Holding

A partnership prohibited by statutory licence conditions is unlawful and void under section 23 of the Contract Act and cannot be treated as a genuine partnership for registration under sections 184/185 of the Income Tax Act.

Summary

Bihari Lal Jaiswal obtained a retail liquor licence under the Madhya Pradesh Excise Rules and entered into a partnership with ten others to run the business. He applied for registration of the partnership under sections 184 and 185 of the Income Tax Act, but the Income Tax Officer rejected the application because the partnership violated clause VI of the General Licence Conditions, which forbids any partnership without the Collector’s written permission. The Appellate Assistant Commissioner ordered registration, the Tribunal reversed that order, and the High Court refused to refer the matter to the Tribunal under section 256. The Supreme Court held that a partnership prohibited by a statutory provision is unlawful and void under section 23 of the Contract Act, cannot be deemed a genuine partnership, and therefore cannot be granted registration under the Income Tax Act. The Court allowed the appeals, set aside the High Court’s decision and withdrew the reference to the Tribunal.

Issues considered

The partnership entered into in violation of clause VI of the Madhya Pradesh Excise Rules is a 'genuine' partnership within the meaning of section 185 of the Income Tax Act.
Whether a partnership prohibited by a State excise law can be recognised and granted registration under a Central statute.
Whether such a prohibited partnership is void under section 23 of the Contract Act and thus ineligible for registration.

Legislation cited

Income Tax Act, 1961s. 184, s. 185, s. 256(1), s. 256(2)
Indian Contract Act, 1872s. 23
Taxation Laws (Amendment) Act, 1975s. Explanation to section 185 (revised)

Subjects

registrationpartnershipexcise licenceillegal partnershipIncome Tax Actsection 184section 185section 23 Contract Actpublic policyintoxicating liquorexcise law

Judgment

BIHARI LAL JAISWAL A
v.
THE COMMISSIONER OF INCOME TAX

NOVEMBER 16, 1995

[B.P. JEEVAN REDDY AND B.N. KIRPAL, JJ.)
B

Income Tax Act, 1961 :

Sections 184 and 185-Registration of a Jinn-Genuineness of partner-
ship-Detemiination of-Income Tax Officer competent to look to law C
governing partnership-Partnership prohibited under State Excise Enact-
ments-Bar to registration.

Contract Act, 1872:

Section 23-Agreement to enter into partnership which is prohibited D
under State Excise Enactments-Held : unlawful and void-Bar to registration
under Income Tax Act, 1961 being opposed to public policy.

The appellant - assessee had obtained a licence for retail sale of
country spirit under the Madhya Pradesh Excise Rules, 1960. He entered E
into a partnership with ten other persons to conduct the business under
the said licence. He filed an application under sections 184 and 185 of the
Income Tax Act, 1961 for grant of registration to the said firm. The Income
Tax Officer rejected the application on the ground that the partnership
was prohibited under clause (VI) of the General Licence conditions
prescribed by the Rules since no permission from the Collector was taken. F
On appeal the Appellate Assistant Commissioner directed the Income Tax
Officer to grant registration. The tribunal reversed this order. Thereupon
the appellant applied to the Tribunal to refer two questions under section
256(1) of the Act which was refused. The application to the High Court
under section 256(2) of the Act to refer the aforesaid questions was also G
rejected. Aggrieved by the High Court's judgment the appellant - assessee
preferred the present appeals.

On behalf of the appellant it was contended that the prohibition
contained in the General Licence Conditions has no relevance in the
matter of grant of registration. H
285
286 SUPREME COURT REPORTS (1995] SUPP. 5 S.C.R.

A On behalf of the respondents it was contended that the partnership
being prohibited cannot be recognised in law; that this is so even if the
partnership is prohibited by a State enactment and registration is sought
under a Parliamentary enactment, and that the partnership is unlawful
under section ~3 of the Contract Act, 1872.
B
Allowing the appeals, this Court

HELD : 1. No person has a fundamental right to deal or trade in
intoxicating liquors. The State is entitled to prohibit and or closely regu-
late their production, manufacture, possession, transport, purchase and
c sale. The right of a citizen to deal in these intoxicating liquors is only to
the extent it is provided for and permitted by the Act and the Rules made
thereunder. (297-C-E]

Khoday Distilleries Ltd. & Ors. v. State of Kamataka & Ors., (1995] 1
D sec 574, relied on.
2.1. Clause (VI) of the General Licence Conditions which are
Statutory in character provides expressly that a holder of a licence/privilege
shall not enter into a partnership for the working of such privilege in any
way or manner without the written permission of the Collector. This condi-
E tion is binding upon the Iicencee. If so, he cannot enter into a partnership;
nor can there be, in law, a partnership with respect to the privilege (busi-
ness) granted under the licence. No person, and no licensee can claim any
right contrary to the said provision. (297-E-F]

F 2.2. The object underlying the said Clause is self- evident. Since the
licence is granted for dealing in intoxicating liquors, the business wherein
is res extra commercium - and also because they are supposed to be
harmful and injurious to health and morals of the members of the society
- close control is envisaged and provided over the business carried on
under the licence. This object will be defeated if the licensee is permitted
G to bring in strangers into the business, which would mean that instead of
the licensee carrying on the business, it would be carried on by others - a
situation not conducive to effective implementation of the excise law and
consequently deleterious to public interest. It is for this very reason that
transfer or sub-letting of licence is uniformly prohibited by several State
H Excise enactments. (297-G-H; 298-A]
B.L.JAISWALv. C.l.T. 237

2.3. Any agreement whereunder the licence is transferred, sub-Jet or A
a partnership is entered into with respect to the privilege/business under

.. the said licence, contrary to the prohibition contained in the relevant excise
enactment, is an agreement prohibited by law. The object of such an agree-
ment must be held to be of such a nature that if permitted it would defeat
the provisions of the excise law within the meaning of section 23 of the
Contract Act. [298-B-C] B

2.4. 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 Iicem:e do C
not prohibit the entering into the partnership, it is obvious, such a partner-
ship cannot be held to be illegal, unlawful or void. But where there is a
specific prohibition as in the case before this Court, any partnership
entered into would be 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 D
Collector does not detract from the mandatory character of the clause.
[298-D-F]
fer and Company v. Commissioner of Income Tax, (1971) 79 ITR 546,
referred to.
E
Commissioner of Income Tax, Madhya Pradesh v. Pagoda Hotel and
Restaurant, (1974) 93 ITR 271, approved.

Unacharan Shaw & Bros. v. Commissioner of Income Tax, West Bengal,
(1959) 37 1.T.R. 271 and Commissioner of Income Tax, Andhra Pradesh - IV
v. Nalli Venkataramana & Ors., (l984) 145 I.T.R. 759, held inapplicable. F

3. 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. G
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. [298-F-G]

4. 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 H
288 SUPREME COURT REPORTS [1995] SUPP. 5 S.C.R.

A different matter if the Income Tax Act had specifically provided that
registration can be granted notwithstanding that the partnership is viola-
tive of any other law-but it does not say so .

B
[However, the Court clarified that it 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.]
-
[298-H; 299-A-B]
CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 1825-28
of 1977.

C From the Judgment and Order dated 28.1.75 of the Madhya Pradesh
High Court in Misc. C.C. Nos. 598, 599, 602 and 605 of 1975.

Pramod Swarup Parveen Swarup, O.N. Kaul and Ms. Prerna Swarup
Advs. for the Appellants.

D Dr. P.R. Misra for S.N. Terdol for the Respondents.

The Judgment of the Court was delivered by

B.P. JEEVAN REDDY, J. These appeals are preferred against the
judgment and order of the Madhya Pradesh High Court rejecting the
E applications filed by the assessee under Section 256(2) of the Income Tax
Act, 1961. The assessee had requested the High Court to direct the
Tribunal to state the following question of law for its opinion :

"Whether on the facts and in the circumstances of the case, the
applicant could be refused registration under section 185 of the
Income-tax Act, 1961 on the ground that its constitution was illegal
F 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. 3, inspite of written intimation,
dated 27.4.1967 about its constitution."
G
The High Court rejected the applications on the ground that the
question sought to b~ raised by the assessee was concluded against it by
two decisions of that Court, viz., Commissioner of Income Tax, Madhya
P1;adesh v. Sheonarayan Hamarayan, (1973) Tax Law Reporter 1186 =
(1975) 100 I.T.R. 213 and Commissioner of Income Tax, Madhya Pradesh
H v. Pagoda Hotel and Restaurant, (1974) 93 1.T.R. 271.
BL. JAISWAL v. C.LT. [B.P, JEEVAN REDDY, J.) 289

A licence for retail sale of country spirit under supply system in form A
C.S. No. 3 of the Madhya Pradesh Excise Rules, 1960 was obtained by
Biharilal Jaiswal in respect of twenty two out-stall shops in Tehsil Saran-
garh, District Raigarh in the public auction held in January, 1968. The
licence was effective for the period commencing on April 1, 1968 and
ending with March 31, 1969. Biharilal Jaiswal entered into a partnership
B
with ten other persons to conduct the business under the said licence. The
partnership is evidence by the deed dated August 30, 1968. An application
for grant of registration to the said firm under Sections 184 and 185 of the
Act was filed in Form-11. The Income Tax Officer rejected the application
for registration on the ground that the partnership having been formed in
violation of clause (VI) of the General Licence Conditions prescribed by c
the Madhya Pradesh Excise Rules is illegal and cannot, therefore, claim
registration under the Income Tax Act. On appeal, the Appellate Assistant
Commissioner directed the Income Tax Officer to grant registration as
prayed for, against which order the Revenue appealed to the Tribunal. The
Tribunal reversed the order of the Appellate Assistant Commissioner and D
restored the order of the Income Tax Officer. Thereupon, the assessee
applied to the Tribunal to refer two questions under Section 256(1) of the
Act which was refused. The application to the High Court under Section
256(2) to refer the aforesaid (consolidated) question was also rejected as
stated above.
E
Clause (VI) of the Central Licence Conditions prescribed by the
Excise Rules reads thus :

"VI. TRANSFER OR SUBLEASE OF LICENCE : No privilege
of supply or sale shall be sold, transferred or sub-leased, nor shall F

..
a holder of any such privilege enter into a partnership for the
working of such privilege in any way or manner without the written
permission of the Collector, which shall be endorsed on the licence .
A partner, sub-lessee, transferee shall be bound by all the condi-
tions of the licence, but the original licencee also shall continue to
be responsible to the State Government for the due payment of G
the licence fees and proper working of the shop, except that in the
case of a transfer his responsibility shall cease as soon as the
transfer is endorsed on the licence."

Another condition of licence, viz, clause (14) provided that "on H
290 SUPREME COURT REPORTS [1995) SUPP. 5 S.C.R.

A breach of any of the conditions of this licence or of any of the provisions
of the Madhya Pradesh Excise Act, 1915, or the Rules made thereunder ,
this licence may be cancelled by the Collector."

A few clauses in the partnership deed may also be noticed. The
preamble to the partnership deed reads :
B
"Whereas Shri Girdharilal son of Buddhulal J aiswal of Ambikapur
has secured the excise contract of two Liquor shops Goda Chowk
and Talaiya in Bhopal in Sehore District for Rs. 3,05,000.00 and
1,50,000.00 respectively total of Rs. 4,55,000.00 in his name in the
c open auction held on 31st January, 1968 for the period from 1st
April 1968 to 31st Ma~ch 1969 and whereas as agreed between the
aforesaid persons and as he alone unable to execute the same
contract individually for want of funds and whereas the parties
No.1 to 6 named above having agreed to carry on the above
contract business in partnership with effect from 1.4.68 desire to
D reduce in writing and place in a legal form the terms <1.nd conditions
under which they have agreed to carry on the partnership business,
they do hereby declare and stipulate that they have been partners
in the firm named and styled as 'GIRDHARILAL JAISWAL
LIQUOR CONTRACTOR BHOPAL on the terms and condi-
E tions as detailed below :"

Clause (7) of the partnership deed provided that :

"No partner shall be entitled to any remuneratio,n for taking part
in the conduct of the firms and that all the partners shall carry on
F the same to the common advantage, be just and faithful to each
other and shall render the accounts and full information of all
things effective the firms business."

In Pagoda Hotel and Restaurant, a Division Bench of the Madhya
Pradesh High Court had opined that the prohibition contained in Clause
-
G (VI) of the General Licence Conditions is absolute and is conched in wide
terms. Since the said clause expressly prohibited the entering into partner-
ship for working the business/privilege under the licence, it was held, no
partnership could have been entered into with respect to the said business.
Accordingly, it was held that no registration can be granted under Section
H 26(A) of the Indian Income Tax Act, 1922 to such an invalid partnership.
B.L. JAISWAL v. C.I.T. [B.P. JEEVAN REDDY, J.] 291

The High Court distinguished the decisions of the Bombay and Patna High A
Courts in Champsey v. Gordhandas, A.LR. (1917) Born. 250, Commissioner
of Income Tax v. Prakash Ram Gupta, (1969) 72 l.T.R. 366 (Patna) and
Commissioner of Income Tax v. Manda/ (N.C.) & Co., (1969) 72 I.T.R. 707
Patna on the ground that the statutory provisions concerned in those cases
merely prohibited the transfer of the privilege but did not contain a
B
prohibition against entering into partnership whereas the Madhya Pradesh
Rules expressly prohibited the entering into partnership as well. This
decision was followed in Sheonarayan Hamarayan. The Division Bench
rejected the contention put forward by the assessee that the decision in
Pagoda Hotel and Restaurant must be deemed to have been overruled by
the decision of this Court in fer and Company v. Commissioner of Income c
Tax, [1971] 79 I.T.R. 546. The High Court pointed out that the statutory
provision concerned in fer and Company was altogether different from the
one contained in the Madhya Pradesh Excise Rules. The correctness of the
said decisions, which have been followed in the order under appeal, are
questioned in these appeals.
D
Sub-section (1) of Section 184 (the order sub-section being not
relevant for the present purpose are not referred to) read as follows at the
relevant time :

"184. Application for registration.- (1) An application for registra- E
tion of a firm for the purposes of this Act may be made to the
Income Tax Officer on behalf of any firm, if -

(i) the partnership is evidenced by an instrument; and

(ii) the individual' shares of the partners are specified in that F
instrument."

Sub-section (1) of Section 185, which too is relevant for our purpose,
read thus at the relevant time :

"185. Procedure on receipt of application. - (1) On receipt of an G
application for the registration of a firm, the Income Tax Officer,
shall inquire into the genuineness of the firm and its constitution
as specified in the instrument of partnership, and -

(a) if he is satisfied that there is or was during the previous year
in existence a genuine firm with the constitution so specified, he H
292 SUPREME COURT REPORTS (1995] SUPP. 5 S.C.R.

A shall pass an order in writing registering the firm for the assessment
year,

(b) if he is not so satisfied, he shall pass an order in writing refusing _
to register the firm."

B The position emerging from the above two sub-sections is this; an ap-
plication for registration of a firm for the purposes of the Act could be made
on behalf of any firm if the partnership was evidenced by instrument and that
instrument specified the individual shares of the partners. On such applica-
tion being filed, the Income Tax Officer was obliged to enquire into the
c genuineness of the firm and its constitution as specified in the instrument of
partnership and if, on such enquiry, he was satisfied that a genuine firm with
the constitution as specified in the instrument of partnership was in existence
during the relevant previous year, he was obliged to grant registration. If, how-
ever, he was not so satisfied, he was to reject the application.*

D In the present case, the partnership was evidenced by an instrument
of Partnership which specified the individual shares of the partners. The
Truth of the partnership agreement was not disputed by the Revenue nor
was it disputed that the partners as specified in the instrument of partner-
ship did the business under the excise licence for the relevant excise
E year/fmancial year. It is equally not in dispute that the written permission
of the Collector was not obtained for entering into such partnership,
though the assessee -says that they had applied for the same. The only
question is whether such a partnership could not be called a genuine
partnership and whether such a partnership was dis-entitled to registration
under the Act because of the fact that it was entered into without obtaining
F
An explanation was added to sub-section (1) of Section 185 by the Taxation Laws
(Amendment) Act, 1970 with effect from April 1, 1971, which reads thus: "Explanation"
- For the purposes of this section and section 186, a fim1 shall not be regarded as a
genuine firm if any partner of the firm was, in relation to the whole or any part of his
share in the income or property of the fim1, at any time during the -previous year, a
benamidar of any other person to whom the first-mentioned partner does not stand in
G the relationship of a spouse or minor child." Though this explanation was not there
during the assessment year concerned herein, it is yet indicative of Parliaments'
thinking. The explanation frowned upon benami partners. It declared that existence of
a benami partner renders the partnership 'not genuine' within the meaning of Section
185(1), unless, of course, such benami partner happened to be the spouse or minor
child. The said explanation was substituted by a more elaborate one with effect from '>
April 1, 1976 by the Taxation Laws (Amendment) Act, 1975. We need not refer to it
H for the purpose of this case, since it merely eludicates the pre-existing explanation.
B.L. JAISWAL v. C.I.T. [B.P. JEEVAN REDDY, J.] 293

the written permission of the Collector. In other words, the question is A
whether a partnership which is prohibited by the law governing the licence
and the business under the licence can yet be granted registration under

... the income Tax Act. We have set out hereinbefore clause (VI) of the
General Conditions of Licence. It provided that (a) the privilege of supply
or sale granted to the licencee shall not be sold, transferred or sub-leased
B
without the written permission of the Collector which shall be endorsed on
the licence, (b) the holder of such licence/privilege shall not enter into a
partnership for the working of such privilege in any way or manner without
the written permission of the collector which shall be endorsed on the
licence, and (c) a partner, sub-lessee or a transferee shall be bound by all
the conditions of licence but that did not mean that the original licencee c
was free of any obligations under the licence. The original licencee con-
tinued to be responsible to the State Government for the due payment of
the licence fees and proper working of the shops except in the case of a
transfer of licence in which case the responsibility of the original licencee
ceased as soon as the transfer was endorsed on the licence. Clause (14) of D
the Licence further provided that on breach of any of the conditions of
licence or any of the provisions of the Madhya Pradesh Excise Act or the
Rules made thereunder, the licence may be cancelled by the Collector.

The contention of Sri Pramod Swarup, learned counsel for the
appellant is that the prohibition contained in clause (IV) of the General E
Licence Conditions provided by the Madhya Pradesh Excise Rules has no
relevance in the matter of grant of registration under Sections 184 and 185
of the Income Tax Act. May be, the learned counsel says, the said partner-
ship would not be recognised by, and may not be able to enforce any of
their right against, the Excise Department but so far as the Income Tax F
Act is concerned, such a partnership existed in fact and did actually do the
business during the relevant previous year. In other words, the learned
counsel says, the partnership was a genuine partnership. It was evidenced
by an instrument of partnership specifying the individual shares of the
partners and therefore, entitled to grant of registration. The learned
counsel for the Revenue, on the other hand, submits that since the excise G
law in force in Madhya Pradesh at the relevant time prohibited the entering
into of partnership for the working of the privilege granted under the
licence without the written permission of the Collector, no such partnership
can be recognised in law. What is prohibited by one enactment cannot be
recognised or sanctioned by another enactment. This should be so, he says, H
294 SUPREME COURT REPORTS (1995) SUPP. 5 S.C.R.

A even if the enactment prohibiting the partnership is a State enactment and
the Act whereunder registration is sought is a Parliamentary enactment;
otherwise, it would be opposed to public policy. The learned counsel
submits that an illegal partnership cannot be characterised as a genuine
partnership within the meaning of Section 185(1). Section 23 of the Contact
Act, the learned counsel points out, declares that every agreement of which
B
the object or consideration is unlawful is void. (Section 23 provides, inter
alia, that where "the object of an agreement is ......... of such a nature that
if permitted, it would defeat the provisions of any law", it is an unlawful
agreement and accordingly void.) The Income Tax Act cannot sanction,
recognise or grant registration to such a partnership agreement, he says:
c /

The question concerned herein has been the subject-matter of con-
sideration by this Court as well as several High Courts in the country. We
shall first refer to the decisions of this Court.

D
In Umacharan Shaw .& Bros. v. Commissioner of Income Tax, West
Bengal, (1959) 37 l.T.R. 271, the question arose with reference to Section
26A of the Indian Income Tax Act, 1992. Section 42(1)(a) of the Bengal
Excise Act provided that "subject to such restrictions as the State Govern-
ment may prescribe, the authority who granted any licence, permit or pass
E under this Act may cancel or suspend it... ..... (a) if it is transferred or sub
let by the holder thereof without the permission of the said authority''. The
Tribunal had, of course, denied the registration not on the ground of
illegality of partnership but on. the ground that a genuine partnership had
not come into existence. Even so, this Court referred to the said provision
F of the Bengal Excise Act and observed, "(T)here was no evidence that the
excise licence were transferred or sub-let. The three shops, it appears,
were managed separately and their accounts were kept distinct. There was
thus nothing which militated against the partnership and it cannot be said
that this affected the genuineness of the agreement". Having thus observed,
this Court went into the material relevant on the question of genuineness
G of the partnership and held that. there was no material upon which the
Income Tax Officer could come to the conclusion that the firm was not
genuine. We may mention that this decision is not really relevant on the
question arising in these appeals, yet we have referred to it because it
happened to be the first decision relied upon by the learned counsel for
H the assessee appellant.
B.L. JAISWAL v. C.l.T. [B.P. JEEVAN REDDY, J.] 295

The next decisi.on relied upon is in fer and Company. It was a case A
of the licencee entering into a partnership with others for doing the
business under the licence. Though the High Court had proceeded on the
footing that the excise licence concerned therein was governed by Rule 322,
which prohibited the holder of the licence from entering into a partnership
with another person, this Court found, as a matter of fact, that the licence
B
concerned therein was not governed by Rule 322 but by a different rule in
the Uttar Pradesh Excise Rules. The licence was issued in Form FL-IL It
did not prohibit the licencee from entering into partnership with respect
to the business under the licence. It merely provided that the licencee shall
not sub-let or transfer the licence. In this view of the matter, this Court
held that the question whether the partnership was illegal did not arise in C
that case and the firm was entitled to registration. This is what the Court
said:

"The Commissioner and the High Court proceeded on the footing
that the licence was governed by rule 322 which prohibited the D
holder of the licence from entering into a partnership with another
person. But the licence, it is clear from the record, was in Form
FL II issued under the U .P. Excise Manual. The licence does not
prohibit the holder from entering into partnership by the holder
of the licence; it merely provides that the licence shall not be
sub-let or transferred. Since there is no prohibition against entry E
by the holder of the licence into a partnership the question whether
the partnership was illegal does not arise. The firm was entitled
on that account to registration. It is somewhat unfortunate that the
attention of the Commissioner and the High Court was not invited
to the form in which the licence was issued by the excise F
authorities. They proceeded to decide the case on the footing that
rule 322 of the Excise Manual applied. But that rule has no
application here."

The learned counsel for the Revenue understands the said decision
as laying down that a partnership prohibited by the excise law cannot be G
granted registration under the Income Tax Act, while the learned counsel
for the assessee reads it differently. Be that as it may, the fact remains that
the rule concerned in the ·said decision did not prohibit entering into
partnership by the licencee with respect to the business under the licence.
It was for the said reason, this Court held that the partnership cannot be H
296 SUPREME COURT REPORTS (1995] SUPP. 5 S.C.R.

A called illegal and cannot be refused registration.

So, far as the High Courts are concerned, their decisions turned upon
the particular language of the statutory provisions concerned in each case.
Several of these decisions have been referred to in an exhaustive decision
of the Andhra Pradesh High Court in Commissioner of Income Tax,
B Andhra Pradesh-W v. Nalli Venkataramana & Ors., (1984) 145 I.T.R. 759
rendered with reference to Andhra Pradesh Excise Rules. Rule 19(1) of
the Andhra Pradesh Excise Rules, 1969 provided that the licencee shall
not transfer the licence for the sale of arrack and toddy to any other
persons". At the same time, sub-rule (2) of Rule 19 provided that "(2)
c where a licence is granted jointly, no licencee shall include or exclude any
partner except with the previous permission of the licencing authority." In
both the cases considered in the said decision, the licence· was granted in
the name of an individual who in turn entered into a partnership with
others for conducting and carrying on the business under the said licence.
D The High Court took the view that so far as sub-rule (1) of Rule 19 is
concerned, it did not prohibit entering into a partnership with respect to
the business under the licence and that it merely prohibited the transfer
of the licence. On this basis, the High Court held that the partnership
entered into by the licencee(s) in the cases before them cannot be said to
E be opposed to or violative of sub-rule (1) of Rule 19. So far as sub-rule (2)
of Rule 19 is concerned, the High Court construed it as not applicable to
a case where the licence was granted in the name of a single person. The
High Court opined that sub-rule (2) applied only where the licence was
granted jointly in the name of two or more persons, i.e., to a partnership,
in which case, it held the sub-rule provided that no partners shall be
F excluded or included without the previous permission of the licencing
authority. In the words of the High Court, the position under Rule 19(2)
is this : "Rule 19(2) requires that whenever a new partner is introduced or
excluded, the previous permission of the licencing authority should be
obtained. But if such permission is not obtained, the partnership is not
G rendered illegal. As between the partners it continues to be valid and
entitled to registration under the LT. Act." On the above reasoning, the
High Court held that the two partnership agreemem.s before them did not
violate either sub-rule (1) or sub-rule (2) of Rule 19 and cannot be refused
registration under Section 185 of the Income Tax Act. The correctness of
H the interpretation placed by the High Court on Rule 19(2) does not fall for
B.L.JAISWALv. C.l.T. [B.P.JEEVAN REDDY,J.] 297

our consideration herein. Even so, we must say that the proposition, quoted A
by us hereinabove, is unacceptable as will be evident from the following
discussion.

In our op1mon, the correct pos1t1on appears to be this we are
confining ourselves to partnerships entered into with respect to a
licence/permit granted under the State Excise enactments) : these enact-
B
ments deal with intoxicating liquor, that is to say, the production, manufac-
ture, possession, transport, purchase and sale of intoxicating liquors (Entry
8 of List-II of the Seventh Schedule to the Constitution and other noxious
substances besides providing for duties of excise referred to in Entry 51 of
the said List. It has been held by this Court repeatedly that no person has c
a fundamental right to deal or trade in intoxicating liquors and that the
State is entitled to prohibit and/or close!y regulate their production,
manufacture, possession, transport, purchase and sale. It is enough to
refer to the recent Constitution Bench Judgment in Klwday Distilleries Ltd.
& Ors. v. State of Kamataka & Ors., (1995) 1 S.C.C. 574 where in all the D
earlier decision of this Court have been referred and the proposition
aforesaid affirmed. The right of a citizen to deal in these intoxicating
liquors is only to the extent it is provided for and permitted by the Act and
the Rules made thereunder. Take the Madhya Pradesh Act, with which are
concerned herein. Clause (VI) of the General Licence Conditions - it is E
not disputed that those conditions are statutory in character - provides
expressly that a holder of a licence/privilege shall riot enter into a partner-
ship for the working of such privilege in any way or manner without the
written permission of the Collector, which permission shall be endorsed on
the licence. This condition is binding upon the licencee. If so, he cannot
enter into a partnership nor can there be, in law, a partnership with respect
F
to the privilege (business) granted under the licence. No person, and no
licencee, can claim any right contrary to the said provision. The object
underlying the said clause is self-evident. Since the licence is granted for
dealing in intoxicating liquors, the business wherein is Res extra commer-
cium - and also because they are supposed to be harmful and injurious to G
health and morals of the members of the society - close control is envisaged
and provided over the business carried on under the licence. This object
will be defeated if the licencee is permitted to bring in strangers into the
business, which would mean that instead of the licencec carrying on the
business, it would be carried on by others - a situation not conducive to H
298 SUPREME COURT REPORTS [1995] SUPP. 5 S.C.R.

A effective implementation of the excise law and consequently deleterious to
public interest. It is for this very reason that transfer or sub-letting of
licence is uniformly prohibited by several State Excise enactments. It,
therefore, follows that any agreement whereunder the licence is trans-
ferred, sub-let or a partnership is entered into wjth respect to the
B privilege/business under the said licence, contrary to the prohibition con-
tained in the relevant excise enactment, is an agreement prohibited by law.
The object of such an agreement must be held to be of such a nature that
if permitted it would defeat the provisions of the excise law within the
meaning of Section 23 of the Contract Act. Such an agreement is declared
by Section 23 to be unlawful and void. The question is whether such an
c unlawful or void partnership can be treated as a genuine partnership within
the meaning of Section 185(1) and whether registration can be granted to
such a partnership under the provisions of the Income Tax Act and the
Rules made thereunder. We think not. When the law prohibits the entering
into a particular partnership agreement, there can be in law no partnership
D 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 fer and Company. But where there is a specific
E prohibition as in the case before us, any partnership entered into would be
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
F 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
G 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
H which is seeking registration. It would probably have been a different
B.L.JAJSWALv. C.I.T. [B.P.JEEVANREDDY,J.] 299

matter if the Income Tax Act had specifically provided that registration A
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 B
question considered herein is its right to claim registration under the
Income Tax Act.

For the above reasons, the appeals are allowed. The application(s)
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., c
against the assessee and in favour of the Revenue.

No costs.

v.s.s. Appeals allowed.