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Issues Involved:
1. Legality of the partnership firm under the Rajasthan Excise Act, 1950. 2. Entitlement to registration under section 185 of the Income-tax Act, 1961. Detailed Analysis: 1. Legality of the Partnership Firm under the Rajasthan Excise Act, 1950 The primary issue was whether the partnership firm, formed without obtaining written permission from the excise authorities, was valid under the Rajasthan Excise Act, 1950. The Government of Rajasthan had granted a licence for the retail sale of country liquor to three individuals who later formed a partnership with five other persons without obtaining the required permission from the excise authorities. Clause (3) of the licence explicitly prohibited the transfer of the licence or taking a partner without written permission from the licensing authority. The Income-tax Officer, Appellate Assistant Commissioner, and Income-tax Appellate Tribunal all held that the partnership was invalid as it violated the conditions of the licence and the provisions of the Rajasthan Excise Act, thus rendering the contract of partnership illegal under section 23 of the Indian Contract Act. The court considered various judgments, including the decision in Durga Madira Sangh v. CIT [1985] 153 ITR 226 (Raj), which held that the partnership was permissible with written permission. However, the court distinguished this case by emphasizing that the prohibition against forming partnerships without permission was a substantive legal requirement aimed at protecting public health and public policy, not merely excise revenue. The court cited Halsbury's Laws of England and Lindley's treatise on the Law of Partnership to support the view that statutory penalties for protecting the public imply a prohibition of the act, making the partnership illegal. 2. Entitlement to Registration under Section 185 of the Income-tax Act, 1961 The second issue was whether the firm was entitled to registration under section 185 of the Income-tax Act, 1961. The court examined the conditions under sections 184 and 185 of the Income-tax Act, which require that the firm be constituted under an instrument of partnership specifying individual shares of the partners, and that the partnership must be genuine. The court held that since the partnership was formed in violation of the Rajasthan Excise Act, it was illegal and not genuine, and thus not entitled to registration. The court reviewed various judgments, including Jer & Co. v. CIT [1971] 79 ITR 546 (SC), which allowed registration where the licence did not prohibit entering into a partnership. However, the court noted that the Rajasthan Excise Act explicitly required permission for forming partnerships, distinguishing it from the cases cited by the assessee. The court also considered the decision in Brij Mohan v. N. V. Vakharia [1965] RLW 254; AIR 1965 Raj 172, which held that a partnership formed without the required permission was illegal. Conclusion: The court concluded that the partnership firm was invalid as it violated the conditions of the licence under the Rajasthan Excise Act, 1950, and was therefore illegal under section 23 of the Indian Contract Act. Consequently, the firm was not entitled to registration under section 185 of the Income-tax Act, 1961. The court affirmed the decisions of the Income-tax Officer, Appellate Assistant Commissioner, and Income-tax Appellate Tribunal, and answered both questions referred by the Tribunal in the affirmative, emphasizing the need to protect public health and uphold public policy.
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