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Issues Involved:
1. Validity of the formation of the firm in light of the Rajasthan Excise Act, 1956. 2. Entitlement of the assessee to registration under section 185 of the Income-tax Act, 1961. Issue-wise Detailed Analysis: 1. Validity of the Formation of the Firm: The primary issue was whether the formation of the firm was valid given the provisions of the Rajasthan Excise Act, 1956. The firm was constituted to carry on the business of selling country liquor, with licenses issued under Section 42 of the Rajasthan Excise Act to four individuals who later formed a partnership with eleven others. The Income Tax Officer (ITO) denied registration, citing a breach of Clause 3 of the license, which prohibited licensees from transferring the licenses or entering into partnerships without written permission from the licensing authority. The ITO concluded that this breach rendered the partnership void ab initio under Section 23 of the Indian Contract Act. The Appellate Assistant Commissioner (AAC) disagreed, holding that the firm was entitled to registration as there was no transfer or sub-letting of the license. The Income-tax Appellate Tribunal (ITAT) reversed this decision, relying on precedents like CIT v. Krishna Reddy & Co., which held that partnerships formed in contravention of excise laws were void. However, the High Court found that there was no direct prohibition under the Rajasthan Excise Act or its rules against forming a partnership. The prohibition in the license's terms required written permission for partnerships, suggesting that partnerships were permissible with such permission. The High Court noted that the business was carried out by the partnership firm for and on behalf of the partners, including the four licensees, and thus did not constitute an illegal transfer of the license. 2. Entitlement to Registration under Section 185 of the Income-tax Act, 1961: The second issue was whether the assessee was entitled to registration under Section 185 of the Income-tax Act, 1961. The ITO had rejected the registration on the grounds that the partnership was void due to the breach of the license conditions. The AAC allowed the registration, but the ITAT reversed this decision. The High Court examined various precedents and found that the partnership did not violate public policy or the provisions of Section 23 of the Indian Contract Act. The Court noted that the Rajasthan Excise Act allowed for penalties but did not declare such partnerships illegal or void. The Court also distinguished the facts of this case from those in CIT v. Krishna Reddy & Co., where there was a direct statutory prohibition. In conclusion, the High Court held that the Tribunal was not justified in denying registration under Section 185 of the Income-tax Act. The partnership was neither illegal nor void, and the assessee was entitled to registration. Conclusion: The High Court answered both questions in the negative, ruling against the Revenue and in favor of the assessee. The formation of the firm was valid, and the assessee was entitled to registration under Section 185 of the Income-tax Act, 1961. Each party was left to bear its own costs.
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