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Calculation of net profits for a construction contract, Inclusion of materials supplied by the State Government in gross receipts. Analysis: The judgment pertains to a case where an assessee-firm undertook a construction contract for canals under the Vallabh Nagar Project, with the State Government supplying materials for the project. The Income Tax Officer (ITO) rejected the firm's accounts and applied a net profit rate of 12.5%. The Appellate Authority Commission (AAC) maintained the profit rate for contracts executed directly by the assessee at 12.5% but reduced it to 7.5% for contracts supervised by others. Upon appeal to the Income-tax Appellate Tribunal (the Tribunal), it upheld the 12.5% profit rate for direct contracts and 7.5% for supervised contracts. However, the Tribunal ruled that the value of materials supplied by the State Government should be excluded from the gross receipts of the assessee. The Tribunal referred the question of whether the cost of materials supplied by the State Government should be included in the gross receipts for calculating profits. The High Court relied on a previous decision and the Supreme Court's ruling in Brij Bhushan Lal's case, emphasizing that when materials are supplied by the government for exclusive use in the project, no profit element is involved in the turnover represented by the cost of such materials. The High Court concurred with the Tribunal's decision, stating that the cost of materials supplied by the State Government should not be included in the gross receipts when calculating the net profits of the business. Consequently, the question was answered in favor of the assessee. In conclusion, the judgment clarifies that when materials are supplied by the government for a specific project, the cost of those materials should be excluded from the contractor's gross receipts for profit calculation. The ruling aligns with the principle that no profit element is involved in such materials supplied exclusively for project execution.
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