1979 (11) TMI 134 - AT - Income Tax

Summary

Issues Involved:
1. Validity of the partnership firm under the Excise Laws of the State.
2. Application of Section 23 of the Indian Contract Act.
3. Entitlement of the partnership firm to registration under the Income Tax Act.

Detailed Analysis:

1. Validity of the Partnership Firm under the Excise Laws of the State:
The primary issue was whether the partnership firm was validly constituted under the Excise Laws of Rajasthan. The Revenue argued that the partnership was invalid because it was formed without the prior permission of the Excise Authorities, as required by clause (3) of the licence. The assessee contended that the partnership was validly constituted since the licence was not transferred to the firm, and the business was managed solely by Shri Narendra Kumar, with Smt. Pushpadevi acting merely as a financing partner. The AAC held that the partnership was validly constituted, noting that the Excise Authorities did not cancel the licence or impose any fine, indicating no contravention of the Excise Laws.

2. Application of Section 23 of the Indian Contract Act:
The Revenue argued that the partnership was hit by Section 23 of the Indian Contract Act, which states that an agreement is void if its object or consideration is unlawful. The Revenue claimed that forming the partnership without prior permission from the Excise Authorities violated public policy. The assessee countered by stating that the partnership agreement was not against public policy, as the necessary application for permission was made, and no adverse action was taken by the Excise Authorities. The AAC agreed with the assessee, concluding that the partnership was not invalid or against public policy, as the primary condition of the licence was to protect revenue, and the authorities did not find it necessary to take any punitive action.

3. Entitlement of the Partnership Firm to Registration under the Income Tax Act:
The Revenue's appeal also questioned the AAC's direction to grant registration to the partnership firm. The AAC had directed the ITO to grant registration, reasoning that the partnership was validly constituted and all formalities for claiming registration were duly observed. The Tribunal upheld the AAC's order, noting that the partnership did not contravene the Excise Laws, and the business was managed by the licensee, Shri Narendra Kumar, with no transfer of the licence to the firm. The Tribunal referenced several judicial precedents, including decisions by the Patna and Allahabad High Courts, which supported the view that a partnership is not invalid if the licence remains with the licensee and the business is conducted lawfully.

Conclusion:
The Tribunal upheld the AAC's decision, affirming that the partnership firm was validly constituted and entitled to registration. The Revenue's appeal was dismissed, as the partnership did not violate the Excise Laws or Section 23 of the Indian Contract Act, and the necessary conditions for registration were met.