S.K Jha, J.:— This is a reference under section 66(1) of the Indian Income-tax Act, 1922, hereinafter referred to as “the Act”, by the Income-tax Appellate Tribunal, Patna Bench, Patna. Tax Case No. 63 arises out of a proceeding for registration under section 26A of the Act of the assessee-firm for the assessment year 1958-59 and Tax Case No. 64 relates to the assessment year 1959-60. Since the same question of law arose in both these tax cases the common question of law has been referred for decision to this court by the Tribunal in these terms:

“Whether, on the facts and in the circumstances of the case, the assessee-firm was entitled to registration under the Income-tax Act for the assessment years 1958-59 and 1959-60?”

2. Shortly stated the facts giving rise to this reference are as follows: An application under section 26A of the Act for the registration of the firm styled as Narpati Khan and Company had been filed. The aforesaid firm would hereinafter be referred to as “the assessee”. The assessee is a dealer in country liquor and runs five shops where distillation and sales of liquor are carried on. Licences for the shops in question stand in the names of three of the partners, whereas the partnership is constituted of seven persons, four of them being non-licensees under the Bihar and Orissa Excise Act. In the assessment years 1958-59, the licence for one of the liquor shops was in the name of one of the partners, Narpati Khan, and the other four shops were run under the licences obtained in the names of Nakul Chandra Khan and Surendra Nath Mandal. In the assessment year 1959-60 also, there were five shops and seven partners. The partners were the same as in the earlier assessment year, except that Kartik Chandra Mandal was introduced in this year in place of Nakul Chandra Khan. The licence for one of the shops was again in the name of Narpati Khan, and in respect of the other four shops, in the names of Kartik Chandra Mandal and Surendra Nath Mandal. The assessee-firm applied for registration of the firm which was refused in the first instance by the Income-tax Officer. The assessee took up the matter in appeal before the Appellate Assistant Commissioner, who confirmed the orders of the Income-tax Officer in respect of both the assessment years. The assessee then took up the matter in further appeal to the Income-tax Appellate Tribunal, where it was contended by the learned counsel for the assessee that there was no bar to a partnership being formed for sharing the profits of an excise business even if some of the partners were not licensees. In the view of the Tribunal, the facts as found by the assessing officer as well as the Appellate Assistant Commissioner were not sufficient to throw any light on the real matter in controversy and, therefore, the Tribunal set aside the order of the Appellate Assistant Commissioner and remanded the case to him for recording certain findings. The Tribunal held:

“Since the authorities below have not applied their mind as to whether there has been any transfer of the licence to the partnership, we need not consider the effect of these provisions for finding out whether the licence has been transferred. The points to be ascertained shall be whether the licence fee has been charged as an expense of the partnership, whether the stocks of liquor belonged to the firm so that all partners have an interest therein, whether the non-licensee partners could manage the liquor business as such and so on.”

3. In compliance with the direction of the Tribunal, the Appellate Assistant Commissioner asked the assessing officer to make an inquiry and submit a report on the following points:

1. Whether the excise licence has been transferred to the partnership?

2. Whether the license fee has been charged as expenses of the partnership?

3. Whether the stock of liquor belong to the firm so that all partners have an interest therein, and

4. Whether the non-licensee partner could manage the liquor business as such?

4. The Income-tax Officer reported that the excise licence had not been transferred to the partnership and that the licence fees were being charged as expenses of the partnership and that the other partners had an interest in the stock. With regard to the question of management, the Income-tax Officer reported that it could not be verified whether the non-licensee partners could manage the liquor business as such and that, according to clause 5 of the partnership deed, all the partners were to manage the partnership business, but as the licence was only in the names of only a few of them, the others could manage the liquor business as insignificant employees. The Appellate Assistant Commissioner while hearing the appeals on remand, after taking into consideration the report and the findings recorded by the Income-tax Officer, did not accept the report of the assessing officer with regard to the management of the business. He held that, according to the partnership deed, each partner was entitled to take part in the management of the business. He also held that the non-licensee partners were not merely working partners, but they had contributed their shares of capital as well. He, however, accepted the finding recorded by the Income-tax Officer that the licence was not transferred in the name of the firm. Having thus held, the Appellate Assistant Commissioner allowed the appeals before him and directed the Income-tax Officer to register the firm under the provisions of section 26A. The judgment of the Appellate Assistant Commissioner aforesaid after remand has been marked annexure “E” to the statement of the case.

5. The revenue, thereafter, went up in appeals to the Income-tax Appellate Tribunal and the Tribunal by its common judgment and order dated the 8th July, 1964 (annexure “F” to the statement of the case), held that the licences had not been transferred to the partnership. The Tribunal further held that, on the facts as found, it was not possible to hold that there was either a de facto transfer or assignment of the excise licences in favour of the partnership, as was contended by the revenue, on the footing that since the liquor manufacturing business was carried on by the partnership itself, it should be deemed to have been so doing only by an implied transfer or assignment of the licences in favour of the firm. At the instance of the revenue, the Tribunal has referred the question of law already quoted above for our decision.

6. Mr. Tarkeshwar Prasad, learned counsel appearing on behalf of the Commissioner of Income-tax, has urged that the partnership deed in question ought to have been held to be invalid in law as being in contravention of the provisions of section 13(f) of the Bihar and Orissa Excise Act, 1915. Learned counsel further contended that the carrying on of a business by the assessee-firm should also be construed as having the effect of transfer of licence to the firm without which it could not carry on the business and the carrying on of the business would itself be illegal in the absence of such an assignment. Learned counsel has relied upon the decision in D. Mohideen Sahib & Co. v. Commissioner of Income-tax 1, Commissioner of Income-tax v. Union Tobacco Co. [1961] 41 I.T.R 115 Ker. and Commissioner of Income-tax v. Pagoda Hotel and Restaurant [1974] 93 I.T.R 271 M.P.. Before dealing with these cases, I think it would be useful first to refer to some cases in order to show the settled propositions of law in respect of the matter in controversy before us. The law, in my view, is well settled that while the licence may be in the name of one or more persons, and there is nothing either in the terms of the licence or any law for the time being in force laying down that such a licensee or licensees was or were prohibited from entering into a partnership for carrying on the business founded upon such a licence, such licensees were at liberty to enter into a partnership agreement with other persons for the purpose of carrying on the business. This is for the simple reason that in the absence of any statutory bar and in the absence of any term in the licence itself, prohibiting such an agreement, the partnership agreement cannot be said to be void. As has been pointed out in the case of Dayabhai & Co. v. Commissioner of Income-tax [1966] 59 I.T.R 364 M.P.:

“The question of illegality of a partnership must be distinguished from illegality of any acts done in the course of its business by the firm or some or all of its members.”

7. Cases have drawn a clear distinction between such partnership agreements as are void ab initio and such other agreements which, though they are not void at their inception, yet in the course of the conduct of business some individual members of the partnership firm do something which may be termed to be illegal. In the first category of case, registration can certainly be refused as the agreement itself is illegal. But where that is not the case, registration cannot be refused under section 26A of the Act merely on the ground that in the course of the conduct of the business some of the partners may be said to have committed some illegalities or irregularities. I may refer in this connection to some of the decisions cited by Mr. Vishundeo Narayan on behalf of the assessee. A Division Bench decision of this court in Commissioner of Income-tax v. K.C.S Reddy is an authority for the proposition that though a mica dealer's licence under the provisions of the Bihar Mica Act, 1947, was in the name of one of the partners, there was no prohibition either in the Act or in the license granted to that partner precluding him from entering into a partnership agreement with other persons who were non-licence holders for carrying on the business, reserving to himself the right and duty of fulfilling the terms imposed upon him by the licence. It was also held in that case that since the partnership firm is not a legal entity, no dealer's licence could be taken out in its name, and it was still open to the firm to carry on the business in pursuance of the licence granted to one of the partners. The case of Umacharan Shaw & Bros. v. Commissioner of Income-tax, which is a decision of the Supreme Court, is also an authority for the proposition that a partnership firm could carry on the business of selling of foreign liquor though the licences were held by individual members constituting the partnership with regard to different shops, and while so holding the Supreme Court made a pointed reference to section 42(1)(a) of the Bengal Excise Act and held that such a partnership could not be said to be illegal on account of any alleged contravention of the aforesaid statutory provision. Their Lordships upheld the validity of the partnership agreement on the finding that there was no evidence that the excise licences themselves were transferred or sub-let.

8. Three decisions of our own High Court need be referred to in support of the proposition already enunciated above. In Commissioner of Income-tax v. Prakash Ram Gupta, Commissioner of Income-tax v. N.C Mandal & Co. and Md. Warasat Hussain v. Commissioner of Income-tax [1971] 82 I.T.R 718 Pat.., this court has unanimously adopted the view taken by this court in K.C.S Reddy's case and the decision of the Supreme Court in Umacharan Shaw & Bros. v. Commissioner of Income-tax. All these cases mentioned above were with respect to a firm carrying on the business under the excise licences granted to only some of its partners. The validity of the partnership agreement in all these cases was accepted and registration allowed. In the last mentioned case, namely, Warasat Hussain's case, this court held that the mere formation of the partnership did not and could not amount to a transfer of the licences within the meaning of section 23 of the Bihar and Orissa Excise Act, 1915, and the management of the business would not mean handling or being in possession of the excisable commodities, and since there was no evidence to show that the partners (non-licensees) handled or were in possession of such commodities, registration could not be refused.

9. Now, referring to the cases relied upon by learned counsel for the revenue, the case in D. Mohideen Sahib & Co. v. Commissioner of Income-tax seems to have proceeded upon the assumption that there had been a transfer of the licence which was not permitted by law. The Madras High Court in express terms held that the carrying on of business in that case “involves a transfer of the licence” in contravention of rule 27 of the Abkari Rules and, therefore, the agreement was void ab initio. The decision in Commissioner of Income-tax v. Union Tobacco Co., relied upon by Mr. Tarkeshwar Prasad, has followed the decision in D. Mohideen Sahib & Co. v. Commissioner of Income-tax. It may be mentioned that the correctness of both these decisions, apart from their distinguishing features on facts, was doubted in the case of Dayabhai & Co. v. Commissioner of Income-tax [1966] 59 I.T.R 364 M.P., where the Madhya Pradesh High Court, while discussing the decision of this court in Commissioner of Income-tax v. K.C.S Reddy and the effect of the Supreme Court decision in Umacharan Shaw & Bros. v. Commissioner of Income-tax held that the law as laid down in D. Mohideen Sahib & Co. v. Commissioner of Income-tax and Commissioner of Income-tax v. Union Tobacco Co. was not unexceptionable. Another case, on which learned counsel for the revenue has relied, rather strongly, is the case of Commissioner of Income-tax v. Pagoda Hotel and Restaurant [1974] 93 I.T.R 271 M.P.. That case is easily distinguishable in essential features. Under the Central Provinces Excise Act, rules have been framed, and one of the rules in the Central Provinces Excise Rules relating to general licence conditions is that no privilege of supply or sale shall be sold, transferred or sub-leased, nor shall 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. Thus in the case before the Madhya Pradesh High Court, there was a statutory bar to the formation of any such partnership in pursuance of any agreement and as such the agreement itself was held to be void ab initio. It may further be noticed that while dealing with the special facts of that case, the Madhya Pradesh High Court had placed reliance upon a Bench decision of the Allahabad High Court in Jer & Co. v. Commissioner of Income-tax. It may be pointed out that the decision of the Allahabad High Court in the aforesaid case has since been reversed by the Supreme Court in Jer & Co. v. Commissioner of Income-tax. It is also to be noticed that even when the aforesaid Supreme Court case was not referred to before a Full Bench of the Allahabad High Court in P.C Kapoor v. Commissioner of Income-tax the Full Bench, while dealing with the same point in controversy, overruled the decision of the Division Bench of that court in Jer & Co. v. Commissioner of Income-tax. Thus, in my view, the cases relied upon by the learned counsel for the revenue, namely, D. Mohideen Sahib & Co. v. Commissioner of Income-tax Commissioner of Income-tax v. Union Tobacco Co. and Jer & Co. v. Commissioner of Income-tax, apart from their distinguishing features in essential respects, must be held to be no longer good law. With regard to the case of Commissioner of Income-tax v. Pagoda Hotel and Restaurant, as I have pointed out above, the law even though correctly laid down, the case itself is very much distinguishable in view of the express statutory bar to the formation of any such partnership.

10. In the view that I have taken, the question of law referred to us must be decided in the affirmative and I would, accordingly, hold that, on the facts and in the circumstances of the case, the assessee-firm was entitled to registration under the Indian Income-tax Act, 1922, for the assessment years 1958-59 and 1959-60. The assessee will be entitled to costs. Hearing fee is assessed at Rs. 100 only.

Untwalia, C.J:— I agree.