1995 (11) TMI 2 - SC - Income Tax

Right to claim registration - Whether the applicant could be refused registration u/s 185 on the ground that its constitution was illegal for breach of the provisions of clause VI of the General Licence Conditions made under the Excise Rules, although no action was taken by the Collector for cancellation of the licence under clause 14 of the Licence in Form C. S. No. 3, in spite of written intimation, about its constitution - applications u/s 256(2) filed by the assessee are allowed

Issues Involved:
1. Legality of partnership under the Madhya Pradesh Excise Rules.
2. Entitlement to registration under the Income-tax Act.
3. Interpretation of relevant provisions of the Income-tax Act and the Madhya Pradesh Excise Rules.
4. Public policy and the interplay between State and Central laws.

Issue-wise Detailed Analysis:

1. Legality of Partnership under the Madhya Pradesh Excise Rules:
The core issue revolves around whether the partnership formed by the assessee without the written permission of the Collector, as mandated by clause VI of the General Licence Conditions under the Madhya Pradesh Excise Rules, is legal. Clause VI explicitly prohibits the transfer, sub-lease, or formation of a partnership for the working of the excise privilege without the Collector's written permission. The High Court, relying on earlier decisions in CIT v. Sheonarayan Hatnarayan and CIT v. Pagoda Hotel and Restaurant, held that the prohibition is absolute, making the partnership illegal.

2. Entitlement to Registration under the Income-tax Act:
The next issue is whether such an illegal partnership can be granted registration under sections 184 and 185 of the Income-tax Act. Section 184(1) requires that the partnership be evidenced by an instrument specifying individual shares, while section 185(1) mandates the Income-tax Officer to inquire into the genuineness of the firm. The Supreme Court held that a partnership prohibited by law cannot be considered genuine for the purposes of registration under the Income-tax Act. The partnership, being illegal under the excise rules, cannot be granted the substantial benefit of registration.

3. Interpretation of Relevant Provisions of the Income-tax Act and the Madhya Pradesh Excise Rules:
The Supreme Court examined the interplay between the Income-tax Act and the Madhya Pradesh Excise Rules. The court noted that while the partnership was evidenced by an instrument and specified individual shares, the lack of the Collector's written permission rendered it illegal. The court emphasized that the object of clause VI is to ensure close control over the business of intoxicating liquors, which would be compromised if partnerships could be formed without permission. The court concluded that such a partnership, being prohibited, is void under section 23 of the Contract Act and cannot be recognized for registration under the Income-tax Act.

4. Public Policy and the Interplay Between State and Central Laws:
The court underscored that one arm of law cannot be used to defeat another. Recognizing a partnership prohibited by the excise rules under the Income-tax Act would be against public policy and bring the law into ridicule. The court held that the Income-tax Officer must consider the legality of the partnership under the relevant excise laws before granting registration. The court clarified that while such a partnership can be taxed as an unregistered firm or an association of persons, it cannot claim the benefit of registration under the Income-tax Act.

Conclusion:
The appeals were allowed, and the applications under section 256(2) filed by the assessee were granted. The Supreme Court answered the reference in the affirmative, against the assessee and in favor of the Revenue, holding that the illegal partnership cannot be granted registration under the Income-tax Act. No costs were awarded.

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