1995 (11) TMI 2 - SC - Income Tax

Illegal excise-licence partnership void u/s23 Contract Act, denied s.185 Income-tax registration despite genuine conduct

SC held that a partnership formed in contravention of statutory licence conditions under the Excise Rules is void and unlawful under s. 23 of the Contract ... Right to claim registration - individual shares of the partners - Whether the applicant could be refused registration u/s 185 on the ground that its constitution was illegal for breach of the provisions of clause VI of the General Licence Conditions made under the Excise Rules, although no action was taken by the Collector for cancellation of the licence under clause 14 of the Licence in Form C. S. No. 3, in spite of written intimation, about its constitution - HELD THAT:- When the law prohibits the entering into a particular partnership agreement, there can be in law no partnership agreement of that nature. The question of such an agreement being genuine cannot, therefore, arise. Where, of course, the statutory provisions or the conditions of licence do not prohibit the entering into of partnership, it is obvious, such a partnership cannot be held to be illegal, unlawful or void, as held by this court in Jer and Co.'s case [1971 (1) TMI 4 - SUPREME COURT]. But where there is a specific prohibition as in the case before us, any partnership entered into would be an unlawful and void agreement within the meaning of section 23 and no other law, whether State or Central, can recognise such an agreement. The fact that such a partnership can be permitted by the Collector does not detract from the mandatory character of the clause. As pointed out above, Licence Condition No. 14 expressly provides that for breach of any condition of licence or of the Act or the Rules made thereunder, the licence may be cancelled. The context---that it is an excise enactment---should not be forgotten. The grant of registration under the Income-tax Act, it must be remembered, confers a substantial benefit upon the partnership firm and its members. There is no reason why such a benefit should be extended to persons who have entered into a partnership agreement prohibited by law. One arm of law cannot be utilised to defeat the other arm of law. Doing so would be opposed to public policy and bring the law into ridicule. It would be wrong to think that while acting under the Income-tax Act, the Income-tax Officer need not look to the law governing the partnership which is seeking registration. It would probably have been a different matter if the Income-tax Act had specifically provided that the registration can be granted notwithstanding that the partnership is violative of any other law---but it does not say so. We may clarify that our holding does not mean that such an illegal partnership cannot be taxed. It is certainly bound to be taxed either as an unregistered partnership firm or as an association of persons. The only question considered herein is its right to claim registration under the Income-tax Act. Appeals are allowed. The applications under section 256(2) filed by the assessee are allowed. The consequent reference is withdrawn to this court and answered in the affirmative, i.e., against the assessee and in favour of the Revenue. Issues Involved:1. Legality of partnership under the Madhya Pradesh Excise Rules.2. Entitlement to registration under the Income-tax Act.3. Interpretation of relevant provisions of the Income-tax Act and the Madhya Pradesh Excise Rules.4. Public policy and the interplay between State and Central laws.Issue-wise Detailed Analysis:1. Legality of Partnership under the Madhya Pradesh Excise Rules:The core issue revolves around whether the partnership formed by the assessee without the written permission of the Collector, as mandated by clause VI of the General Licence Conditions under the Madhya Pradesh Excise Rules, is legal. Clause VI explicitly prohibits the transfer, sub-lease, or formation of a partnership for the working of the excise privilege without the Collector's written permission. The High Court, relying on earlier decisions in CIT v. Sheonarayan Hatnarayan and CIT v. Pagoda Hotel and Restaurant, held that the prohibition is absolute, making the partnership illegal.2. Entitlement to Registration under the Income-tax Act:The next issue is whether such an illegal partnership can be granted registration under sections 184 and 185 of the Income-tax Act. Section 184(1) requires that the partnership be evidenced by an instrument specifying individual shares, while section 185(1) mandates the Income-tax Officer to inquire into the genuineness of the firm. The Supreme Court held that a partnership prohibited by law cannot be considered genuine for the purposes of registration under the Income-tax Act. The partnership, being illegal under the excise rules, cannot be granted the substantial benefit of registration.3. Interpretation of Relevant Provisions of the Income-tax Act and the Madhya Pradesh Excise Rules:The Supreme Court examined the interplay between the Income-tax Act and the Madhya Pradesh Excise Rules. The court noted that while the partnership was evidenced by an instrument and specified individual shares, the lack of the Collector's written permission rendered it illegal. The court emphasized that the object of clause VI is to ensure close control over the business of intoxicating liquors, which would be compromised if partnerships could be formed without permission. The court concluded that such a partnership, being prohibited, is void under section 23 of the Contract Act and cannot be recognized for registration under the Income-tax Act.4. Public Policy and the Interplay Between State and Central Laws:The court underscored that one arm of law cannot be used to defeat another. Recognizing a partnership prohibited by the excise rules under the Income-tax Act would be against public policy and bring the law into ridicule. The court held that the Income-tax Officer must consider the legality of the partnership under the relevant excise laws before granting registration. The court clarified that while such a partnership can be taxed as an unregistered firm or an association of persons, it cannot claim the benefit of registration under the Income-tax Act.Conclusion:The appeals were allowed, and the applications under section 256(2) filed by the assessee were granted. The Supreme Court answered the reference in the affirmative, against the assessee and in favor of the Revenue, holding that the illegal partnership cannot be granted registration under the Income-tax Act. No costs were awarded.