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TMI Blog1987 (1) TMI 44X X X X Extracts X X X X X X X X Extracts X X X X ..... e joint names of Motilal, Chunnilal and Bhanwarlal, son of Motilal. It appears that with a view to carry on the aforesaid business of retail sale of country liquor, the aforesaid licensees entered into a partnership with five other persons and constituted the firm, M/s. Motilal Chunnilal, Bhilwara, consisting of the following eight partners: 1. Motilal, 2. Chunnilal, 3. Bhanwarlal, 4. Smt. Vijaylaxmi, wife of Satishchandra, 5. Poonamchand, son of Gangaram, 6. Bhuralal, son of Devilal, 7. Ram Nath, son of Magniram, and 8. Smt. Kamala, wife of Mangilal. On the basis of the deed of partnership dated August 8, 1966, entered into by the aforesaid eight persons, the assessee, M/s. Motilal Chunnilal, applied for registration of the firm. However, registration of the firm was refused by the Income-tax Officer on the ground that the partnership was not legal as it violated the provisions of clause (3) of the terms of the licence issued by the Excise Department of the State. Clause (3) of the licence translated into English runs as under : " The licence-holder shall not be entitled to transfer the licence of the shop to any person without the written permissi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntion. On the other hand, learned counsel for the Revenue submitted that entering into partnership with strangers is prohibited as section 54 of the Rajasthan Excise Act provides penalty for contravention of the provisions of the licence granted under the Act and section 34(c) provides for cancellation or suspension of the licence for breach of the conditions thereof, with the view of protecting public health and not merely safeguarding excise revenue. The question which really arises in the present case is as to whether there is a prohibition either by the provisions of the Rajasthan Excise Act or the Rules made thereunder or by the terms of the licence against the bolder of the licence entering into a partnership with third parties. If there is a prohibition, the partnership entered into in contravention of the prohibition would ipso facto become illegal or unlawful. We have to determine whether the imposition of a condition upon the licence-holder of obtaining the written permission of the competent excise authority before entering into a partnership with third parties would amount to prohibition, particularly when the breach of such condition exposes the licence-holder to imp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the object of protecting the public, though it may also be for the protection of the revenue, the act must be taken to be Prohibited, and no action can be maintained by the offending party on a contract which is made in contravention of the statute." [Emphasis added]. There appears to be a sharp divergence of judicial opinion on the question as to whether the licensee entering into partnership with strangers without obtaining the permission of the excise authorities renders such a partnership illegal and the firm is not entitled to registration under the Income-tax Act. In Gordhandas Kessowji v. Champsey Dossa [1921] AIR 1921 PC 137, it was held by their Lordships of the Privy Council that a licensee of salt manufacture cannot be said to contravene the terms of the licence or the provisions of section 11 of the Bombay Salt Act, 1890, whereby he is prohibited from " alienating the interest ", simply because the licensee admitted members of his family and others as partners for sharing the profits of the business. The decision of their Lordships of the Supreme Court in Jer Co. v. CIT [1971] 79 ITR 546, where a similar question about partnership in the matter of licence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the excise authority thinks it proper, it may cancel the licence. But the agreement to enter into a partnership could not be held to be forbidden by law and the income-tax authorities were not justified in refusing registration to the firm. The view taken in P. C. Kapoor's case [1973] 90 ITR 172, by the Full Bench of the Allahabad High Court was also taken by the Patna High Court in CIT v. Prakash Ram Gupta [1969] 72 ITR 366 and in Md. Warasat Hussain v. CIT [1971] 82 ITR 718 (Pat) and in CIT v. N. C. Mandal Co. [1969] 72 ITR 769 (Pat) and in CIT v. Narpati Khan and Co. [1974] 97 ITR 645 (Pat). The view was also shared by the Calcutta High Court in CIT v. Manick Chandra Dey [1977] 106 ITR 860, wherein the view taken by the Full Bench of the Allahabad High Court in P. C. Kapoor's case [1973] 90 ITR 172 was followed. In CIT v. Gian Chand Co. [1973] 87 ITR 113 (P H), the decision of their Lordships 'of the Supreme Court in Jer Co.'s case [1971] 79 ITR 546 was followed as, under the Punjab Fisheries Rules, there is no prohibition in entering into a partnership so far as the fishing licences are concerned. The Madras High Court also took the same view in T.K.P.R. Ramanath ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eing opposed to the provisions of the Abkari Act and the rules made thereunder. The Madras Full Bench decision in Velu Padayachi's case, AIR 1950 Mad 444, was also followed by the Punjab High Court in CIT v. Benarsi Das Co. [1962] 44 ITR 835 and it was observed that where there is some express prohibition by law or rule having the force of law against the action of the contracting party, the contract will be held to be void ; where there is no such prohibition, it will be upheld. The decision in Benarsi Das Co.' s case [1962] 44 ITR 835 was followed by the Punjab and Haryana High Court in Lalchand Mohan Lal Fazilka v. CIT [1967] 65 ITR 418. The Punjab and Haryana High Court again took the same view in CIT v. Hardit Singh Pal Chand Co. [1979] 120 ITR 289 and followed the earlier decisions of that court in Benarsi Das' case [1962] 44 ITR 835 and Lalchand Mohan Lal Fazilka's case [1967] 65 ITR 418. In CIT v. Pagoda Hotel and Restaurant [1974] 93 ITR 271, the Madhya Pradesh High Court distinguished the decisions of the Bombay and Patna High Courts holding that mere entering into partnership with outsiders did not interfere with the actual working of the privilege and did not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sisting of three partners carried on the business of selling provisions, medicines and wines, but as the licence for sale of wines stood in the name of one of the partners, the registration of the firm under the Income-tax Act was cancelled holding that the deed of partnership was void. It was held that the partnership carried on business in stores, provisions, medicines and wines and so the partnership could not fail in its entirety simply because three brothers also proposed to sell wines in addition to provisions and medicines. In this view of the matter, it was held that the deed of partnership was not void and the mere fact of selling of wine did not make the entire partnership itself void or illegal and registration of the firm could not be cancelled on the ground that the partnership was void. The facts of this case are clearly distinguishable as it is apparent that the partnership was not only for the purpose of doing business of selling wines but it was also for doing business in provisions and medicines for which there was no prohibition for entering into partnership. The two decisions of the Supreme Court are relevant in the context of the present discussion, though no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h rule 85(4) of the Rules made thereunder, the partnership entered into without the permission of the concerned authority was illegal. In that case also, the licence for manufacture of medicines and toilet preparations stood in the name of one of the partners, but later on the licensee entered into a partnership with two more persons and the partnership took over the entire business which was earlier carried on by the licensee alone. The Division Bench of this court held that the collective effect of the relevant provisions of the Act and the Rules led to the unmistakable result that a business of the nature of manufacture of medicinal and toilet preparations cannot be carried on without a proper licence in the name of the partnership. Rule 85(4) referred to by their Lordships provided that if the holder of a licence wished to enter into a partnership in regard to the business covered by the licence, he could do so after obtaining the sanction of the licensing authority and the licence would thereafter be suitably amended. Thus, in that case, it was also permissible to enter into a partnership subject to obtaining the sanction of the licensing authority. But the production or manuf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ege from sub-letting or assigning the same or any portion without the express permission of the concerned authority. In those cases, the view taken was that the prohibition was against letting or assignment and there was no bar against the licence-holder entering into a partnership with third parties. However, the cases where the law specifically prohibits the licence-holder from entering into partnership with strangers without the express permission in writing of the licensing authority and makes the breach of the condition of the licence punishable and also exposes the licence to cancellation stand on an entirely different footing. The taking of partner by the licence-holder may not amount to transfer of licence or sub-lease or sale thereof but it would enable the unlicensed partner by himself or through his agent to sell excisable articles without holding licence. It may be pointed out that in cases of fishing licences and motor transport permits, the prohibition that the licence-holder shall not transfer or sub-let or otherwise assign the business under the licence or the permit is meant for the protection and convenient collection of revenue. But it is different in cases o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion in writing of the licensing authority for entering into partnership and of imposition of penalty on failure of obtaining such permission, is not only for the protection of the revenue but also the protection of the public in general. The intention of the Legislature appears to he that the business of sale of liquor or other intoxicants may not fall into the hands of unsocial elements or undesirable persons. Condition No. 3 of the licence provides that the licence-holder shall not transfer or assign the business or enter into partnership with third parties without obtaining the written permission of the licensing authority. The licensing authority is entitled to verify that the persons who are proposed to be inducted as partners by the licence-holder are not unscrupulous people. Thus public policy is clearly involved in providing a check against the introduction of persons having a shady background and in safeguarding the public from the leaders of the underworld gaining control over the liquor trade in the. State or a specified area. That is why section 54 of the Rajasthan Excise Act provides a penalty for contravention of the provisions of the licence and section 34(c) expose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppear to have been brought to the notice of the Bench which decided Durga Madira Sangh's case [1985] 153 ITR 226 (Raj). As we are inclined to take a view different from the view taken in Durga Madira Sangh's case [1985] 153 ITR 226, it would be proper that the case should be decided by a larger Bench. As the question involved in the present case involves a pure question of law, it would be proper that the entire case may be referred to a larger Bench for decision. We are, therefore, of the view that the case may be placed before the Hon'ble Chief justice for seeking appropriate directions in this respect. JUDGMENT OF FULL BENCH The judgment of the court was delivered by G. M. LODHA J.-The liquor licensee's alleged efforts to allow back door entry device permitting new partners in a firm without permission of the excise authorities has assumed another dimension on the question of such adulterated firm's recognition by the income-tax authorities, under the provisions for the registration of firms under section 185 of the Income-tax Act, 1961. The excise authorities normally treat default of payment in other excise licences, conviction, etc., as a disqualification for taking l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that taking in of stranger in the partnership of an excise licence, without permission of the excise authority under the Rajasthan Excise Act, would not make the partnership illegal and the income-tax authorities can recognise it as partnership firm with the stranger for income-tax purposes. Yet another Bench of this court consisting of Hon'ble Justice S. K. Mal Lodha and Hon'ble Mr. Justice I. S. Israni in CIT v. Rooplal Danchand [1986] 162 ITR 742 (D.B. Income-tax Reference No. 15 of 1980) decided on February 10, 1986, held that such a firm would be valid, as the conditions provided for registration under section 185 of the Income-tax Act are satisfied and it is entitled to registration. It also held that there was no contravention of the provisions of the Rajasthan Excise Act when Rooplal took over others as partners in the business of excise licence. It would thus be seen that there are two Division Bench judgments of this court in Rooplal [1986] 162 ITR 742, decided on February 10, 1986, curiously enough after the reference was made on May 6, 1985, in Motilal Chunnilal's case, which is now to be decided, and the earlier view in Durga Madira Sangh's case [1985] 153 ITR 226 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... number of Magistrate Courts terminals located in court buildings are open to Magistrates, Lawyers, Attorneys at Law, Notaries and Chartered Accountants. 2. 201-Terminals: In other jurisdictions-State Administrative Offices, various public libraries and institutions. 3. 339-Terminals : At other private and public institutes on payment of different tariffs. The management of centre arranged training courses in Rome (2 monthly course in Rome, on an experimental basis): foreign users are presently connected to the centre through the European network. Mead Data Central International . The world is advancing in more and more technology development and to make use of these developments in our daily life or to make the work with greater pace and ease, Mead Data Central International is just an example. Now instead of looking through a library of thousands upon thousands of newspapers, books and periodicals, law journals, we can get within seconds vast amount of information available electronically. To keep abreast of the news that affect the decisions, lawyers spend over 80% of their day manning information, which comes from outside sources such as the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... perts in British and American Legal reviews, or scan the journal officials for the French Government's latest action on a specific point of law. " " The computer terminal at our desk or work station can unlock wealth of information we never before knew was available. Information that can help us make better decisions, learn more about our judicial world and keep on top of what's happening in our profession. From the world's most prestigious newspapers to detailed technical news-letters, we can find what we need to know through Mead Data Central's Information Service at our fingertips. It places a world of knowledge and expertise, 'Lexis' is the world's largest legal research service of nearly three million cases and other documents, quickly, continuously updated (some cases are added within 48 hours of decision). It contains American, English, French case law (reported and unreported cases) and U.S. Federal Statutes codes and regulations, U.K. Statutes and Statutory instruments, French law and regulations both reported and unreported cases of the European Court of justice, special libraries on tax securities, energy, labour, bankruptcy, trade regulations, international trade, ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lex facilities and computerisation and further the ignorance of the learned advocate appearing for the Revenue on February 10, 1986, in Rooplal Danchand's case [1986] 162 ITR 742 (Raj) about the reference to a Full Bench in the same High Court, resulted in this very anomalous and peculiar situation of there being a judgment on February 10, 1986, during the pendency of reference of May 6, 1985, confirming the judgment of Durga Madira Sangh's case [1985] 153 ITR 226 (Raj) which has been dissented from by the Division Bench in Motilal Chunnilal's case. Be that as it may, we have made a passing reference to the pressing necessity for immediate introduction of electronic technology in legal judicial discipline, so that not only great precious time of all concerned is saved but further such serious errors are avoided and law becomes certain, specific, precise and up to date. We hope this aspect would attract the attention of the State authorities and the top brass of judiciary who in co-ordination would bring the Indian judiciary on the world judicial map of electronics and technology. Now, before we proceed to discuss in detail the various facets of this controversy, let us have a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uthorities of the Excise Department of the State for entering into partnership with five other persons. Thus, the Income-tax Officer held that the failure on the part of the licence-holders to take permission in writing from the excise authorities to form the partnership amounted t violation of the conditions of the licence and the provisions of the Rajasthan Excise Act and, therefore, the contract of partnership was hit by section 23 of the Indian Contract Act, 1872. The Appellate Assistant Commissioner of Income-tax confirmed on appeal the order passed by the Income-tax Officer. On further appeal by the assessees, the Income-tax Appellate Tribunal held that there was a clear prohibition in clause (3) of the licence in respect of the formation of a partnership by the licence-holders without the prior permission of the excise authorities. Thus, the provisions of the excise law have been violated as there was public policy involved in the provisions of the Rajasthan Excise Act and the Rules and the agreement of partnership was entered into in violation of such public policy and should, therefore, be held to be invalid. The Tribunal thus dismissed the appeal and maintained the order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e terms of the instrument; and lastly, (5) that the partnership must have been genuine and must actually have existed in conformity with the terms and conditions of the instrument. In R. C. Mitter Sons v. CIT [1959] 36 ITR 194 (SC), this view has been consistently followed and in this connection reference was made to Agarwal Co. v. CIT [1970] 77 ITR 10 (SC) and Ratanchand Darbarilal v. CIT [1985] 155 ITR 720 at p. 728 (SC). Mr. Mehta further submitted that once the said conditions are fulfilled, then the Income-tax Officer is under an obligation to register the firm and in support of it, he referred us to a decision in the cases of Agarwal and Co. v. CIT [1970] 77 ITR 10 (SC) and of Ratanchand Darbarilal v. CIT [1985] 155 ITR 720 (SC). On fulfilment of the said conditions, the Income-tax Officer is bound and under an obligation to register the firm under the Act, as held in Agarwal [1970] 77 ITR 10 (SC); Ratanchand [1985] 155 ITR 720 (SC) and CIT v. Rooplal Danchand [1986] 162 ITR 742, 752 (Raj) decided on February 10, 1986. In the present case, all the aforesaid conditions are fully satisfied and, therefore, there was no justification for the refusal of registration, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ission. Therefore, it cannot be said that the taking of partners is forbidden by law. It will be relevant to mention here that there is no provision in the Act, rules or licence that any transfer made in violation of rule 72 or any partner taken in violation of condition No. 3 would make such partnership illegal. Further, there is no provision in the Excise Act and the rules that if a partnership is formed for liquor business, then the business can be carried on only with licence obtained by such firm itself. Mr. Mehta then invited our attention to the following decisions: (a) Gordhandas Kessowji v. Champsey Dossa, AIR 1921 PC 137 The Privy Council decision which was a judgment in appeal from the Bombay High Court judgment reported in AIR 1917 Bom 250 (Champsey v. Gordhandas) clearly laid down that formation of partnership does not amount to transfer. In that case, the licensee for salt manufacture took other persons as partners and the relevant clause only prohibited sale or alienation of interest. (b) Umacharan Shaw Bros. v. CIT [1959] 37 ITR 271 (SC) In this case, the liquor licences for three shops were in different names but not in the name of the family. Partnersh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said Madras High Court judgments must be deemed to be impliedly overruled. (d) K. M. Vishwanatha Pillai v. K. M. Shanmugham Pillai, AIR 1969 SC 493: In this case arising under the Motor Vehicles Act, the Hon'ble Supreme Court while holding that a stage carriage could be plied lawfully by the real owner even though the permit was in the name of a benamidar, expressly dissented from the judgment of the Madras High Court in A.V. Varadarajulu Naidu v. K. V. Thavasi Naidu, AIR 1963 Mad 413 (refer para 10 of the Supreme Court judgment). A. V. Varadarajulu Naidu's case, AIR 1963 Mad 413, is based on AIR 1950 Mad 444 [FB] (refer para 9 at page 417 of AIR 1963 Mad 413). Thus, it is clear that the dissent of AIR 1963 Mad 413 also extended to AIR 1950 Mad 444 [FB] and all other cases based on the said judgment. (e) Udhoo Dass v. Prem Prakash, AIR 1964 All 1 [FB]: In this case, it was held that a contract of tenancy entered into "without permission " of the concerned authority was not void even though the statute penalised for not obtaining the permission in contravention of the provisions of the Act. (f) Murlidhar Agarwal v. State of Uttar Pradesh, AIR 1974 SC 1924: The decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... law regarding previous sanction for entering into partnership is not statutory (at page 184) and, therefore, it is not the law which prohibits partnership. In any case, absence of such permission would not render the partnership invalid. Penalty for breach of such condition without declaring contract made in contravention of such condition to be illegal does not imply prohibition. Held, firm entitled to registration. In our case also, penalty is envisaged under section 62 of the Excise Act which makes wilful contravention punishable with fine, extending to Rs. 200. The object of controlling sale of liquor seems to ensure realisation of excise revenue. Section 62 also does not cover penalty in case of breach of condition of the licence. Section 34 of the Excise Act only gives power to cancel or suspend licence in case of breach of condition. No action has been taken in this respect. This power is discretionary. Until the licence is cancelled, the licensee can carry on business. The formation of partnership itself is not prohibited. (j) Durga Madira Sangh v. CIT [1985] 153 ITR 226 (Raj): Held, that there was no direct prohibition under the Rajasthan Excise Act and the rules tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cil Act. Held, even by participation of the advocate, the partnership is not rendered illegal. (n) CIT v. Manick Chandra Dey [1977] 106 ITR 860 (Cal): The provision did not prohibit the partnership. The licensing authority did not take any action against the licensee. The Income-tax Officer could not decide about the validity of firm. Following [1971] 79 ITR 546 (SC), [1973] 87 ITR 113 (Punj) and [1973] 90 ITR 172 (All) [FB], held that the firm is entitled to registration. (o) Sree Ramakrishna Mining Company v. CIT [1967] 64 ITR 197 (MYS) : Mineral Concession Rules, 1949: Rule 37 providing for transfer of lease with previous sanction of the State Government. No provision that transfer in contravention thereof would be void. Hence, the firm is legal and valid. The rule does not forbid transfer. It authorises transfer with the previous sanction. There is a distinction between a statutory provision which contains an express prohibition against the performance of a certain act and one which enables its performance subject to prescribed conditions. Absolute prohibition against performance is forbidden by law but this is not so in the cases falling under the second category. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of persons like a firm of partners. In this context, the Supreme Court observed that as the partnership was not licensed, it could not deal in foodgrains. Thus, in the case before the Supreme Court, there was a specific prohibition against the formation of a partnership by the licensee-partner. Even with the permission of the competent authority, a licence in an individual's name could not be used by the partnership. It was necessary for the partnership itself to have a licence. The aforesaid position has been clearly brought out in Vasant Rao's case [1970] 72 Bom LR 333. This decision has been followed in CIT v. Nalli Venkataramana [1984] 145 ITR 759 by the Andhra Pradesh High Court. The petitioner places reliance on them. Therefore, the said Supreme Court judgment and [1965] RLW 254 which are based on the said Supreme Court judgment are clearly distinguishable. Further, [1965] RLW 254 is not in conformity with the Supreme Court judgments in [1959] 37 ITR 271, [1971] 79 ITR 546, AIR 1969 SC 493, AIR 1974 SC 1924 and AIR 1959 SC 781 and, therefore, the same cannot be considered to be good law. Further, in [1965] RLW 254, the word " person " has been used in section 6 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt[1973] 90 ITR 172 All (FB] (P. C. Kapoor's case), [1969] 72 ITR 366 (Pat) (Prakash Ram Gupta's case), [1960] 38 ITR 560 (Pat) (K. C. S. Reddy's case), [1971] 82 ITR 718 (Pat) (Mohd. Warasat Hussain's case), [1967] 64 ITR 197 (Mys) (Sree Ramakrishna Mining Co.'s case) and [1967] 1 All ER 241 (Ch D) (Dungate's case) relevant portion at page 250. In the present case, there is no material on record produced by the Department to show that the non-licensee partner had acted in contravention of the Act or the rules. Further, even if it is so, the formation of the partnership at its inception being not in violation of the Act or the rules, the subsequent acts of the partners cannot make the firm illegal. There is always difference between illegality of a contract and illegality in its performance. Therefore, subsequent acts of the partners cannot make the partnership illegal. That on the question of public policy under section 23 of the Contract Act, it would suffice to say that Hon'ble Supreme Court in Umacharan Shaw and Bros. v. CIT [1959] 37 ITR 271 and Jer and Co. v. CIT [1971] 79 ITR 546, which were cases under the Excise Act, held that the partnerships were entitled to registra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and that too only once clearly shows that constitution of a partnership is permissible. The condition regarding permission in writing has nothing to do with public policy. No protection of the public in general is involved. The learned Division Bench making the reference has merely relied upon conjectures, surmises and hypothetical situations, namely, that the sale of liquor should not fall in the hands of unsocial, undesirable and unscrupulous people. There is no question of protecting the public from the leaders of the underworld. The laws of our country including the Excise Act are there to take care of such persons and situations. Such conjectures and surmises based on mere whims cannot render the otherwise genuine and valid partnership not genuine or invalid. It is nobody's case that unscrupulous people were taken as partners. The partners have been taken for finances and efficient running of business. There is nothing immoral or against public policy in taking other persons as partners. The question of registration under the Income-tax Act has nothing to do with hypothetical situations, argued Mr. Mehta. He contended that if in such circumstances a partnership is held to be v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndian Contract Act was attracted and the assessee was not entitled to registration under section 185 of the Income-tax Act. Mr. Arora pointed out that this view of the Income-tax Officer refusing to grant registration was upheld by the Appellate Assistant Commissioner of Income-tax, Udaipur, and then afterwards it was further upheld by the Appellate Tribunal. The appellate authorities were of the opinion that various provisions of the Excise Act as well as the rules and conditions framed thereunder regulating the consumption and sale of excisable articles were violated and the restrictions and regulations were for the benefit of public and, therefore, the registration, if granted, would be against public policy. The Tribunal also rejected the appeal and upheld the judgment of the Income-tax Officer. The reference was made by the Tribunal under section 256(1) for the opinion of the High Court whether the rejection was valid and whether the object of the agreement of inclusion of partnership was to defeat the public policy as contained under the provisions of the Rajasthan Excise Act. The view which has found favour with the Division Bench consisting of Hon'ble justice Gupta an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... v. Abdul Rasool Khan, AIR 1967 AP 119; CIT v. Benarsi Das Co. [1962] 44 ITR 835 (P H); CIT v. Hardit Singh Pal Chand and Co. [1979] 120 ITR 289 (P H); CIT v. Pagoda Hotel and Restaurant [1974] 93 ITR 271 (MP); CIT v. Sheonarayan Harnarayan [1975] 100 ITR 213 (MP); CIT v. Kondra Durgaiya [1983] 143 ITR 315 (MP); Narsaiya Co. v. CIT [1983] 143 ITR 304 (MP); Mohapatra Bhandar v. CIT [1965] 58 ITR 671 (Orissa); Oudh Cocogem and Provision Stores v. CIT [1968] 69 ITR 819 (All) and Umacharan Shaw Bros. v. CIT [1959] 37 ITR 271 (SC). It was pointed out that the above decisions would show that the decision of the Income-tax Officer upheld by the Appellate Assistant Commissioner and the Tribunal was in accordance with law and the refusal to register the partnership firm by the Income-tax Officer was justified. We have Summarised so far the rival contentions only, so that now the decks are clear for our adjudication and decision. Nothing mentioned above so far can be treated as our decision on the questions referred to us. Now onwards we would give our views and decision. Rajasthan Excise Law's extracts: In order to decide the issues involved, we would first of all have r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... licence and so also section 35. Sections 31, 34 and 35 read as under : " Section 31. Every licence, permit or pass granted under this Act, shall be granted: (a) by such authority; (b) on payment of such fees (if any); (c) subject to such restrictions and on such conditions; (d) in such form and containing such particulars ; and (e) for such periods ; as the State Government may prescribe by rules either generally or for any class of licences, permits or passes or as the (State Government) may direct for any particular licence, permit or pass." " Section 34. Power to cancel and suspend licences.-(1) Subject to such restrictions as the State Government may prescribe, the authority granting any licence, permit or pass under this Act may cancel or suspend it (a) if it is transferred or sub-let by the holder thereof without the permission of the said authority ; or (b) if any duty or fee payable by the holder thereof be not duly paid; or (c) in the event of any breach by the holder of such licence, permit or pass or by his servants, or by anyone acting on his behalf with his express or implied permission, of any of the terms or conditions of such licence, p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isonment for a term which may extend to two thousand rupees: Provided that if a person is so found in possession of a workable still for the manufacture of any excisable article or is found to be guilty of selling or possessing for sale any excisable article in contravention of the provisions of this Act or of any rule or order made or of any licence, permit or pass granted thereunder, he shall be punishable with the minimum sentence of imprisonment for six months and fine of two hundred rupees." " Section 58. Penalty for certain acts by licensee or his servants.Whoever being the holder of a licence, permit or pass granted under this Act, or being in the employ of such holder and acting on his behalf : (a) fails to produce such licence, permit or pass on the demand of any excise officer or of any officer duly empowered to make such demand; or (b) in any case not provided for in section 54 wilfully contravenes any rule made under section 41 or 42 ; or (c) wilfully does or omits to do anything in breach of any of the conditions of the licence, permit or pass not otherwise provided for in this Act; shall be punished for each such offence with fine which may extend to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed spirit or intoxicating drugs in a district may hold or possess any interest in a licence for the wholesale or retail manufacture or sale of foreign or country liquor in the same district. (3) No person shall hold or have an interest in two or more shops for the retail sale of the same excisable articles in the same village, or in the same city or town, and (4) No person holding or having an interest in a licence for the manufacture of country liquor or supply thereof from a distillery or retail vendor shall hold or have an interest in a licence for the retail sale of country liquor in the area in which the distillery is established in any area supplied from such distillery. (5) No person whose tender or bid at an auction for grant of licence tinder the Act or these Rules has been accepted but who fails to deposit within the time allowed, the security amount required to be deposited according to the conditions of tender or auction in the financial year 1972-73 or thereafter shall be entitled to hold any licence under the Act or these Rules for a period of three years from the last date allowed for deposit of such security. " Licence forms conditions The form of lic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es. Clause (iv) of section 19 mentions person or class of persons. Again section 24 mentions the grant of a licence to a person and section 31 provides for the form of licence, restrictions and framing of the rules. Under section 33, the authority granting the licence would require execution of counterpart agreement. Section 34 provides the authority with power to cancel and suspend the licence, if it is transferred or sub-let by the persons holding the licence without permission of the authority or even if there has been any breach of the conditions of the licence or if the person holding the licence is convicted. It would thus be seen that the distinction which Mr. Mehta wants to draw from the case of Govind Rao v. Nathmal decided on April 11, 1962, is not permissible in view of the above Excise law of Rajasthan. We may here also point out that the partnership deed in the present case further mentions that all the partners were to contribute not only their capital but also skill and labour, which would naturally mean that the partners who are licence-holders would be entitled to deal with the country liquor. Sections 19 and 20 of the Rajasthan Excise Act, 1950, expressly pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 's various manifestations. As mentioned above, section 54 of the Excise Act provides penalty for contravention of the provisions of the licence granted under the Act. Section 34, clause (c), provides for cancellation, suspension and they are all provisions enacted by the Legislature for protecting public health, and public hygiene and ensuring public morality and, therefore, they are all interlinked with public policy and they are not at all limited to excise revenue only. Mr. Mehta's contention that there is no prohibition and the only requirement is of permission and, therefore, the contract of the partnership agreement is not illegal nor unlawful nor void ab initio now deserves consideration. The imposition of a condition in the licence for obtaining permission and that in writing by the competent excise authorities before entering into partnership with third parties is not a mere formality. It is a prohibition and the prohibition also is of a serious nature. In Durga Madira Sangh's case [1985] 153 ITR 226 (Raj), undoubtedly, this court, after quoting condition No. 3 of the licence, held that even the aforesaid condition of the licence nowhere totally prohibits the licen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d on public policy. Halsbury's Laws of England, IIIrd edition, Volume 8, para 245, at page 141, sums up the law on the point as under: " Where a penalty is imposed by statute upon any person who does a particular act, this may or may not imply a prohibition of that act. It is a question of construction in each case whether the Legislature intended to prohibit the doing of the act altogether, or merely to make the person who did it liable to pay the penalty. If the penalty is recurrent, that is to say, if it is imposed not merely once and for all but as often as the act is done, this amounts to a prohibition. Where the object of the Legislature in imposing the penalty is merely the protection of the revenue, the statute will not be construed as prohibiting the act in respect of which the penalty is imposed. But where the penalty is imposed with the object of protecting the public, though it may also be for the protection of the revenue, the act must be taken to be prohibited, and no action can be maintained by the offending party on a contract which is made in contravention of the statute. The crux of the matter is as per the observations (emphasis supplied) mentioned above ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re from the Rajasthan excise law in the Punjab Fisheries Rules is that there is no prohibition from entering into a partnership, so far as the fisheries licences are concerned. The Madras High Court also took the same view in T. K. P. R. Ramanatha Chettiar Bros. v. CIT [1969] 73 ITR 811 and National Roadways v. CIT [1975] 99 ITR 97. In cases of partnership firms running transport business on the basis of the permit standing in the name of one of the partners as there was no prohibition against the partnership in the Motor Vehicles Act, the same view was taken by the Division Bench of the Madhya Pradesh High Court in Dayabhai and Company's case [1966] 59 ITR 364. The Full Bench of the Madhya Pradesh High Court in Smt. Janki Bat Chunilal v. Ratan Melu, AIR 1962 MP 117, in cases relating to transport business took the same view. Here also there was no prohibition. It may be mentioned that the Madras High Court in D. Mohideen Sahib Co. v. CIT [1950] 18 ITR 200, has discussed the matter in detail. The Madras High Court in D. Mohideen Sahib Co. v. CIT [1950] 18 ITR 200, has also discussed the question of inclusion of a partner in partnership rendering the partnership illegal. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p becomes illegal and no contract can be enforced even for rendition of accounts by the partners. Such a partnership, therefore, cannot claim registration under the Indian Income-tax Act. The Andhra Pradesh High Court in CIT v. Krishna Reddy Co. [1962] 46 ITR 784, V. Basavayya v. N. Kottayya, AIR 1964 AP 145, and Dinsawji v. Abdul Rasool Khan, AIR 1967 AP 119, have also taken similar view and supported the view which was taken earlier. It would thus be seen that so far as the cases of liquor licences are concerned, in view of the prohibition introduced by the Rajasthan excise licensing conditions and the various provisions of the Excise Act and the rules making it liable to punishment and also liable to confiscation, cancellation and suspension on this ground alone goes to show that the Legislature had expressed the intention to treat such firm as illegal and unlawful. The Madras High Court in T. K. P. R. Ramanatha Chettiar Brothers v. CIT [1969] 73 ITR 811 and in National Roadways v. CIT [1975] 99 ITR 97, in cases of a permit standing in the name of one partner as there was no prohibition against the partnership in the Motor Vehicles Act, although there is prohibition agai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 322 which prohibited the holder of the licence from entering into a partnership with another person. But the licence, it is clear from the record, was in Form FL II issued under the U.P. Excise Manual. The licence does not prohibit the holder from entering into partnership by the holder of the licence : it merely provides that the licence shall not be sub-let or transferred. Since there is no prohibition against entry by the holder of the licence into a partnership, the question whether the partnership was illegal does not arise. The firm was entitled on that account to registration. It is somewhat unfortunate that the attention of the Commissioner and the High Court was not invited to the form in which the licence was issued by the excise authorities. They proceeded to decide the case on the footing that rule 322 of the Excise Manual applied. But that rule has no application here. " (Emphasis supplied) We have already pointed out that in our instant case unlike Form FL 11, the Rajasthan Form No. C.L.I.E. contains condition No. 3 which expressly prohibits new partners without written permission of the excise authorities. Therefore, all decisions of the High Courts which relied up ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acts and declaring them illegal and not for this court to resort to judicial legislation. " Before the above in para. 20, deductions Nos. (5) and (6) are relevant and they are as under (p. 792 of 1959 AIR): " (5). Section 30 of the Indian Contract Act is based upon the provisions of section 18 of the Gaining Act, 1845, and though a wager is void and unenforceable, it is not forbidden by law and, therefore, the object of a collateral agreement is not unlawful under section 23 of the Contract Act; and (6) partnership being an agreement within the meaning of section 23 of the Indian Contract Act, it is not unlawful, though its object is to carry on wagering transactions. We, therefore, hold that in the present case the partnership is not unlawful within the meaning of section 23(a) of the Contract Act. " The above judgment is based on the provisions of the Gaming Act and directly it has got no application in a case where a partnership has been formed by the inclusion of new parties in sale of liquor business without the permission of the excise authorities. We find that in Rajasthan Excise law and as per the licence condition No. 3 of Form No. C.L.I.E. C.L. (1) G. prescribed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rga Madira Sangh v. CIT [1985] 153 ITR 226 (Raj) is not correct and requires reconsideration. We are in agreement with the view of the Division Bench expressed in its judgment dated May 6, 1985, in the instant case and on account of additional reasons which we have given above, we express our agreement with the view taken by the Madras High Court, Kerala High Court, Andhra Pradesh High Court, Madhya Pradesh High Court, Punjab Haryana High Court and Orissa High Court in the above referred cases, in which it has been held that inclusion of new persons as partners in excise licence for country liquor without the permission of the excise authorities makes the partnership illegal and opposed to public policy. We, therefore, hold that the contrary view taken in Durga Madira Sangh's case [1985] 153 ITR 226 and also another judgment of this court in CIT v. Rooplal Danchand [1986] 162 ITR 742 (D.B. Income-tax Reference No. 15 of 1980, decided on February 10, 1986, at jodhpur), holding that such firm is entitled to registration under section 185 of the Income-tax Act, 1961, and such firms are valid and the object of the agreement is not against public policy, cannot be accepted as good ..... X X X X Extracts X X X X X X X X Extracts X X X X
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