Mandatory prior approval for liquor-licence partnership changes controls tax registration where the partnership is prohibited by law.

A partnership formed by inducting additional partners without the mandatory prior approval of the licensing authority under the Andhra Pradesh liquor rules is an agreement prohibited by law and cannot support registration under the Income-tax Act. Mere intimation does not satisfy the statutory requirement, and a change in the constitution of the licensee firm without approval amounts to contravention of rules 38 and 39. In light of the Supreme Court principle in Bihari Lal Jaiswal, the Tribunal could not rely on the earlier High Court view to uphold validity of such a partnership, because a prohibited arrangement cannot be treated as a genuine firm for tax registration purposes.

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Issues: (i) Whether the assessee-firm was entitled to registration under the Income-tax Act despite the induction of additional partners without prior approval of the licensing authority; (ii) Whether there was contravention of rules 38 and 39 of the Andhra Pradesh (Foreign Liquor and Indian Liquor) Rules, 1970; (iii) Whether the Tribunal was justified in relying on the earlier High Court decision on the validity of such a partnership.

Issue (i): Whether the assessee-firm was entitled to registration under the Income-tax Act despite the induction of additional partners without prior approval of the licensing authority.

Analysis: Rule 39 of the Andhra Pradesh (Foreign Liquor and Indian Liquor) Rules, 1970 requires prior permission of the licensing authority before any person is included as a partner. Mere intimation is not enough. Where a partnership is formed in breach of that prohibition, the agreement has no legal sanctity and cannot be treated as a valid basis for registration under the Income-tax Act.

Conclusion: The assessee-firm was not entitled to registration; the finding was against the assessee.

Issue (ii): Whether there was contravention of rules 38 and 39 of the Andhra Pradesh (Foreign Liquor and Indian Liquor) Rules, 1970.

Analysis: The induction of three additional partners was done without obtaining the required prior approval of the licensing authority. The statutory scheme governing liquor licences insists on strict control over changes in the constitution of the licensee firm, and such a change without approval falls within the prohibition contained in the rules.

Conclusion: There was contravention of rules 38 and 39; the finding of no contravention was incorrect and was against the assessee.

Issue (iii): Whether the Tribunal was justified in relying on the earlier High Court decision on the validity of such a partnership.

Analysis: The Supreme Court decision in Bihari Lal Jaiswal v. CIT laid down that an agreement entered into contrary to a prohibition in the excise law is an agreement prohibited by law and cannot found a genuine partnership for registration purposes. In light of that decision, the earlier view of the High Court could not govern the matter.

Conclusion: The Tribunal was not justified in relying on the earlier High Court decision; the reliance was against the Revenue's challenge and in favour of the Revenue.

Final Conclusion: A partnership constituted in breach of the mandatory prior-approval requirement under the excise rules cannot be treated as a valid firm for income-tax registration, and the Tribunal's contrary view was unsustainable.

Ratio Decidendi: A partnership formed in contravention of a statutory prohibition governing liquor-licence transfers or changes in constitution is an agreement prohibited by law and cannot be recognised as a genuine partnership for registration under the Income-tax Act.

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