Holding

A sub‑partnership that merely finances a partner’s share in a main abkari partnership and shares its profits and losses, without itself carrying on the liquor business, does not violate Section 14 of the Abkari Act and is therefore a legal entity eligible for registration under the Income‑Tax Act.

Summary

The case concerned a main partnership engaged in abkari (liquor) business that had a partner, Ganga Goud, who held a 10% share. Ganga Goud and eleven other persons formed a sub‑partnership to provide the capital required for his share and to share the profits and losses arising from the main partnership. The Income‑Tax Officer rejected the sub‑partnership’s application for registration, holding that it was void under Section 14 of the Andhra Pradesh (Telangana Area) Abkari Act because its members (except Ganga Goud) were not licence holders. The Income‑Tax Tribunal and the Andhra Pradesh High Court held that the sub‑partnership did not itself carry on the liquor business and therefore was a valid legal entity entitled to registration under the Income‑Tax Act. The Supreme Court affirmed this view, stating that the sub‑partnership did not violate Section 14 of the Abkari Act and was not illegal. Consequently, the revenue’s appeal was dismissed with costs.

Issues considered

Whether a sub‑partnership formed to finance a partner’s share in a main abkari partnership, without itself dealing in liquor, violates Section 14 of the Andhra Pradesh (Telangana Area) Abkari Act.
Whether such a sub‑partnership is entitled to registration under the Income‑Tax Act, 1961.

Legislation cited

Income Tax Act, 1961s. 256(1)

Subjects

sub-partnershipAbkari ActIncome Tax Actregistrationliquor licencepartnership lawsection 14section 256tax assessmentillegal partnership

Judgment

\,,

A THE ADDITIONAL COMMISSIONER OF
INCOME-TAX, ANDHRA PRADESH -f.-
\',
""
M/S. DEGAON GANGA REDDY
G. RA:.IAKRISHNA AND CO. AND ORS.
B MARCH 1, 1995

[J.S. VERMA AND K.S. PARIPOORNAN, JJ.]
'
c
Income Tax Act, 1961-Andhra Pradesh (Telangana Area) Abkari Act,
1316 F-Section 14-Registered partnership Jinn doing Abkari business - Sub- y
partnership f onned by one partner with some other to finance his share in the /
main Jinn and share his profits and losses therein-Sub-partnership not illegal
or void-Entitled to registration under the Income Tax Act.

By a partnership deed dated October 15, 1962, a partnership
D 'Nizamabad Group Sendhi Contractors' was formed with 17 partners, one
of whom was 'G' who had a 10% share. The said partnership firm was
registered by the Income Tax Department under the Income Tax Act and
-:r·
were the highest bidders in the auction held by the Excise Authorities for
the Year 1962-63.
E
On August 27, 1963 'G' and 11 others executed a partnership deed
constituting a sub-partnership and the said sub- partnership agreed to
provide the finances required by G to contribute capital in the main firm
on the condition of being taken as partners in respect of 'G's' 10% share
in the main partnership. ).
F
The sub-partnership firm filed an application for registration under
-~
the Income-Tax Act which was rejected by the Income Tax Officer on the
grounds that no business had been conducted by the assessee during the
relevant year and that the sub-partnership was void ab initio under the
G Andhra Pradesh (Telangana Area) Abkari Act, 1316 F as the members of
the sub- partnership firm except 'G', were not licence holders under the
Act. Similar applications by six other sub-partnership firms were also
rejected by the assessing authorities.

H The Appellate Assistant Commissioner upheld the order of the
404
I
ADDL. COMMR. OFINCOME TAX v. D.G.REDDY(J.S. VERMA,J.] 405

assessing authority holding that registration of the sub- partnership A
would defeat the purpose of the Abkari Act. The Tribunal allowed the
assessee's appeals holding that it could not be said that the sub-partner-
ship did not carry on any business. It held the sub-partnership to be a
separate entity valid in law and entitled to registration under the Income
fu~ B
The High Court in a reference u/s 256(1) of the Income-Tax Act
upheld· the Tribunal's view stating that a valid sub-partnership could be
entered into by a partner of the main firm with strangers, to share the
I
·"f income or losses from the main partnership, a sub-partner had definite
enforceable rights to claim a share in the profits accured to or received by C
the partner in the original partuership and such sub-partnership was
entitled to registration. It was further held that the partners of the sub-
partnership would not become partners of the main partnership firm, the
two being different and distinct entities for the purpose of the Income Tax
Act. The High Court also observed that the sub-partnership confined its D
business to only sharing the profits earned by one of the partners of the
1 main partnership doing Abkari business, in lieu of their capital invested
for the share of that partner, and, therefore, it could not be said that such
a sub-partnership was dealing in liquor without permission or that it was
illegal and void. E

Dismissing the appeal, this Court

HELD : The sub-partnership formed by individual partners of the
main partnership, with some others, merely to finance the busines~ of a
partner of the main firm doing Abkari business and share the profits and
F
losses accured to or received by him from the main firm, were not in
violation of section 14 of the Andhra Pradesh (Telangana Area) Abkari
Act. There was no basis to hold that the sub-partnerships were in violation
of Section 14 of the Abkari Act and, therefore, illega~. The assessee sub-
partnerships being found to be genuine were entitled to be registered under G
the Income Tax Act. [410-B-CJ

Murlidhar Himatsingka v. Commissioner of Income Tax, (1966) 62 ITR
323 (SC) and fer and Co. v. Commissioner of Income Tax, (1971) 79 ITR
546 (SC), referred to. H
406 SUPREME COURT REPORTS [1995] 2 S.C.R.

A CIVIL APPELLATE JURISDICTION : Civil Appeal No. 222 uf
1977 etc. etc.

From the Judgment and Order dated 16.4.1976 of the Andhra
Pradesh High Court in R.C. No. 25 of 1973.

B Dr. R.R. Mishra, S. Rajappa, Ms. A Subhashini and B.K. Prasad for
the Appellant. :

The Judgment of the Court was delivered by

J.S. VERMA, J. This appeal is by a certificate granted by the Andhra
C Pradesh High Court on the question as to "whether a sub- partnership
which is alleged to be illegal as being in violation of Section 14 of the
Abkari Act, can be registered under the Income-tax Act". The impugned
judgment of the High Court is reported in (1978) 111 I.T.R. 93. The
decision of the High Court was rendered in a reference made by the
Income-tax Appellate Tribunal, Hyderabad bench under Section 256(1) of
the Income-tax Act, 1961 at the instance of the revenue for opinion on the
following question of law, namely,
,
"Whether, on the facts and in the circumstances of the case, the '-\
sub-partnerships are entitled to the benefits of registration under
E the Income-tax Act, 1961, for the assessment year 1964-65?"

The High Court answered the question in the affirmative in favour of the
assessee and against the revenue. Hence this appeal by the revenue on
certificate granted by the High Court.

F The material facts are: For the relevant assessment year a partner-
ship by name "Nizamabad Group Sendhi Contractors" was formed under
a deed of partnership dated October 15, 1962 with 17 partners one of
whom Rampuram Ganga Goud had 10% share. On August 27, 1963,
Ganga Goud and 11 others executed a partnership deed to the effect that
Ganga Goud after becoming a partner in the Nizamabad Sendhi Group
G Contractors, the main partnership found it difficult to contribute the
required capital towards his share and, therefore, other 11 partners of the
sub-partnership agreed to provide the fmance on they being taken as
partners in respect of Ganga Goud's 10% share in the main partnership.
The main partnership, that is, Nizamabad Sendhi Group Contractors are
H the lessees who were the highest bidders in the auction held by the excise
I

ADDL.COMMR.OFINCOMETAX v. D.G.REDDY[J.S.VERMA,J.] 407

authorities for the Fasli year 1962-63. The main partnership has been A
registered by the Income-tax Department under the Income-tax Act. The
partners of the sub-partnership filed an application for its registration as a
firm under the Income-tax Act on September 30, 1963. The Income-tax
Officer rejected the claim of the sub-partnership for registration under the
Income-tax Act on the ground that no business was conducted by the
B
assessee during the relevant year of account and th~t the sub-partnership
was void ab initio under the Andhra Pradesh (Telangana Area) Abkari Act
_y-
(hereinafter referred to as "the Abkari Act") as the members of the
sub-partnership except Ganga Goud were not_licence holder under the
-, Abkari Act. On appeal, the Appellate Assistant Commissioner upheld the
c
order of the assessing authority taking the view that registration of the sub-
partnership would defeat the purpose of the Abkari Act. similar applica-
tions for registration under the Income-tax Act by six other sub-partner-
ships formed by different partners of the main partnership with others were
rejected by the assessing authority and their appeals were also dismissed
by the Appellate Assistant Commissioner. All the 7 sub-partnerships D
preferred further appeals to the Income-tax Appellate Tribunal. On a
construction of the terms of the deed constituting the sub-partnerships, the
Tribunal held that it could not be said that the sub-partnerships did not
carry on any business; and that the sub-partnerships are separate entities
valid in law. Accordingly, the Tribunal allowed the assesses' appeals and
held that all the sub-partnerships were entitled to registration under the E
Income-tax Act.

Aggrieved by the decision of the Tribunal, the revenue obtained a
reference under Section 256(1) of the Income-tax Act, 1961 in all the
matters for the decision of the aforesaid common question of law which
F
arose out the Tribunal's order. The High Court upheld the Tribunal's view
and has answered the said question against the revenue and in favour of
the assessee.

The High Court referred to the decision of this Court in Murlidhar
Himatsingka v. Commissioner of Income-Tax, (1966) 62 I.T.R. 323 (SC), G
and stated thus:-

"This decision is an authority for the proposition that a valid
sub-partnership can be entered into by a partner of the main firm
with some strangers to share the income or loss receivable by him H
408 SUPREME COURT REPORTS (1995) 2 S.C.R.

A from the main partnership and a sub-partner has definite enforce-
able rights to claim a share in the profits accrued to or received
by the partner in the original partnership, and such sub-partnership
is entitled to registration.and it creates a superior title and diverts
the income from the main firm before it becomes the income of
the partner."
B
(at pages 101-102)

This proposition is not doubted. The High Court then proceeded to
consider the next question, namely, whether a partner of the main firm who y
· C deals in liquor ...... or any other prohibited article which requires a specific I
permission of the State Government ..... can validly enter into a sub-
partnership with strangers in respect of his share in the main partnership.
This question arises because of the prohibition contained in Section 14 of
the Abkari Act against carrying on the business in liquor without a licence
D granted for the purpose. The High Court rightly pointed out that the
partners of the sub-partnership \\:'Ould not become partners of the main
partnership firm and this position would not alter in any manner even if
the business of the main firm is to deal in liquor or any other prohibited
article since the partners of the sub-partnership would be entitled only to
share the profits and losses, as the case may be, that accrue or fall to the
E share of the partner in the main firm. Accordingly, the members of the
sub-partnership do not become partner of the main firm, the two being
different and distinct entities for the purpose of the Income-true Act. The
High Court then proceeded to state thus:

F "...... All the decisions relied upon by the revenue are applicable
only if it is found as a fact that the sub-partnership had carried on
the business of liquor, tobacco, opium or any other prohibited
article, without the requisite permission of the State Government
or the Collector, as the case may be ...... The pertinent question
that arises in the present case is whether the sub-partnership has
G intended to do and in fact did business in liquor in the accounting
year. If the sub- partnership also had indulged in the business of
liquor without the requisite licence in the name of the sub-partner-
ship or in the names of all the partners of the sub-partnership, the
sub- partnership, on the application of the principles referred to
H above, must be held to be void ab initio and non est as it intended
!
ADDL. COMMR. OF INCOME TAX v. D.G.REDDY[J.S. VERMA,J.] 409

to do business in liquor without the requisite licence. If, on the A
other hand, the business of the sub-partnership is not the sale of
liquor or dealing in liquor or doing anything in connection with
the purchase and sale of liquor in any manner, it cannot be said
that those sub-partnerships are illegal and void and non est. ...... "

(at page 105) B

After correctly stating the legal position, the High Court referred to the
contents of the deed of sub-partnership and the finding of the Tribunal
that the assessee-sub-partnership cannot be said to have not carried on any
business; that the sub-partnership had financed and owned the capital C
invested by one of its partners in the main firm; and that the sub-partner-
ship had been formed mainly to finance the business of one of the partners
of the main firm doing Abkari business and share the profits and losses
accured to or received by him from the main firm. The High Court also
observed Lat th:! sub-partnership confined its business to only sharing the
profits earned by one of the partners of the main partnership doing Abkari D
business in lieu of their capital invested for the share of that partner and,
therefore, it cannot be said that such a sub-partnership is prohibited in law.
The decisions relied on by the revenue were distinguished by the High
Court on facts since they related to partnerships formed for carrying on
the business in prohibited articles without the grant of a licence in favour E
of that partnership. The High Court also relied on the decision of this
Court in fer and Co. v. Commissioner of Income-Tax, (1971) 79 I.T.R. 546
(SC), wherein it was held that in the absence of a prohibition against the
holder of a licence in liquor entering into a partnership, the partnership
between the holder of the licence and some others was legal and entitled
to registration under the Income-tax Act. In the absence of a specific F
prohibition against the entering into partnership even though transfer and
sub-letting of the licence was prohibited, it was held that the partnership
was valid and entitled to registration.

In our opinion, the High Court was right in taking this view. Section G
14 of the Andhra Pradesh (Telangana Area) Abkari Act, 1316F reads as
under:-

"14. Lessee not to declare any person to be his partner. -No leassee
shall, except with the permission of Government, declare any
person to be his partner; and such partner shall not be competent H
410 SUPREME COURT REPORTS [1995] 2 S.C.R.

A to act as such until he has obtained a licence to that effect from
the Collector or any other competent officer."

In view of the clear findings o~ 'act recorded by the Tribunal, there
can be no doubt that the sub-partnerships formed by individual partners
of the main partnership which were lessees, with some others, merely to
B finance the business of a partner of the main firm doing abkari business
and share the profits and losses accured to or received by him from the
main firm, were not in violation of Section 14 of the Abkari Act. For this
-. )
reason, there is no basis to hold that the sub-partnerships were in violation
of Section 14 of the Abkari Act and, therefore, illegal. The Tribunal was
right in holding that in the facts and circumstances of the case, the assessee
;-·
"'"c
- sub-partnerships being found to be genuine were entitled to be registered
under the Income-tax Act. The High Court has correctly answered the
question of law referred to it, against the revenue and in favour of the
assessee.

D Consequently, the appeals fail and are dismissed with costs quan-
tified at Rs. 5,000.

A.G. Appeals dismissed.

•