1970 (11) TMI 39 - HC - Income Tax

Whether on the facts and in the circumstances of the case the assessee-firm was an illegal firm not entitled to registration?

Summary

Issues:
Whether the assessee-firm was an illegal firm not entitled to registration.

Analysis:
The judgment pertains to a reference under section 66(1) of the Indian Income-tax Act, 1922, initiated by the Commissioner of Income-tax, M.P. The primary issue is whether the assessee-firm was illegal and ineligible for registration. The firm in question comprised four partners engaged in running a hotel and restaurant named Pagoda Hotel, along with two liquor shops. The partners had equal shares in all businesses, with two partners previously operating the liquor shops individually before merging them into the partnership. The partnership agreement explicitly mentioned the inclusion of the two partners in the liquor shop business. The key consideration was the legality of the partnership concerning the liquor shops under the Central Provinces Excise Act.

The judgment delves into the relevant rule under the C.P. Excise Rules, which prohibits the entry into a partnership for the working of liquor privileges without written permission. The rule explicitly bars any partnership in the working of such privileges, emphasizing the absolute nature of the prohibition. The contention raised by the assessee's counsel regarding the lack of active involvement of certain partners in the liquor shop operations was dismissed. The court highlighted the broad and unambiguous language of the rule, precluding any attempts to circumvent the prohibition.

The court distinguished this case from precedents cited by the assessee's counsel, emphasizing the unique prohibition against entering into a partnership in any manner. While other High Courts had differing views on similar matters, the court asserted the absolute prohibition in this instance. Referring to a previous judgment, the court concluded that the partnership concerning the liquor shops was illegal and ineligible for registration. However, the partnership related to the hotel business was deemed valid and entitled to registration under the Income-tax Act. The court's final decision was to disallow registration for the liquor shop partnership but permit registration for the hotel business partnership. Each party was directed to bear their respective costs.

In conclusion, the judgment clarifies the legality of the partnership in question, highlighting the specific prohibition under the C.P. Excise Rules and affirming the distinction between the liquor shop and hotel business partnerships in terms of registration eligibility under the Income-tax Act.