D.K.SEN, J. - (1.) STEWARTS & Lloyds of India Ltd., the assessee, was a wholly owned subsidiary of Stewarts & Lloyds Ltd. of London (the U.K. company). In December, 1963, the assessee entered into a contract with the Indian Oil Corporation under which the work of erection of a pipeline at the Baroda Refinery of the Corporation was entrusted to the assessee. The contract was valued at Rs. 127.11 lakhs.
(2.) THE assessee commenced the work under the said contract in 1964. Initially, the work was expected to be completed within 15 months from commencement but in fact it took more than three and a half years to complete the same. In the meantime, on 8th June, 1965, the assessee was converted into a public limited company under the Companies Act, 1956, but remained a subsidiary of the U.K. company which continued to hold 60 per cent of the shares of the assessee. In executing the contract with the Indian Oil Corporation, the assessee incurred expenditure aggregating to Rs. 173.94 lakhs and according to the assessee, it sustained a loss of Rs. 57.85 lakhs in the venture.
(3.) CORRESPONDENCE was had between the U.K. company and the assessee in 1966 and on 20th Jan., 1967, the U.K. company passed a resolution as follows: "It was resolved that although the company had no legal obligation to do so, in all the circumstances, it was proper for the company, without admission of liability, to indemnify S and L of I (Stewarts and Lloyds of India) against such loss up to a maximum of Rs. 25 lakhs for a period of two years. In the event that the total loss on this contract has not been established by the end of two years from the date of this resolution, the company will, on the request of S and L of I, transfer the said sum of Rs. 25 lakhs to S and L of I in consideration of S and L of I agreeing, in the event of the total loss subsequently being established to be less than the said sum, to repay to the company the difference between the said sum and the total loss established." ;