1990 (11) TMI 10 - HC - Income Tax

Summary

Issues Involved:
1. Entitlement to registration of the sub-partnership firm under the Income-tax Act.
2. Legality and genuineness of the sub-partnership firm under the Rajasthan Excise Act.
3. Compliance with the conditions necessary for registration of the firm.

Detailed Analysis:

1. Entitlement to Registration of the Sub-Partnership Firm under the Income-tax Act:
The Tribunal, Jaipur Bench, referred the question of whether the assessee is entitled to registration. The sub-partnership firm, Sujankhan Laloo Khan, applied for registration, which was initially refused by the Income-tax Officer on grounds of no business activity and contravention of the Rajasthan Excise Act. The Appellate Assistant Commissioner upheld this decision, citing the lack of genuine partnership. However, the Tribunal later allowed the appeal, holding that the assessee-firm is a validly constituted partnership firm and entitled to registration. The Tribunal's decision was based on the principles laid down by the Supreme Court in R.C. Mitter and Sons v. CIT, which identified five essential conditions for registration: (1) constitution under an instrument of partnership specifying individual shares, (2) application signed by all partners, (3) application made before assessment, (4) division or credit of profits/losses according to the instrument, and (5) genuineness of the partnership.

2. Legality and Genuineness of the Sub-Partnership Firm under the Rajasthan Excise Act:
The Revenue argued that the sub-partnership was illegal and void as it contravened the Rajasthan Excise Act, which requires written permission for non-licensees to share profits from a liquor business. The Full Bench decision in Motilal Chunnilal v. CIT was cited to support this argument. However, the court distinguished this case, stating that the sub-partnership firm did not engage in the liquor business directly but only shared profits derived from a partner's share in the main firm. The court referred to several precedents, including Murlidhar Himatsingka v. CIT and CIT v. Sivakasi Match Exporting Co., which supported the legality of sub-partnerships sharing profits from a main partnership without engaging in the main business directly.

3. Compliance with the Conditions Necessary for Registration of the Firm:
The court analyzed the compliance of the sub-partnership firm with the conditions necessary for registration under the Income-tax Act. It was emphasized that the sub-partnership firm was validly constituted, fulfilled all necessary requirements, and was genuine. The court reiterated that the finding of genuineness by the Tribunal is a factual determination not to be disturbed by the High Court. The court also noted that the sub-partnership did not violate any provisions of the Rajasthan Excise Act as it did not engage in the liquor business directly.

Conclusion:
The court concluded that the sub-partnership firm, Sujankhan Laloo Khan, was entitled to registration. The Tribunal's decision to grant registration was justified, and the question referred was answered in the affirmative, favoring the assessee and against the Revenue. The judgment emphasized the distinction between the main partnership's business activities and the sub-partnership's profit-sharing arrangement, which did not contravene the Rajasthan Excise Act.