1991 (12) TMI 104 - AT - Income Tax

Summary

Issues Involved:
1. Legality of partnership firm registration when one business is illegal.
2. Implications of a partner bringing a personal licence into the firm.
3. Prohibition of licence transfer under the Abkari Act.
4. Applicability of the Kerala High Court decision in CIT v. Union Tobacco Co. to the Abkari Act.

Detailed Analysis:

Issue 1: Legality of Partnership Firm Registration When One Business is Illegal
The Tribunal considered whether a partnership firm could be denied registration if one of its businesses is deemed illegal. The Tribunal noted that the firm in question, M/s. Raveendra Engineering Construction Company, had been granted registration for the earlier assessment year 1980-81. The firm had carried on Abkari Contracts business based on a licence obtained by one of its partners. The Tribunal referenced the Andhra Pradesh High Court decision in CIT v. Three Aces, which held that even if one activity of a firm is illegal, it does not render the entire firm illegal or disentitle it to registration under the Income-tax Act. Therefore, the Tribunal concluded that the firm was entitled to registration despite one of its businesses being potentially illegal.

Issue 2: Implications of a Partner Bringing a Personal Licence into the Firm
The Tribunal examined whether a partner bringing a personal licence into the firm constitutes a transfer of that licence to the firm. The Tribunal found no document or account entry indicating that the licence was transferred to the firm as a capital contribution. It was determined that the firm merely provided funds to the partner who held the licence and assisted in the business, sharing the profits. This arrangement was deemed valid by the Andhra Pradesh High Court in Uppala Rameswar Rao & Co.'s case, and the Supreme Court had refused to grant special leave petition against that decision. Thus, the Tribunal concluded that there was no transfer of the licence to the firm.

Issue 3: Prohibition of Licence Transfer Under the Abkari Act
The Tribunal considered whether such a transfer is prohibited under the Abkari Act. Rule 6(22) of the Kerala Abkari Shops (Disposal in Auction) Rules, 1974, prohibits the sale or transfer of a licence without written consent. However, the Tribunal noted that the licence of the assessee was not cancelled for any violation of the rules, and there was no penalty provision for transferring the licence without permission under the Kerala Abkari Act. The Tribunal contrasted this with the Rajasthan High Court decision in Motilal Chunnilal's case, where the Rajasthan Excise Law rendered such a transfer punishable. The Tribunal concluded that the Kerala Abkari Act did not treat the transfer as a punishable offence, making the agreement valid.

Issue 4: Applicability of the Kerala High Court Decision in CIT v. Union Tobacco Co. to the Abkari Act
The Tribunal evaluated whether the decision in CIT v. Union Tobacco Co. regarding the Cochin Tobacco Act applied to the Abkari Act. The Tribunal distinguished the provisions of the Cochin Tobacco Act from the Abkari Act, noting that the former treated the transfer of a licence as forbidden and void. In contrast, the Abkari Act did not have such stringent provisions. The Tribunal also referenced the Supreme Court decision in Jer & Co.'s case, which held that a partnership formed to exploit a licence did not amount to a transfer of the licence in violation of the rules. Consequently, the Tribunal found that the Kerala High Court decision in Union Tobacco Co.'s case did not apply to the Abkari Act.

Conclusion:
The Tribunal confirmed the order of the Appellate Assistant Commissioner, directing the Income-tax Officer to grant registration to the assessee firm. The Tribunal answered the referred questions in the negative and dismissed the appeal.