1996 (3) TMI 81 - HC - Income Tax

Summary

Issues Involved:
1. Entitlement to registration u/s 185(1)(a) of the Income-tax Act, 1961.
2. Legality of forming a partnership by an abkari licensee and exploiting the licence.
3. Interpretation of "sale or otherwise transfer" under the Abkari Act and the Kerala Abkari Shops (Disposal in Auction) Rules, 1974.

Summary:

Issue 1: Entitlement to Registration u/s 185(1)(a) of the Income-tax Act, 1961
The firms, Narayanan and Co., and K. S. Ramakrishnan, P. K. Narayanan and Co., applied for registration under section 184 of the Income-tax Act, 1961. The Income-tax Officer refused registration, citing a violation of section 15 of the Abkari Act due to the transfer of the licence obtained in the name of one partner to the firm. The Commissioner of Income-tax (Appeals) reversed this decision, but the Appellate Tribunal restored the Income-tax Officer's order, leading to these references.

Issue 2: Legality of Forming a Partnership by an Abkari Licensee and Exploiting the Licence
The court examined whether forming a partnership by an abkari licensee and exploiting the licence amounts to an illegal transfer under the Abkari Act. Section 15 of the Abkari Act prohibits the sale of liquor without a licence, and Rule 6(22) of the Kerala Abkari Shops (Disposal in Auction) Rules, 1974, prohibits the licensee from selling or otherwise transferring the licence without written consent from the Assistant Excise Commissioner. The court held that forming a partnership for exploiting the licence constitutes a transfer of the licence, making the business of the firm illegal.

Issue 3: Interpretation of "Sale or Otherwise Transfer" under the Abkari Act and the Kerala Abkari Shops (Disposal in Auction) Rules, 1974
The court interpreted the term "otherwise transfer" in Rule 6(22) broadly, concluding that it includes any transaction where the licensee shares his privilege with others. The court emphasized that the privilege to vend liquor is personal to the licensee and cannot be shared with others without violating public policy. The court cited the Supreme Court's decision in Bihari Lal Jaiswal v. CIT [1996] 217 ITR 746, which held that partnerships formed in contravention of statutory provisions are unlawful and void.

Conclusion:
The court answered all the questions referred in the negative, against the assessee and in favor of the Revenue. The partnerships formed by the licensees were deemed void under section 23 of the Contract Act, and thus not entitled to registration under the Income-tax Act, 1961. The partners are to be taxed either as an unregistered partnership-firm or as an association of persons.