1983 (12) TMI 5 - HC - Income Tax

Summary

Issues:
1. Whether the cost of materials supplied by the Government should be included in the gross receipts for estimating the net income of the assessee?

Analysis:
The case involved a building contractor who had undertaken contracts for construction of buildings for Central Government departments. The Government supplied materials worth Rs. 1,02,196 to the contractor for the execution of the contracts. The Income Tax Officer (ITO) rejected the accounts maintained by the assessee and applied a net profit rate of 15% to the turnover. The Appellate Authority Commission (AAC) reduced the net profit rate to 12.5%. The Tribunal, on further appeal, excluded the value of materials supplied by the Government from the turnover while estimating the net income, as no profit accrued on those materials. The Commissioner of Income-tax applied for a reference to the High Court under the Income Tax Act, 1961, questioning whether the Tribunal was right in excluding the cost of materials from the gross receipts for estimating the net income.

The High Court referred to judgments by various High Courts and a Full Bench of the Andhra Pradesh High Court, which supported the Tribunal's view. However, the Punjab and Haryana High Court had taken a contrary stance. The Supreme Court, in a related case, held that when materials are supplied by the Government at fixed rates for incorporation in works, there is no element of profit involved in the turnover represented by the cost of such materials. The Supreme Court clarified that the total value of the contract should be calculated excluding the cost of materials supplied by the Government. Following the Supreme Court's principles, the High Court held that the value of materials supplied by the Government should be excluded while determining the turnover of the contractor-assessee. The High Court ruled in favor of the assessee and against the Department, citing the Supreme Court's decision.

In conclusion, the High Court affirmed that the value of materials supplied by the Government for execution of works should not be included in the turnover of the contractor-assessee for the purpose of estimating net income. The judgment aligned with the Supreme Court's ruling in a similar case, settling the legal position on the matter. The parties were directed to bear their own costs of the reference.