N.K.Agrawal, J.

1. The following question has been referred to this court by the Income-tax Appellate Tribunal, Chandigarh (for short, "the Tribunal"), at the instance of the Department under Section 256(1) of the Income-tax Act, 1961 (for short, "the Act") :

"Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in cancelling the order passed by the Commissioner of Income-tax under Section 263 of the Income-tax Act, 1961 ?"

2. The assessee-firm was engaged in the business of sale of liquor under a licence. The Income-tax Officer under Section 185(1)(a) of the Act granted registration to the firm, Jagdish Chand Walia and Company, Ludhiana, for the assessment year 1977-78 on the basis of the partnership deed filed on March 31, 1977. The Commissioner of Income-tax, however, cancelled that order under Section 263 of the Act, holding that the order of the Income-tax Officer was erroneous and prejudicial to the interests of the Revenue. The Commissioner noticed that licences to sell liquor had been actually granted by the Punjab Government in the names of three persons, Jagdish Chand Walia, Amarjit Walia and Harish Chand Walia. The firm was, however, constituted by four partners. The name of the fourth person, Sudhir Walia, was not entered in the licence. Therefore, the firm was held to be not legally constituted and not entitled to registration under the Act. The Commissioner took the view that the licences to sell liquor could not be exploited by four persons, if those were granted in favour of three persons only. The Commissioner held that any contravention of the Punjab Excise Act and the Rules framed thereunder would render the firm illegal. Non-approval of the change in the constitution of the firm by the excise authority would amount to a violation of the excise law. Since L-2 licences had been obtained individually by three persons on March 18, 1976, the subsequent addition of the fourth person to the business was said to be not permissible without sanction from the concerned excise authority. The assessee went in appeal against the order of the Commissioner before the Tribunal and succeeded. The Tribunal took the view that there was no material on record to show that the rules framed under the Punjab Excise Act had been violated.

3. The basic question which arises is whether the genuineness of the firm running the liquor business was rightly discarded and rejected by the Income-tax Officer on the ground that the names of all the partners constituting the firm had not been entered in the liquor licence.

4. Section 185 of the Act requires that the Income-tax Officer on receipt of an application for the registration of a firm, shall enquire into the genuineness of the firm and its constitution as specified in the instrument of partnership. If he is satisfied that there was, during the previous year, in existence a genuine firm with the constitution so specified, he shall pass an order in writing, registering the firm for that assessment year. If he is not satisfied, he shall pass an order in writing, refusing to register the firm. It cannot be said as a general proposition of law that Section 185 is merely a procedural provision. It requires the Income-tax Officer to make an enquiry into the genuineness of the firm and its constitution.

5. Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. Persons who have entered into partnership with one another are called individually partners and collectively a firm. To constitute a partnership, there must be three elements :

(i) there must be an agreement entered into by two or more persons ;

(ii) the agreement must be to share the profits of a business ; and

(iii) the business must be carried on by all or any of those persons acting for all.

One of the essential conditions of a partnership firm is that every partner must have domin