Unlawful partnership under liquor licensing law cannot claim firm status for income-tax benefits despite amended registration rules.

A partnership formed in breach of the Andhra Pradesh excise licensing regime was unlawful and could not be recognised as a valid firm for income-tax purposes. The excise statute and rules barred inclusion of partners without prior licensing permission, and a partnership created in contravention of that prohibition was opposed to public policy under the Contract Act. The amendment to sections 184 and 185 of the Income-tax Act, which removed the registered/unregistered firm distinction, did not prevent the tax authority from examining whether the firm was constituted in accordance with law. The claimed firm status and related deductions were therefore denied, and the Revenue was entitled to assess the assessees otherwise than as firms.

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Issues: Whether, after the amendment of sections 184 and 185 of the Income-tax Act, 1961, a partnership formed in contravention of the Andhra Pradesh Excise Act, 1968 and Rule 39 of the Andhra Pradesh Indian Liquor and Foreign Liquor Rules, 1970 could still be treated as a valid firm for income-tax purposes and allowed partner remuneration and interest deductions.

Analysis: The statutory scheme governing liquor trade in Andhra Pradesh permits business in intoxicating liquor only in accordance with the licence and its conditions. Section 15 of the Andhra Pradesh Excise Act, 1968, read with section 31 and Rule 39 of the Andhra Pradesh Indian Liquor and Foreign Liquor Rules, 1970, prohibits inclusion of partners without prior permission of the licensing authority. A partnership entered into in breach of that regime is opposed to public policy and is unlawful under section 23 of the Indian Contract Act. The amendment to sections 184 and 185 of the Income-tax Act, 1961, introduced a new scheme to remove the distinction between registered and unregistered firms and to avoid double taxation, as reflected in Circular No. 636; it did not take away the assessing authority's power to examine whether the firm was constituted in accordance with law. The earlier excise-law based decisions therefore continued to apply.

Conclusion: The alleged partnership could not be recognised as a valid firm for income-tax purposes, and the Revenue was entitled to have the assessees assessed otherwise than as firms.

Final Conclusion: The Tribunal's view was set aside and the Revenue succeeded on the legality of the partnership and the consequent denial of firm status for the claimed tax benefits.

Ratio Decidendi: A partnership formed in violation of a statutory prohibition governing liquor licences is unlawful and cannot be treated as a valid firm under the Income-tax Act merely because the post-amendment scheme dispenses with registration-based distinctions.

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