1987 (2) TMI 144 - AT - Income Tax

Issues Involved
1. Correctness of the decision of the AAC regarding the appellant-firm's entitlement to registration under section 185 of the Income-tax Act, 1961.
2. Legality and validity of the partnership contract under the Bombay Prohibition Act, 1949, and Bombay Foreign Liquor Rules, 1953.
3. Interpretation of Rule 21 of the Bombay Foreign Liquor Rules, 1953.
4. Applicability of Section 23 of the Indian Contract Act, 1872, to the partnership contract.
5. Burden of proof regarding the legality of the partnership.
6. Relevance and applicability of case law cited by both parties.

Detailed Analysis

1. Correctness of the Decision of the AAC:
The appeals were filed by the revenue against the order of the AAC dated 11-1-1984 for the assessment years 1979-80 and 1980-81. The primary issue was the correctness of the AAC's decision that the appellant-firm was entitled to registration under section 185 of the Income-tax Act, 1961. The AAC had allowed the assessee's appeal, which was contested by the revenue on various grounds, including the legality of the partnership under the relevant excise laws.

2. Legality and Validity of the Partnership Contract:
The ITO had refused registration on the grounds that the partnership contract was void under Rule 21 of the Bombay Foreign Liquor Rules, 1953. The AAC's decision was challenged on the basis that the partnership involved a violation of excise rules, constituting a serious offense. The departmental representative argued that the partnership was a scheming attempt to defeat the provisions of law, as evidenced by the sequence of actions taken by Shri Mulchand and his family.

3. Interpretation of Rule 21 of the Bombay Foreign Liquor Rules, 1953:
Rule 21(1) specifies that no person shall be recognized as a partner of the trade and import licensee unless the partnership is declared to the Collector before the licence is granted, and the names of the partners are entered jointly in the licence. Rule 21(2) requires the licensee to carry on the business either personally or by an authorized agent or servant. The ITO argued that the partnership was not declared to the authorities, making the contract void. The AAC, however, had focused on the distinction between wholesale and retail licenses, which was deemed irrelevant by the Tribunal.

4. Applicability of Section 23 of the Indian Contract Act, 1872:
Section 23 states that the consideration or object of an agreement is unlawful if it is forbidden by law or defeats the provisions of any law. The departmental representative contended that the partnership contract was designed to defeat the provisions of the excise laws, making it void under Section 23. The Tribunal agreed, noting that the partnership contract allowed Ramesh and Umesh to take full part in the business, which was not permitted by law.

5. Burden of Proof Regarding the Legality of the Partnership:
The AAC had erred in holding that the burden of proving the illegality was on the person alleging it. The Tribunal clarified that the burden of proving all the facts lies primarily on the person in whose knowledge the facts lie. The partnership deed did not put any restrictions on Ramesh and Umesh, and the burden was on the assessee to show that the business was carried on without breaching the law.

6. Relevance and Applicability of Case Law:
Both parties cited various case laws to support their arguments. The Tribunal noted that the legality of the partnership must be examined in the context of the specific facts and relevant laws. The Tribunal found that the case law cited by the assessee did not apply to the facts of this case, as the partnership contract was designed to defeat the provisions of the excise laws. The Tribunal also noted that the case law following Velu Padayachi's case was no longer good law in view of the Supreme Court's decision in K. M. Viswanatha Pillai's case.

Conclusion:
The Tribunal concluded that the partnership contract was void under Section 23 of the Indian Contract Act, as it was designed to defeat the provisions of the excise laws. The decision of the AAC was reversed, and the ITO's order refusing registration was restored. The appeals were allowed.

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