M/S KEERTHI ENTERPRISES vs. THE STATE OF KARNATAKA

1/23 IN THE HIGH COURT OF KARNATAKA, BENGALURU

DATED THIS THE 09TH DAY OF OCTOBER 2017

BEFORE

THE HON'BLE Dr.JUSTICE VINEET KOTHARI

WRIT PETITION No.42694/2017 (EXCISE)

BETWEEN:

M/S. KEERTHI ENTERPRISES A REGISTERED PARTNERSHIP FIRM REGISTERED UNDER THE PROVISIONS OF INDIAN PARTNERSHIP ACT, 1932 AND CL-2 LICENSEE UNDER THE KARNATAKA EXCISE ACT, 1965 AND RULES PRESENTLY HAVING BUSINESS AT No.8/3 MAGADI MAIN ROAD, TAVAREKERE BENGALURU-562 130 REP. BY ITS MANAGIN PARTNER SMT. LATHA

…PETITIONER (BY SRI. RAJAGOPAL M.R. ADV.,)

AND:

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J.C. NAGAR, BENGALURU-560 027.

…RESPONDENTS (BY SRI. A.M. SURESH REDDY, AGA)

THIS W.P. IS FILED UNDER ARTICLES 226 & 227 OF THE CONSTITUTION OF INDIA PRAYING TO QUASH THE IMPUGNED OFFICIAL MEMORANDUM DATED 31.08.2017 ISSUED BY R-3 AT ANNEX-A & ETC.,

THIS W.P. COMING ON FOR PRELIMINARY HEARING THIS DAY, THE COURT MADE THE FOLLOWING:-

ORDER

Mr. Rajagopal M.R. Adv. for Petitioner Mr. A.M. Suresh Reddy, AGA for Respondents

(ii) Further declare that the Rule-17-B of Karnataka Excise License (General Conditions) Rules, 1967 is not applicable to petitioner’s case

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since CL-2 license issued in favour of the petitioner U/s 26 of Karnataka Excise Act, 1965 and Rule – 3 & 4 of Karnataka Excise (Sale of Indian & Foreign Liquors) Rules, 1968 continued in the name of petitioner’s partnership firm and not been transferred in favour of any person, firm, company or society or association. (iii) Issue writ in the nature of mandamus directing the 3rd respondent Dy. Commissioner of Excise to renew the license for the year 2017-18 without insisting the payment of license fee for the year 2014-15 as per ANNEXURE-A by accepting the license fee paid for the year 2017- 18 in terms of law. (iv) Pass any other order, writ or direction as this Hon’ble Court deems fit and proper in the circumstances of the case in the interest of justice and equity”.

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The Commissioner of Excise in Karnataka, Bangalore & Others on 22.08.2017 in W.P.No.30590/2014 c/w W.P.No.56657/2014, by a detailed judgment with the relevant guidelines has been laid down by this Court.

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EXCISE COMMISSIONER IN KARNATAKA, BANGALORE AND OTHERS – 1992(1) KAR.L.J. 360. In the said case, the Division Bench has held that licence is purely personal. It cannot be transferred at all and that is why Rule 17-A of the Rules clearly laid down that only in the event of the death of a licensee, the Deputy Commissioner may on an application by the LRs of the deceased with the previous sanction of the Excise Commissioner can transfer licence in favour of the LRs. This Court, therefore, found exception to the instructions issued by the Excise Commissioner on 02.05.1984 providing for transfer of licence, otherwise than in favour of the LRs, observing that such circular was contrary to the rules. The Division Bench has further repelled the contention that question of equitable estoppel did not arise as such transfer was not permitted in law. 7. It is thus clear that the provision enabling transfer of licence except in favour of the LRs of deceased licensee was for the first time introduced by inserting Rule 17-B. Rule 17-B as extracted above provides that the Deputy Commissioner may on an application by the licensee and subject to payment of transfer fee equivalent to the annual licence fee and with the prior approval of the Excise Commissioner, transfer such licence in favour of any person named by such licencee, provided such person is eligible for grant of a licence under the Karnataka Excise Act, 1965 and the Rules made thereunder. Thus, for the first time by imposing several safeguards, conditions and restrictions, provision has been made for transfer of licence in cases other than the one covered under Section 17-A. Therefore, there cannot be any dispute about the legal position that without complying with the requirement of Rule 17-B, there can be no transfer of licence to vend liquor.

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pursue their business and it is for this reason that the licence granted is not exclusively to a legal entity, but in favour of the partners though it is given in the name of the firm. He refers to Section 17-A, 13, 14 and 42 of the Indian Partnership Act and Order 30 of CPC. Reliance is placed on the judgments of the Apex Court in the case of DULICHAND LAXMINARAYAN VS COMMR. OF INCOME- TAX, NAGPUR – AIR 1956 SC 354, to emphasize the nature of the legal character of a partnership firm, particularly on paragraph 15. Judgment of the Full Bench of the Punjab & Haryana High Court in the case of M/S. NANDLAL SOHANLAL JULLUNDUR VS THE COMMISSIONER OF INCOME-TAX, PATIALA – AIR 1977 PUNJAB AND HARYANA 320 is also relied upon in this regard. 12. Attention of the Court is also invited to the judgment of this Court in the case of GEETHA VS STATE OF KARNATAKA AND OTHERS – 2000(2) KAR.L.J. 383, to contend that State has exclusive privilege and right of manufacturing and selling intoxicating liquor and grant of CL-9 licence is a privilege or permission granted by the State to the licencee to sell liquor in the manner prescribed in the licence. Therefore, parting with the possession and control of the business covered by CL-9 licence would amount to transfer of such privilege and such an act without the permission of the licensing authority will be illegal and violative of the terms of the licence. 13. In the said judgment, at paragraph 10, it is note worthy to notice that this Court has stated that if the licensee retains possession and control, but only authorises a servant or an Agent to manage the business on his behalf, there is no illegality or infringement of the conditions of licence. In paragraph 11, it is further observed in the said judgment that, a

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transfer of licence may be either by way of a transfer simpliciter (that is transfer of the licence alone) or a transfer implied in, or consequential upon: (a) the transfer of the business of Bar and Restaurant covered by the CL-9 licence, by way of sale or mortgage with possession; or (b) the licensee parting with the possession and control of the business, by way of lease, sub-lease or an agreement of transfer and/or a power of attorney coupled with interest. Useful reference can also be made to the observations made in paragraph 15 of the said judgment, wherein it is held that having regard to the nature of the licence and the obligations attached to a licence, under the Excise Act and Rules, it would be open to the licensing authority to consider at the time of granting licence as to whether the application is merely a camouflage for someone else running the business as there was no fundamental right to carry on trade or business in liquor and the State had the power to effectively regulate the various activities relating to intoxicants as observed by the Supreme Court in the case of HAR SHANKAR VS DEPUTY EXCISE AND TAXATION COMMISSIONER- AIR 1975 SC 1121. 14. In the light of the respective contentions urged, if the materials on record are perused, it emerges that the action initiated in demanding transfer fee is traceable to the letter dated 20.08.2009 issued by the State Government (Principal Secretary, Finance Department, Bangalore, addressed to the Excise Commissioner). In the said letter, the judgment rendered by this Court in W.P.No.8130/2002 dated 28.10.2006 is referred to state that in the event of induction of new partner or change in the partnership by re-constituting the same, transfer fee is liable to be collected. Thereafter, the Excise Commissioner has addressed letters to all the Deputy Commissioners of Excise in the State on

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04.10.2011 to initiate action by securing necessary information about the change in the constitution and composition of the partnership firms and for collection of licence fee in terms of Rule 17-B of the Rules by ensuring that applications are submitted by such firms. This communication is produced at Annexure-K to the writ petition. 15. Thereafter notices came to be issued to the petitioners calling upon them to make payment of the transfer fee as provided under Rule 17-B. These notices dated 28.02.2012 and 28.03.2012 are produced at Annexures-E & G, respectively. Petitioner has submitted a reply on 31.03.1012 vide Annexure-F. In the reply, it is submitted that the previous partnership firm which had been granted licence has continued in existence although new partners have been inducted and earlier partners have resigned and therefore, the judgment rendered by this Court in W.P.No.8130/2002 had no application to the facts. 16. The Deputy Commissioner of Excise, Hassan, has having considered the reply submitted, come to the conclusion that the reply could not be accepted as, in terms of the Government directive and in the light of Rule 17-B, petitioner was required to make payment of transfer fee. 17. During the course of arguments, learned Advocate General has pointed out that Annexure-M communication issued by the Finance Department addressed to the Excise Commissioner has to be ignored as it is not traceable to any authority vested with the Finance Department to issue such communication/direction. He further submits that whether a change in the partnership firm, by inducting new partner tantamounts to transfer of licence from the previous firm and the partners to the re-constituted firm is a matter which the competent authority has to

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consider based on the facts and circumstances of the case and therefore, in the present case, as the Deputy Commissioner of Excise has found that there is re-constitution of the firm resulting in implied transfer of licence in favour of newly inducted partners, transfer fee has to be paid, he, therefore, submits that the petitioner has to approach the Appellate Authority, if at all they are aggrieved by the order passed by the Deputy Commissioner of Excise. He further points out that if such an appeal is filed, the Appellate Authority will examine the mater in accordance with law based on the facts and circumstances of the case and law applicable. He, however, asserts that in the instant case, there is indeed transfer of licence from the previous partners in favour of the newly inducted partners and therefore the action of the Deputy Commissioner of Excise is just and legal. 18. In the light of the above submission, it has to be stated that the communication issued by the State Government through the Finance Department on 20.08.2009 vide Annexure-M cannot have any legal effect and the authorities of the Excise Department who are invested with quasi-judicial powers to examine the issue regarding the liability of the partnership firm to pay transfer fee on account of the alleged change in the composition of the firm have to consider the question without reference to and without in any manner being influenced by the said communication dated 20.08.2009 and by ignoring the same. 19. As regards the effect of change in the composition of the partnership, there can be different ways of bringing about such change. The change in the composition may be such that some partners may be inducted along with the new partners; some of the partners may retire out of the existing partners. In both the cases, there is likelihood of change in the control and

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management of the firm and in some cases, it may not result in material change at all in the management of the firm. A partnership firm does not have a separate legal entity as compared to the legal status that a corporate body enjoys. In DULICHAND LAXMINARAYAN VS COMMR. OF INCOME-TAX, NAGPUR – AIR 1956 SC 354, the Apex Court dealing with the nature and legal character of a partnership firm, has held that the general concept of partnership, firmly established in both systems of law (English and Indian), still is that a firm is not an entity or person in law but is merely an association of individuals and a firm name is only a collective name of those individuals who constitute the firm. In other words, a firm name is merely an expression, only a compendious mode of designating the persons who have agreed to carry on business in partnership. 20. If this broad legal aspect is kept in mind and the object and purpose behind insertion of Rule 17-B is examined, coupled with the requirements that are to be satisfied while making an application for grant of licence by a firm, it will be clear that the State having exclusive privilege and right of manufacturing and selling intoxicating liquor, can grant licence as a privilege or permission granted by the State to the licencee to sell liquor in the manner prescribed in the licence. If that is so, parting with possession and control of business covered under such a licence would certainly amount to transfer of such privilege. Such an act, if resorted to without the permission of the licensing authority, will be illegal and violative of the terms of licence. Such a situation can be brought about by what may be called as transfer simplicitor or by an act that by implication may tantamount to transfer of such licence.

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Appellate Tribunal, wherein it was held that in the name of re-constitution of the firm, the management had been taken over by the petitioner and the original partner had been reduced to insignificant status, tantamounting to change of management. In such circumstances, this Court refused to interfere with the concurrent findings of fact recorded by the authorities holding that there was implied transfer of license as a result of the reconstitution of the firm. Therefore, the issue has to be determined based on the facts and circumstances of each case and not by applying a thumb rule. 24. In the light of the conclusion that I have reached, it is now not appropriate for this Court to embark upon an enquiry into the nature of the re-constitution and composition and the change of control and management if any of the petitioner firms after re-constitution. The same has to be decided by the competent authority, who, in the instant case, is the Deputy Commissioner of Excise. 25. However, as the Deputy Commissioner, in the present case, has proceeded on the basis of the Government Order and the clarification issued by the Excise Commissioner based on the Government Order, the authorities have to ignore the said Government Order and examine the matter keeping in mind the principles laid down herein above. 26. The Deputy Commissioner of Excise has passed the impugned orders referring to the facts and circumstances of each case, it is not necessary for this Court to undertake re-examination of the facts involved in these cases as the petitioners have an alternative efficacious remedy of preferring a statutory appeal before the Commissioner of Excise under Section 61(2) of the Act. Petitioners are therefore

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given 30 days time from the date of receipt of a copy of this order to prefer such an appeal before the Commissioner of Excise, whereupon the Commissioner will examine the matter, keeping in mind the observations made and the principles laid down in this order.”

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difficulty in applying Rule 17-B to such a case and for transfer of Excise Licence in the name of the new partnership firm, even though, it has continued to carry on the business in old and existing name and style of the partnership firm. But, the difficulty may arise where the change in the constitution of partnership firm takes place in a phased or staggered manner. Therefore, a thumb rule of 50% or more of the change of the share in the profits and losses of the partnership firm is considered to be appropriate and the said thumb rule of 50% change in the existing partnership firm composition was found to be acceptable to both the sides, the petitioners as well as the Excise Department, also. 13. The said rule of 50% or more of change in composition would operate in the following in the manner:- Suppose, the Excise Licencee is in the partnership firm ie., M/s. ABCD, Bangalore with four partners namely A, B, C, D each having 25% of shares in the partnership firm and the Excise Licence is held during the current year July 2017 to June 2018. On 31.12.2017, partner with 25% share retires and a new partner ‘X” is introduced in the partnership firm giving ‘X’ 25% of share. Since in the said illustrative case, the partnership

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firm of M/s.ABCD does not lose 50% or more of its effective control and ‘X’ is introduced in the firm with only 25% of share, this will not attract the transfer fee and the new partnership firm M/s.ABCX can be given the same Licence upon a transfer being recorded under Rule 17-B of Rules, 1967, without payment of transfer fees. 14. In the next change in the constitution of partnership firm, if partner “C” also retires with 25% share and a new partner say ‘Y’ is introduced and he is also given 25% share in place of “C”, the new firm M/s.ABXY will be a new firm, where the original partnership firm M/s.ABCD loses 50% of its stake in the new partnership firm M/s.ABXY. At this stage, a new firm M/s.ABXY can get Licence transferred in their name only upon paying the transfer fee in terms of Rules 17-B of Rules, 1967. 15. Taking another example, if two partners at the same time like A and B retire out of the firm M/s.ABCD and 50% is given to the new partners entering at the same time namely, X and Y with 25% share to each, even then upon such change of licence from M/s.ABCD to M/s.CDXY, it will attract the transfer fee under Rule 17-B. In terms of the aforesaid thumb rule of 50% or more of the effective control of existing

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Licencee partnership firm is divested and given to the newly entering partners. 16. If it is a case of more than 50% of share (effective control) is divested by the existing Licencee firm and such share of 50% or more of the profits of the partnership firm of the existing partners is given to the newly entering partners, there is no question of any confusion and such a change in the partnership firm will definitely attract the transfer fee under the Rule 17-B of Rules, 1967. 17. While considering the case of change of partners, it will not matter even if an outgoing or incoming partners are the family members. So, even if the husband and wife of the partnership firm goes away upon retirement from partnership firm and the new partner who may or may not be a family member comes in, if the 50% of the existing partners who hold the Licence at a particular relevant point of time is given away to other new incoming partners, then, it will be a transfer attracting the transfer fee under Rule 17- B of the Rules, 1967. 18. In other words, so long as the existing partners do not divest themselves to 50% or more of the stake in the partnership firm which holds the Licence in question, the transfer fee

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applicable under Rule 17-B of the Rules will not be attracted or will not be payable. But the moment, the change is effected by one or more of the partnership deeds subsequently executed to divest the existing partners divesting of 50% or more and such 50% or more is the stake given to the incoming partner(s), it will attract the transfer fee under Rule 17-B of Rules, 1967 irrespective of their relationship with the existing partners. 19. To effectively implement this yardstick of 50% or more, an obligation would be cast upon the existing Licencee firm to immediately inform to the Excise Department of any change in the constitution of partnership firm which may be effected in the said partnership firm whether it divests the existing partners of 50% of their stake or less or more, so that the Excise Department can keep a track of every change in the composition of the partnership firm at all the stages and can apply the aforesaid rule of 50% or more, whenever the said threshold of 50% by the existing partnership firm Licencee is crossed, the transfer fee may be imposed and collected by the Excise Department. 20. In case, the partnership firm who holds the licence does not inform the fact of change in the constitution of partnership firm

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within a reasonable period, say within a period of one month from the change in constitution of partnership firm, the concerned Excise Authorities may even proceed to initiate action against the Licencee of the partnership firm to impose suitable penalty and even take action for cancellation of the Licence itself. 21. Thus, with the aforesaid illustrative examples of change in the constitution of partnership firm for the purpose of Rule 17-B, it is held that there would be implied effective change of control and management of the said partnership firm, if 50% or more of its stake in the profit sharing ratio changes hands and existing strength of group of partners loses 50% or more of the total stake of 100%, then such a change in the constitution of partnership firm will attract the payment of Transfer Fee under Rule 17-B. Below 50%, it will not attract the payment of transfer fees. The change of 50% or more will be reckoned with reference to the existing excise licence composition of firm and transferred excise licence under Rule 17-B and at the every stage of 50% or more of change of stake by exit and entry of partners in the firm it will so attract the transfer fees and for regulating such change in the constitution of Partnership Firms; every change of

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the constitution will have to be informed by the licencee firm to the Excise Department and they will maintain the record of all such changes in the constitution of the partnership firms on regular basis.

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with the compliance with the other conditions given in Rule 17-B, namely, that the transferee firm should be otherwise also eligible to get the Excise Licence to be transferred in the name of such firm. If there is any other disqualification and ineligibility with the transferee partnership firm, then the Deputy Commissioner will of course be free to take his own decision and pass appropriate orders depending upon the facts and circumstances of each case and it is again reiterated that this judgment only lays down the parameters and yardsticks for attracting the transfer fees under Rule 17-B of Rule of 1967. This is done to avoid different views by different authorities all over the State and to achieve a uniformity in such cases and also to avoid unnecessary litigation at different forums, may be before the Departmental Authorities or even before this Court as far as the issue of levy of transfer fee is concerned under Rule 17-B of Rules of 1967. 24. It is also clarified that the aforesaid Rule 17-B will also stand attracted in the cases where there are only two partners. For example, A and B, each having 50% of shares and one partner B retires, but no new partner is taken in and firm M/s. AB is converted into a

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proprietorship concern of Mr.A. This will also attract transfer fee, if the proprietorship concern of Mr.A seeks such transfer of the licence under Rule 17-B. In the same case, even though the share of Mr.A may be 70% and share of Mr.B is only 30%, but since with the B’s retirement no new partner is taken in, the change would convert a partnership firm into a proprietorship concern of Mr.A and it will still attract the transfer fee and if Mr.A wants the Licence to be transferred in the name of Mr.A as a proprietorship concern, A will have to pay the transfer fees. This additional point also requires a clarification because even if the Excise Licencee does not continue in the form of partnership firm, but such a change converts a partnership firm into a proprietorship concern or vice-versa ie., a proprietorship concern becoming a partnership firm, such cases would also attract Rule 17-B, irrespective of aforesaid rule of 50% or more of change in share or in other words effective control of the partnership firm. The petitions are disposed of accordingly. No costs”.

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disposed of with a liberty and direction to the 3rd Respondent-The Deputy Commissioner of Excise, Bangalore Urban District (West), Bengaluru, to re- decide the issue in terms of the aforesaid judgment. No costs.

Sd/- JUDGE

Srl.