Rajasthan High Court - Jaipur
Motilal Chunnilal vs Commissioner Of Income-Tax on 9 January, 1987
Equivalent citations: 1987(2)WLN126
JUDGMENT Dwarka Prasad, J.
1. This is a reference by the Income-tax Appellate Tribunal, Jaipur Bench, Jaipur, by which the following questions of law were referred to this court for its opinion :
"1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the firm was not valid and that the object of the agreement was of such a nature that, if permitted, it would defeat the public policy as contained in the provisions of the Rajasthan Excise Act, 1950 ?
2, If the answer to the above is in the affirmative, whether the Tribunal was justified in holding that the firm was not valid and, therefore, not entitled to registration under Section 185 of the Income-tax Act, 1961 ?"
2. The Government of Rajasthan granted a licence for the retail sale of country liquor during the year 1966-67 at Bhilwara including the shops situated at Bhupalganj, Gulmandi and Dhanmandi, in the 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.
3. 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 permission of the officer granting the licence and shall not be entitled to take a partner and such permission shall not be given till such time as the licence-holder pays all dues outstanding against him."
4. During the course of an enquiry, the Income-tax Officer found that the licence-holders had not obtained the permission in writing from the authorities of the Excise Department of the State for entering into a 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 to 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. The Appellate Assistant Commissioner of Income-tax confirmed on appeal the order passed by the Income-tax Officer. On further appeal by the assessee, 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 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 of refusal of registration of the assessee-firm.
5. It was submitted before us by learned counsel for the assessee that no public policy was involved in incorporating Clause (3) in the licence and that the violation of the provisions of Clause (3) would not automatically mean that the contract was violative of the provisions of Section 23 of the Indian Contract Act or was void ab initio. It was urged that the object of imposition of penalty and the provision for cancellation or suspension of licence in the case of breach of any terms or conditions of the licence have been provided to safeguard the excise revenue and not for the purpose of protection of the public generally or a section of the public. Learned counsel for the assessee relied upon a decision of a Division Bench of this court in Durga Madira Sangh v. CIT [1985] 153 ITR 226 (Raj) in support of his contention. On the other hand, learned counsel for the Revenue submitted that entering into a 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.
6. 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 holder 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 imposition of penalty and also to the cancellation of the licence. In Durga Madira Sangh's case [1985] 153 ITR 226 (Raj), a Bench of this court, after quoting condition No. 3 of the licence, held that even the aforesaid condition of the licence did not "totally" prohibit the licensee from entering into a partnership but it only requires that the licensee should obtain written permission for entering into a partnership. Thus the partnership was held to be permissible but with the written permission. It was thus held that the business carried on by the partnership firm for and on behalf of the partners, including the persons in whose names the licence was granted, cannot be held to be illegal or void as it was neither forbidden by law nor was in contravention of the provisions of Section 23 of the Contract Act, as there is nothing immoral or against public policy in taking some more persons as partners in the firm.
7. Lindley in his treatise on the Law of Partnership, Fifteenth edition, summed up the law on the subject as under :
"although a statute may in terms apparently prohibit an actor omission, and affix a penalty in case of disobedience, it does not necessarily follow that all transactions to which the penalty attaches are illegal. They are so if the statute is really prohibitory as is the case if the penalty is imposed for the protection of the public, but they are not so if the true construction of the statute is that the penalty is, as it were, the price of a licence for doing what the statute apparently forbids."
8. The law on the point has been summed up in Halsbury's Laws of England, III edition, Vol. VIII, paragraph 245, at page 141, as follows :
"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 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 considered 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."
9. 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.
10. 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.
11. 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 for wholesale vending of foreign liquor came up for consideration may also be referred to in this context. In that case, the assessee-firm had two partners, one of whom had obtained a licence for the wholesale vending of foreign liquor which was renewed from year to year. The question being raised as to whether the firm was entitled to registration under Section 26A of the Income-tax Act, 1922, it was held by their Lordships of the Supreme Court that the licence did not prohibit the holder from entering into a partnership, but it merely provided that the licence shall not be sub-let or transferred. It was also held that as there was no prohibition against the holder entering into a partnership, the question whether the partnership was illegal did not arise and the firm was entitled to registration. It appears that after the aforesaid decision of their Lordships of the Supreme Court in Jer & Co.'s case [1971] 79 ITR 546, a term that the licence-holder should obtain permission in writing from the excise authorities concerned before entering into a partnership has been added in liquor licences.
12. The Bench deciding Durga Madira Sangh's case [1985] 153 ITR 226 (Raj) followed the line of reasoning adopted by the Full Bench of the Allahabad High Court in P.C. Kapoor v. CIT [1973] 90 ITR 172. That was also a case of licensee of a liquor shop entering into partnership with other persons. It was held that merely because other persons were taken into partnership by the licensee, it could not be held that any interest in the licence was transferred in favour of the other partners. Various partners agreed to carry on the business of excise contracts on the basis of the licence standing in the name of some of the partners. It necessarily implied an agreement that the business activity would be done in a lawful manner and that the sale of liquor will be carried on by the partners on behalf of all the partners in accordance with law. It was held in P.C. Kapoor's case [1973] 90 ITR 172 (All) [FB], that when an enactment merely imposes a penalty without declaring a contract made in contravention thereof to be illegal or void, the imposition of penalty by itself and without more does not necessarily imply a prohibition of the contract ; but the commission of the act leading to the contravention of the conditions of the licence exposes the person to imposition of penalty and if 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.
13. 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 368 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).
14. The view was also shared by the Calcutta High Court in CIT v. Manick Chandra Dey [1977] 106 ITR 850, 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.
15. 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. Ramanatha Chettiar & Brothers v. CIT [1969] 73 ITR 811 and in National Roadways v. CIT [1975] 99 ITR 97 (Mad), in the case of a partnership firm running a transport business on the basis of permits standing in the name of one of the partners, as there was no prohibition against the partnership in the Motor Vehicles Act, although there is a prohibition against the transfer of the permit. The same view was taken by a Division Bench of the Madhya Pradesh High Court in Dayabhai & Co. v. CIT [1966] 59 ITR 364 and by a Full Bench of the Madhya Pradesh High Court in Smt. Janki Bai Chunnilal v. Ratan Melu, AIR 1962 MP 117, in the case of a partnership relating to transport business.
16. The opposite view was taken by a Full Bench of the Madras High Court in Velu Padayachi v. Sivasooriam Pillai, AIR 1950 Mad 444, which related to a partnership entered into for the purpose of conducting a business for vending arrack or toddy on a licence granted to only one of the partners. It was held in that case that the partnership was ab initio void as the entering into a partnership involved either transfer of the licence which was prohibited under the provisions of the Abkari Act and was made punishable or because the unlicensed partner by himself or through his agent sold excisable goods without a licence. The same view was also taken in another decision of the Madras High Court in D. Mohideen Sahib and Co. v. CIT [1950] 18 ITR 200 and it was held that as the partnership contract was itself void ab initio, the Income-tax Officer was justified in refusing registration to the partnership firm. These decisions of the Madras High Court were followed by the Kerala High Court in CIT v. Union Tobacco. Co. [1961] 41 ITR 115.
17. The decision in Velu Padayachi's case, AIR 1950 Mad 444 [FB], of the Madras High Court, was also followed by the Andhra Pradesh High Court in CIT v. Krishna Reddy [1962] 46 ITR 784. The same view was also taken by the Andhra Pradesh High Court in V. Basavayya v. N. Kottaya, AIR 1966 AP 145, that a partnership entered into by a dealer of cloth in contravention of the provisions of the relevant control orders was illegal and void. The Andhra Pradesh High Court also took the same view in Dinsawji v. Abdul Rasool Khan, AIR 1967 AP 119, and held that the agreement to run the business of supplying liquor in partnership on a licence in the name of one of the partners was void being opposed to the provisions of the Abkari Act and the rules made thereunder.
18. 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.
19. 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 amount to transfer of the privilege on the ground that, under the Central Provinces Excise Rules, entering into partnership in any way or manner without the written permission of the Collector is expressly prohibited. The decision in Pagoda Hotel's case [1974] 93, ITR 271 (MP) was followed by the Madhya Pradesh High Court in CIT v. Sheonarayan Harnarayan [1975] 100 ITR 213 (MP) and the decisions of that court in Dayabhai and Co.'s case [1966] 59 ITR 364 (MP) and Janki Bai Chunnilal's case, AIR 1962 MP 117 [FB], were distinguished on the ground that the prohibition of transfer or lease of a privilege stood on a footing different from the case of prohibitionun respect of entering into a partnership. It was observed that under the M.P. Excise Rules, 1915, there could not be a partnership for the working of a privilege of supply or sale of liquor granted to an individual unless a written permission was endorsed on the licence. A partnership formed in contravention of the aforesaid provision would be void ab initio. Thus, in a case where a licence was granted to an individual for carrying on business in liquor and he entered into partnership with another person without obtaining the written permission of the Collector, the partnership was held to be void, in so far as it related to liquor business and the firm was held not to be entitled to registration in respect thereof. The same view was reiterated by the Madhya Pradesh High Court in Narsaiya and Co. v. CIT [1983] 143 ITR 304 and CIT v. Kondra Durgaiya [1983] 143 ITR 315.
20. The same view was also taken by the Orissa High Court in Mohapatra Bhandar v. CIT [1965] 58 ITR 671 and it was held that the income-tax authorities were justified in refusing registration to a partnership firm where no leave of the Collector was sought to carry on the excise business in partnership, while the licence for the excise shop and for sale of ganja and opium stood in the name of one of the partners. The Madras, Punjab and Kerala decisions were followed and it was held that the agreement of partnership was unlawful as possession and sale of ganja was prohibited by the Bihar and Orissa Excise Act and the rules made thereunder and similar is the position of opium, where the prohibition was contained in the Opium Act and the rules made thereunder. In Oudh Cocogem and Provision Stores v. CIT [1968] 69 ITR 819 (All), the assessee-firm consisting 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.
21. The two decisions of the Supreme Court are relevant in the context of the present discussion, though none of them is directly on the point in issue before us. In Umacharan Shaw and Bros. v. CIT [1959] 37 ITR 271 (SC), three brothers formed a joint Hindu family governed by the Dayabhaga law and held licences for sale of foreign liquor in their individual names, but not in the name of the family. After the disruption of the joint family, the three brothers entered into a deed of partnership by which they agreed to carry on a liquor business in partnership for which they kept separate account books. It was held by their Lordships of the Supreme Court that if a business was carried on by some members of the joint Hindu family, it was open to them to enter into a partnership, so long as they did not contravene the provisions of the Excise Act prohibiting transfer or sub-lease and such a partnership could not be said to be illegal or void ab initio. It was held by their Lordships of the Supreme Court, while upholding the validity of the partnership agreement in that case, that there was no evidence that the excise licences themselves were transferred or sub-let. Another decision of the Supreme Court in the case of Jer & Co. v. CIT [1971] 79 ITR 546 has already been noticed by us above. In that case, their Lordships of the Supreme Court reversed the decision of the Allahabad High Court in Jer & Co. v. CIT [1966] 60 ITR 335 (All). In that case, it was held that the conditions of the licence did not prohibit the holder from entering into a partnership with an outsider, but merely provided that the licence shall not be sub-let or transferred and since there was no prohibition against the holder of the licence entering into a partnership, the question whether the partnership was illegal did not arise and so the firm was entitled to registration. In that case, it was observed that Rule 322 of the Uttar Pradesh Excise Manual prohibited the holder of a licence from entering into a partnership with another person, but the rule had no application as the licence issued in that case did not contain any such condition.
22. An earlier Division Bench of this court in Brij Mohan v. N.V. Vakharia [1965] RLW 254 ; AIR 1965 Raj 172, held that as a business for manufacture of medicines and toilet preparations could not be lawfully carried on without a proper licence in accordance with the provisions of Section 6 of the Medicinal and Toilet Preparations (Excise Duties) Act, 1955, read with 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 manufacture of dutiable goods by any person without a licence was made punishable.
23. A resume of the various decisions on the subject go to show that cases where the relevant law under which the licence or permit was issued prohibited the licensee or permit-holder from entering into partnership for carrying on the business under the licence without the written permission of the concerned authority have to be distinguished from cases where the licensee was not authorised under the relevant law to sub-let, transfer, sell or otherwise alienate the privilege granted under the licence. This principle was laid down by their Lordships of the Privy Council in Gordhandas Kessowji's case, AIR 1921 PC 137, where Section 11 of the Bombay Salt Act prohibited the licensee from "alienating the interest". The same principle was clearly brought about by their Lordships of the Supreme Court in Jer & Co.'s case [1971] 79 ITR 546, where it was observed that the licence did not prohibit the holder thereof from entering into partnership, but merely provided that the licence shall not be sub-let or transferred. The decision of the Punjab High Court in Gian Chand & Co.'s case [1973] 87 ITR 113 relating to fishing licence and the decisions of the Madras High Court in Ramanatha Chettiar & Bros. case [1969] 73 ITR 811 and National Roadways' case [1975] 99 ITR 97 (Mad) relating to transport licences, therefore, stand on a different footing from the cases relating to liquor licences as they fall within the same line as the decision of the Privy Council in Gordhandas Kessowji's case, AIR 1921 PC 137, and the decision of the Supreme Court in Jer & Co.'s case [1971) 79 ITR 546. As a matter of fact, the aforesaid cases were distinguished in subsequent cases by the Punjab and Haryana High Court and the Madras High Court themselves, as mentioned earlier. In the same class of cases falls the decision of the Supreme Court in Umacharan Shaw & Bros.' case [1959] 37 ITR 271, where also the prohibition was in respect of transferring or sub-letting the business covered by the licence. The decisions of the Patna High Court in Prakash Ram Gupta's case [1969] 72 ITR 366, Md. Warasat Hussain's case [1971] 82 ITR 718 and N. C. Mandal & Co.'s case [1969] 72 ITR 769 also fall in the same category of cases, as Section 23 of the Bihar and Orissa Excise Act only prohibited the grantee of an exclusive privilege 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.
24. 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 a 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 a licence.
25. 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 of abkari, opium and liquor licences, as the prohibition has a material bearing on the working of the exclusive privilege granted to the licensee and the provision in the licence that it shall not be assigned, sub-let or transferred and that no partners shall be taken without the express permission in writing of the licensing authority appears to have been introduced in furtherance of public policy.
26. A Bench of this court in Brij Mohan's case [1965] RLW 254, AIR 1965 Raj 172, where the prohibition contained in Rule 85(4) of the Medicinal and Toilet Preparations (Excise Duties) Rules was couched in almost similar language, had taken the view that the business like the one which the parties were carrying on could not be lawfully carried on without a licence in the name of the partnership. Unfortunately, that decision was not brought to the notice of the Bench deciding Durga Madira Sangh's case [1985] 153 ITR 226. In our view, in such cases, the question always is whether the Legislature intended to prohibit the contract which must be decided on a construction of the statute. If the object of the enactment or one of its objects in imposing penalty is to protect the general public or any class thereof, it would be construed as implying a prohibition of the contract. On the other hand, if the object of imposition of penalty is merely the protection of the revenue, then mere imposition of penalty would not necessarily imply a prohibition of the contract. The Full Bench of the Allahabad High Court in P. C. Kapoor's case [1973] 90 ITR 172 took the view that the only object of annexing the condition attached to the licence was that the excise authorities be always kept acquainted with the real persons who were conducting the business and the question of public policy was not involved. The Allahabad High Court's view which was followed in the decision of the Patna High Court and the Calcutta High Court referred to by us above was also relied upon by the Bench of this court deciding Durga Madira Sangh's case [1985] 153 ITR 226. But the other view taken by the Full Bench of the Madras High Court, which was followed by the decisions of the Andhra Pradesh, Kerala, Punjab and Haryana, Madhya Pradesh and Orissa High Courts cited above, appeals to us, that in the case of licences issued for the sale of excisable articles, the object of imposing the condition of prior permission 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 be 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) exposes the licence-holder to cancellation or suspension of the licence for breach of a condition thereof. Further, Section 62 also makes the contravention punishable with fine. In our view, it is necessary in order to protect public health that unscrupulous people or persons with shady background may not be inducted by the licence-holder in the liquor trade by entering into partnership with them. The Bench deciding Durga Madira Sangh's case [19851 153 ITR 226 has observed that the Act and the rules did not contain a direct prohibition but the same is contained merely in the terms of the licence. But the decision of their Lordships of the Supreme Court in Jer & Co.'s case [1971] 79 ITR 546, makes it clear that if the licence contained a prohibition and breach of the conditions of the licence is made punishable by the provisions of the Act and the rules made thereunder, then it cannot be said that there was no prohibition contained in the law against entering into partnership without the express permission of the licensing authority. In Durga Madira Sangh's case [1985] 153 ITR 226, it was also observed that there is nothing immoral or against public policy in taking other persons as partners. However, with great respect to the learned judges, as pointed out by us above, the entry of unsocial elements in the liquor trade by the back door by entering into partnership with the licence-holder may lead to causing injury to public health and is likely to affect public policy. The licensing authority is entitled to consider the background or the previous conduct of the person who has applied for a liquor licence under the provisions of the Rajasthan Excise Act and the same vigilance has to be maintained while permitting the licence-holder to enter into partnership with other persons or in allowing the licensee to transfer or sub-let the business carried on under the licence. In this view of the matter, we are of the view that the decision by the Bench of this court in Durga Madira Sangh's case [1985] 153 ITR 226 requires reconsideration. Moreover, it appears that the view taken in that case is also not in conformity with the view taken by the earlier Bench in Brij Mohan's case [1965] RLW 254 ; AIR 1965 Raj 172, and the decisions of the Madras, Kerala, Andhra Pradesh, Madhya Pradesh, Punjab and Haryana and Orissa High Courts, referred to above by us, many of which do not appear to have been brought to the notice of the Bench which decided Durga Madira Sangh's case [1985] 153 ITR 226 (Raj).
27. 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 G.M. Lodha, J.
28. 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 a, licence. Whether the bootleggers, defaulters, unscrupulous and unsocial elements who are prohibited from entering by front doors can be allowed backdoor entry without scrutiny of their credentials and credibility by excise authorities, is an important facet of this juristic debate to be examined for deciding the question whether, under the Income-tax Act, registration of such firms should be allowed, where no scrutiny of such disqualifications is permissible.
29. This legal debate has gained added importance on account of two decisions of Division Benches of this court giving the green signal and permitting registration and yet the third Division Bench has not fallen in line with it and expressed a strong voice of dissent emphatically by making reference to the Full Bench, for reversal of the earlier view of Durga Madira Sangh's case [1985] 153 ITR 226 (Raj). We are, therefore, required to have a complete, comprehensive and thorough survey and study of the various relevant provisions of the Rajasthan Excise Act, 1950, and a plethora of decisions from the Privy Council to the Supreme Court in addition to the divergent views of the High Courts sittings in Division Benches and Full Benches, about the various dimensions and facets of this debate.
30. Hon'ble Mr. Justice Dwarka Prasad Gupta and Hon'ble Mr. Justice S. S. Byas, constituting a Division Bench of this court, have, therefore, referred this case for decision by a larger Bench on account of the conflicting views between different Benches of the Rajasthan High Court.
31. Apparently, there is a sharp divergence of judicial opinion on an important question of law regarding registration of a partnership firm under the Income-tax Act when a licensee of Rajasthan having a licence under the Rajasthan Excise Act enters into a partnership with strangers or a third party without obtaining permission of the concerned excise officer. A Division Bench of this court in Brij Mohan v. N.V. Vakharia [1965] RLW 254 ; AIR 1965 Raj 172, held that a business for manufacture of medicines and toilet preparations could not be lawfully carried on without a proper licence under the Act of 1955, and, therefore, the partnership entered into between the partners without the permission of the concerned authority would be illegal.
32. In Durga Madira Sangh v. CIT [1985] 153 ITR 226, decided by another Division Bench, this court took the view that taking in of a 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 a partnership firm with the stranger for income-tax purposes.
33. 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.
34. 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 Chimnilal's case (supra p. 652), which is now to be decided, and the earlier view in Durga Madira Sangh's case [1985] 153 ITR 226 (Raj).
35. Need for introduction of computers in judiciary :
The present case would amply show the importance of introduction of facility of computers to co-ordinate the different Benches of the same High Court and for the requirement of legal awareness of the latest decisions of other High Courts and the Supreme Court which can be readily made available on telex and computers.
36. If the telex or word processor facility would have been available then, the judgment of Motilal Chimnilal's case, making reference on May 6, 1985, and expressing an opinion different from Durga Madira Sangh's case [1985] 153 ITR 226 (Raj), which was decided earlier could not have remained unnoticed by the Division Bench sitting at Jodhpur, when they decided on February 10, 1986, the case of Rooplal Danchand's case [1986] 162 ITR 742.
37. In Roma, there is 'Supreme Court Electronics Centre's. It has got a net work of carrying judicial data on 800 terminals. The data contains statutes, judicial precedents, legal literature, decisions of the Constitutional, Civil and Criminal courts, legal courts of the European countries. The computerised data Supply of Italy Electronics Centre can be utilised throughout Europe/America on terminals, which act like Visual Display Unit (V.D.U.) in answering your legal queries.
38. Japan has, in spite of destruction by atomic blast of Hiroshima and Nagasaki in 1945 year rebuilt itself and started electronics and computerisation in Judiciary in 1951 year with data bank.
39. In America and England, 'Lexis' is having thousands of terminals where legal opinion is computerised and displayed on V.D.U. Now one can know of the latest precedents within 48 hours on V.D.U. throughout the world, but we in India still have to spend all our energy in search and research from digests in plethora of precedents.
40. Italian Supreme Court Electronics Centre for Legal Documentation (Court Suprema Dia Cia Ssazione Centra Electronico Legal Documentazione)
41. Italian Supreme Court has the Electronic Documentation Centre which provides judges, magistrates, lawyers and the general public with all the legal data with all necessary information about law and its application.
42. The centre is equipped with a sperry Univac 1100/81 computing system ; a data transmission network with approx. 800 elivetli TCV-275 terminals.
1. 211 - Terminals:
At the Supreme Court-all law courts and in 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.
43. 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.
44. 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."
45. 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 news media, journals, industry and trade press, the world of science and technology and the law.
46. Mead Data Central International offers a wide variety of publications that gives legal and general information and news in full text, which stores entire magazine and newspapers, articles, complete legislation and statutes, patents and books.
47. Moreover, lawyers and judges do not need experience with computers to use the system easily and effectively. These informations were created especially for people like judges/lawyers. Thus, the computer terminal at our desk or work station can give us a wealth of information that can help us to make better decisions, learn more about law :
This centre collects information in various fields and some of them are as follows :
Legal Information :
1. They contain American, English and French case law (reported and unreported cases).
2. U.S. Federal Statutes, Codes and Regulations, U.K. Statutes and statutory instruments, French laws and regulations.
3. Both reported and unreported cases of the European Court of Justice.
4. Nearly 3 million cases and other documents which are kept updated continuously and quickly (some of them within 48 hours of decision)'.
5. World's largest legal research remarks.
6. Special libraries on tax, securities, energy, labour, bankruptcy, trade regulations, international trade, admiralty, communications, patent, copyright and trademark.
7. World's largest legal research services.
8. Identify cases tried before a particular judge or by a certain lawyer.
9. Find quickly every way in which a case has been cited in the U.S. or English courts.
48. Quite simply, Mead Data Central offers the largest full text data base in the world. One can read or scan more than 15 million articles, legal cases, patents and references without even leaving our desk or trace the development of legal doctrine by following a case from decision to appeal. It is all possible and affordable with the power of Mead Data Central Information Services. In the U.S.A., the legal profession was one of the first to recognise the time saving benefits of computer-assisted information retrieval. Attorneys in England, the United States and France use Lexic Daily, to determine the most and recent precedent on a specific question of law, keep track of a bill's progress in the Congress, examine the analysis of experts in British and American Legal reviews, or scan the journal officials for the French Government's latest action on a specific point of law.
49. "The computer terminal at our desk or work station can unlock a 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, admiralty, communications, patent, copyrights and trade marks and decisions of the Commission of the European Communities relating to competition."
50. If you have got lexis terminal with the Indian Taxation Law decisions feeding, you would take a few minutes only to know that the Supreme Court in Indian and Eastern Newspaper Society v. CIT [1979] 119 ITR 996 has disapproved Kalyanji Mavji & Co. v. CIT [1976] 102 ITR 287 and R.K. Malhotra, ITO v. Kasturbhai Lalbhai [1977] 109 ITR 537 on the principle of reassessment. If you want to know the latest view of the Supreme Court on speculations, the V. D. U. would tell you not to refer to Raghunath Prasad Poddar v. CIT [1973] 90 ITR 140 but to refer to Davenport & Co. P. Ltd. v. CIT [1975] 100 ITR 715. The electronics Centre would immediately point out that for "Trusts", the tax practitioner must refer to Addl. CIT v. Surat Art Silk Cloth Manufacturers Association [1980] 121 ITR 1 (SC), as the decision in Indian Chamber of Commerce v. CIT [1975] 101 ITR 796 (SC) is no longer good law. For all latest references, a lawyer or judge need not burn the midnight oil in digests and references now. The latest text of tax laws, rules, notifications, decisions of tribunals, all can be known from them within 48 hours of birth.
51. If the Division Bench view of Hon'ble D. P. Gupta J. and Hon'ble S. S. Byas J. had been available before Hon'ble Justice S. K. Mal Lodha and Hon'ble I. S. Israni J., then they could not have given a judgment affirming the view of Durga Madira Sangh's case [1985] 153 ITR 226 (Raj).
52. If the computer's facilities had been available, the computer and/or word processer, immediately on putting query by the judges or the advocates about the validity or illegality of recognition to a firm under the Income-tax Act, when it has taken a stranger as a partner without permission of the excise authorities, the computers would have displayed that the Full Bench is seized of the matter in Motilal's case and Durga Madira Sangh's case [1985] 153 ITR 226 (Raj) view is to be reconsidered by a Full Bench and, therefore, the judges considering the case of Rooplal Danchand [1986J 162 ITR 742 (Raj) decided on February 10, 1986, would have immediately obtained the judgment under reference and then normally would have passed an order for awaiting the decision of the Full Bench or referred it to a Full Bench.
53. The absence of telex 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.
54. 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.
55. Now, before we proceed to discuss in detail the various facets of this controversy, let us have a resume of the facts of the instant case and the questions referred by the Income-tax Appellate Tribunal for decision by the High Court:
"1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the firm was not valid and that the object of the agreement was of such a nature that, if permitted, it would defeat the public policy as contained in the provisions of the Rajasthan Excise Act, 1950?
2. If the answer to the above is in the affirmative, whether the Tribunal was justified in holding that the firm was not valid and, therefore, not entitled to registration under Section 185 of the Income-tax Act, 1961 ?"
56. The Government of Rajasthan granted a licence for the retail sale of country liquor during the year 1966-67 at Bhilwara, including the shops situated at Bhopalganj, Gulmandi and Dhanmandi, in the joint names of Motilal Chunilal and Bhanwarlal, sons 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. Kamla, wife of Mangilal.
57. 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 term of the licence issued by the Excise Department of the State. Clause (3) of the licence translated into English reads as under :
"The licence-holder shall not be entitled to transfer the licence of the shop to any person without the written permission of the officer granting the licence and shall not be entitled to take a partner and such permission shall not be given till such time as the licence-holder pays all dues outstanding against him."
58. During the course of an enquiry, the Income-tax Officer found that the licence-holder had not obtained the permission in writing from the authorities of the Excise Department of the State for entering into a 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 to 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 of refusal of registration to the assessee-firm.
59. Submission of Mr. Mehta :
Before us, as also before the Division Bench which had made the reference, Shri Rajendra Mehta has argued for the assessee as follows :
"It was submitted before us by learned counsel for the assessee that no public policy was involved in incorporating Clause (3) in the licence and that the violation of the provisions of Clause (3) would not automatically mean that the contract was violative of the provisions of Section 23 of the Indian Contract Act or were void ab initio. It was urged that the object of imposition of penalty and provision for cancellation or suspension of licence in case of breach of any terms or conditions of the licence have been provided to safeguard the excise revenue and not for the purpose of protection of the public generally or a section of the public. Learned counsel for the assessee relied upon a decision of a Division Bench of this court in Durga Madira Sangh v. CIT [1985] 153 ITR 226 in support of his contention. On the other hand, learned counsel for the Revenue submitted that entering into a 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."
60. Mr. Mehta then referred to us that according to Sections 184 and 185 of the Income-tax Act (corresponding to Sections 26 and 26A of the Indian Income-tax Act, 1922), the following conditions are required to be fulfilled in order that a firm gets registration under the Act:
(1) That the firm should be constituted under an instrument of partnership, specifying the individual shares of the partners ;
(2) that an application on behalf of, and signed by all the partners, containing all the particulars as set out in the rules has been made.
(3) that the application has been made before the assessment of the income of the firm made under Section 23 of the Act, for that particular year ;
(4) that the profits (or loss, if any) of the business relating to the previous year, that is to say, the relevant accounting year, should have been divided or credited, as the case may be, in accordance with the 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.
61. 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).
62. 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).
63. 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.
64. In the present case, all the aforesaid conditions are fully satisfied and, therefore, there was no justification for the refusal of registration, argued Mr. Mehta.
65. Mr. Mehta then pointed out the following features:
The partnership in the present case is legal and valid. The Rajasthan Excise Act, 1950, or the rules made thereunder do not in any manner prohibit or forbid the forming of partnerships and taking of other persons as partners by the licence-holders. Rule 72B of the Rules only provides that no licence shall be sold or transferred without obtaining the previous permission in writing from the licensing authority. The said rule does not even prohibit/forbid transfer or sale of a licence. It authorises sale subject to written permission of the authority.
66. In the present case, licence has neither been transferred nor sold, only some other persons have been taken as partners. There is no prohibition of taking other persons as partners in the said rule or under any other provision of the Rajasthan Excise Act or the rules. The partnership that was formed by the licence-holders did not amount to transfer or sale of licence and, therefore, the restrictions envisaged by Rule 72B are not at all attracted.
67. Now, condition No. 3 of the licence may be noticed which, inter alia, contains a restriction regarding taking of partners. The condition No. 3 reads as under:
^^ykblsUl/kkjh bl ykblsUl dks ykblsUl nsus okys vf/kdkjh dh fyf[kr LohÑfr ds fcuk fdlh nwljs O;fDr dks gLrk{kj ugh dj ldsxk vkSj u blls fdlh dks lk>snkj gh cuk ldsxk A bl rjg dh LohÑfr rd ykblsUl/kkjh vius ftEes dh dqy 'ks"k jde vnk u dj ns A**
68. Firstly, it is submitted that the said condition is beyond the scope of the Excise Act and the rules, and, therefore, in so far as it restricts the entry of partners, the same cannot be enforced. Therefore, the said restriction contained in the condition is of no consequence. Further, the word "law" as used in Clause (1) of Section 23 of the Contract Act means judicial law, i.e., the law enacted by any competent Legislature. The terms contained in the licence cannot be "law". Entering into partnership without permission may have violated condition No. 3 of the licence but that is not violative of any law and, therefore, Section 23 of the Contract Act is not hit in any manner. Reference was made to two Full Bench judgments reported in A. R. L. P. Firm v. U Po Kyaing, AIR 1939 Rang 305 (headnote G) and Udhoo Dass v. Prem Prakesh, AIR 1964 All 1 (headnote),
69. Even if we take into account restrictions contained in Rule 72B and condition No. 3 of the licence, the position which emerges is that the partnership is not prohibited or forbidden. On the other hand, the condition itself permits partnership with outsiders subject to written permission. Therefore, it cannot be said that the taking of partners is forbidden by law.
70. 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. Ckampsey 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. Partnerships were formed with persons other than licence-holders along with the licence-holders themselves. Section 42(1) of the Bengal Excise Act restricted transfer of licence without permission. Before the Hon'ble Supreme Court, it was urged that the partnership was not genuine. The Supreme Court at page 276 observed that "there was no evidence that the excise licences were transferred or sub-let". This decision is an authority for the proposition that partnership business can be carried on the strength of a licence held by a partner and that the prohibition regarding transfer of licence does not mean prohibition from taking a partner. Formation of partnership is not transfer of licence and such partnership is legal.
(c) Jer & Co. v. CIT [1971] 79 ITR 546 (SC):
In Jer & Co.'s case, the Hon'ble Supreme Court held that there was no positive prohibition against formation of partnership in Clause 13 of the licence as it merely provided that the licence shall not be sub-let or transferred. The Supreme Court, therefore, held that the question regarding illegality of partnership did not arise and the firm was entitled to registration. In this case, the Supreme Court reversed the Allahabad High Court-judgment reported in Jer & Co. v. CIT [1966] 60 ITR 335. The Allahabad High Court judgment was based on Velu Padayachi's case, AIR 1950 Mad 444 [FB], Govindaraj's case AIR 1957 Mad 186, Mohideen Sahib & Co.'s case [1950] 18 ITR 200 (Mad), Union Tobacco Co.'s case [1961] 41 ITR 115 (Ker), Benarsidas & Co.'s case [1962] 44 ITR 835 (Punj) and Krishna Reddy & Co.'s case [1962] 46 ITR 784 (AP).
71. In view of the fact that the Allahabad High Court judgment was reversed by the Hon'ble Supreme Court, the authorities on which the Allahabad High Court judgment was based must be deemed to have been impliedly overruled by the Supreme Court judgments reported in Umacharan Shaw & Bros.'s case [1959] 37 ITR 271 and Jer & Co.'s case [1971] 79 ITR 546.
72. The Madhya Pradesh High Court in Dayabhai & Co.'s case [1966] 59 ITR 364, the Patna High Court in Narpathi Khan & Co.'s case [1974] 97 ITR 645, the Punjab High Court in Gian Chand & Co.'s case [1973] 87 ITR 113 and the Andhra Pradesh High Court in Nalli Venkataramana's case [1984] 145 ITR 759 have all taken the view that the Madras High Court's Full Bench in Velu Padayachi v. Sivasooriam Pillai, AIR 1950 Mad 444, or the cases following the 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).
73. 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 The decision in Udhoo Dass' case, AIR 1964 All 1 [FB] has been followed in P.C. Kapoor v. CIT [1973] 90 ITR 172 (All) [FB] and CIT v. Nalli Venkataramana [1984] 145 ITR 759 (AP) and has been approved by the Hon'ble Supreme Court in Murlidhar Agarwal's case, AIR 1974 SC 1924, 1927. The Supreme Court held the lease to be valid even without the permission even though the breach was punishable.
74. The agreement of partnership between the partners, i.e., licence-holders and outsiders, is valid and binding. This might not have bound the excise authorities and they could have taken action regarding cancellation or suspension of licence or imposition of penalty, according to law. This has not been done in the present case.
75. Thus, it is clear that mere non-obtaining of permission would not render the partnership invalid.
(g) Gherulal Parakh v. Mahadeodas Maiya, AIR 1959 SC 781 :
Held, that the partnership agreement which was a collateral agreement in respect of wagering contracts was valid between the partners. It was not hit by Section 23 of the Contract Act. In this case, the scope of the public policy under Section 23 of the Contract Act was also examined and it was held that the principles of public policy have already been laid down under different heads and that they cannot be expanded and new heads should not be made out.
76. Thus, it is quite clear that Velu Padayachi's case, AIR 1950 Mad 444 [FB], Mohideen Sahib & Co.'s case [1950] 18 ITR 200 (Mad), Union Tobacco Co.'s case [1961] 41 ITR 115 (Ker), Krishna Reddy & Co.'s case [1962] 46 ITR 784 (AP) and Benarsi Das & Co.'s case [1962] 44 ITR 835 (P&H) like other cases do not lay down good law and they stand impliedly overruled by the aforesaid Supreme Court judgments. The judgment under reference is mainly based on the aforesaid decisions which already stand impliedly overruled.
(h) Mohamad Syed Baba v. Universal Timbers Traders, AIR 1976 J&K 9:
Assignment of leasehold rights to third person without Government sanction held not void. It is not against Section 23 of the Contract Act or against public policy. In para 13, it has been observed that there was no absolute prohibition on assignment which was only subject to permission.
(i) P.C. Kapoor v. CIT [1973] 90 ITR 172 (All) [FB] :
Formation of partnership does not amount to transfer of licence. Held, that the condition contained in the licence and the excise 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 a contract made in contravention of such condition to be illegal does not imply prohibition. Held, firm entitled to registration.
77. 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 that a licensee could not enter into a partnership. Even the condition in the licence did not totally prohibit formation of partnership. Partnership was permitted with written permission. There is nothing immoral or against public policy in taking other persons as partners. The firm was held to be entitled to registration.
(k) CIT v. Rooplal Dhanchand [1986] 162 ITR 742 (D.B.I.T. Ref. No. 15 of 1980) decided on February 10, 1985, by Hon'ble S.K. Mal Lodha J. and Israni J.
Held, that the partnership did not contravene any provision of the Excise Act or the rules. Hence entitled to registration. In this case, P. C. Kapoor's case [1973] 90 ITR 172 (All) [FB] and N. C. Mandal & Co.'s case [1969] 72 ITR 769 (Pat) were followed and the cases relied on by the Revenue including Hardit Singh Pal Chand & Co.'s case [1979] 120 ITR 289 (Punj) and Narsaiya & Co.'s case [1983] 143 ITR 304 (MP) were distinguished.
(1) CIT v. Nalli Venkataramana [1984] 145 ITR 759 (AP) :
In this case, all authorities on the point in issue have been taken into consideration and it has been held that even though the permission of the licensing authority was not obtained before taking a new partner, the partnership was not illegal. (Rule 9(2) of the Andhra Pradesh Excise Rules, 1969). As between partners it continues to be valid and is entitled to registration under the Income-tax Act.
78. This authority fully applies to the present case and it clearly holds that the case law on the basis of which reference has been made are no longer good law. In this case, the Supreme Court judgment given (unreported) in Govind Rao v. Nathmal on April 11, 1962, has also been distinguished. It has also been held that the partnership is valid even though the permission of the excise authority was not obtained for taking partners and even though the authorities may have power to punish the parties for contravention of the Act and the rules. In this case, it has also been held that the authorities in Sheonarayan Harnarayan's case [1975] 100 ITR 213 (MP), Pagoda Hotel's case [1974] 93 ITR 271 (MP) and Mohapatra Bhandar's [1965] 58 ITR 671 (Orissa) (which have also been relied upon in the judgment under reference) were contrary to the principle laid down by the Hon'ble Supreme Court.
(m) Malwa Knitting Works v. CIT [1977] 107 ITR 379 (MP) :
An advocate became a partner in a firm in violation of the Bar Council 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.
79. 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.
80. The partnership in this case is not prohibited by law, nor was it such that, if permitted, would defeat the provisions of any law and the performance of contract was possible without disobeying law and hence the partnership was not illegal under Section 23 of the Contract Act.
(p) CIT v. Prakash Ram Gupta [1969] 72 ITR 366 (Pat):
Excise case : Held, that formation of partnership is not transfer of licence. At page 373, it was observed that the Madras High Court judgment was not correct. Firm entitled to registration.
81. Mr. Mehta then referred to the decision of Brij Mohan's case [1965] RLW 254, which has been relied upon by the Division Bench making reference to other decisions while giving reply to the submission made by Mr. Arora.
(q) CIT v. Gian Chand and Co. [1973] 87 ITR 113 (Punj) : A case of fishing licence--No prohibition of partnership--Held, at page 115, that [1962] 44 ITR 835 (Punj), [1965] 58 ITR 671 (Orissa) and [1966] 60 ITR 335 (All), no longer good law--Registration granted.
(r) Md. Warasai Hussain v. CIT [1911] 82 ITR 718 (Pat): Excise case : Formation of partnership does not amount to transfer of licence--Provisions of Excise Act not contravened--Firm held entitled to registration.
(s) CIT v: Narpati Khan & Co. [1974] 97 ITR 645 (Pat): Excise case: Followed [1969] 72 ITR 366 (Pat), [1971] 82 ITR 718 (Pat) and held that [1961] 41 ITR 115 (Ker), [1966] 60 ITR 435 (All) and [1950] 18 ITR 200 (Mad) are no longer good law, Mr. Mehta then distinguished the decision in [1965] RLW 254 (Brij Mohan v. N.V. Vakharia.), and submitted that this judgment has been relied upon by the Division Bench in making the reference. This judgment is based on an unreported decision of the Supreme Court in Govind Rao v. Nathmal decided on April 11, 1962. In that case, the Supreme Court held that the licence in the name of one partner cannot be accepted as a licence in the name of the partnership. There, the Supreme Court laid emphasis on Section 3(1) of the C.P. & Berar Food Grains (Control) Order, 1945, which prohibited any person from dealing in foodgrains without a licence. The words "deal in foodgrains" were defined as follows :
"To engage in the business of purchase, sale, or storage for sale of foodgrains whether on one's own account or on account of any partnership. "
82. The Supreme Court held that the word "person" includes a group or an association 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.
83. 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.
84. 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.
85. Therefore, the said Supreme Court judgment and [19651 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 the Act of 1955 and defined specifically whereas there is no such provision under the Rajasthan Excise law. Rule 85(4) also contained a prohibition regarding partnership but under the Rajasthan Excise Act or the rules, there is no such prohibition, argued Mr. Mehta.
86. It is well-settled that a decision of the Supreme Court cannot be ignored on the ground that there the Lordships have not considered the question of public policy. He referred to Ballabhdas' case, AIR 1970 SC 1002 para 4.
87. It is also settled that a decision of the Supreme Court may not in so many words state that certain cases were wrongly decided, still when the Supreme Court decided in a particular way, every previous decision which had answered the same question in a different way cannot but be held to have been wrongly decided. Mr. Mehta referred to Jai Kaur v. Sher Singh, AIR 1960 SC 1118.
88. In CIT v. Abdul Rahim & Co. [1965] 55 ITR 651 (SC), it was held that even if it is found that one of the partners of the firm was benami for another person, still the firm is entitled to registration. The beneficial interest in the income pertaining to the share of the said benamidar may have relevance to the matter of assessment but not in regard to the question of registration (paragraph No. 13 of the report).
89. Thus, the conclusion is that the partnership firm by the licensee-partner without the permission of the competent authority cannot be considered to be illegal or void and in this connection, as already stated above, the following judgments of the Privy Council and the Supreme Court are directly on the point apart from other cases stated above.
90. AIR 1921 PC 137 (Gordhandas' case), [1959] 37 ITR 271 (SC) (Umacharan's case), [1971] 79 ITR 546 (SC) (Jer & Co.'s case), AIR 1969 SC 493 (Vishwanatha's case), AIR 1974 SC 1924 (Murlidhar's case), AIR 1959 SC 781 (Gherulal's case) and [1965] 55 ITR 651 (SC) (Abdul Rahim (A.) & Co.'s case).
91. Further, the agreement of partnership has to be construed in a manner which would be consistent with the provisions of the Excise Act and the rules. The clause in the partnership deed entitling all the partners to manage and conduct the firm's business does not necessarily mean that non-licensee partner claimed a right to sell liquor. Such partner would participate in the manner permissible by law. In this connection, the following decisions are directly on the point [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.
92. 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.
93. 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 registration and thus there is no question of any public policy involved in the excise partnerships. The fact that the Supreme Court did not consider the question of public policy is hardly of any consequence as already held in Ballabhdas Mathuradas Lakhani v. Municipal Committee, AIR 1970 SC 1002. The agreement of partnership is not placed on record for coming to such a conclusion.
94. Further, no public policy is involved in this case as propounded by established decisions. The agreement in question is not covered under any of the heads of public policy and, therefore, the question of its contravention does not arise. New heads of public policy cannot be made out as already held in R. C. Mitter & Sons' case [1959] 36 ITR 194 (SC).
95. The licences are granted in order to have control over the persons who are authorised to sell liquor. The object of controlling the persons seems to ensure realisation of excise revenue. This is also explicit in condition No. 3 of the licence. Section 62 of the Rajasthan Excise Act, if at all the same is attracted on account of the contravention of any condition in the licence, only provides for imposition of penalty on wilful contravention (This only shows that entering into partnership as such is not prohibited). Further, the penalty is also only leviable (if at all that be so) once and for all and it is not recurring.
96. The only case of the Department is that the partnership is in violation of the condition of licence and, therefore, illegal and hit by Section 23 of the Contract Act. This does not mean that the agreement of partnership is against public policy.
97. In the Division Bench judgment of this Hon'ble Court in [1985] 153 ITR 226 (Raj) (Durga Madira Sangh v. CIT) and in other cases directly on the point, namely, (P. C. Kapoor's case) [1973] 90 ITR 172 All [FB], CIT v. Prakash Raw Gupta [1969] 72 ITR 366 (Pat), Sree Ramakrishna Mining Company v. CIT [1967] 64 ITR 197 (Mys), CIT v. Nalli Venkataramana [1984] 145 ITR 759 (AP) and CIT v. Manick Chandra Dey [1977] 106 ITR 860 (Cal), the question of public policy has been considered and it has been held that no such public policy was involved in the agreements of partnerships relating to excise licences.
98. Abkari, opium or liquor licences are also for the protection and convenient collection of revenue. The fact that permission can be granted and that only wilful breach is penalised 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 void, then partners or any of them or even outsiders will not be able to maintain any action, say, for example, regarding recovery of money, rendition of accounts, etc., against the firm and the firm would be able to avoid its otherwise legal liabilities and obligations under cover of its so-called illegal formation on account of the alleged violation of some provisions of the Excise Act and the rules. There are numerous restrictions under excise law and their violation cannot render a firm invalid, e.g., establishment of shop in particular areas.
99. Such a view would be against general public interest, spirit of law and such interpretation cannot, therefore, be given.
100. Cancellation of licence:
The licence is granted for one year under the Excise Act and the rules. The fact that the licence was not cancelled during its currency or at any time shows that the partnership rightly and validly carried on business. No penalty was also imposed.
101. The cancellation of licence on account of non-obtaining of permission for taking partner (if permissible in law) would naturally lead to the closure of the business as the basis of the business, namely, the licence would not be there. In such a case, the question of registration under the Income-tax Act would not arise.
102. Submission of Mr. Arora :
We have mentioned above the submission of Mr. Mehta and not our comments as we would give our comments and decision on them after mentioning the reply of Mr. Arora, counsel for the Revenue. Mr. Arora, appearing for the Revenue, has argued that the first partnership for which licence for sale of country liquor in the shops of Gopal Ganj, Gul Mandi and Dhan Mandi of the town of Bhilwara for the year 1956-57 was granted consisted of Moti Lal, son of Chunni Lal, and Bhanwar Lal, son of Moti Lal. However, after the grant of licence, more partners were included. The Income-tax Officer found that apart from Moti Lal and Chunni Lal, sons of Motilal and Bhanwar Lal, they further included Smt. Vijaylaxmi Poonam Chand, Bhoorlal, Ramnath and Kamla. The licensee never applied for permission to the Excise Officer for this inclusion and change of partnership and thus the altered partnership firm functioned without permission of the excise authority. He found that this inclusion was not permissible, for, the provisions of the Rajasthan Excise Act were violated. Therefore, Section 23 of the Indian Contract Act was attracted and the assessee was not entitled to registration under Section 185 of the Income-tax Act.
103. 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.
104. 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.
105. The view which has found favour with the Division Bench consisting of Hon'ble Justice Gupta and Justice Byas being different from the earlier view of Durga Madira Sangh's case [1985] 153 ITR 226 (Raj) is based on the ground that the provisions of the Rajasthan Excise Act fails to recognise such partnership unless permission is given and taken. This view was consistent with the view taken earlier by the Bench in Brij Mohan's case [1965] RLW 254 and the decisions of the Madras, Kerala, Andhra Pradesh, Punjab and Haryana and Orissa High Courts.
106. Mr. Arora submitted that the Supreme Court in the decision of Jer and Company [1971] 79 ITR 546, where a condition was added in the liquor licence which was applicable to the petitioner-assessee, held that such a licence-holder before entering into partnership should obtain previous permission in writing from the excise authorities, and since no such permission was taken in the present case, Mr. Arora submitted that this decision would also apply in support of the view of the Division Bench referring the case to the Full Bench. Mr. Arora also pointed out that the acceptance or refusal to include other persons as partners in the partnership for sale of country liquor depends upon various factors for the Excise Department's consideration and, therefore, unless the inclusion is allowed by express permission, the recognition of such partnership by the income-tax authorities would indirectly encourage unscrupulous persons entering into partnership against the excise laws and carrying on the business in violation of the excise laws and against public interest and public policy.
107. In this connection, Mr. Arora referred to Sections 54, 34(c), 62 of the Excise Act and Rule 72B of the Excise Rules imposing certain conditions. The intention of the entire scheme of the Rajasthan Excise Act and the Rules and the conditions is that the entry of unscrupulous persons and anti-social elements and defaulters in the partnership firm should be avoided. In support of his contention that the change of partners without permission of the excise authority by a liquor licensee in Rajasthan is against public policy, Mr. Arora referred to the following decisions : Velu Padayachi v. Sivasooriam Pillai [1950] AIR 1950 Mad 444 [KB]; D. Mohideen Sahib & Co. v. CIT [1950] 18 ITR 200 (Mad); CIT v. Union Tobacco Co. [1961] 41 ITR 115 (Ker); CIT v. Krishna Reddy & Co. [1962] 46 ITR 784 (AP); V. Basavayya v. N. Kottayya, AIR 1964 AP 145; Dinsawji 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).
108. 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.
109. 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.
110. Rajasthan Excise Law's extracts:
In order to decide the issues involved, we would first of all have a resume and study of the various provisions under the Rajasthan Excise Act and the Rules, about the relevant points involved in respect of licence for liquor sale and the various regulations, restrictions, prohibitions, conditions, etc.
111. The Rajasthan Excise Act, 1950, governs the possession and sale of liquor in Rajasthan. In order to carry out the provisions of the Excise Act, 1950, rules have been framed in 1956 which are known as the Rajasthan Excise Rules (hereinafter called as the "Rules").
112. Under the Act, "manufacture" and "sale" have been defined under Clauses (17) and (20) of Section 3 which read as under :
"'Manufacture' includes every process, whether natural or artificial, by which any excisable article is produced or prepared wholly or partly and also redistillation and every process for the rectification, reduction, flavouring, blending or colouring of liquor;
'Sale' with its grammatical variations includes any transfer otherwise than by way of gift."
113. Section 13 empowers the Government to prohibit import, export and transport of excisable articles. Section 16 prohibits manufacture of excisable articles, prohibited except under the provisions of this Act. Section 20 expressly prohibits the sale of excisable articles without licence. Section 20 reads as under :
"No excisable article shall be sold without a licence from the Excise Commissioner (or any Excise Officer duly empowered in that behalf) provided that:
(1) a person licensed under this Act to cultivate or collect the hemp plant (cannabis satiya) may sell without a licence those portions of the plant from which any intoxicating drugs can be manufactured to any person licensed under this Act to deal in the same or to any officer whom the Excise Commissioner may prescribe ;
(2) a licence for sale in more than one district of those parts of the State of Rajasthan to which this Act extends shall be granted with the previous approval of the State Government and ;
(3) nothing in this section applies to the sale of any foreign liquor legally produced by any person for his private use and sold by him or by auction on his behalf or on behalf of his representatives-in-interest upon his quitting a station or after his decease."
114. Licences are granted under Chapter VI. Section 37 prescribes the form of conditions of licences. Section 34 provides power to cancel a suspected 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."
115. "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, permit or pass ; or
(d) if the holder thereof is convicted of any offence punishable under this Act or any other law for the time being in force relating to revenue or of any cognizable and non-bailable offence or any offence punishable under the Dangerous Drugs Act, 1930 (Central Act II of 1930), or any law relating to merchandise marks or of any offence punishable under Sections 482 to 489 (both inclusive of the Indian Penal Code); or
(e) where a licence, permit or pass has been granted on the application of the grantee of an exclusive privilege under this Act, on the requisition in writing of such grantee ; or
(f) if the conditions of the licence, permit or pass provide for such cancellation or suspension at will.
(2) When a licence, permit or pass held by any person is cancelled under Sub-section (1), the authority aforesaid may cancel any other licence, permit or pass granted to such person under this Act or any other law for the time being in force relating to excise, revenue or under the Opium Act, 1878 (Central Act I of 1878).
(3) The holder of a licence, permit or pass shall not be entitled to any compensation for the cancellation or suspension thereof under this section or to a refund of any fee paid or deposit made in respect thereof."
116. Offences are given in Chapter IX and Section 54 provides penalty for import, export, transport, manufacture, possession, and Section 58 provides penalty for certain offences. Sections 54 and 58 read as under :
"Section 54. Penalty for unlawful import, export, transport, manufacture, possession, etc.--Whoever, in contravention of this Act or any rule, or order made or of any licence, permit or pass granted, thereunder :
(a) imports, exports, transports, manufactures, collects, sells or possesses any excisable articles ; or
(b) cultivates any hemp plant (cannabis satiya); or
(c) constructs or works any distillery, pot still or brewery ;
(d) uses, keeps or has in his possession any materials, still, utensil, implements or appartus whatsoever for the purpose of manufacturing any excisable article other than tari; or
(e) removes any excisable article from any distillery, pot still (brewery) or warehouse established or licensed under this Act; or
(f) bottles any liquor for the purposes of sale ; or
(g) taps or draws tari from any tari producing trees ;
shall be punishable with imprisonment 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."
117. "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 five hundred rupees."
118. Section 62 provides for penalties for offences not otherwise provided for which reads as under :
"Penalties for offences not otherwise provided for.--Whoever is guilty of any act or intentional omission in contravention of any of the provisions of this Act, or of any rule or order made under this Act and not otherwise provided for therein shall be punishable for each such act or omission with fine which may extend to two hundred rupees."
"Section 64(1). When any excisable article has been manufactured or sold or is possessed by any person on account of any other person and such other person knows or has reason to believe that such manufacture or sale was or that such possession is, on his account, the article shall, for the purpose of this Act, be deemed to have been manufactured, or sold or to be in the possession of such other person.
(2) Nothing in Sub-section (1) shall absolve any person who manufactures, sells or has possession of an excisable article on account of another person from liability to punishment under this Act for the unlawful manufacture, sale or possession of such article."
119. We then come to the Excise Rules and Rule 72 provides for application for licence which reads as under :
"Rule 72. Who may grant licences.--Except as otherwise provided in these rules, all licences under the Act shall be granted by the Excise Commmissioner."
120. It is significant that Rule 72B was introduced on November 19, 1959, expressly prohibiting sale or transfer of licence without prior permission in writing from the licensing authority. Rule 72B reads as under :
"Rule 72B. Transfer of licence.--(a) Every licence shall be deemed to have been granted or renewed personally to the licensee and no licence shall be sold or transferred without obtaining previous permission in writing from the licensing authority."
121. Rule 74 provides for disqualification for holding licences which reads as under :
"Rule 74. Persons debarred from holding.--Without the previous written sanction of the Excise Commissioner :
(1) No person holding or having an interest in a licence for the manufacture, sale or supply of foreign liquor in a district may hold or possess any interest in a licence for the retail sale of country liquor in the district.
(2) No person holding or having an interest in a licence for the retail sale of opium, denatured 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 under 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."
122. Licence forms conditions :
The form of licences are prescribed under Rule 93 and Form C.L.-I is the form for sale of country liquor. Condition No. 3 of the licence form prescribed under Rule 93 reads as under :
^^ykblsUl/kkjh bl ykblsUl dks ykblsUl nsus okys vf/kdkjh dh fyf[kr LohÑfr ds fcuk fdlh nwljs O;fDr dks gLrk{kj ugh dj ldsxk vkSj u blls fdlh dks lk>snkj gh cuk ldsxk A bl rjg dh LohÑfr rd ykblsUl/kkjh vius ftEes dh dqy 'ks"k jde vnk u dj ns A**
123. Our decision :
The above schemes of the Rajasthan Excise Act and the rules are relevant for the purpose of understanding and appreciating the question involved in the present reference, namely, whether there is any prohibition for taking a partner after the licence is obtained in the name of a partnership firm in which a newly introduced person was not originally a partner at the time of taking out of the licence. Closely connected with it is the next important question whether the requirements of grant of permission, taking of permission, is a matter of substance or form for introducing a new partner. Yet another facet to be considered is whether the induction of a new partner by the excise licence firm without permission of the excise authorities would be against public policy as contemplated by Section 23 of the Contract Act.
124. On a thoughtful consideration of the various facets of this controversy and the principles of law as deduced in the various judgments referred to above, we are inclined to think that the decision referred to by Mr. Mehta for convincing us and persuading us to hold that the view of this court in Brij Mohan's case [1965] RLW 254 based on the decision of the Supreme Court in Govind Rao v. Nathmal decided on April 11, 1962, no longer holds the field is difficult to be accepted.
125. No doubt Nathmal's case was in respect of the C. P. and Berar Food Grains (Control) Order, 1945, which prohibited by Section 3, Clause (i), any person from dealing in foodgrains without a licence but Mr. Mehta's efforts to distinguish the case on the ground that the definition there was comprehensive as the word "person" was incorporated to mean a group or an association of persons like a firm of partners is without any distinction and with no difference and, therefore, cannot succeed.
126. As per the resume of the relevant provisions of the Excise laws of Rajasthan extracted above, there is a prohibition for possession and sale of liquor without licence and further under Section 16(g) any (sic) material except on the terms and conditions of the licence. Similarly, Section 19 prohibits any person from possession and manufacture of articles without licence to manufacture and sale of such articles. 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.
127. 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.
128. 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 prohibit it. Section 54(a) and Section 58, Clause (c), of the Act expressly provide that if infringement of any of the provisions of this Act is committed, it would be punishable with imprisonment or fine or with both.
129. It is thus clear that the authority to the newly inducted partners who were not there earlier in the partnership at the time of grant of licence and for whom no permission has been given by the excise authorities, would be an offence by excise licensees for all intents and purposes. This would mean that even a previous convict or a defaulter or a person having bad antecedents, or a person who is known as a bootlegger for manufacture and sale of liquor by adulteration, playing with the life of several innocent people would also be able to sit as a licensee at the liquor shop and sell it. These are all hazards and dangers against public and people, society and citizens as a whole, which are being safeguarded by Clause 3 in the licence which expressly mentions that no partner would be inducted into the partnership of such a licensee without permission in writing from the authorities.
130. This would all show that there are several factors which are relevant and which directly affect the public policy, public hygiene and risk to peoples' lives in this matter. Mr. Mehta's contention that no public policy is involved in incorporating Clause (3) in the licence and violation of it would not automatically mean that the contract is violative of the provisions of Section 23 of the Indian Contract Act or void ab initio cannot be accepted for the reasons mentioned above.
131. In our opinion, the object of imposition of penalty and provisions for cancellation, suspension of licence in the case of breach of any terms and conditions of the licence, is the safeguard of not only excise revenue but also for protecting the public generally from such dangerous hazards and from such unscrupulous persons who as anti-social elements can make backdoor entry in the liquor trade and play with the lives of the people. We have, therefore, no hesitation in holding that public policy is directly involved and the condition No. 3 introduced in the licence is not a formal matter only for excise revenue but it is expanded on wider horizons and in its dimensions it covers public hygiene, public morality, public ethics, public safety, public security and is, therefore, public policy's various manifestations.
132. 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.
133. '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.
134. 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 licensee from entering into partnership but it only requires that he should obtain permission. In this view of the matter, this court held that there was no prohibition.
135. We have given our thoughtful consideration to this aspect of the matter and we feel that conditional permission or permission by such authority and in the absence of that prohibition cannot result in a finding that the prohibition is not contemplated. The prohibition can be of various types and patterns and varieties. To illustrate, a foreign citizen cannot come to India or a citizen of India cannot travel abroad except with a passport and a visa. Then, there are further restrictions. The emphasis may be different but the visa is a condition which is prohibitory in nature and except that there is a complete prohibition to enter a foreign country. Similarly, a person who comes here on a visa can stay here only for a certain period and after that by extension by competent authority but it would be simplifying the matter, if it is said that there is no prohibition and it is only a regulation. Regulations, restrictions, limitations and fetters may amount to prohibition because those conditions are the basic bedrock and cannot be violated.
136. The object of insistence on permission is that certain unwarranted, unscrupulous and unsocial elements, defaulters or persons of objectionable history should not be allowed to do liquor business. If by the backdoor they enter into partnership and thus become entitled, it would be a mockery of the prohibition.
137. Yet another type of cases can be of previous convicts or persons who are defaulters or persons against whom there are certain government dues or persons whose bids have been rejected or persons who have been declared to be disqualified under any law for holding a liquor licence. If such persons by indirect backdoor entry become partners with the licensee, then it would mean that all the excise laws, prohibitions, safeguards, restrictions, etc., would be thrown to the winds, and unscrupulous persons would manage to enter by backdoor by first giving bid in the name of some persons benami and then entering into partnership with such a licensee by inclusion and induction into the partnership without even giving any intimation to the excise authorities and without obtaining the permission. We, therefore, feel that this is a case of prohibition and that too based on public policy.
138. 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.
139. The crux of the matter is as per the observations mentioned above, if the penalty is imposed with the object of protecting the public, then it is a case of prohibition and not a case of device of revenue-earning only.
140. Mr. Mehta's reliance on a judgment of Gordhandas Kessowji v. Champsey Dossa, AIR 1921 PC 137, where a licensee of salt manufacture was held not to contravene the terms of the licence, in view of the provisions of Section 11 of the Bombay Salt Act, where it was not prohibited, is not applicable in the instant case because there the licensee admitted the members of his family and others as partners for saving the profits of the business.
141. In our opinion, unless the licence conditions of that case are thoroughly seen, this judgment cannot enlighten us on the questions as to what were the conditions and, what were the words and whether they were mandatory or directory and in what context and for what purpose the conditions were laid down so as to apply that judgment in the instant case before us.
142. Then Mr. Mehta's reliance on the judgment in Jer and Co. v. CI7 [1971] 79 ITR 546 (SC), requires to be considered. There is no doubt that Jer and Co.'s case is of far-reaching importance in this branch of law.
143. In that case, the assessee-firm had two partners one of whom had obtained a licence for the wholesale vending of foreign liquor which was, renewed from year to year. The question being raised was whether the firm was entitled to registration under Section 26A of the Indian Income-tax Act, 1922. It was held by their Lordships of the Supreme Court that the licence did not prohibit the holder from entering into partnership and it merely mentions that when the licensee entered into a partnership, the question whether the partnership was illegal did not arise and the firm was allowed registration.
144. It appears that after the aforesaid decision of their Lordships of the Supreme Court in Jer and Company's case [1971] 79 ITR 546, a term that the licence-holder should obtain permission in writing from the excise authorities concerned before entering into partnership has been added in liquor licences. This has watered down the effect of Jer and Company's case [1971] 79 ITR 546 (SC) as now there is an express requirement of permission which in that case was conspicuously absent.
145. In CIT v. Siyam Chand and Company (sic) the Supreme Court followed Jer and Company's case [1971] 79 ITR 546 (SC). The distinguishing feature 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 Daydbhai and Company's case [1966] 59 ITR 364. The Full Bench of the Madhya Pradesh High Court in Smt. Janki Bai Chunilal v. Ratan Melu, AIR 1962 MP 117, in cases relating to transport business took the same view. Here also there was no prohibition.
146. "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 Full Bench decision of the Madras High Court in Velu Padayachi v. Sivasooriam Pillai, AIR 1950 Mad 444 [FB], further fortified the view that such a partnership becomes illegal and for illegal partnership the income-tax authorities cannot grant registration.
147. The Madhya Pradesh High Court in a series of cases, CIT v. Pagoda Hotel and Restaurant [1974] 93 ITR 271, CIT v. Sheonarayan Harnarayan [1975] 100 ITR 213 and CIT v. Kondra Durgaiya [1983] 143 ITR 315, has also affirmed the same view that when a new partner is taken after the licence is given by the excise authorities and permission is not taken for the inclusion, then the licence partnership comes to an end becomes illegal, unlawful and cannot be enforced. It has been held in a series of cases that in such cases of partnership, one partner cannot sue the other for rendition of accounts, for the amount which he has taken because such partnership is unlawful and is against public policy.
148. The Madhya Pradesh excise law and licence conditions are in pari materia with licence condition No. 3 of Form No. C.L.I.E. prescribed under Section 42(E) of the Rajasthan Excise Act, 1950, and Rules 57, 67 (Jha) and 93 of the Rajasthan Excise Rules, 1956 (page 495 of Rajasthan Local Laws by S. L. Gupta, Vol. VI, E-1983 edn.; Govt. Notification dt. 5th February, 1964, Rajasthan Gazette, Extraordinary, Part-IV, dated 6th February, 1965), in respect of inclusion of new partners in liquor licence business. In our opinion, the above judgment of the Madhya Pradesh High Court squarely applies to the facts of the instant case and we express our respectful agreement with the above view and hold that such partnership being illegal cannot be registered under the Income-tax Act.
149. The view of the Orissa High Court in Mohapatra Bhandar v. CIT [1968] 58 ITR 671, is also the same and so is the case of Rajasthan High Court in Brij Mohan v. Vakharia [1965] RLW 254.
150. The Kerala High Court in CIT v. Union Tobacco Co. [1961] 41 ITR 115, has taken a similar view and held that such a partnership is illegal and cannot claim registration as of right.
151. The Punjab and Haryana High Court in successive judgments, first being [1962] 44 ITR 835 (CIT v. Benarsi Das) and then Lalchand Mohan Lal Fazilka v. CIT [I967] 65 ITR 418 and the third one CIT v. Hardit Singh Pal Chand & Co. [1979] 120 ITR 289, have taken the same view that such a partnership 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.
152. 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 licencing 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.
153. The Madras High Court in T. K. P. R. Ramanatha Chettiar & Brothers v. CIT[1969] 73 ITR 811 and in National Roadways v. CIT [1915] 99 ITR 97, in cases of a permit standing in the name of one partner as there wise no prohibition against the partnership in the Motor Vehicles Act, although there is prohibition against transfer of permit, took the view that the partnership is legal. A Division Bench of the Madhya Pradesh High Court in Dayabhai v. CIT [1966] 59 ITR 364 and the Full Bench of the Madhya Pradesh High Court in Smt. Janki Bai Chunnilal v. Ratan Melu, AIR 1962 MP 117, and other cases of partnerships relating to transport business, also held the partnership legal, as there was no prohibition in those laws. These cases are clearly distinguishable being based on different facts and laws as mentioned above.
154. On a thoughtful and thorough consideration of the important decisions relied upon by Mr. Mehta and also by the learned judges deciding the two references earlier, we find that they are not applicable, as the facts in the present case are different, and so also the relevant law, rules and conditions of licence having the force of law.
155. Let us now discuss and point out the distinguishing features of those cases:
Umacharan Shah and Bros. v. CIT [1959] 37 ITR 271 (SC) : An excise licence was operated by a partnership of joint family members though the licence was in the name of an individual member of the family. Section 42(1) of the Bengal Excise Act prohibited transfer or sub-letting. There was no prohibition for inducting partners and, therefore, the Supreme Court directed the registration. It would thus be seen that the Bengal Excise Act was not at all violated. In the instant case, the Rajasthan Law prescribes licence conditions and they are notified with every tender form and at the time of auction. Condition No. 3 extracted above expressly prohibits inclusion of any person as partner without written permission. It is further provided in the Rajasthan Excise Act and the rules as well that conditions of violations would be treated as statutory violation and hence actionable. We cannot apply Bombay Excise law to Rajasthan without having similar licence conditions.
156. Jer and Co. v. CIT [1971] 79 ITR 546 (SC) has not been correctly understood by most of the High Courts, on whose judgments reliance has been placed by Mr. Mehta. The crux of the distinction based on non-application of Rule 322 of the Excise Manual, where licence is in Form FL II, has tilted the fate from illegality of partnership to legality.
157. The relevant discussion is as under (at page 548):
"The Commissioner and the High Court proceeded on the footing that the licence was governed by Rule 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."
178. We have already pointed out that in our instant case unlike Form FL II, 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 upon Jer & Co.'s case judgment [1971] 79 ITR 546 (SC)--registration has been allowed in spite of the provisions like Clause 3 of the licence--are based on error of inexactitude in understanding the implications of Jer & Co.'s case [1971] 79 ITR 546 (SC). Our High Court's two judgments of the Division Bench in Durga Madira Sangh's case [1985] 153 ITR 226 and CIT v. Rooplal Danchand's case [1986] 162 ITR 742 (D.B. Income-tax Reference No. 15 of 1980 decided on February 10, 1986, at Jodhpur), with due respect, fall in this category.
159. We may now turn to "wagering contracts" judgment in Gherulal Parakh v. Mahadeodas Maiya, AIR 1959 SC 781, on which tremendous emphasis has been laid by Mr. Mehta.
160. In order to appreciate this decision, we must analyse the deduction in para. 28 which reads as under (p. 797 of 1959 AIR):
"28. To summarize: The common law of England and that of India have never struck down contracts of wager on the ground of public policy ; indeed they have always been held to be not illegal notwithstanding the fact that the statute declared them void. Even after the contracts of wager were declared to be void in England, collateral contracts were enforced till the passing of the Gaming Act of 1892, and in India, except in the State of Bombay, they have been enforced even after the passing of the Act No. 21 of 1848, which was substituted by Section 30 of the Contract Act. The moral prohibitions in Hindu law texts against gambling were not only not legally enforced but were allowed to fall into desuetude. In practice, though gambling is controlled in specific matters, it has not been declared illegal and there is no law declaring wagering illegal. Indeed, some of the gambling practices are a perennial source of income to the State. In the circumstances, it is not possible to hold that there is any definite head or principle of public policy evolved by courts or laid down by precedents which would directly apply to wagering contracts. Even if it is permissible for courts to evolve a new head of public policy under extraordinary circumstances giving rise to incontestable harm to the society, we cannot say that wager is one of such instances of exceptional gravity, for it has been recognised for centuries and has been tolerated by the public and the State alike. If it has any such tendency, it is for the Legislature to make a law prohibiting such contracts and declaring them illegal and not for this court to resort to judicial legislation."
161. 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 Gaming 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."
162. 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.
163. 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 under Section 42E and Rules 57, 67 (Jha) and 93, since there is an express prohibition of new partnership without written permission, such a partnership is forbidden by law, and, therefore, it is unlawful, for, Section 23 of the Indian Contract Act, as also Section 34(c) of the Rajasthan Excise Act render the licences liable to cancellation on breach of the conditions of the licence ; and Sections 54 and 58(c) make it punishable with imprisonment or fine.
164. We, therefore, are of the view that the view taken by this court in Durga Madira Sangh's case [1985] 153 ITR 226 and Rooplal Danchand's case [1986] 162 ITR 742, (D.B.I.T. Reference No. 15 of 1980, decided on February 10, 1986), cannot be accepted as laying down the correct law and with due respect, we find insurmountable legal hurdle in persuading us to agree to confirm it, as we are of the contrary view.
165. The decision in K.M. Vishwanatha Pillai v. K.M. Shanmugham Pillai, AIR 1969 SC 493, is on the Motor Vehicles Act provisions--where the real owner holding the permit in benamidar's name has been held to be entitled to valid and lawful operation of permits. It fails to support Mr. Mehta's contention as the facts are quite different in our instant case. We are firmly of the view that none of the principles laid down in the decisions of the apex court in K.M. Vishwanatha Pillai v. K.M. Shanmugham Pillai, AIR 1969 SC 493, Gherulal Parakh v. Mahadeodas Maiya, AIR 1959 SC 781,Umacharan Shah & Bros. v. CIT [1959] 37 ITR 271 (SC), Jer & Co. v. CIT [1971] 79 ITR 546 (SC) and Gordhandas Kessowji v. Champsey Dossa, AIR 1921 PC 137, can result in treating the present partnership as legal in spite of specific prohibition contained in licence condition No. 3, which is prescribed under Section 42 of the Act and Rules 93, 57 and 67 (Jha). Since it is illegal, the logical effect would be to not recognise it for registration. An illegal act can never be treated as genuine and registration would result in providing a protective umbrella to illegal activities which the judicial court should never do by expanding the connotation "genuine" to unlawful, illegal, prohibited acts also.
166. Consequently, we hold that such a partnership cannot be registered under the Indian Income-tax Act.
167. The Division Bench making the reference to us have referred the entire case for decision as it was of the view that the view taken in Durga Madira Sangh v. CIT [1985] 153 ITR 226 (Raj) is not correct and requires reconsideration.
168. 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.
169. 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 law.
169. We are of the opinion that, on the facts and circumstances of the present case, the Tribunal was right in holding that the firm was not valid and that the object of the agreement was of such a nature that if permitted, it would defeat the public policy as contained in the Rajasthan Excise Act, 1950. We further hold that the Tribunal was justified in holding that the firm was not valid and, therefore, not entitled to registration under Section 185 of the Income-tax Act, 1961,
170. In this view of the matter, both the questions referred by the Income-tax Appellate Tribunal, Jaipur Bench, Jaipur, are, therefore, answered in the affirmative. Since the questions of law are genuinely and seriously debatable, we make no order as to costs.