1. Sub-partnership formed to finance a partner's share in a main firm dealing in liquor — Refusal of registration under Income Tax Act citing Section 14, Abkari Act. (Para 2 )
Back
Next 
1996 Supreme(SC) 1843
1996(8) Supreme 264
SUPREME COURT OF INDIA
A.M Ahmadi, C.J.I., K.S. Paripoornan and Sujata V. Manohar, JJ.
Commissioner of Income Tax, Andhra Pradesh -Appellant
versus
M/s. B. Posetty & Co. -Respondent
Civil Appeal No. 1209 of 1978
Decided on 5-11-1996
Counsel for the Parties :
For the Appellant : J. Ramamurthy, Sr. Advocate and S.N. Terdol, Advocate.
For the Respondent : V.A. Bobde, Sr. Advocate.
IMPORTANT POINT
The inhibition contained in Section 14 of the Andhra Pradesh (Telangana Area) Abkari Act will apply only in a case where the lessee declares any person as its partner and when the main partnership and the sub-partnership are, for the purpose of law, distinct and different entities, to such a situation Section 14 of the Act is not attracted.
Headnote:Andhra Pradesh (Telangana Area) Abkari Act-Section 14-Applicability-Sub-partnership-Registration of-Main firm, the lessees and sub partnership are distinct and different -Lessee had not declared either sub partnership or any other person, as its partner-Inhibition contained in Section 14 cannot apply-Sub-partnership financed one of its partners to make a capital investment in main firm-Such an arrangement or agreement between persons who formed a distinct and different firm, is valid in law-To such a situation Section 14 of Abkari Act is not attracted.
Held : In this case, the lessee is Nizamabad Group Sendhi Contractors (main firm). The sub-partnership is a distinct and different firm. It is one recognised by law and it is not a partnership with the main firm. It will not have the effect of making the partners in the sub-partnership, partners of the main firm. In other words, the main firm, the lessees and the sub-partnership are distinct and different. In the light of the above legal position, it cannot be said that either the sub-partnership in the instant case, or any of its partners as a partner, became a partner of the main firm, Nizamabad Group Sendhi Contractors. The inhibition contained in Section 14 of the Abkari Act will apply only in a case where in lessee declares any person as its partner. Here, the lessees, M/s. Nizamabad Group Sendhi contractors, had not declared either the sub-partnership or any other person, as its partner. In such circumstances, the inhibition contained in Section 14 of the Abkari Act cannot apply. It is true that Sri Posetty and 10 others formed the sub-partnership, "B. Posetty & Co." - for a legitimate business purpose, to provide the requisite finance, on condition of allotment of certain shares to them out of Mr. Posetty s share in the main firm. The sub-partnership financed one of its partners to make a capital investment in the main firm. Such an arrangement or agreement between persons who formed a distinct and different firm, is valid in law and to such a situation Section 14 of the Abkari Act is not attracted; not is there any basis to hold that there was any contravention of the provisions of the said Act. Law recognises formation of sub-partnership. The main partnership and the sub-partnership are, for the purpose of law, distinct and different entities. Registration cannot be refused to the sub-partnership on the ground that one of the partners of the main firm had agreed to share the profits received by him from the firm, with a stranger or strangers (members of the sub-partnership) since the agreement does not make the stranger or strangers or the sub-partnership firm, a partner in the original firm and such an arrangement or agreement does not affect either the main firm or its other members, in any way. Section 14 of the Abkari Act has no application to such a situation. (Para 8)
Legal Category Hierarchy
Table of Contents
2. Whether a sub-partnership sharing profits from an abkari business violates the prohibition against declaring partners without government permission under Section 14 of the Abkari Act. (Para 2 , 6 )
3. Sub-partnerships are distinct entities from the main firm; they do not make sub-partners members of the main firm or violate restrictions on lessee partnerships. (Para 4 , 8 )
4. A sub-partnership formed to share a partner's income from a main firm does not make sub-partners partners of the main firm, thus not violating lessee-partnership prohibitions. (Para 8 )
5. Appeal dismissed — High Court decision granting registration to the sub-partnership affirmed. (Para 8 )
6. What is a sub-partnership and its legal relationship to the main firm?
A sub-partnership is a partnership within a partnership where a partner of a main firm agrees to share their profits or losses with strangers. It is a distinct legal entity and does not make the sub-partners partners of the main firm. (Para 4 , 8 )
7. Does a sub-partnership violate Section 14 of the Abkari Act if the main firm is a lessee?
No, provided the main firm (lessee) has not declared the sub-partners as its own partners. Since the sub-partnership is a separate entity and does not make its members partners of the main firm, the prohibition against declaring partners without permission does not apply. (Para 8 )
8. Under what circumstances would a sub-partnership be considered void under the Abkari Act?
A sub-partnership would be void if it intended to and actually carried on the business of liquor or other prohibited articles in its own name or the names of its partners without obtaining the requisite licence. (Para 4 )
JUDGMENT
Paripoornan, J.-The Revenue has filed this appeal against the judgment of the High Court of Andhra Pradesh dated 22.8.1977 rendered in Case Referred No. 45 of 1975. The High Court granted a certificate under Section 261 of the Income Tax Act to appeal to this Court, in S.C.L. Petition No. 57 of 1978. The assessee is the respondent in this appeal.
Since the respondent (assessee) was not represented, we requested Sri V.A. Bobde (senior counsel) to assist us. We heard counsel for the Revenue Sri J. Ramamurthy and Sri V.A. Bobde.
2. The short question involved in this Appeal is:-
Whether the respondent-assessee firm is entitled to registration under Income Tax Act for the year 1966-67? The Income Tax Officer by his order passed under Section 185 of the Income-tax Act, 1961, dated 28.12.1970, held that the respondent-assessee- sub-partnership - contravenes the provisions of Section 14 of the Andhra Pradesh (Telangana Area) Abkari Act (hereinafter referred to as the Abkari Act ) and so, the sub-partnership should be considered as void and illegal. Section 14 of the Act is to the following effect :-
"No lessee shall, except with the permission of Government, declare any person to be his partner; and such partner shall not be competent to act as such until he has obtained a licence to that effect from the Collector or any other competent officer."
Registration was refused. The said order was confirmed in appeal by the Appellate Assistant Commissioner by order dated 28.2.1972. In further appeal, the Income-tax Appellate Tribunal (the Tribunal) in I.T.A. No. 210 (Hyd)/1972-73 by order dated 31.12.1973, held that the firm (sub-partnership) is valid and entitled to registration. In rendering the said order, the Tribunal noticed that another Bench of the Tribunal in I.T.A. No. 1028 (Hyd.) of 1969-70 and connected appeals had by an earlier order dated 30.6.1972, held that a sub-partnership on identical lines was not hit by Section 14 of the Abkari Act, Concurring with the said view, the Tribunal further held that the business of sub-partnership was not the same as that of the main partnership and all the insignia of a valid partnership are present in this case and so, it is valid and entitled to registration. It is thereafter, at the instance of the Revenue, the Appellate Tribunal referred the following question of law for the decision, of the Andhra Pradesh High Court.
"Whether on the facts and in the circumstances of the case, the sub-partnership is entitled to the benefits of registration under the Income-tax Act, 1961 for the assessment year 1966-67?"
By the time the said reference came up for final hearing before the High Court, the reference made by the Tribunal of an identical question in the connected cases arising from I.T.A.No. 1028 (Hyd) of 1969-70 was heard and decided by the High Court, holding that the sub-partnership in the said case, is valid and entitled to registration, vide judgment in Additional Income Tax Commissioner, Hyderabad v. D.G.G. Ramakishan & Co.1. When the instant reference came up before the High Court, the earlier decision on the identical matter was noticed and the High Court answered the question in the affirmative and in favour of the assessee vide judgment dated 2.8.1977. It is thereafter, the Revenue moved the High Court in SCL Petition No. 57/1978 under section 261 of the Income-tax Act and having obtained a certificate to appeal to this Court vide order dated 10.3.1978, has filed the above appeal.
4. At this stage, one fact deserves to be noticed. The decision of the Andhra Pradesh High Court rendered in Additional Income Tax Commissioner, Hyderabad v. D.G.G. Ramakishan & Co. (supra), came up in appeal before this Court, in Additional Commissioner of Income Tax v. Degaon Ganga Reddy G. Ramakrishna and Co. and Others. , and a Bench of this Court affirmed the said decision. It was noticed that this Court had in Muralidhar Himatsingka v. CIT3 held that a valid sub-partnership can be entered into by a pa
