1968 (1) TMI 7 - HC - Income Tax

Firm - deed of partnership is partly valid and a firm is in existence constituted under that deed of partnership - firm entitled to registration

Summary

Issues:
Entitlement to registration under section 26A of the Income-tax Act for the assessment year 1958-59 based on the constitution of the firm and the legality of the partnership agreement.

Analysis:
The case involved the assessment of entitlement to registration under section 26A of the Income-tax Act for the assessment year 1958-59. The firm in question, Messrs. Oudh Cocogem and Provision Stores, Lucknow, comprised three brothers as partners and was involved in selling wines. The Income-tax Officer initially granted renewal of registration for the relevant assessment year as there was no change in the constitution of the firm. However, the Commissioner of Income-tax canceled the renewal of registration under section 33B of the Income-tax Act, citing the lack of a license in favor of the firm for the wine business as the reason. This decision was upheld by the Income-tax Appellate Tribunal, leading to the referral of the case to the High Court.

The crux of the matter was whether the firm, with its proposed business activities, was legally entitled to registration under section 26A. The deed of partnership indicated the firm's intention to carry on business in wines, among other goods. However, the U.P. Excise Rules in force at the time posed restrictions on the issuance of licenses for the sale of wines and liquors to partnerships comprising more than two partners, making the partnership agreement potentially unlawful in part.

The court examined relevant legal precedents, such as the provisions of the Contract Act, to determine the legality of the partnership agreement. It was established that the object of the agreement to sell wines, which conflicted with the U.P. Excise Rules, rendered that part of the agreement unlawful and void. The court distinguished between the consideration and object of the agreement, emphasizing that unlawful objects could invalidate an agreement.

Additionally, the court considered the doctrine of severability in contracts, where legal and illegal parts of an agreement can be separated. In this case, since the firm maintained separate accounts for its lawful and unlawful activities, the court found that the partnership agreement could be upheld for lawful activities like selling stores, provisions, and medicines, despite the illegality of the wine business aspect.

Ultimately, the court held that the firm was entitled to registration under section 26A as the partnership agreement, though partly invalid due to the unlawful object of selling wines, still constituted a valid firm for lawful activities. The decision highlighted the distinction between privileges and rights regarding registration, affirming the firm's entitlement to registration based on the valid aspects of the partnership agreement.

In conclusion, the court answered the question of law in the affirmative, affirming the firm's entitlement to registration under section 26A for the relevant assessment year. The court's decision emphasized the legality of the partnership agreement concerning the firm's business activities and the application of legal principles to determine the firm's registration status under the Income-tax Act.