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

Citation: [1995] 2 S.C.R. 404 · Decided: 01-03-1995 · Supreme Court of India · Bench: J.S. VERMA · Disposal: Dismissed
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Judgment (excerpt)

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% share 
F in the main partnership. 
The sub-partnership firm filed an application for registration under 
the Income-Tax Act which was rejected by the Income Tax Officer on the 
grounds that no business had been conducted by the assessee during the 
relevant year and that the sub-partnership was void ab initio under the 
G Andhra Pradesh (Telangana Area) Abkari Act, 1316 F as the members of 
the sub- partnership firm except 'G', were not licence holders under the 
Act. Similar applications by six other sub-partnership firms were also 
rejected by the assessing authorities. 
H 
The Appellate Assistant Commissioner upheld the order of the 
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ADDL. COMMR. OFINCOME TAX v. D.G.REDDY(J.S. VERMA,J.] 
405 
assessing authority holding that registration of the sub- partnership A 
would defeat the purpose of the Abkari Act. The Tribunal allowed the 
assessee's appeals holding that it could not be said that the sub-partner-
ship did not carry on any business. It held the sub-partnership to be a 
separate entity valid in law and entitled to registration under the Income 
fu~ 
B 
The High Court in a reference u/s 256(1) of the Income-Tax Act 
upheld· the Tribunal's view stating that a valid sub-partnership could be 
entered into by a partner of the main firm with strangers, to share the 
income or losses from the main partnership, a sub-partner had definite 
enforceable rights to claim a share in the profits accured to or received by C 
the partner in the original partuership and such sub-partnership was 
entitled to registration. It was further held that the partners of the sub-
partnership would not become partners of the main partnership firm, the 
two being different and distinct entities for the purpose of the Income Tax 
Act. The High Court also observed that the sub-partnership confined its D 
business to only sharing the profits earned by one of the partners of the 
main partnership doing Abkari business, in lieu of their capital invested 
for the share of that partner, and, therefore, it could not be said that such 
a sub-partnership was dealing in liquor without permission or that it was 
illegal and void. 
E 
Dismissing the appeal, this Court 
HELD : The sub-partnership formed by individual partners of the 
main partnership, with some others, merely to finance the busines~ of a 
partner of the main firm doing Abkari business and share the profits and 
losses accured to or received by him from the main firm, were not in 
violation of section 14 of the Andhra Pradesh (Telangana Area) Abkari 
Act. There was no basis to hold that the sub-partnerships were in violation 
F 
of Section 14 of the Abkari Act and, therefore, illega~. The assessee sub-
partnerships being found to be genuine were entitled to be registered under G 
the Income Tax Act. [ 410-B-CJ 
Murlidhar Himatsingka v. Commissioner of Income Tax, (1966) 62 ITR 
323 (SC) and fer and Co. v. Commissioner of Income Tax, (1971) 79 ITR 
546 (SC), referred to. 
H 
406 
SUPREME COURT REPORTS 
[1995] 2 S.C.R. 
A 
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 222 uf 
1977 etc. etc. 
From the Judgment and Order dated 16.4.1976 of the Andhra 
Pradesh High Court in R.C. No. 25 of 1973. 
B 
Dr. R.R. Mishra, S. Rajappa, Ms. A Subhashini and B.K.
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