I T R 200) where seven persons executed an instrument of partnership for carrying on arrack business and sought registration under section 26‑A. The arrack shops stood some in the name of the individuals and some in the names of the strangers. Following a Full Bench decision of the same Court in Velu Padayachi v. Sivasooriam Pillai ((1950) 1 M L J 315) it was held that such a partnership arrangement either involved a transfer of the licence which was prohibited under rule 27 and punished under section 56 of the Abkari Act, or it was a breach of section 15 and punishable under section 55 because the unlicensed partner by himself, or through his agent, the other partner, sold without a licence. The Full Bench had also held that even though a part nership was lawful at its inception because it was not intended to infringe any of the provisions of the Contract Act, it nevertheless became unlawful when it intended to conduct the business jointly on a licence granted to only one of the partners. Consequently, it was held that registration had been rightly refused by the Income tax Officer. One of the reasons which prevailed with the Full Bench of the Madras High Court was that a partnership formed in such circumstances would be illegal either because the offence would necessarily be committed or because it would be against general public policy underlying the enactment that only approved persons specially licensed should be allowed to sell liquors. It may be that there is no provision analogous to rule 27 which came up for consideration in the Madras case prohibiting transfer of a licence in this State which may be punishable as under section 56 of the Madras Abkari Act but it cannot be denied that the general public policy underlying the enactment and the rules in force here is that only approved persons specially licenced should be allowed to sell opium. It was open to the partnership to obtain a licence in the name of the firm but that was not done and when the licence was granted in favour of Benarsi Das only, the whole object of the partnership was to enable the other partners to sell opium on the licensed premises without complying with the provisions contained in the rules, referred to before. Admittedly Benarsi Dass never submitted the names of his other partners to the Deputy Excise and Taxation Commissioner for being allowed to conduct sales in his behalf and for getting an endorsement made on his licence in respect of the same. Even if no transfer of the licence is involved with regard to which the view of the Tribunal may be correct, but it cannot be said that the object and purpose of the partnership was not illegal.

The Tribunal relied on two Lahore cases, namely, 159 P L R 1906 and Abdullah v. Allah Diya (A I R 1927 Lah. 333). In the latter case there is hardly any discussion which is relevant for our purposes but in the earlier case Chitty, J. held that by entering into an agreement of partnership there was no transfer of the licence within the meaning of the excise rules and that the contract was not void as opposed to public policy but was capable of being enforced by one partner against the others. There, the question of the validity of an agreement of partnership with regard to a liquor licence was involved. The licence was for a wholesale vend and did not provide that the licensee alone shall personally attend to the sale. Clause 7 of the licence clearly contemplated the employment of servants or agents in the business ; other conditions also con templated a licence being granted to a firm. The learned Judge was of the view that the taking of a partner in the business was not very different in its effect from the employment of a servant, who was to be remunerated by a share of the profits and thus entering into such a partnership did not amount to the transfer of a licence. He was further of the view that the agreement could not per se be regarded as opposed to public policy in the sense that it was in itself immoral or improper. The following observa tions may be noticed:

"The result of the rulings appears to be that where there is some express prohibition by law, or rule having the force of law, against the ,action of the contracting parties, the contract will be held void ; where there is no such prohibition, it will be upheld:

The rules to which reference has been made in the present case do contemplate that it is the licensee who must attend to the sale of opium in the premises with regard to which he holds the licence. This is clear from condition (t) which must be contained in every licence along with the other conditions mentioned in rule 40. Of course, the licensee can obtain the permission of the appropriate authority for another person conducting sales on his behalf but unless that is done, it is only the licensee who can possess and sell opium and no other. Section 4 of the Act is equally clear on the point. Moreover, the public policy under lying the Act and the rules, as stated before, is that only an approved person specially licensed should be allowed to sell opium. Thus the decision of the Punjab Chief Court is quite distinguish able and it is not possible to see how the Tribunal could properly apply the law laid down there to the facts of the present case which is one of registration under section 26‑A of the Income‑tax Act which was not one of the matters which had to be decided by Chitty, J. Even if the partnership was not per se unlawful, it cannot be said that it did not become unlawful when it intended to con duct the business jointly on a licence granted to only one of its partners as was observed in Mohideen Sahib & Co. v. Commissioner of Income‑tax.

In this view of the matter, the question that has been referred must be answered in the negative. As there was no appearance on behalf of the assessee, we make no order as to costs.

MEHAR SINGH, J.

‑I agree.

Question answered in the negative.

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