2007 (10) TMI 342 - AT - Income Tax

Summary

Issues Involved:
1. Whether the assessee should be treated as an Association of Persons (AOP) or a registered firm (RF).
2. Validity of the partnership firm under the articles of association of UPSEAL.
3. Applicability of Section 23 of the Indian Contract Act.
4. Consistency in the assessment of the firm's status in subsequent years.

Summary:

1. Whether the assessee should be treated as an AOP or a registered firm (RF):
The assessee challenged the CIT(A)'s decision to treat it as an AOP instead of a registered firm. The firm, constituted under a partnership deed dated 28th Feb. 1992, was initially assessed as an RF for the assessment year 1993-94. However, for the assessment year 1994-95, the AO scrutinized the case and questioned the genuineness of the partnership firm under the articles of association of UPSEAL. The CIT(A) agreed with the AO but directed the AO to assess the income in the status of AOP, which the assessee contested.

2. Validity of the partnership firm under the articles of association of UPSEAL:
The AO and CIT(A) held that the firm violated Article 28 of the articles of association of UPSEAL, which restricts the formation of partnerships to specific categories of relations. The assessee argued that the articles of association do not carry the force of law and thus, the partnership cannot be deemed invalid under the IT Act, 1961.

3. Applicability of Section 23 of the Indian Contract Act:
The assessee contended that the articles of association of UPSEAL do not have the force of law and thus, any violation thereof does not infringe Section 23 of the Indian Contract Act. The Tribunal referred to the Supreme Court's decision in Co-operative Central Bank Ltd. vs. Additional Industries Tribunal (AP) and Hindustan Steels vs. State of Orissa, which held that articles of association regulate internal management and do not have statutory force. Therefore, the partnership cannot be denied registration on the grounds of violating Article 28 of UPSEAL's articles of association.

4. Consistency in the assessment of the firm's status in subsequent years:
The Tribunal emphasized that under Section 184(3) of the IT Act, 1961, once a firm is assessed as such, it should continue to be assessed in the same capacity in subsequent years unless there is a change in the constitution of the firm or the shares of the partners. The Tribunal noted that the firm was assessed as an RF in the assessment years 1993-94 and 1995-96, and thus, the status should remain consistent. The Tribunal also cited the Supreme Court's decision in Radhasoami Satsang vs. CIT, which supports maintaining consistency in assessments.

Conclusion:
The Tribunal concluded that the status of the assessee should be taken as a registered firm, as in the earlier years, and allowed the appeal filed by the assessee.