1997 (10) TMI 62 - HC - Income Tax

Summary

Issues:
1. Interpretation of the provisions of the Kerala Abkari Act regarding transfer of license to a partnership firm.
2. Eligibility of a partnership firm for registration under the Income-tax Act.

Analysis:

Issue 1:
The case involved a partnership firm denied registration under the Income-tax Act due to carrying on abkari business in violation of the Kerala Abkari Act. The firm's license was in the name of a partner, leading to a dispute over the transfer of the license to the firm. The Full Bench decision in Narayanan and Co. v. CIT [1997] 223 ITR 209 was cited, which held that sharing the license privilege with partners constitutes a transfer and is void under the Contract Act. The firm argued that their partnership was formed to exploit the license legally, citing the partnership deed and other rules that did not explicitly prohibit such arrangements. However, the court held that the partnership aimed to treat the license as firm property, constituting an illegal transfer under the Contract Act. The court emphasized that the partnership's intention to exploit the license through the firm was equivalent to the prohibited transfer outlined in the Narayanan case. Therefore, the partnership was deemed illegal, justifying the denial of registration.

Issue 2:
Regarding the eligibility for registration under the Income-tax Act, the court rejected the firm's argument that forming a partnership to exploit a license did not violate any specific prohibition except under rule 19(4) of the Kerala Rectified Spirit Rules. The court distinguished the case from Jer and Co. v. CIT [1971] 79 ITR 546, emphasizing that the partnership's intention to use the license as firm property constituted an illegal transfer. The court also referred to Sunil Siddharthbhai v. CIT [1985] 156 ITR 509, supporting the view that entering a partnership involves a transfer of individual assets. The court concluded that the partnership's agreement clearly indicated the intention to use the license as firm property, thereby violating the Contract Act. Consequently, the court upheld the assessing authority's decision to deny registration to the firm.

In conclusion, the court ruled against the assessee, upholding the denial of registration and answering all questions in the negative, favoring the Revenue. The judgment highlighted the illegality of the partnership formed to exploit a license, as it constituted a prohibited transfer under the Contract Act, despite the firm's arguments regarding the legality of their arrangement.