COMMISSIONER OF INCOME TAX VISAKHAPATNAM Vs. CIRCAR ENTERPRISES

JUDGEMENT

(1.) This is a reference under Section 256(2) of the Income Tax Act by the Revenue seeking the opinion of this Court on the following questions of law formulated by it, viz., (1) Whether on the facts and in the circumstances of the case and in law the appellate Tribunal was justified in holding that the assessee firm is entitled to the benefits of Registration? (2) Whether on the facts and in the circumstances of the case and in law, the finding of the appellate Tribunal that there was no contravention of Rules 38 and 39 of the Andhra Pradesh (Foreign Liquor and Indian Liquor) Rules, 1970, was correct? (3) Whether on the facts and in the circumstances of the case and in law, the appellate Tribunal was justified in relying on the decision in the case of CIT, AP-IV v. M/s Nalli Venkataramana and others, 145 LTR 759, wherein Rule 19(1) and 19(2) of the Andhra Pradesh Excise (Arrack and Toddy Licences General ConditionsX Rules, 1969, was applicable?Facts in brief are as under: Originally Sri M.B.R. Prasada Reddy was carrying on business in liquors, wine and beer after obtaining FL 16 licence from the State Excise Authorities. The licence was, however, exploited by a firm of four partners formed under deed dated 5-10-1978 with effect from 17-5-1978. Sri M.B.R. Prasada Reddy was the Managing Partner of the said firm. He applied to the Licensing Authorities for inclusion of three partners under the deed dated 5-10-1978 in the licence granted according permission to sell liquors, wines and beer on wholesale as well as on retail basis at Vijayawada. The names of other three partners i.e., M. Madan Mohan Reddy, M. Appi Reddy and T. Padmavathi were included in the licence granted by the Excise Authorities by their order dated 3-12-1979 in the proceedings of the Superintendent of Excise, Krishna in D.Dis.No.3116 of 79.

(2.) Subsequently, three more persons were added viz., Smt.T. Nagubhai, Smt.T. Ramanamma and Smt. P. Varahalamma, as partners making the total number of partners at seven. However, the firm of seven partners did not obtain permission for the inclusion of the three new partners from the licensing authority in order to enable the department to include their names also in the licence granted in Form FL-16. The Income Tax Officer, however for the Assessment year 1980-81 granted registration to the firm of seven partners under Section 185(l)(a) of the Income Tax Act by his order dated 27-5-1982 and assessed the said firm under Section 143 of the Income Tax Act while accepting the total income returned at Rs.49,210.00 and determined the divisible income among partners at Rs.46,521.00. He also made the division of share of the income as well as interest income among the partners as per the table giveruinder his assessment order dated 27-5-1982.

(3.) However, the Commissioner of Income Tax, Visakhapatnam was of the view that granting registration to the firm of seven partners was erroneous and prejudicial to fhe interests of revenue, and therefore, took up the matter while exercising powers under Section 263 of the Income Tax Act and revised the order. The CIT, Visakhapatnam felt that the firm contravened Rules 38 and 39 of the Andhra Pradesh (Foreign Liquor and Indian Liquor) Rules, 1970. Tne CIT,Visakhapatnam was of the further view that as per Rule 39 of the above Rules, either inclusion or exclusion of any person as a partner to a firm is prohibited, unless prior approval of the licensing authority is obtained. He was further of the view that the addition of three more partners pursuant to deed dated 2-4-1980 making it to seven partners was never intimated to the Superintendent of Excise, Krishna District and no approval of new Constitution was obtained and as such the firm so constituted cannot be legally held to be a valid, form and registration to it under the Income Tax Act cannot be granted. The CIT further found that the contravention of the provisions of the Rules mentioned above, are punishable under Sections 36 and 41 of the Andhra Pradesh Excise Act. The CIT, Visakhapatnam further held that the partnership deed dated 2-4-1980 is void ab initio as it contravened the Rules 38 and 39 of the Andhra Pradesh (Foreign Liquor and Indian Liquor) Rules, 1970 (for short 'the Rules").