Illegal partnership in liquor trade can offend public policy and defeat income-tax registration where excise permission is required.

An excise licence condition prohibiting induction of new partners without prior written permission operates as a real legal restriction, not a mere revenue control, because breach can trigger cancellation, suspension, and penal consequences. In the context of liquor trade, such an arrangement may offend public policy and section 23 of the Contract Act where it permits entry of outsiders contrary to the statutory scheme. A firm formed in violation of that restriction is treated as illegal and therefore cannot meet the requirement of a valid firm for registration under the Income-tax Act.

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Issues: (i) Whether a partnership formed by excise licence-holders with new partners, without prior written permission of the excise authority, is invalid as being opposed to the Rajasthan Excise Act, 1950 and public policy. (ii) Whether such a firm is entitled to registration under section 185 of the Income-tax Act, 1961.

Issue (i): Whether a partnership formed by excise licence-holders with new partners, without prior written permission of the excise authority, is invalid as being opposed to the Rajasthan Excise Act, 1950 and public policy.

Analysis: The licence conditions, read with the Rajasthan Excise Act and Rules, were held to impose a real prohibition on inducting strangers into the liquor business without written permission. The statutory scheme provided for cancellation or suspension of the licence and penal consequences for breach, showing that the restriction was not merely revenue-oriented but was intended to protect public health, morality, safety, and order. The Court held that such an arrangement would permit backdoor entry of unsuitable persons into liquor trade and therefore offend public policy and section 23 of the Indian Contract Act, 1872.

Conclusion: The partnership was invalid and unlawful, and the object of the agreement was opposed to public policy.

Issue (ii): Whether such a firm is entitled to registration under section 185 of the Income-tax Act, 1961.

Analysis: Registration under the Income-tax Act requires a genuine and valid firm constituted in accordance with law. Since the partnership itself was held to be illegal and void, it could not satisfy the legal requirements for registration. The Court distinguished authorities where only transfer or sub-letting was prohibited and held those cases inapplicable because the Rajasthan licence expressly barred induction of partners without permission.

Conclusion: The firm was not entitled to registration under section 185 of the Income-tax Act, 1961.

Final Conclusion: The reference was answered against the assessee, and the refusal of registration was upheld because the unapproved partnership in liquor trade was contrary to the excise law and public policy.

Ratio Decidendi: Where the governing excise law and licence conditions expressly prohibit induction of new partners without written permission and attach penal and cancellation consequences to breach, a partnership formed in violation of that restriction is unlawful and cannot be registered under the income-tax law.

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