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Income Tax Appellate Tribunal, DELHI BENCH ‘E’, NEW DELHI
This appeal has been filed by the assessee against the order of CIT(A)- Meerut, dated 30th January, 2015 raising following grounds of appeal :
“1. That on the facts and circumstances of the case the ITO Ward 1(4) Meerut erred in law by making an addition of Rs. 27,92,190/- on substantive basis to the income of the assessee. 2. That on the facts and circumstances of the case the Ld. AO erred in law by making the addition to this income of the .Del.2015 Mrs Madhu, Meerut V ITO Ward 1 (4) Meerut A Y 2003-04 assessee of the firm Messrs Madhu and Others duly assessed as PF AOP.
That on the facts and circumstances of the case the Ld. AO presumed and misled himself by considering the case laws of Apex Court as the entire excise amount is now deposited on the date of auction of the shop.’ 4. That on the facts and merits of the case the assessment so framed is bad in law and needs to be modified.
5. That the assessee reserves the right to have additions/ or deletions to the grounds of appeal in order to have justice.”
Brief facts of the case are that assessee is an individual who was granted license for sale of liquor by District Excise officer. However in AY 2002-03 , the year in which she was granted license, it was submitted that business of sale of liquor is carried on in the name of the Firm in name and style as “ M/s Madhu & Others” which is constituted by the deed of partnership dated 26.3.2002. For the year Ld AO was of the view that there is no transfer of license from assessee to the partnership firm and as the license was granted to the assessee in his individual capacity the income arising therefore shall be chargeable in the hands of the assessee individual. However the partnership firm also filed the return of income showing income from the business of sale of liquor. Therefore Ld AO taxed the income of that firm in the hands of the individual assessee on substantial basis and in the hands of the firm on protective basis. On appeal by the before CIT (A) , he upheld that the income s to be taxed in the hands of the individual on substantive basis. On appeal before CIT (A) by the appellant Individual assessee, he upheld taxing of the income in the 2 .Del.2015 Mrs Madhu, Meerut V ITO Ward 1 (4) Meerut A Y 2003-04 hands of the individual assessee. The partnership firm M/s Madhu & Others did not files any appeal against the order of the CIT (A) before higher forums. Therefore assessee has accepted that the income of the firm is chargeable to tax in the hands of the individual on substantive basis and in the hands of the firm on protective basis. The first ground of appeal is that income of Messrs Madhu and Others which is a registered partnership firm has been taxed on substantive basis as income of Smt. Madhu -individual. For this AO relying on the decision of Hon’ble Supreme Court in CIT vs. Friends and Company 256 ITR 177 and Moti Lal Tak vs. CIT in 234 ITR 472 held that such firm is illegal as the business is licensed issued in the name of individual.
Therefore income which has been disclosed in the hands of the firm by the firm is belonging to the assessee herself. CIT (A) while deciding the issue relied up on the decision of Honorable supreme court in case of CIT V Rangila Ram & Other 254 ITR 230 (SC) where in it has been held that firm is not entitled to registration as it some of the partners of the firm hold the license to sell liquor.
3. On this ground no. 1 no arguments were placed by the AR and Ld DR relied on the orders of lower authorities.
As held by Ld. CIT (A) relying on the decision of Honorable Supreme court in case of CIT V Rangila Ram & Others where honourable court has held that:- .Del.2015 Mrs Madhu, Meerut V ITO Ward 1 (4) Meerut A Y 2003-04 “The partnership (the assessee) dealt in liquor. Only some of the partners held the liquor license.
Our attention was drawn by the learned Solicitor-General, appearing for the Revenue, to the judgment of this court in Bihari Lal Jaiswal v. CIT [1996] 217 ITR 746. It was held that a licensee could not be “permitted to bring in strangers into the business, which would mean that instead of the licensee carrying on the business, it would be carried on by others-a situation not conducive to effective implementation of the excise law and consequently deleterious to public interest. For this very reason the transfer or subletting of the licence is uniformly prohibited by several State excise enactments. It, therefore, follows that any agreement where under the license is transferred, sublet or a partnership is entered into with respect to the privilege/business under the said licence, contrary to the prohibition contained in the relevant excise enactment, is an agreement prohibited by law.” Accordingly, it was held that this not being a genuine agreement, it could not be registered under the Income-tax Act.
Our attention was also drawn to the judgment in CIT v. Hardit Singh Pal Chand and Co. [1979] 120 ITR 289 (P & H), where (at page 291) the rules applicable, even in the State of Himachal Pradesh, have been set out, and there is no doubt that a liquor licensee may not enter into a partnership without prior permission.
The basic principle, as it seems to us, is that the liquor business is res extra commercium. No one may deal in liquor without express permission. It is only the licensee who is granted such permission. If he enters into a partnership to deal in liquor, all the other partners would, as partners, also be dealing in liquor and holding the same. This would be contrary to the basic principle and illegal.
Learned counsel for the assessee relied upon a judgment of this court in Addl. CIT v. Degaon Ganga Reddy G. Ramakrishna and Co. [1995] 214 ITR 650 ; [1995] Suppl. 2 SCC 146. It dealt with the A. P. (Telangana Area) Abkari Act, which contained a prohibition similar to that stated above. This court held (page 655) :
“In view of the clear findings of fact recorded by the Tribunal, there can be no doubt that the sub-partnerships formed by individual partners of the main partnership which were lessees, with some others, merely to finance the business of a partner of the main firm doing abkari business and share the profits and losses accrued to or received by him from the main firm, were not in violation of section 14 of the Abkari Act. For this reason, there is no basis to hold that the sub-partnerships were in violation of section 14 of the Abkari Act and, therefore, illegal. The Tribunal was right in holding that in the facts and circumstances of the case, the assessee-sub-partnerships being found to be genuine were entitled to be registered under the Income-tax Act. The High Court has correctly answered the question of law referred to it, against the Revenue and in favour of the assessee.”
.Del.2015 Mrs Madhu, Meerut V ITO Ward 1 (4) Meerut A Y 2003-04 The facts of the case are entirely different. The sub-partnerships were not formed to do business in liquor but, as the Tribunal clearly found, to finance the business of the partner of the main firm doing abkari business and share the profits and losses accrued to or received by him therefrom. It was in these circumstances that it was held that such sub- partnerships were not disentitled to registration under the Income-tax Act. In the result, the appeal is allowed. The judgment and order under appeal is set aside and the question is answered in the negative and in favour of the Revenue.” In view of above decision of Honourable Supreme court we confirm the action of AO in taxing the income of “M/s Madhu & Other” partnership firm as income of the assessee Mrs. Madhu – Individual. Therefore ground no 1 of the appeal is dismissed.
The second, third and fourth grounds are relating to additions made in the hands of ‘M/s Madhu & Ors’ which is a partnership firm vide order dated 20th March 2006 as under :-
a. Ground NO 2 - Rs. 1,92,000/- were disallowed on account of salary paid to partners because assessment is made in the status of AOP on protective basis b. Ground No 3. an addition of Rs. 16,99,558/- u/s 40A(3) for a payments of Rs. 84,97,791/- is made in violation of section 40A(3) and therefore a disallowance @ 20% thereof amounting to Rs. 16,99,558/- is made c. Ground No 4 - unexplained deposit taxed u/s 68 of the Act with respect to six persons amounting to Rs. 8,50,000/-.
.Del.2015 Mrs Madhu, Meerut V ITO Ward 1 (4) Meerut A Y 2003-04 6. Over and above sum of Rs. 50,633/- was the returned income in the hands of Messrs Madhu and Ors was also added in the hands of the assessee.
‘Messrs Madhu & Ors’ was assessed a total income of Rs. 27,90,190/- on protective basis. In the hands of the assessee appellant, an addition of identical amount i.e. of Rs. 27,92,190 was made on substantive basis. On reading of the orders in case of M/s Madhu & Others of assessing officer as well as well as CIT (A) vide order dated 29.01.2015 where in it is held that the income of the liquor business has been assessed in the hands of Smt. Madhu in her individual status.
Therefore Ld CIT(A) in the case of M/S Madhu & Others has held that additions made in the hands of Messrs Madhu & Ors which are now clubbed in the hands of appellant assessee (individual) would be dealt with in the appeal of appellant assessee Individual. On appeal before CIT(A) all the arguments of the assessee were rejected on the basis of finding of assessing officer in case of assessment order of Messrs Madhu & Ors. and therefore assessee is in appeal before us.
Ld. AR submitted before us that at the time making substantive addition in the hands of assessee no opportunity was given to assessee, Mrs Madhu, to contest the additions made in the hands of M/s Madhu & Ors which was made u/s 68 and u/s 40A(3). It was further submitted that even the disallowance of salary to partners of .Del.2015 Mrs Madhu, Meerut V ITO Ward 1 (4) Meerut A Y 2003-04 the firm paid by M/s Madhu & Ors was also not discussed. Therefore he stated that an opportunity was not granted by AO to explain these issues of addition u/s 68 as well as disallowance u/s 40A (3) of the Act. Therefore the matter may be set aside to the file of AO.
Ld. DR relied on the order of CIT(A) stating that CIT(A) has considered all the aspects and therefore the appeal of the assessee may be dismissed.
We have carefully considered the rival submission. On the basis of additions made in the M/s Madhu & Others on protective basis Ld. AO has made the addition of Rs. 27,92,190/- on substantive basis in the hands of the assessee. As the income of M/s Madhu & Others has been assessed in the hands of assessee wherein disallowance u/s 40A(3) of Rs. 16,99,558/- and addition u/s 68 of Rs. 8,50,000/- has been made , it is apparent that no opportunity is given by assessing officer to the assessee. Reason for the same is that both the orders u/s 143(3) read with section 148 in the hands of the assessee as well as M/s Madhu & Others are passed on 20th March, 2006 and therefore we set aside ground no. 2 and 3 of the appeal of the assessee contesting the addition u/s 68 as well as u/s 40A(3) of the Act back to the file that assessing officer with direction to deal with both the issues on merit after giving proper opportunity of hearing to the assessee. .Del.2015 Mrs Madhu, Meerut V ITO Ward 1 (4) Meerut A Y 2003-04 11.Regarding ground no. 4 which is against disallowance of the salary to the partners of Rs. 92,000/- in the hands of M/s Madhu & Others. We dismiss this ground as M/s Madhu & Others is not treated by assessing officer as a “ Firm” but “AOP” and therefore deduction of salary to partner cannot be granted as deduction to AOP. As the income of AOP is taxed in the hands of assessee on substantive basis the income of AOP would be computed without granting deduction of salary to the AOP.
In the result ground no. 2, 3 are allowed for statistical
purposes and ground no. 4 is dismissed.
In the result appeal of the assessee is partly allowed. (Order pronounced in the Open Court on 23.12.2015)