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TMI Blog1995 (11) TMI 2X X X X Extracts X X X X X X X X Extracts X X X X ..... r its opinion. " Whether, on the facts and in the circumstances of the case, the applicant could be refused registration under section 185 of the Income-tax Act, 1961, 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, dated April 27, 1967, about its constitution ? " The High Court rejected the applications on the ground that the question sought to be raised by the assessee was concluded against it by the two decisions of that court, viz., CIT v. Sheonarayan Hatnarayan [1973] TLR 1186; [1975] 100 ITR 213 (MP) and CIT v. Pagoda Hotel and Restaurant [1974] 93 ITR 271 (MP). A licence for retail sale of country spirit under supply system in Form C. S. No. 3 of the Madhya Pradesh Excise Rules, 1960, was obtained by Bihari lal Jaiswal in respect of twenty-two out-stall shops in Tehsil Sarangarh, District Raigarh, in the public auction held in January, 1968. The licence was effective for the period commencing on April 1, 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Buddhulal Jaiswal of Ambikapur, has secured the excise contract of two liquor shops Goda Chawk and Talaiya in Bhopal in Sehore District for Rs. 3,05,000 and Rs. 1,50,000, respectively, total of Rs. 4,55,000 in his name in the open auction held on 31st January, 1968, for the period from 1st April, 1968, to 31st March, 1969, and whereas as agreed between the aforesaid persons and as he alone is unable to execute the same contract individually for want of funds and whereas the parties Nos. 1 to 8 named above having agreed to carry on the above contract business in partnership with effect from April 1, 1968, desire to reduce in writing and place in a legal form the terms and conditions under which they have agreed to carry on the partnership business, they do hereby declare and stipulate that they have been partners in the firm named and styled as 'Girdharilal Jaiswal Liquor Contractor, Bhopal', on the terms and conditions as detailed below : " Clause (7) of the partnership deed provided that : " No partner shall be entitled to any remuneration for taking part in the conduct of the firm and that all the partners shall carry on the same to the common advantage, be just and faithf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) of section 185, which too is relevant for our purpose, read thus at the relevant time : " 185. Procedure on receipt of application. --- (1) On receipt of an application for the registration of a firm, the Income-tax Officer, shall inquire into the genuineness of the firm and its constitution as specified in the instrument of partnership, and (a) if he is satisfied that there is or was during the previous year in existence a genuine firm with the constitution so specified, he shall pass an order in writing registering the firm for the assessment year ; (b) if he is not so satisfied, he shall pass an order in writing refusing to register the firm." The position emerging from the above two sub-sections is this : an application for registration of a firm for the purposes of the Act could be made on behalf of any firm if the partnership was evidenced by instrument and that instrument specified the individual shares of the partners. On such application being filed, the Income-tax Officer was obliged to enquire into the genuineness of the firm and its constitution as specified in the instrument of partnership and if, on such enquiry, he was satisfied that a genuine firm with th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hya Pradesh Excise Act or the Rules made thereunder, the licence may be cancelled by the Collector. The contention of Sri Pramod Swarup, learned counsel for the appellant, is that the prohibition contained in clause (VI) of the General Licence Conditions provided by the Madhya Pradesh Excise Rules has no relevance in the matter of grant of registration under sections 184 and 185 of the Income-tax Act. May be, learned counsel says, the said partnership would not be recognised by, and may not be able to enforce any of their rights against, the Excise Department but so far as the Income-tax Act is concerned, such a partnership existed in fact and did actually do the business during the relevant previous year. In other words, learned counsel says, the partnership was a genuine partnership. It was evidenced by an instrument of partnership specifying the individual shares of the partners and, therefore, entitled to grant of registration. Learned counsel for the Revenue, on the other hand, submits that since the excise law in force in Madhya Pradesh at the relevant time prohibited the entering into of partnerships for the working of the privilege granted under the licence without the wr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terial upon which the Income-tax Officer could come to the conclusion that the firm was not genuine. We may mention that this decision is not really relevant on the question arising in these appeals, yet we have referred to it because it happened to be the first decision relied upon by learned counsel for the assessee-appellant. The next decision relied upon is in Jer and Co. [1971] 79 ITR 546 (SC). It was a case of the licensee entering into a partnership with others for doing the business under the licence. Though the High Court had proceeded on the footing that the excise licence concerned therein was governed by rule 322, which prohibited the holder of the licence from entering into a partnership with another person, this court found, as a matter of fact, that the licence concerned therein was not governed by rule 322 but by a different rule in the Uttar Pradesh Excise Rules. The licence was issued in Form FL-II. It did not prohibit the licensee from entering into partnership with respect to the business under the licence. It merely provided that the licensee shall not sub-let or transfer the licence. In this view of the matter, this court held that the question whether the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of the licensing authority. " In both the cases considered in the said decision, the licence was granted in the name of an individual who in turn entered into a partnership with others for conducting and carrying on the business under the said licence. The High Court took the view that so far as sub-rule (1) of rule 19 is concerned, it did not prohibit entering into a partnership with respect to the business under the licence and that it merely prohibited the transfer of the licence. On this basis, the High Court held that the partnership entered into by the licensees in the cases before them cannot be said to be opposed to or violative of sub-rule (1) of rule 19. So far as sub-rule (2) of rule 19 is concerned, the High Court construed it as not applicable to a case where the licence was granted in the name of a single person. The High Court opined that sub-rule (2) applied only where the licence was granted jointly in the names of two or more persons, i.e., to a partnership, in which case, it held, the sub-rule provided that no partners shall be excluded or included without the previous permission of the licencing authority. In the words of the High Court, the position under rul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctor, which permission shall be endorsed on the licence. This condition is binding upon the licensee. If so, he cannot enter into a partnership nor can there be, in law, a partnership with respect to the privilege (business) granted under the licence. No person, and no licensee, can claim any right contrary to the said provision. The object underlying the said clause is self-evident. Since the licence is granted for dealing in intoxicating liquors, the business wherein is res extra commercium---and also because they are supposed to be harmful and injurious to the health and morals of the members of the society-close control is envisaged and provided over the business carried on under the licence. This object will be defeated if the licensee is permitted to bring in strangers into the business, which would mean that instead of the licensee carrying on the business, it would be carried on by others---a situation not conducive to effective implementation of the excise law and consequently deleterious to public interest. It is for this very reason that transfer or subletting of licences is uniformly prohibited by several State excise enactments. It, therefore, follows that any agreemen ..... X X X X Extracts X X X X X X X X Extracts X X X X
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