Bhargava,J. - (1.)THIS is a reference under Section 256(1) of the I.T. Act, 1961 (hereinafter referred to as "the Act'), by the Income-tax Appellate Tribunal, Jaipur Bench, Jaipur, who referred the following questions of law for the opinion of this court :
"1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the formation of the firm was not valid and that the object of the agreement was of such a nature that, if permitted, it would defeat the provisions of law, namely, the Rajasthan Excise Act, 1956 ?

(2.)IF the answer to the above be in the affirmative, whether the Tribunal was justified in holding that the assessee was not entitled to registration under Section 185 of the I.T. Act, 1961 ?"
2. The applicant (hereinafter referred to as "the assessee ") claimed to be a firm consisting of the following partners :

1. Shri Madho Lal Tak.

2. Shri Ram Pratap Tak.

3. Shri Norat Mal Tak.

4. Shri Heera Lal Tak.

5. Shri Ram Lal Tak.

6. Shri Ramdeo Tak,

7. Shri Hemchand Tak.

8. Shri Dolat Ram Tak.

9. Shri Pannalal Tak.

10. Shri Mishri Lal Rajput.

11. Shri Ram Swaroop Kumawat.

12. Shri.Bhanwar Lal Rajput.

13. Shri Durga Lal Kumawat.

14. Shri Santoshi Lal,

15. Smt. Bali Bai.

This firm was constituted to carry on the business of sale of country liquor. Four licences Nos. 2(a), 2(b), 2(c) and 2(d) were issued under Section 42 of the Rajasthan Excise Act authorising the sale of country liquor in the j"int names of the following persons :

1. Shri Heeralal Tak.

2. Shri Ram Lal Tak.

3. Shri Hemchand Tak.

4. Shri Dolat Chand.

These four persons joined with other 11 persons so as to form a partnership firm consisting of 15 persons named above so as to overcome the difficulty of shortage of finances and to reduce the burden of losses, if any, in the business and to pool the resources and start the partnership business, The agreement materialised and the firm started functioning from 1st April, 1965, and carried on the business of selling country liquor for the whole year, in the name of M/s. Durga Madira Sang, Beawar, and no objection was raised by the Excise Department. The applicant moved an application before the ITO under Section 185 of the Act in Form No. 11, for registration under the I.T. Act, 1961. The ITO, after examining the various provisions of the licence and, in particular, the restriction imposed upon the licensees in terms of Clause 3 of the licences referred to above, prohibiting them from transferring the licences and entering into partnership with outsiders without the specific written permission of the licensing authority, came to the conclusion that the licensees had committed breach of the restriction imposed upon them, vide Clause 3 of the licence. He was, therefore, of the opinion that the partnership violated the provisions of Section 23 of the Indian Contract Act. He relied on CIT v. Krishna, Reddy & Co. 1962] 46 ITR 784 (AP), CIT v. Benarsidas & Co. [1962] 44 ITR 835 (Punj) and Jer & Co. v. CIT [1966] 60 ITR 335 (All), rejected the application and did not register the firm and ordered that the assessment will be made in the status of an association of persons. The assessee preferred an appeal before the AAC of Income-tax. The AAC relied on Jer & Co. v. CIT [1971] 79 ITR 546 (SC) and distinguished the cases relied on by the ITO and held that the firm was jointly constituted and was entitled to registration and that there was no transfer or sub-letting of the licence. Therefore, he allowed the appeal and directed the ITO to grant registration to the firm. The Department feeling aggrieved of the above order of the AAC of Income-tax preferred an appeal before the Income-tax Appellate Tribunal who distinguished the cases relied on by the assessee and placed reliance on CIT v. Krishna, Reddy & Co. [1962] 46 ITR 784. The facts of this case are applicable on all fours to the facts of the present case and, therefore, allowed the appeal, and found that the firm was Bet genuine because the partmership agreement was vaid ab initio and allowed the appeal and reversed the erder of the AAC. The assessee preferred an application under Section 256(1) of the Act requesting the Tribunal to refer the following question of law for the opinion of this court :

"Whether, on the facts and in the circumstances of the case, the refusal of registration was legally valid in terms of Section 185 of the Income-tax Act, 1961?"

The Income-tax Appellate Tribunal after hearing the parties referred the above question for our opinion.

We have heard Shri N. K. Jain for the assessee and Shri R. N. Surolia for the Department. The learned counsel for the Department has placed reliance on CIT v. Krishna Reddy & Co. [1962] 46 ITR 784 (AP), a decision of the Andhra Pradesh High Court, in which case a licence for carrying on abkari business under the Hyderabad Abkari Act was issued in the name of K without obtaining the prior approval of the Talukdar as required by the Act. K entered into partnership with A. It was held that the partnership with A was in contravention of law and was void but as the partners had joined with the common purpose of earning profits, they were assessable as an AOP on the profits made. The facts of this case are exactly identical with the facts of the present case and, therefore, the Income-tax Appellate Tribunal was right and justified in relying on this authority. The learned counsel for the Department also placed reliance on two decisions of the Madhya Pradesh High Court in CIT v. Pagoda Hotel and Restaurant [1974] 93 ITR 271, wherein it was held that since in the Excise Rules there was an absolute prohibition from entering into a partnership, the partnership in liquor was illegal and could not be registered, though the partnership was valid with regard to the business of running of hotel, and the other decision of the Madhya Pradesh High Court in CIT v. Sheonarayan Harnamyan [1975] 100 ITR 213, wherein it was held that since the licence was granted in the name of an individual for carrying on the business in liquor and since there was prohibition from entering into partnership with another person, the partnership was void in so far as it related to the liquor business and, therefore, was not entitled to registration.

(3.)ON the other hand, Shri N. K. Jain, the learned counsel for the assessee, placed reliance on Kapoor v. CIT [1973] 90 ITR 172 (All) [FB], It was a case of partnership in excise business and the Allahabad High Court rejected the contention of the Revenue that the partnership was illegal because of the provisions of the U.P. Excise Manual wherein paragraph 337 provided that a partnership in respect of an excise licence without obtaining the prior approval of the Excise Commissioner is invalid. Its was held by the Allahabad High Court that the instructions contained in the Excise Manual were merely executive instructions issued to the District Excise Officers and do not have the force of law and had been issued merely for the purpose of providing a guideline. Under Section 64 of the U.P. Excise Act, a licensee, if he wilfully does anything in breach of any of the conditions of the licence, is to be punished with fine which may extend to Rs. 200. It was held by the Allahabad High Court that since the Act merely imposes a penalty without declaring a contract made in contravention of it to be illegal or void, the imposition of penalty by itself and without more does not necessarily imply a prohibition of the contract and since the excise authority did not choose to cancel the licence, the licensee was entitled to carry on his business under the licence and will also be bound by the agreement entered into by him. Therefore, the agreement entered into by the parties was not held to be an agreement forbidden by anything contained in the U.P. Excise Act. The Allahabad High Court distinguished its earlier cases, Jer & Co. v. CIT [1966] 60 ITR 335 and Oudh Cocogem and Provision Stores v. CIT [1968] 69 ITR 819 (All) and placed reliance on a decision of the Privy Council in Govardhan Das Kesshowji v. Chamsey Dassa [1921] AIR 1921 PC 137, wherein the Privy Council had held that a licensee of salt manufacture cannot be said to have contravened the terms of his licence whereby lie is prohibited from alienating his interest simply because he admits members of his family and others as partners and had relied on two decisions of the Patna High Court in CIT v. Prakash Ram Gupta [1969] 72 ITR 366 (Pat) and Md. Warasat Hussain v. CIT [1971] 82 ITR 718 (Pat), wherein it has been held that in a case where a licensee entered into a partnership with a non-licensee, mere formation of a partnership does not amount to transfer of licence. The decision of the Allahabad High Court in Jer & Co. v. CIT [1966] 60 ITR 335 has been overruled by the Supreme Court in the case reported in Jer & Co v. CIT [1971] 79 ITR 546 (SC) and held that the licensee is not prohibited from entering into a partnership. It merely provided that the licence shall not be sub-leased or transferred and there was no prohibition in the licence against the holder entering into a partnership and, therefore, the partnership was legal and the appellant was entitled to registration.
Mr. Jain also placed reliance on a later decision of the Patna High Court in CIT v. Narpati _Khan and Co. [1974] 97 ITR 645, wherein it was held that where the licence for trading in liquor stood in the names of only some of the partners of a firm and was not transferred to the firm which carried on the business, there is no illegality in the partnership and the firm is entitled to registration under the I.T. Act and it followed its earlier decisions in CIT v. Mandal & Co. [1969] 72 ITR 769, CIT v. Prakash Ram Gupta [1969] 72 ITR 366 and Md. Warasat Hussain v. CIT [1971] 82 ITR 718 and placed reliance on a decision of the Supreme Court in Umacharan Shaw and Bros. v. CIT [1959] 37 ITR 271 (SC) and distinguished CIT v. Pagoda Hotel and Restaurant [1974] 93 ITR 271 (MP). Mr. Jain also placed reliance on a decision of the Madhya Pradesh High Court in Dayabhai & Co. v. CIT [1966] 59 ITR 364 wherein it was held that since the statute does not prohibit a licensee or a permit-holder from taking a partner but simply prohibits a transfer or a sub-lease of the licence or the permit, then the licensee or the permit-holder, by merely admitting a partner or partners in the business to which the licence or the permit-holder relates, does not transgress the prohibition against transfer or sub-lease and the partnership is valid. They also observed that there is a distinction between a statutory provision or a term or a condition in the permit prohibiting a permit-holder from taking a partner and a statutory provision or a term or a condition simply prohibiting a transfer except under certain conditions. Mr. Jain placed reliance on a decision of the Punjab and Haryana High Court in CIT v. Gian Chand & Co. [1973] 87 ITR 113, in which case a firm whose five partners had obtained licences in their separate names from the Fisheries Department of the Punjab Government for fishing in public waters, did not become illegal by taking in four others as partners and was not disentitled to registration under Section 185 of the I.T. Act, 1961, as the Punjab Fisheries Rules did not contain any rule prohibiting entering into partnership so far as the fishing licences were concerned, and placed reliance on Jer & Co. v. CIT [1971]79 ITR 546 (SC). He also placed reliance on a decision of the Madras High Court in National Road-Ways v. CIT [1975] 99 ITR 97 in which case the partners of the assessee-firm who had individually advanced moneys to one S took over two buses standing in the name of S together with the route permits in part payment of the moneys due to them and the firm carried on the business of running the buses. Under an agreement entered into with the partners, S had agreed to make over the buses with the route permits and had also undertaken to apply to the motor vehicles authorities concerned for the transfer of the route permits in favour of the partners. The claim of the assessee-firm for registration under Section 185 of the I.T. Act, 1961, was rejected by the officer in the view that the firm was exploiting the route permits granted to S in an illegal manner without getting the route permits transferred in its own name. The AAC, however, directed grant of registration. The Appellate Tribunal in the appeal by the Department reversed the order of the AAC. In the reference at the instance of the assessee, the High Court held that the firm was entitled to registration under the I.T. Act, 1961.

Lastly, he placed reliance on CIT v. Manick Chandra Dey [1977] 106 ITR 860 (Cal), in which it was held that the provisions of the Control Order did not prohibit entering into a partnership or make the formation of a partnership illegal. On the contrary, the provisions seemed to suggest that on reconstitution of the firm, the new firm was entftled to apply for fresh licence. Therefore, the constitution of the firm was legal and, as such, the firm was entitled to registration.