COMMISSIONER OF INCOME TAX Vs. HIRANI CONSTRUCTION CO

JUDGEMENT

(1.) THIS is a reference under section 66(1) if the Income -tax Act, 1922, at the instance of the Commissioner. The question referred to us, in our opinion, will have to be answered in favour of the revenue having regard to the decision of the Supreme Court in Commissioner of Income -tax v. Jadavji Narsidas and Co. We are here concerned with the assessment year 1958 -59, the accounting period being from November 3, 1956, to October 23, 1957.

(2.) FACTS giving rise to this reference in brief are. The assessee before us is a partnership concern doing construction work under the name and style of Messrs. Hirani Construction company. The partnership consists of five partners. The assessee -firm will be referred to hereafter as Hirani firm, This firm commenced its business from January 1, 1956. The capital of the firm was Rs. 25,000 to be contributed equally by the five partners. The five partners shared equally in the profit and loss. This firm was registered under the Income -tax Act. Now, there was another concern which was a private limited company doing the same business under the name and style of Messrs. Manoharsingh Sethi and Co. (P.) Ltd. This limited company will be hereafter referred to a Manoharsingh Limited. Manoharsingh Limited had secured a contract from the Government for building a High School and hostel at Arvi. Hirani firm and Manoharsingh entered into a partnership for the contraction of the said High School and hostel. A regular deed of partnership was entered into evidencing the terms and conditions on which Hirani firm and Manoharsingh Limited agreed to do the business. The said deed is of February 26, 1956. The deed, inter alia, provided : 'It is further provided that the company (i.e., Manoharsingh Limited) may take the firm (i.e., Hirani firm) as its partner in other contract works also after having obtained the written consent of the firm, on the terms and conditions as provided in the deed.' This deed has been signed on behalf of Manoharsingh Limited by Manoharsingh who was the managing director of the company. This partnership deed is also signed by all the five partners of Hirani firm. This new entity, namely, the partnership between Manoharsingh Limited and Hirani firm has been, for brevity's sake, referred to in the statement of the case as 'M. H. Entity.' We would also in the course of the judgment refer to this new partnership as M. H. Entity. A new contract also was subsequently obtained by Manoharsingh Limited from the Government for building a Normal School at Chanda. Both the construction works, i.e., building of a High School and hostel at Arvi and building a Normal School at Chanda were done by the partnership M. H. Entity. It appears that the entire capital required for the construction at Chanda was advanced by Hirani firm. The contract relating to the construction of the buildings at Arvi could not be successfully carried out for certain reasons and when the time fixed for the completion of that construction had expired M. H. Entity had to hand over the building in an incomplete stage to the Government and that is said to have resulted in a loss and this appears to have led to the dissolution of the firm. It however was expected that the contract relating to the construction of the Normal School at Chanda would results in good profits. M. H. Entity however resolved to dissolve itself as and from 5th October, 1957, on terms and conditions which have been incorporated in the deed of October 9, 1957. That deed is annexure 'C' to the statement of the case. In this deed of dissolution, Hirani firm has been described as party No. 2 and Manoharsingh Limited as party No. 1.

(3.) THE combined effect of these relevant provisions is that the partnership between five partners of Hirani Firm and Manoharsingh Limited was dissolved as and from October 5, 1957, and for the purpose of its dissolution it had been amicably agreed to make accounts of the two works, viz, Arvi and Chanda works, on ad hoc basis. Losses said to have been sustained in the Arvi contract were fixed at Rs. 54,000, the share of losses sustained therein by Hirani Firm being Rs. 27,000 and the share of losses sustained by Manoharsingh Limited being Rs. 27,000. Similarly, on the ad hoc basis the share of profits of Manoharsingh Limited was fixed at Rs. 35,000 in the Chanda work which still had to be completed. The share of the loss of the partnership of Manoharsingh Limited was deducted from the amount advanced by them towards the construction of the Arvi contract and the share of the estimated profit of Manoharsingh Limited in Chanda work was paid to Manoharsingh Limited by Hirani Firms by way of adjustment against the balance in the said deposit and further paying in cash the remaining amount of Rs. 11,307. As and from October 5, 1957, the partners in the Hirani Firm got exclusive right, title and interest in the contract of construction of the Normal School building at Chanda.