1965 (4) TMI 129 - HC - Income Tax

Summary

Issues Involved:
1. Entitlement to registration under Section 26-A of the Indian Income Tax Act, 1922.
2. Legality of the partnership under the Motor Vehicles Act, 1939.
3. Transfer of vehicles and permits in contravention of Sections 31 and 59(1) of the Motor Vehicles Act, 1939.
4. Compliance with statutory provisions and public policy.

Issue-wise Detailed Analysis:

1. Entitlement to Registration under Section 26-A of the Indian Income Tax Act, 1922:
The primary question was whether the assessee, Messrs. Dayabhai & Co., was entitled to registration under Section 26-A for the assessment year 1956-57. The Tribunal had rejected the application for registration, stating that the partnership was invalid due to the alleged transfer of vehicles and permits in contravention of the Motor Vehicles Act, 1939. The Tribunal did not consider the terms of the partnership deed or determine the actual involvement of Dayabhai's brother, Chhotabhai, in the business.

2. Legality of the Partnership under the Motor Vehicles Act, 1939:
The partnership was formed on 1st August 1954, between Dayabhai and his brother Chhotabhai to carry on the business of bus plying and cinema exhibition. The Income Tax Officer and the Appellate Assistant Commissioner had rejected the registration, citing Sections 31 and 59 of the Motor Vehicles Act, which prohibit the transfer of vehicles and permits without proper authorization. They relied on precedents from the Madras High Court and the Kerala High Court, which held that such partnerships were invalid if they involved unauthorized transfers.

3. Transfer of Vehicles and Permits in Contravention of Sections 31 and 59(1) of the Motor Vehicles Act, 1939:
The Tribunal and the Income Tax authorities argued that the partnership involved a transfer of vehicles and permits in violation of Sections 31 and 59(1) of the Motor Vehicles Act. However, the partnership deed did not mention any transfer of permits or vehicles. The Tribunal's reliance on balance-sheet entries showing vehicles as assets of the firm was deemed irrelevant for determining the legality of the partnership. The court emphasized that the Motor Vehicles Act does not prohibit the formation of partnerships for transport business and that such business can be carried on with vehicles belonging to a partner or the firm and on permits obtained by a partner.

4. Compliance with Statutory Provisions and Public Policy:
The court referred to the general principles of partnership law and relevant case law, including the Supreme Court's decision in Umacharan Shaw & Bros. v. Commissioner of Income Tax, which held that a partnership business could be carried on with property belonging to a partner and that the formation of such a partnership does not violate statutory provisions if the relevant statute does not prohibit it. The court concluded that the partnership was not illegal merely because the business was carried on by a partner with permits obtained by him and with vehicles belonging to him or the firm. The court also noted that the transfer of vehicles by itself did not involve a violation of Section 31 or 59(1) of the Motor Vehicles Act.

Conclusion:
The court held that the assessee-firm was not illegal and was entitled to registration under Section 26-A of the Indian Income Tax Act, 1922, for the assessment year 1956-57. The question posed by the Tribunal was answered in the affirmative, and no order was made regarding the costs of the reference.