1985 (10) TMI 34 - HC - Income Tax

Summary

Issues:
Whether the cost of materials supplied by the Government is liable to be included in the total receipt of the assessee for calculating its profit for the assessment year 1967-68?

Analysis:
In this reference under section 256(2) of the Income-tax Act, 1961, the primary issue revolves around determining whether the cost of materials supplied by the Government should be considered in the total receipt of the assessee for profit calculation in the assessment year 1967-68. The assessee, a contractor engaged in building construction, received materials from steel plants for executing works. The materials remained under the control of the steel plants, not the assessee. Initially, the assessee filed a return showing a total income of Rs. 73,794, later revising it to account only for the net amount received from the steel plants. The Income-tax Officer insisted on considering the gross amount paid to the assessee for profit calculation, while the Appellate Assistant Commissioner and the Tribunal held that only the net amount received by the assessee was relevant for profit determination.

The Department, dissatisfied with the lower authorities' decisions, filed an application for reference to the High Court under section 256(1) of the Income-tax Act, which was rejected. Subsequently, the High Court was approached under section 256(2) for an opinion on whether the cost of materials should be included in the assessee's total receipts for profit calculation. The High Court noted a similar issue was decided in a previous case involving the same assessee for the assessment year 1968-69, where it was held that the net receipt was the determining factor for profit calculation when the assessee lacked control over the supplied materials.

The High Court emphasized that the earlier decision was in line with the principles established in other relevant cases, notably distinguishing a conflicting decision cited by the Department. Ultimately, the High Court affirmed the Tribunal and the Appellate Assistant Commissioner's findings, ruling that the cost of materials supplied by the Government need not be included in the assessee's total receipts for profit calculation in the assessment year 1967-68. The judgment favored the assessee and went against the Revenue, with directions to transmit a copy of the order to the Income-tax Appellate Tribunal in compliance with the Income-tax Act, 1961.