COMMISSIONER OF INCOME TAX vs ALLASIA ENTERPRISES.

N. K. AGRAWAL, J. :

The following question has been referred to this Court by the Tribunal under s. 256(1) of the IT Act, 1961 (for short, "the Act") :

"Whether, on the facts and in the circumstances of the case, Tribunal was right in law in holding that the firm was validly constituted keeping in view the provisions of Punjab State Excise Act/Rules and was entitled to registration for the asst. yr. 1978-79 ?"

The assessee firm was engaged in the business of liquor under a licence. The firm was constituted under a partnership deed executed on 10th February, 1978, by 4 persons, namely, Satya Paul, Girdhari Lal, Kapil Dev and Darshan Anand. Application in Form No. 11 along with the original partnership deed was filed by the assessee for the asst. yr. 1978-79, seeking the registration of the firm under the Act. The ITO noticed that L-1 licence for running the business in Indian made foreign liquor had been issued by the excise authority of Punjab in the name of Satya Paul only. The licensee, Satya Paul, had admitted the aforesaid 3 persons as partners to run the business, though their names had not been entered in the licence by the concerned excise authority. The ITO, therefore, refused to grant registration to the firm under s. 185(1)(b), of the Act on the ground that the firm had been constituted in contravention of the Punjab Excise Act and the Rules framed thereunder.

The AAC dismissed the assessees appeal but the Tribunal allowed the appeal, observing that there was no finding to the effect that the partners sharing profits and losses of the business had in fact violated and provision of the Punjab Excise Act or the rules by actively participating in the business or by handling the prohibited goods.

Clause 8 of the Partnership deed (Annexure D) reads as under :

All the partners shall be entitled to take part in the conduct of the business of the firm but no salary or remuneration shall be paid to any partner unless otherwise naturally agreed to by the partners. Each partner shall remain faithful and sincere to each other and shall render true accounts and full information of all the things effecting the firm of the other partners. No partners shall do or cause to be done anything which may prove determinal to the interest of the firm or the other partners.

The plea of the Department is that the formation of the partnership firm by one licensee with the assistance of 3 non-licensee partners was in breach of r. 7 of the Punjab Liquor Licence Rules 1956, and, therefore, the constitution of the firm was not valid.

The question which actually arises for consideration is whether registration can be refused to a partnership firm under s. 185(1) of the IT Act on the ground that the person or persons holding licence to run a business in liquor had constituted such firm by adding more persons as partners without permission from the competent authority under the Punjab Excise Act and the rules framed thereunder.

A similar question was examined by this Court in the CIT vs. Jagdish Chand Walia & Co. ITR No. 93 of 1984 decided on 29th September, 1997, [reported at (1998) 144 CTR 127] and it has been held that a partnership firm constituted by a licensee together with non-licensee partners to run a liquor business cannot be treated to be a genuine firm under s. 185(1) of the IT Act in as much as there was a breach of r. 7 of the Punjab Liquor Licence Rules, 1956.

Following the aforesaid view, the question is answered in the negative i.e. in favour of the Department and against the assessee.