1. R. L. Mishra, the assessee, had secured from the Municipal Corporation at Nagpur, a contract for construction of a stadium known Yeshwant Stadium after his tender for the work of construction of the stadium was accepted by the Corporation. The contract is dated January 7, 1969. On April 15, 1969, a partnership firm consisting of three partners came to be formed, one of whom was the assessee. This document of partnership refers to an earlier partnership firm which came into being by a deed of partnership which was executed on October 26, 1968, for carrying on the business of construction of Yashwant Stadium under the name and style of M.S.M. Construction Company The new partnership firm came to be formed because two partners of the earlier partnership firm had retired w.e.f. April 14, 1969. The work of carrying out the construction work was to be done by the new partnership firm and the new partnership deed expressly recites that Shri Ram Lakhan Mishra, the party of the first part agrees that the work of Yashwant Stadium allotted to him by the Nagpur Corporation shall be executed by the partnership firm formed hereunder'. Clause 8 of the partnership deed provides that Shri R. L. Mishra who alone was entitled to receive the payments of the bills from the Corporation authorities, agrees to collect the bills for and on behalf of the firm and payments received by him shall always be treated as the funds of the firm. It appears that there was another deed of partnership dated November 26, 1969, one of the terms of which was that the firm known as messrs. R. L. Mishra, Engineers & Contractors, were to carry on the business of constructing buildings, bridges, roads and all other allied civil constructions.
2. R. L. Mishra tried to have the contract with the corporation which was held by him transferred in the name of the partnership firm but failed because the Corporation expressed its inability to do this retrospectively w.e.f. April 1, 1969, and asked Mishra to make a separate application if the desired that the partnership firm should be registered in the records of the Corporation. The partnership firm constituted by the partnership deed dated November 26, 1969, was registered by the ITO under s. 185 of the I.T. Act, 1961, as the genuineness of the firm was not doubted.
3. For the assessment year 1970-71 the assessee field a return showing a total income of Rs. 17,740 which included the share income of the partnership firm, Messers R. L. Mishra Engineers and Contractors. The ITO, however, called upon the assessee to show cause shy the income form the contract work of Yeshwant Stadium should not be treated as the income of the individual and not that of the partnership firm. According to the assessee, only his share of income in the income of the partnership firm could be included in his assessment, which stand was, however, rejected by the ITO who determined the entire income from the contract work as assessable in the hands of the assessee. He followed the same pattern for the assessment year 1971-72 The contention of the assessee was, however, accepted by the AAC while allowing the appeal field by the assessee.
4. In the appeals field before the Tribunal by the Department, the contention raised was that since the Nagpur Corporation which had given the contract to the assessee had not transferred had not transferred the contract in the name of the partnership firm, the share of profits received by the partners of the partnership firm was in the nature of application of income earned by the assessee in pursuance of the contract in pursuance of the contract with the Corporation. Reliance was placed before the Tribunal on s. 60 of the I.T. Act, 1961, but the contention of the assessee was that s. 60 did not come into play because the income was the income of the firm and no income, therefore, accrued to the assessee as an individual. The Tribunal observed that though the Corporation recognised the assessee alone as the contractor, as per the terms of the partnership deed between the assessee and two other persons, the work was carried out by the partnership firm and not by the individual. According to the Tribunal, the asset, which was in the form of the contract, was transferred by the individual to be firm. In view of the fact that the asset itself was transferred, the Tribunal rejected the contention based on s. 60 of the Act. The Tribunal thus found that there was no application of income by the assessee as contended for by the Department. As many as five question were raised by the Revenue as arising out of the order of the Tribunal which the Tribunal found were not very happily worked. The three question which finally came to be reared were as follows :
(1) Whether, on the facts and in the circumstances of the case, the ITO was justified in resorting to ss. 60 to 63 of the I.T. Act ?
(2) Whether, on the facts and in the circumstances of the case, whether the case was diversion of income by overriding title ?
(3) Whether, on the facts and in the circumstances of the case, any other under the procedural s. 185 prejudices and precludes the effective application of the substantive s. 60 or s. 61 of the Act in the order under s. 143(3)'.
5. Shri Joshi appearing on behalf of the Revenue has drawn our attention to the correspondence between the assessee and the Corporation and contained that since the Corporation has refused to recognise the partnership as the contractor which was entrusted with the work of constructing the stadium, and inasmuch as so far as the Corporation was concerned, the assessee alone was recognised as the contractor, whatever monies were paid by the Corporation in pursuance of the contract must be treated the income of the assessee alone. In other words, the criteria, according the learned counsel, was the fact that the fact that the money was paid by the Corporation to the assessee and, therefore the entire amount paid in pursuance of the contract of construction was the income of the assessee. Now, it is no doubt true that so far as the Corporation was concerned, it declined to substitute in its records the name of the partnership firm constituted to substitute in its records the name of the partnership firm constituted by the assessee and the other partners in place of the name of the assessee himself w.e.f. April 1, 1969. As we have already pointed out, the agreement between the Corporation and the assessee took place on January 7, 1969, and the request of the assessee to substitute the name of the partnership in place of his name, if granted, would have meant that the corporation had granted the original contract to the partnership itself which was not a fact as the contract was given to the assessee individually. It is, however, difficult for us to see how this fact is conclusive of the question as to whether the income derived from the work of construction which was carried on not by the assessee alone but in partnership with other persons, was not the income of the partnership firm. The partnership itself has been found to be genuine by the Department. There is no illegality involved in the asset in the form of the construction contract being made the asset of the partnership firm and the work of construction being carried out by the partnership as such. If none of the partnership documents is vitiated by any illegality, then the agreement of partnership as between the assessee and the other members of the partnership firm will have to be given effect to. It is significant that the Tribunal has found as a fact that the work of construction was done by the partnership firm. Therefore, the mere fact that it was the assessee alone who dealt with the Corporation and as such received the payment in respect of the construction work in pursuance of the contract of construction did not in any way vitiate or adversely effect the arrangement brought about between the partners that whatever profits were made form the work of construction were to be shared by them as partners of the partnership firm in the proportion set out in the deed of partnership. If the partnership was legal and valid, the monies received by the assessee from the corporation would be received for and on behalf of the firm in so far as the partnership firm is concerned, though, as far as the Corporation is concerned, the corporation paid the monies to the assessee in his individual capacity. Once the amount received from the Corporation is at the very threshold the property of the partnership firm, it is difficult for us to see how the arrangement brought about by the partnership firm can be overlooked so as to enable the ITO to treat the entire receipt or the amount of profits as the income of the assessee individually.
6. There is another aspect of the question. The partnership firm evidenced by the document of partnership dated November 26, 1969, has been duly registered by the ITO. The pre-condition for making an order of registration by the ITO is that he has to find that the firm is genuine and that there is registration of the firm; the deed of partnership itself has to be forwarded to the ITO. One of the requirements of s. 184 is that in such deed of partnership the individual shares have to be specified in the instrument. The deed of partnership dated November 26, 1969, specifies the nature of the business which the partnership firm was intended on The three partners already formed the partnership firm prior to November 26, 1969, as is evidenced by the deed of partnership dated April 15, 1969, which is annex. 8-I to the statement of the case This construction expressly refers to the contract of the contraction of Yeshwant Stadium as the business of the partnership It is the case of the assessee that the amounts received from the Corporation are received by him for and on behalf of the partnership firm which has been recognised the Department. Now, once this partnership firm is recognised under s. 185, it is difficult for us to see how there is any alternative left open to the ITO to make an assessment in respect of the income of the firm except in the manner contemplated by s. 182. Section 182 deals with the procedure with regard to the assessment of registered firms. Sub-s (1) of s. 182 unambiguously provides that the income of the registered firm has to be determined in the manner provided in that section 'not with standing anything contained in ss. 143 and 144 and subject to the provisions of sub-s. (3)'of s. 182. Sub-s. (3) of s. 183 deal with the share of a partner who is a non-resident, with which we are not concerned with in this case. There is thus a clear mandate of s. 182 not with standing the provisions of ss. 143 and 144 as will be clear from the non-obstante clause in the opening part of sub-s. (1) of s. 182. Indeed, in this case on the finding the opening part of sub-s (1) of s. 182. Indeed, in this case on the finding that the firm is genuine firm and that the construction work was done by the firm, the only relevant provision which would control the assessment proceeding would be s. 182. If this provision was imperative in nature, the provisions of s. 60 or s. 61 would be wholly irrelevant for the purpose of the present case.
7. Section 60 deals with a case where the asset from which the income is derived is not transferred. The provision reads as follows :
'All income arising to any person by virtue of transfer whether revocable or not and whether effected before or after the commencement of this Act shall where there is no transfer of the assets from which the income arises, be chargeable to income tax as the income of the transfer and shall be included in his total income.'
8. The essential pre-condition, therefore, which has to be satisfied before revenue can fall back on the provisions of s. 60 is that there should be no transfer of the asset from which the income arises. In the instant case, the asset, namely, the right under the contract which was the asset of the assessee individually, had become the asset of the partnership and on this short fact the provisions of s. 60 will have to be ruled out. One of the question refers to s. 61 of Act but it does not appear that either that question was argued before the Tribunal because it is obvious that s. 61 which deals with irrevocable transfer of assets would be wholly inapplicable it is nobody's case that there is an irrevocable transfer of assets which would be wholly destructive of the premise on which s. 60 was being invoked by the department. Having regard to the legal provisions and the findings recorded in this case, it is clear that the income of the partnership firm earned from the construction contract to relating Yeshwant Stadium could not be assessed wholly in the hands of the assessee.
9. Before we record our answers to the questions referred, it appears that the third question is not very happily framed. It appears that by posing question No. 3, the Revenue wanted to bring in a controversy that a procedural provision would not rule out the applicability of substantive provision of law. The procedural provision which the Department seems to have had in mind is s. 185 and the substantive provisions, according to the Department, were ss. 60 and 61. Now, it is difficult to endorse the view of the Department that s. 185 is merely a procedural provision.
10. It is no doubt true that the marginal heading of that section is 'procedure on receipt of application'. To a certain extent in so far as sub-s. (1) of s. 185 requires the ITO to make an inquiry into the genuineness of the firm and its constitution, that part of s. 185(1) also authorises the ITO either to make an order registering the firm or to make an order refusing to register the firm. When an order is made by the ITO registering the firm, the matter passes out of the realm of procedural law into one of law because certain special substantive rights are conferred on a registered firm so far as the assessment is concerned, as will be clear from s. 182 of the Act. It would, therefore, be wholly improper to term an order of registration as one of procedural nature. The question will, therefore, have to be slightly reframed having regard to the contention which was raised before the Tribunal and before us. We reframe the question as follows :
'Whether, on the facts and in the circumstances of the case, the registration granted to the firm under s. 185 will preclude the application of s. 60 or s. 61 for the purpose of making an assessment under s. 143(3) of the I.T. Act, 1961 ?'
11. We may also point out that if the income earned from the construction work carried out by the partnership is the income of the partnership firm, there was no question of diversion of any income by overriding title.
12. In the view which we have taken the questions in this reference are answered as follows :
Question No 1 :- In the negative and against the Revenue.
Question No 2 :- In the negative and against the Revenue.
Question No 3 :- In the affirmative and against the Revenue.
13. The Revenue to pay the costs of this Reference.