COMMISSIONER OF Income Tax vs JODH SINGH PAUL and CO.

N. K. AGARWAL, J. :

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

"Whether, on the facts and circumstances of the case, the Tribunal was right in law in setting aside the order of the ITO, refusing registration to the assessee firm, with the direction that the ITO should determine whether the partners who did not have licences to handle country liquor, physically handled and possessed the same and to allow registration to the assessee-firm, in case it was found that the said partners had not physically handled and possessed country liquor ?"

The assessee-firm derived income from sale of country liquor and beer. Claim for registration of the partnership firm, M/s Jodh Singh Paul & Co., Gill Road, Ludhiana, for the asst. yr. 1978-79, was made before the ITO, who granted registration. The CIT took notice of the IT Act and set aside that order, holding that the order was erroneous and prejudicial to the interest of the Revenue. The CIT noticed that the firm had been constituted with 13 partners w.e.f. 1st May, 1977, under the partnership deed of even date.

Application for registration filed in Form No. 11 was also not signed by all the partners.

Following the CITs order, the ITO, examined the assessees application for registration. The ITO noticed that licence for running the country liquor vends had been issued in the names of 5 persons whereas the partnership firm to run that business had been formed by 13 partners including 5 licencees. This was treated by the ITO to be breach of the provisions of the Punjab Excise Act and the rules framed thereunder. Registration was refused to the firm and the firm was declared to be an unregistered firm.

The AAC upheld the order of the ITO but the Tribunal allowed registration to the firm.

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 COMMISSIONER OF Income Tax Vs. JAGDISH CHAND WALIA and CO., decided on 29th September, 1997 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 inasmuch 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.