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Whether the Bench was correct in law in refusing to register the applicants as a firm under Section 26A, Income Tax Act? Analysis: The case involved seven individuals who entered into a partnership agreement to conduct an arrack business. They sought registration under Section 26A of the Income Tax Act for the assessment year 1944-45. However, the Income Tax Officer refused registration, citing that the firm was not a licensee, and the partnership agreement was unlawful as it violated Rule 27 of the Rules framed under the Abkari Act. The Income Tax Officer argued that since the partnership was illegal, it could not be registered under Section 26A of the Act. The assessee's counsel contended that even if the partnership was illegal, the profits could still be assessed for taxation purposes. However, the court held that the registration of a partnership formed for an illegal purpose is different from taxing the profits of a business tainted with illegality. In a recent Full Bench decision in Velu Padayachi v. Sivassooriam Pillai, it was established that a partnership formed for conducting a business in arrack or toddy on a license granted to only one partner is void ab initio. This is because such a partnership arrangement either involves a transfer of the license, which is prohibited and punishable, or constitutes a breach of the Abkari Act. The court concluded that even if a partnership was lawful initially, it becomes unlawful if it intends to conduct business jointly on a license granted to only one partner. Therefore, the court held that the object of the partnership in this case was illegal, rendering the partnership contract void ab initio. Consequently, the Income Tax Officer was justified in refusing to register a firm with an unlawful object. The court answered the question in the affirmative, ruling against the assessees. The Commissioner of Income Tax was awarded costs amounting to Rs. 250 for the reference.
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