Allowed

The Deputy Commissioner of Excise v. Hotel Usha

Karnataka HC12 Jul 2024WA/1291/2022

Case brief

AI extract

What is this about?

Excise authorities appealed against quashing of demands for licence transfer fee after a partner's death left his son with 50% share in the licensed firm. The Division Bench held a new partnership came into existence with changed control, attracting Rule 17-B transfer fee, set aside the Single Judge's order and allowed the appeal.

What did the court decide?

Order dated 03.06.2022 of the Single Judge in W.P.No.19825/2021 set aside; writ appeal allowed with no costs.

The Deputy Commissioner of Excise Vs Hotel Usha — Service and Employment | Karnataka HC (2024)

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WA 1291/2022

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IN THE HIGH COURT OF KARNATAKA AT BENGALURU

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DATED THIS THE 12^TH DAY OF JULY, 2024

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PRESENT

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THE HON'BLE MR JUSTICE V KAMESWAR RAO

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AND

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THE HON'BLE MR JUSTICE C M JOSHI WA NO. 1291 OF 2022 (EXCISE)

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BETWEEN:

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1 . THE DEPUTY COMMISSIONER OF EXCISE DAKSHINA KANNADA DISTRICT

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ATTAVAR, MANGALURU

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KARNATAKA – 575 001

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2 . THE COMMISSIONER OF EXCISE TTMC SHANTHINAGAR NGO COLONY, WILSON GARDEN BENGALURU KARNATAKA - 560 027

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…APPELLANTS

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(BY SRI. BHOJEGOUDA T. KOLLER, AGA)

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AND:

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HOTEL USHA A REGISTERED PARTNERSHIP FIRM UNDER INDIAN PARTNERSHIP ACT, 1932 BALMATTA ROAD DON BOSCO HALL CROSS ROAD HAMPANKATTA MANGALORE KARNATAKA – 575 001

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…RESPONDENT

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(BY SRI. K.S. PONNAPPA, ADVOCATE)

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WA 1291/2022

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THIS APPEAL IS FILED UNDER SECTION 4 OF THE KARNATAKA HIGH COURT ACT PRAYING TO ALLOW THIS WRIT APPEAL AND SET ASIDE THE ORDER DATED 03/06/2022 PASSED BY THE LEARNED SINGLE JUDGE OF THIS HON’BLE COURT IN WP NO.19825/2021 AND CONSEQUENTLY DISMISS THE WRIT PETITION AND UPHOLD THE ORDERS PASSED BY APPELLANT NOS.1 AND 2.

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THIS APPEAL HAVING BEEN HEARD AND RESERVED FOR JUDGMENT ON 05.07.2024, COMING ON FOR ‘PRONOUNCEMENT OF JUDGMENT’ THIS DAY, V KAMESWAR RAO J., DELIVERED THE FOLLOWING:

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JUDGMENT

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This appeal has been filed by the Commissioner and the Deputy Commissioner of Excise, Government of Karnataka, challenging the order dated 03.06.2022 passed by the learned Single Judge in W.P.No.19825/2021 (EXCISE) whereby the learned Single Judge has allowed the writ petition by stating as under:

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“Writ petition is allowed.

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The impugned endorsement dated 02.12.2020 issued by the second respondent at Annexure-A and the Memorandum dated 31.12.2020 issued by the first respondent at Annexure-B are hereby quashed.

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The first respondent is hereby directed to consider the representation dated 13.07.2020 submitted by the petitioner at Annexure-H and pass appropriate orders in accordance with law, within a period of six weeks from the

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WA 1291/2022

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date of receipt of certified copy of this order, without insisting for payment of transfer fee as specified under Rule 17-B of the General Conditions Rules.”

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The challenge in the writ petition by the respondent herein was to the letters dated 02.12.2020 and 31.12.2020 issued by the appellants herein, the relevant portion of translated copy of the letter dated 31.12.2020 interalia reads as under:

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“The Excise Commissioner, Karnataka State, Bangalore in letter as cited in reference no.(5) wherein as in this case due to the death of Sri.M.R.Sunil who held 25% of the share which has been distributed to his son who is one of the partners in the firm Sri.Rohan.M.S who aleready holds 25% of the share in the firm thereby his share raised to 50%. Due to this change it is instructed to collect license fee and additional license fee as per the rules and submit proposal. (Copy enclosed)”

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The facts as noted from the record are, the respondent was a partnership firm carrying the activity of boarding and lodging since 1972-73, consisting of 3 partners namely, Sri. M.R.Sunil, Sri. M.A.Sanjay and Sri. M.A.Rakesh.

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It was the case of the respondent that the partnership

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firm has undergone changes in the years 1983, 2002, 2003 and

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2005 when partners have retired and new partners have been inducted.

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On 01.04.2013, a deed of partnership was executed whereby Rohan.M.S son of M.R.Sunil was inducted into the partnership as a partner with 25% of profit and loss share in the firm.

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On 19.07.2019, the respondent obtained CL-7 License (‘License’ for short) for sale of Indian liquor (other than arrack) or Foreign liquor or both to be consumed in the premises combined with meals and refreshments.

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On 02.09.2019, Sri. M.R.Sunil passed away leaving behind three legal heirs including Rohan.M.S. Accordingly, on 10.10.2019, M.S.Sanjay, M.A.Rakesh and Rohan.M.S executed another partnership deed, wherein 25% share held by the deceased partner namely, M.R.Sunil was given to the existing partner namely, Rohan.M.S, who was the son of the deceased partner. After reconstitution, the profit and loss share of the partners is in the following manner:- (i) Sri. Rohan.M.S: 50%,

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(ii) Sri. M.A.Sanjay: 25% and (iii) Sri. M.A.Rakesh: 25%.

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It was the case of the respondent that the aforesaid liquor license was renewed in the excise years of 2018-19 and 2019-20. It is also noted that on 13.07.2020, the earlier partner M.R.Sunil submitted a representation to the Deputy Commissioner seeking renewal of License for the year 2020-21.

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The appellant No.2-Commissioner, vide letter dated 02.12.2020, directed that such an application for renewal could only be considered if the respondent pays license fee and additional license fee as per rules.

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In line with the letter dated 02.12.2020, appellant No.1-Deputy Commissioner, vide letter dated 31.12.2020, directed the functionaries under him to collect license fee and additional license fee as per rules.

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It were the aforesaid two letters challenged by the respondent before the learned Single Judge with an additional prayer to consider the representation dated 13.07.2020 without demanding the payment of transfer fee under Rule 17-B of the

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Karnataka Excise (General Conditions) Rules, 1967 (‘Rules of 1967’ in short).

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The case of the appellants before the learned Single

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Judge, in their objections, was that one of the partners namely, Rohan.M.S has got 50% share in the partnership firm-Hotel Usha after the death of his father M.R.Sunil. The respondent is liable to pay the transfer fee for renewal of licence. It was also the stand of the appellants by referring to the judgment of this Court in M/s Shankar Wines -Vs.- The Commissioner of Excise [W.P.No.56657/2014 (EXCISE) and Connected matter , decided on 22.08.2017 ] that it is true that so long as the original

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partners of the firm at the time of obtaining liquor license, continued to hold 50% or more stake in the partnership firm and Rule 17-B of the Rules of 1967 would have no application to a partnership firm, but in the same judgment in paragraph No.20, the Court held that in case the partnership firm which holds the license does not inform the fact of change in the constitution of

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partnership firm within a period of one month from the change in constitution of partnership firm, the concerned Excise Authorities

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may even proceed to initiate action against the licensee of the

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partnership firm to impose suitable penalty and even take action for cancellation of the license itself.

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It was stated that though M.R.Sunil had expired on 02.09.2019, the respondent-firm brought to the notice of the appellants-department about the reconstitution of the firm only on 13.07.2020. Hence, there is a long gap between the reconstitution of the firm and reporting the same to the department i.e., the appellants herein. It was also stated before granting the renewal of licence it is not the right to voluntary transfer the rights and interest from one person to another. Even after devolution of partnership firm owing to the death of the partner, alternative reconstitution is not informed to the appellants within the stipulated period. Hence, there is no question to quash the demand of transfer fee under the Rules of 1967. It is also stated parting with possession and control of business covered under license obtained in the name of the firm would certainly amount to transfer of such privilege.

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The learned Single Judge has, in paragraphs No.5, 6 and 7 of the impugned order, stated as under:

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“5. Admittedly, one of the partner having 25% share in the partnership firm died on 02.09.2019 and his share devolved upon his son, who already has 25% share in the said partnership firm.

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6. The issue involved in this writ petition whether the change in the constitution partnership firm would effectively result in change in the control and management of partnership firm was examined by the Co- ordinate Bench of this Court in Writ Petition No.30590/2014 (Excise) C/W W.P.No.56657/2014 (Excise), wherein the Co-ordinate Bench of this Court by order dated 22.08.2017, in para 18 it is held that of

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"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 applicable under Rule 17-B of the Rules will not be attracted or will not be payable."

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7. In view of the decision of the Co- ordinate Bench, the deceased partner having not divested more than 50% share in the partnership has not resulted in change in the control and management of the petitioner-firm. Hence, the petitioner is not liable to pay transfer fee as specified under Rule 17-B of the General Conditions Rules. … … …”

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The learned Single Judge, by referring to the judgment

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in the case of Shankar Wines (supra), held as the deceased partner has not divested 50% or more of the stake in the partnership firm, there is no change in the control and

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management of the respondent-firm and hence, the transfer fee applicable under Rule 17-B of the Rules will not be attracted or will not be payable. Hence, the respondent is not liable to pay transfer fee as specified under Rule 17-B of the Rules of 1967.

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Learned counsel for the appellants, at the outset stated that pursuant to the order passed by the learned Single Judge, the appellants herein have, vide communication dated 17.11.2022, renewed the License in favour of the respondent till 30.06.2023, but the same is subject to the outcome of this appeal in terms of an undertaking filed by the partners of the respondent-firm on 30.06.2023 and hence, the issue which arises for consideration is required to be decided by this Court. He stated insofar as further renewal is concerned, the same is pending consideration. He also stated that the impugned communications dated 02.12.2020 and 31.12.2020 calling upon the respondent to deposit the license fee and additional license fee as per the Rules is justified.

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One of the ground in the appeal is also that the deceased partner was holding 25% of the share of profit and loss in the firm and hence, on 10.10.2019, the firm was

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reconstituted, whereby the profit and loss share of Rohan.M.S rose from 25% to 50%. Due to this change, the control and management of the firm has moved into the hands of Sri. Rohan. He heavily relied upon the conclusion drawn by this Court in the judgment of Shankar Wines (supra), whereunder according to him, it was held where there would be effective change of control and management of a 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 of the Rules of 1967.

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The ground of appeal also refers to paragraph No.12 of

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the judgment in Shankar Wines (supra).

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On the other hand, Sri. K.S.Ponnappa, learned counsel

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for the respondent would justify the judgment of the learned Single Judge by stating that the learned Single Judge has rightly followed the judgment in Shankar Wines (supra) to hold that as the deceased partner has not divested 50% or more share, there

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is no change in control and management of the respondent-firm.

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Taking qué from the conclusion drawn by the learned Single Judge, Sri. Ponnappa would submit that it is a case where the share of the deceased partner of 25% has devolved upon Rohan.M.S in succession and as such, it cannot be said that there is a change in the control and management of the respondentfirm though the profit and share in respect of Rohan.M.S has increased to 50%. He has heavily relied upon the judgment in the case of Shankar Wines (supra) in support of his case. He seeks the dismissal of the appeal.

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ANALYSIS:

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Having heard the learned counsel for the parties and perused the record, the short issue which arises for consideration is whether the learned Single Judge is right in holding that as the deceased partner had not divested more than 50% share in the partnership, there is no change in the control and management of the petitioner-firm and therefore, the respondent is not liable to pay transfer fee?

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The answer to the issue has to be in negative. It is true that, partner M.R.Sunil having died, had not divested his share,

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but it is a case, on his death, the partnership got dissolved. The partnership firm having dissolved, there is no question of share of the deceased partner devolving on Rohan.M.S in succession. It appears, the other two L.Rs. (other than Rohan.M.S) of M.R.Sunil have decided not to join the firm as partners and to transfer their share of 16.66% to Rohan.M.S.

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So accordingly, a new partnership deed dated 10.10.2019 was executed between M.S.Sanjay, M.A.Rakesh and Rohan.M.S with profits and losses of the firm to be shared in the proportion of 25%, 25% and 50% respectively. So in that sense, a new partnership firm came into existence, whereby Rohan.M.S having 50% share in the new partnership firm, has the control and management of the same.

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The issue which fell for consideration in Shankar Wines (supra) as noted by the Court in paragraph No.1 is about the levy of transfer fee on the change in the constitution of partnership firm which had the excise license.

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According to the Court, such a change in the constitution of the partnership firm may take place on account of

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either induction of a new partner or retirement of one or more existing partners. The Court also said that the fact situation in different cases may be different, reflecting the manner in which the change in constitution of partnership firm takes place. In that case, it appears there was a change in composition of partnership firm on partner(s) retiring resulting in divestment of 50% or more share in favour of newly entered partner(s). In such a case, there is change in the control and management of new firm.

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In the case in hand, on the execution of new partnership deed, the share of profit and loss of Rohan.M.S having increased to 50%, he got the control and management of the firm attracting Rule 17-B of the Rules of 1967. In this regard, we may reproduce some of the paragraphs of the

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judgment in the case of Shankar Wines (supra) as under:

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“12. It is to be seen first that when such a change in the constitution of partnership firm would effectively result in change in the control and management of the partnership firm, who is the Excise Licencee in question. If an outright sale of business takes place and entire new set of partners takes over the business, then there is no difficulty in applying Rule 17-B to such a case and for

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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 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.

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……………
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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.

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17. While considering the case of change of partners, it will not inatter 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

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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.

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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 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.”

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(emphasis supplied)

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It may be stated here that it is not necessary that a partner need to divest 50% or more of the stake in partnership firm to change the effective control of the firm. As stated in the

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judgment of Shankar Wines (supra), the fact situation in different cases may be different, reflecting the manner in which such change in constitution of partnership firm takes place. In the present case, as stated above, the change in partnership firm has taken place because of the death of one of the partners

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namely, M.R.Sunil resulting in formation of a new partnership firm, wherein Rohan.M.S has got 50% of the stake in the partnership firm and thereby the control and management. It is to this firm, the transfer of License is sought. In that sense, Rule 17-B of Rules of 1967 shall get attracted.

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The learned Single Judge has erred in not appreciating the aforesaid ratio of the judgment as laid down in the case of

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Shankar Wines (supra).

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The conclusion of the learned Single Judge that the deceased partner having not divested 50% or more share in the partnership, it has not resulted in change in the control and management of the petitioner-firm, is not a right conclusion.

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In the present case, there being a change in the control and management of the firm in terms of the partnership deed dated 10.10.2019, it must be held that Rule 17-B of the Rules of 1967 gets attracted and the respondent is required to pay transfer fee for transfer of license to the new partnership firm.

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