1998 (7) TMI 81 - HC - Income Tax

Summary

Issues Involved:
1. Entitlement of the assessee-firm to the benefits of registration.
2. Contravention of rules 38 and 39 of the Andhra Pradesh (Foreign Liquor and Indian Liquor) Rules, 1970.
3. Applicability of the decision in CIT v. Nalli Venkataramana [1984] 145 ITR 759 (AP).

Detailed Analysis:

1. Entitlement of the Assessee-Firm to the Benefits of Registration:
The central issue was whether the assessee-firm, which had increased its number of partners without prior approval from the licensing authority, was entitled to registration under the Income-tax Act. The original licensee, Sri M. B. R. Prasada Reddy, formed a partnership with three others, which was later expanded to seven partners without obtaining the necessary permission from the excise authorities. The Income-tax Officer initially granted registration, but the Commissioner of Income-tax, Visakhapatnam, revised this decision, deeming the partnership void ab initio due to non-compliance with rule 39 of the Andhra Pradesh (Foreign Liquor and Indian Liquor) Rules, 1970. The Tribunal, however, allowed the appeal based on the precedent set in CIT v. Nalli Venkataramana, which was later disapproved by the Supreme Court in Bihari Lal Jaiswal v. CIT. The High Court concluded that the assessee-firm was not entitled to registration as the partnership was formed in contravention of the mandatory rule requiring prior approval from the licensing authority.

2. Contravention of Rules 38 and 39 of the Andhra Pradesh (Foreign Liquor and Indian Liquor) Rules, 1970:
Rule 39 explicitly requires prior permission from the licensing authority for any changes in the partnership structure. The assessee-firm's failure to obtain this permission before including three additional partners was a clear contravention of this rule. Despite the assessee's argument that they had intimated the licensing authority, the High Court emphasized that mere intimation does not suffice; formal approval is mandatory. Consequently, the High Court held that the Tribunal's finding that there was no contravention of rules 38 and 39 was incorrect.

3. Applicability of the Decision in CIT v. Nalli Venkataramana [1984] 145 ITR 759 (AP):
The Tribunal had relied on the decision in CIT v. Nalli Venkataramana, which allowed for registration of a partnership firm even without prior approval from the licensing authority, provided there was no prohibition on changing partners. However, the Supreme Court's decision in Bihari Lal Jaiswal v. CIT overruled this view, stating that any partnership agreement formed in violation of the relevant excise rules is prohibited by law and thus void. The High Court, aligning with the Supreme Court's stance, concluded that the Tribunal's reliance on the Nalli Venkataramana decision was misplaced and no longer valid.

Conclusion:
The High Court answered the questions of law formulated by the Revenue as follows:
(a) The Appellate Tribunal was not justified in holding that the assessee-firm is entitled to the benefits of registration.
(b) The finding of the Appellate Tribunal that there was no contravention of rules 38 and 39 was incorrect.
(c) The Tribunal was not justified in relying on the decision in CIT v. Nalli Venkataramana in light of the Supreme Court's decision in Bihari Lal Jaiswal v. CIT.

The High Court thus set aside the Tribunal's order and upheld the Commissioner's view that the partnership was invalid and not entitled to registration under the Income-tax Act.