TMI Blog2007 (10) TMI 342X X X X Extracts X X X X X X X X Extracts X X X X ..... UPSEAL, an amount of security deposit with them, has been duly entered, in the books of the firm M/s Sanjay Investments. The first year of assessment of the firm was asst. yr. 1993-94. The return of income was filed in the status of registered firm (RF) and the status was so accepted by the Department vide intimation under s. 143(1)(a), dt. 23rd Nov., 1993. The firm filed return for the asst. yr. 1994-95, in dispute before us, in the status of RF. It was processed under s. 143(1)(a) at the returned income. But later, the case was picked up for scrutiny under s. 143(3). Notices under ss. 143(2) and 142(1) were issued. The firm was required to justify the genuineness of the partnership firm within the parameters of art. 28 of the articles of association of UPSEAL. The assessee, against it, justified its claim of registered firm with reference to the provisions of ss. 184 and 185 of the IT Act, 1961. The AO was however of the view that articles of association of UPSEAL have force of law. Since the assessee has violated art. 28 of articles of association of UPSEAL, the partnership is invalid and therefore, the income of the firm has to be assessed as the income of Shri Sanjay Tandon i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company incorporated under the Companies Act, do not have the force of a statute. He then referred to the decision of Hon'ble Madhya Pradesh High Court in Malwa Knitting Works vs. CIT (1977) 107 ITR 379 (MP) wherein it is held that the firm is entitled for registration even if a partner who is an advocate and also a partner in the firm, was prohibited by the provisions of Bar Council Act to carry on the business. Hon'ble Madhya Pradesh High Court held that so far as registration of the firm is concerned, it is not going to be affected by the violation of the provisions of Bar Council Act and it is for the Bar council to take action under that Act if their member violates any provisions thereof by carrying on the business. According to the learned Authorised Representative, Shri Sanjay Tandon is in fact representing the firm and there is no prohibition in the articles of association of UPSEAL for a firm to carry on the business on its floor as stockbroker. What is prohibited is that the partners in the firm should be of specified category. The specified category of partner in a firm who acts as a broker on the floor of stock exchange is specified in the art. 28 of articles of assoc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 27 CTR (P H) 4 : (1982) 138 ITR 830 (P H) for the proposition that if assessee has derived benefit from agreed order of assessment then it should not be allowed to contend that depreciation was not actually allowed. He, then referred to the decision of Hon'ble Supreme Court in case of CIT Ors. vs. G. Parthasarthy Naidu Sons Ors. (1999) 155 CTR (SC) 180 : (1999) 236 ITR 350 (SC) for the proposition that if the assessee claims to be a partnership firm, then it is the duty of the AO to determine whether it is in law and in fact, a partnership firm. The learned Departmental Representative referred to the order of learned CIT(A) wherein it is mentioned that the assessee has violated sub-r. (5) of r. 8 of Securities Contract (Regulation) Rules, 1957, which provided that a firm can be a member of any stock exchange only when the majority of the partners of the firm were also members of the stock exchange. The Securities Contract (Regulation) Act, 1956, carries the force of law. In the present firm, only one partner, i.e., Shri Sanjay Tandon is a member of stock exchange and others were not. Therefore, as there is a violation of law, the firm was not valid. 8. We have considered th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to bye-laws of the nature that a co-operative society is empowered by the Act to make. The bye-laws that are framed by the co-operative society can be merely those which govern the internal management and administration of the society. They are of the nature of articles of association of a company incorporated under the Companies Act. They may be binding between the persons affected by them but they do not have the force of a statute. 10, Similarly, the Hon'ble apex Court in Hindustan Steels vs. State of Orissa AIR 1970 SC 253 held that articles of association of a company are to regulate the internal management of the company and define the powers of its officers. They establish a contract between the company and its members inter se. In this regard it will be useful to refer to para 15 on p. 426 of AIR 1970: "15. Subject to the provisions of the Companies Act the company and the members are bound by the provisions contained in the articles of association. The articles regulate the internal management of the company and define the powers of its officers. They also establish a contract between the company and the members and between the members inter se. The contract governs th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iolates s. 15 of Kerala Abkari Act which prohibits the carrying on of liquor business in the name of the firm if the licence is in the name of individual. For arriving at this decision, Hon'ble Kerala High Court applied the ratio of the decision of Hon'ble Supreme Court in Biharilal Jaiswal Etc. vs. CIT (1996) 130 CTR (SC) 143 : (1996) 217 ITR 746 (SC) wherein it was held that a partnership firm would be invalid, if made in violation of conditions expressly prohibiting forming the partnership by licensee as per Abkari Act. Clause 6 of general license conditions under Madhya Pradesh Excise Rules framed under Madhya Pradesh Excise Act, expressly prohibits that a licensee shall not enter into a partnership for the working of such license/privilege. Thus, wherever there is violation of any law or rule framed thereunder, they are hit by s. 23 of Indian Contract Act. But the moot question is whether articles of association of UPSEAL carry the force of law. As held by Hon'ble Supreme Court in the case referred to above, articles of association do not carry force of statute and therefore, any violation thereof could not infringe s. 23 of Indian Contract Act. Sec. 23 of Indian Contract Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , in Thivikran Narain Singh vs. State of UP AIR 1987 All 362, 371, the law means a law passed by the competent legislature. In another case H.G.E. Corporation vs. Suptd. of Orissa Excise AIR 1966 Patna 248, expression law would include the Act of legislature and also the rules validly made thereunder. From the above, we find that law would include legislative enactments as well as legislation and conditional legislation, rules and order, notification, bye-laws which was having statutory force. In the present case, as held by the Hon'ble Supreme Court in the cases referred to above, articles of association of the company do not have statutory force. UPSEAL is in fact a company. Since, articles of association of UPSEAL do not carry the force of law, their violation will not infringe s. 23 of Indian Contract Act and therefore, firm cannot be denied registration on the ground that it has violated art. 28 thereof. 14. Another argument of learned Departmental Representative is that the firm has violated cl. 5 of art. 8 of Securities Contract (Regulations) Rules, 1957. We have examined art. 8 and sub-articles thereof. Sub-r. (1) of r. 8 provides the eligibility criteria for be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot violated any law of land or the rules framed thereunder, then the question of denying registration to the assessee by the force of s. 23 of Indian Contract Act, does not arise. 16. Even otherwise we are of the considered view that provisions of s. 184 of IT Act, 1961 as amended w.e.f. 1st April, 1993 applicable for the asst. yr. 1993-94 would come into play. Sec. 184 as amended, reads as under: "184. (1) A firm shall be assessed as a firm for the purposes of this Act, if- (i) the partnership is evidenced by an instrument; and (ii) the individual shares of the partners are specified in that instrument. (2) A certified copy of the instrument of partnership referred to in sub-s. (1) shall accompany the return of income of the firm of the previous year relevant to the assessment year commencing on or after the 1st April, 1993 in respect of which assessment as a firm is first sought. Explanation...... (3) Where a firm is assessed as such for any assessment year, it shall be assessed in the same capacity for every subsequent year if there is no change in the constitution of the firm or the shares of the partners as evidenced by the instrument of partnership on the basis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssociation, the registration to the firm cannot be refused as it was otherwise legal and it was not suggested that it was doing any illegal business and had in any way violated the law or that it was not constituted as required by the law of partnership. It cannot cease to be legal merely because it was not recognized by the association. 19. The last limb of the issue to be adjudicated is whether assessee should be allowed to contest a decision taken by learned CIT(A) who accepted the alternative plea of the assessee that it should be assessed as AOP in place of individual? 20. The learned Departmental Representative has relied on the authorities wherein it is held that if an assessment proceeding is made on agreed basis then assessee should not be allowed to aprobate the same. We are of the considered view that there cannot be any agreement against the statute. Even if plea of the assessee has been accepted by the learned CIT(A), it is open to the assessee to challenge that if it discovers that such plea is contrary to the provisions of law. 21. In the present case, s. 184(3) clearly provides that firm should be continued to be assessed as such if it is already assessed as f ..... X X X X Extracts X X X X X X X X Extracts X X X X
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