THE ADDITIONAL COMMISSIONER OF INCOME-TAX, ANDHRA PRADESH vs. M/S. DEGAON GANGA REDDY G. RAMAKRISHNA AND CO. AND ORS.

CIVIL APPEAL No. 222/1977Supreme Court[1995] 2 S.C.R. 40401 March 1995Bench: 2 JudgesAuthor: J.S. VERMA, K.S. PARIPOORNAN THE ADDITIONAL COMMISSIONER OF INCOME7 pages
AI SummaryDismissed

What were the facts?

The assessee, M/s. Degaon Ganga Reddy G. Rajakrishna and Co. and others, are sub-partnership firms. The main partnership, 'Nizamabad Group Sendhi Contractors', held a license for Abkari business for the year 1962-63. One partner, 'G', had a 10% share in this main firm. To finance 'G's' share and profit/loss, 'G' and 11 others formed a sub-partnership on August 27, 1963. The sub-partnership applied for registration under the Income Tax Act. The Income Tax Officer rejected the application, stating no business was conducted and the sub-partnership was void under the Andhra Pradesh (Telangana Area) Abkari Act, 1316 F, as members (except 'G') were not license holders. The Appellate Assistant Commissioner upheld this. The Income Tax Appellate Tribunal allowed the appeals, finding the sub-partnership valid and carrying on business. The High Court upheld the Tribunal's decision on a reference under Section 256(1). The Revenue appealed to the Supreme Court.

What did the Supreme Court hold?

The Supreme Court held that the sub-partnerships were not in violation of Section 14 of the Andhra Pradesh (Telangana Area) Abkari Act, 1316 F. The Court found that the sub-partnerships were formed merely to finance the business of a partner in the main Abkari firm and to share the profits and losses accrued to or received by him from the main firm. There was no basis to hold that these sub-partnerships were illegal or void. The Tribunal's finding that the sub-partnerships were genuine and entitled to registration under the Income Tax Act was upheld. The High Court correctly answered the question of law in favour of the assessee. The appeals were dismissed. The Court noted that the sub-partnerships confined their business to sharing profits in lieu of capital invested, and did not directly deal in liquor without a license. The two entities, the main partnership and the sub-partnership, were distinct for Income Tax purposes.

What were the issues?

1. Whether the sub-partnerships, formed to finance a partner's share in an Abkari business and share profits/losses, are entitled to registration under the Income-tax Act, 1961, for the assessment year 1964-65? (Question of law) Assessee's Contentions: The sub-partnership is a separate legal entity valid in law and entitled to registration. It cannot be said that the sub-partnership did not carry on any business; it financed the capital investment of a partner in the main firm. The High Court relied on Murlidhar Himatsingka v. Commissioner of Income Tax and fer and Co. v. Commissioner of Income Tax, holding that a valid sub-partnership can be entered into by a partner with strangers to share income/loss, and such a sub-partnership is entitled to registration. Revenue's Contentions: The sub-partnership was void ab initio under Section 14 of the Andhra Pradesh (Telangana Area) Abkari Act, 1316 F, as its members (except 'G') were not license holders. Registration would defeat the purpose of the Abkari Act. The High Court's decision was based on a misinterpretation of the facts and the law, particularly concerning the prohibition under the Abkari Act.

Which sections of the Income-tax Act were involved?

Section 14,Section 256(1)

AI-generated summary — verify with the full judgment below

A THE ADDITIONAL COMMISSIONER OF INCOME-TAX, ANDHRA PRADESH \', M/S. DEGAON GANGA REDDY G. RA:.IAKRISHNA AND CO. AND ORS. B MARCH 1, 1995 [J.S. VERMA AND K.S. PARIPOORNAN, JJ.] Income Tax Act, 1961-Andhra Pradesh (Telangana Area) Abkari Act, c 1316 F-Section 14-Registered partnership Jinn doing Abkari business - Sub- 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. D By a partnership deed dated October 15, 1962, a partnership '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 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%

The order continues below.

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