COMMISSIONER OF INCOME TAX VS OMPRAKASH PREMCHAND & CO
1099 P T D 1814
[227 I T R 590]
[Madhya Pradesh High Court (India)]
Before A.R. Tiwari and S. B. Sakrikar, JJ
COMMISSIONER OF INCOME TAX
Versus
OMPRAKASH PREMCHAND & CO
Miscellaneous Civil Case No. 186 of 1988, decided on 23/01/1996.
Income-tax---
----Firm---Registration---Liquor contract---Continuation of Registration-- Difference between dissolution of firm and change in its constitution---Firm obtaining licence to sell country liquor---Ban on transfer of licence under Madhya Pradesh Excise Act---Changes in constitution of firm---Collector intimated about the change and no objection raised by him---No transfer of licence and no violation of Excise Act---Firm entitled to continuation of registration---Indian Income Tax Act, 1961, S. 184---Madhya Pradesh Excise Act, 1915.
Reconstitution and dissolution of firms are two distinct legal concepts. Dissolution brings the partnership to an end while a reconstitution means the continuation of the partnership under altered circumstances.
The assessee firm came into existence for the first time during the accounting period beginning on April 1, 1975, and ending on March 31, 1976, with 17 partners constituting it. The said partnership was evidenced by a deed of partnership, dated September, 15, 1975. For the financial year 1975-76, the firm was granted an excise licence for a group of country liquor shops. It obtained the excise licence again in February 1976 for two years valid up to March 31, 1978. After the acceptance of the bid, in February, 1976, there came about changes in the constitution of the firm effective from April 1, 1976, and thereafter, once again from April 1, 1977. The firm, despite its reconstitution not once but twice, worked the privilege granted under the licence issued by the Madhya Pradesh Excise Authority on the basis of the bid by the firm before its reconstitution in February, 1976. Registration was also granted for 1978-79. The Income-tax Officer refused to grant registration for 1979-80 despite there being no further change. The Income-tax Officer felt that the firm lost its eligibility for registration as a result of change and committed violation of- rules of the Madhya Pradesh Excise Act, and cancelled the registration. The Commissioner of Income-tax (Appeals) and the Tribunal, however, held that the firm was entitled to registration. On a reference:
Held, that under the Madhya Pradesh Excise Act, there was a bam against sale, transfer or sub-lease of privilege of supply or sale and against entering into a partnership for the working of such a privilege in any way or manner without the written permission of the Collector to be endorsed on the licence. Rule I also mandates that every licence shall be deemed to have been granted to the person named therein. In. the instant case, it was clear that (a) the licence was granted to the firm and not to any individual personally; (b) the licensee was the firm which continued to work the privilege granted under the licence, without any type of dissolution and without any objection from excise authorities; (c) the Collector was duly intimated and he granted licence without any objection in regard to violation of rule VI or rule I; (d) the same firm with the same name in spite of changes in constitution continued to exist and operate. It did not enter into any agreement of new partnership and did not transfer the licence and business permitted thereunder. The firm did not lose its identity or status of a licensee. The firm was liable to be assessed as~ a registered firm in respect of the assessment years 1977-78, 1978-79 and 1979-80.
Cabell v. Markhan (1945) 148 F 2d 737; CIT v. A.W. Figgies & Co. (1953) 24 ITR 405 (SC); CIT v Pigot Chapman & Co. (1982) 135 ITR 620 (SC); CIT v. Sant Lal Arvind Kumar (1982) 136 (ITR 379 (Delhi); Meenakshi Achi v. P.S.M. Subramanian Chettiar AIR 1957 Mad. 8; Sohanlal Pachisia & Co. v. Billasray Khemani AIR 1954 Cal. 179; Vijay & Co. v. CIT (1981) 1 MPWN 87 and Vishwanath Seth v. CIT (1984) 146 ITR 249 (All.) ref.
D. D. Vyas for the Commissioner
K.R. Mandovara for the Assessee
JUDGMENT
A.R. TIWARI, J.---On applications presented by the Commissioner of Income-tax, Bhopal, under section 256(1) of the Income Tax Act, 1961, and registered as R.As. Nos.39, 40 and 41/Ind. of 1986 arising out of the order passed in I.T.As. Nos.814, 815 and 816/Ind. of 1986, pertaining to the assessment years 1977-78, 1978-79 and 1979-80, the Income-tax Appellate Tribunal, Indore, has referred the undernoted question for our opinion:--
"Whether, on the facts and in the circumstances, the Tribunal is justified in law in holding that the firm was liable to be assessed as a registered firm in respect of the assessment years under consideration ?"
The facts lie in a narrow compass. The assessee is a firm. It came into existence for the first time for the accounting period beginning on April 1, 1975, and ending on March 31, 1976, with 17 partners constituting it. The said partnership was evidenced by a deed of partnership, dated September, 15, 1975. For the financial year 1975-76, the firm was granted an excise licence for the Ujjain group of country liquor shops in an auction held in February, 1975. In February, 1976, the aforesaid firm again offered the bid in the auction for the licence in regard to the aforesaid shops which was accepted and the contract to sell country liquor was granted for two financial years beginning on April 1, 1976, and ending on March 31, 1978. The bid in February, 1976, was thus for two financial years, i.e., April 1, 1976, to March 31, 1977 and April 1, 1977, to March 31, 1978. Licences were issued to Omprakash Premachand & Co. firm, for these two years on the linchpin of the bid of February, 1976. After acceptance of bid, in February, 1976, there came about changes in the constitution of the firm effective from April 1, 1976, and thereafter once again from April 1, 1977. The firm, despite reconstitution not once but twice as noted above, worked the privilege granted under the licence issued by the Madhya Pradesh excise authority on the basis of the bid by the un reconstituted firm in February, 1976. The registr4tion was also granted for 1978-79. The Income-tax Officer refused to grant registration for 1979-80 despite there being no further change. The Income-tax Officer felt that the firm lost its eligibility for registration as a result of change and committed violation of rules of the M.P. Excise Act. The Income-tax Officer invoked section 186(4) and cancelled the registration already granted. On appeal, the Commissioner of Income-tax (Appeals) reversed the order of the Income-tax Officer and directed him to grant registration for the assessment years 1977-78, 1978-79 and 1979-80. Aggrieved, the Revenue filed appeals. The accountant member held that it was a case of change and not of a new firm and sustained the order of the Commissioner of Income-tax (Appeals). The Judicial Member differed from the view of the Accountant Member and held that it offended rule VI of the M.P. Excise Rules and, thus, reversed the order of the Commissioner of Income-tax (Appeals). The matter was then referred to a Third Member under section 255(4) by the President of the Tribunal as a result of difference of opinion between the Accountant Member and the Judicial Member on the crucial question of the nature of the firm. The Third Member agreed with the opinion of the Accountant Member. The Bench in conformity with the opinion of the majority passed consequential order rejecting the departmental appeals. The revenue then filed applications and the Tribunal referred the aforesaid question for opinion.
We have heard Shri D.D. Vyas, learned counsel for the applicant/Revenue and Shri K.R. Mandovara, learned counsel for the non applicant/assessee.
We will notice the legal position first. Section 4 of the Indian partnership Act, 1932, defines "partnership" as under:--
"4. Definition of 'partnership', 'partner', 'firm' and firm name'.-- 'Partnership' is the relation between persons who have agreed to share the profits of the business carried on by all any of them acting for all.
Persons who have entered into partnership with one another are called individually 'partners' and collectively a 'firm', and the name under which their business is carried on is called the 'firm name'. "
Dissolution of a firm is regulated by Chapter VI---Sections 39 to 44 of the aforesaid Act.
Rule VI substituted by No.8, dated September 3, 1986, of the General Licence Conditions, provided in exercise of powers conferred by section 62 of the M.P. Excise Act, 1915; lays down that:--
"VI. Transfer of sub-lease of licence.---No privilege of supply or sale shall be sold transferred or sub-leased, nor shall a holder of any such privilege enter into a partnership for the working of such privilege in any way or manner without the written permission of the Collector, which shall be endorsed on the licence. A partner, sub-lessee, or transferee shall be bound by all the conditions of the licence, but the original licensee shall also continue to be responsible to the State Government for the due payment of the licence fee and proper working of the shop. "
There is a ban against sale, transfer or sub-lease of privilege of supply or sale and against entering into a partnership for the working of such privilege in any way or manner without the written permission of the Collector to be endorsed on the licence. Rule I also mandates that every licence shall be deemed to have been granted to the person therein.
What, however, emerges in the instant case is chronicled below:--
(a) The licence was granted to the firm and not to any individual personally as a licensee named therein.
(b) The licensee was the firm which continued-to work the privilege granted under the licence without any type of dissolution and without any objection from the excise authorities.
(c) The Collector was duly intimated and he granted license without anyobjection in regard to violation of rule VI or rule I.
(d) The same firm with the same name in spite of changes continued to exist and operate, did not enter into any agreement of new partnership and did not transfer the licence and business permitted thereunder. The firm did not lose its identity or status of a licensee.
Rule VI seems to be concerned with security for due payment of the licence fee and proper working of the shop. If the occasion arises, the Collector can permit transpire of the licence even with retrospective effect as held in Vijay & Co. v. CIT (1981) 1 MPWN 87.
The core question is whether the changes resulted in reconstitution of the firm only or in dissolution, i.e., in disappearance of one firm, as created initially, and in birth of a new firm as a result of the changes and whether the changes, as effected, amounted to transfer of the privilege of supply or sale granted by the excise licence ? Reconstitution and dissolution are two distinct legal concepts. Dissolution brings the partnership to an end while a reconstitution means the continuation of the partnership under altered circumstances. Partner may treat it as continuation. In CIT v. Pigot Champan & Co. (1982) 135 ITR 620 (SC) it is held that (Page 626):--
"It cannot be disputed that 'dissolution' and 'reconstitution' are two distinct legal concepts, for a dissolution brings the partnership to an end while a reconstitution means the continuation of the partnership under altered circumstances."
The Full Bench of the Allahabad High Court in the case of Vishwanath Seth v. CIT (1984) 146 ITR 249, through majority opinion, held that "reconstitution without dissolution does not bring into existence a new firm. In the case of reconstitution, the same firm continues to exist". The same view was expressed by the Calcutta and Madras High Courts in Sohanlal Pachisia & Co. v. Bilasray Khamani AIR 1954 Cal 179 and Meenakshi Achi v. P.S.M. Subramanian Chettiar AIR 1957 Mad. 8. The apex Court affirmed the view in A.W. Figgies & Co.'s case (1953) 24 ITR 405 and held that (page 253 of 146 ITR):--
"The reconstituted firm can carry on its business in the same firm's name till dissolution. "
In Sant Lai's case (1982) 136 ITR 379, the Delhi High Court expressed the view as under (page 388):--
"If one can imagine a partnership as an association of persons bound by a legal tie or a vinculum juris, a change in the constitution of the firm reflects only an adjustment of this legal tie which binds the partners. It is as if there is a belt which encircles all these partners and the belt either shrinks or expands to accommodate or give effect to an incoming or outgoing partner. A dissolution, on the other hand, is a breaking or a disruption of this legal tie."
It is thus beyond the pale of controversy that under the Partnership Act the same firm continues to exist in spite of change in its constitution and that it ceases to exist only on its dissolution. That being so, there is no case of transfer, i.e. violation of rule VI.
It is the area of legislative ambiguities, yet not receding, the Courts have to fill gaps, clear doubts and mitigate hardships. In the words of Judge Learned Hands, spoken in Cabell v. Markhan (1945) 148 F2d 737, 739, we get enough light to locate the correct path:--
"It is one of the surest indexes of a mature and development jurisprudence ...to remember that statutes always have some purpose or object to accomplish whose sympathetic and imaginative discovery is the surest guide to their meaning."
A subject in a free country does not deserve to be lugged into pettifoggery and registration, once granted, is not liable to be incinerated without proof of dissolution of the firm and, thus, change of identity. Some sort of personality and identity is conceded to a firm in the matter of suing or being sued even under Order XXX, rule 1 of the Code of Civil Procedure.
It is a trite position that the subject should not be taxed by ignoring the legal position. The House of Lords expressly reaffirmed the basic principle." A subject is entitled to arrange his affairs so as to reduce his liability to tax". Now if in the instant case the firm permitted exclusion or inclusion of partners without dissolution and transfer in an urge to continue to enjoy the privilege of the excise licence and to avoid liability of tax as an unregistered firm, it cannot be flagellated on mere assumptions and presumptions. The firm remained firm, not infirm on the tax front. The new Testament exhorts "Prove all things, hold fast that is good." The Tribunal correctly held fast to the order of the Commissioner of Income-tax (Appeals) as it was found to be good and legal. It is not a case of an individual obtaining a licence in his name for his use and then entering into an agreement of partnership to transfer .of sub-lease the privilege. On the other hand, the status remained unaltered in the absence of dissolution. Moreover, transfer is not absolutely prohibited but requires permission of the Collector.
In the result, we hold that the Tribunal took the logical and legal view and rightly held that the firm was liable to be assessed as a registered firm. No error, illegality or perversity is visible. It is neither a case of conundrum nor of legal acrobatics.
In the ultimate analysis, we, therefore, answer the question in the affirmative, i.e.,, in favour of the assessee and against the Revenue.
We however, make no orders as to costs. Counsel fee is, however, fixed for each side as Rs.750, if certified.
Let a copy of this order be sent to the Tribunal in accordance with the law
M.B.A./2009/FCReference answered