1974 (9) TMI 4 - HC - Income Tax

Summary

Issues Involved:

1. Justification of determination of profit on estimate by application of the proviso to section 13 of the Indian Income-tax Act, 1922.
2. Justification of computing profits by applying a flat rate on the gross value of the contract jobs.

Issue-wise Detailed Analysis:

1. Justification of Determination of Profit on Estimate by Application of the Proviso to Section 13 of the Indian Income-tax Act, 1922:

The Tribunal held that the completed job basis of accounting was a recognized method of accounting. However, the Tribunal justified the determination of profit on estimate by applying the proviso to section 13 of the Indian Income-tax Act, 1922. The assessee, a contractor, did not show any profit or loss from the jobs and claimed overhead expenses, resulting in a net loss. The Income-tax Officer computed the gross profit at 12 1/2% of the receipts. The Appellate Assistant Commissioner (AAC) did not accept the assessee's contention that the accounts were maintained on a recognized system of accounting and concluded that the final trading and profit and loss account, as drawn up by the assessee, could not be taken as depicting the correct profit of the business. The AAC justified invoking the provisions of section 13 for computing the assessee's income. The Tribunal upheld this decision, stating that the accounts were properly maintained, but where the accounts were rejected, the Income-tax Officer had to determine the correct profit, which could be done through an estimate. The Tribunal applied a flat rate on the value of the contracted job, considering the normal expected rate in such type of business. The High Court affirmed this view, stating that the Tribunal was justified in upholding the decision of the AAC, as the contractor had not been able to satisfy the authorities about the terms of the contract and the consideration for the materials supplied by the contractee.

2. Justification of Computing Profits by Applying a Flat Rate on the Gross Value of the Contract Jobs:

The AAC computed the profits by applying a flat rate of 12 1/2% on the gross value of the contract jobs, which was Rs. 8,39,412. The assessee contended that the estimate of gross profit at the rate of 12 1/2%, adopted by the Income-tax Officer, was excessive and that there was no profit on the part of the contract job covered by the materials supplied by the contractee. The AAC did not accept this contention, stating that the contractor was at a more advantageous position when the contractee supplied the materials, and the normal margin of profit in such cases varied from 12 1/2% to 15%. The Tribunal upheld the AAC's decision, stating that the contractor's profit margin did not depend on the value of the materials supplied by the department. The Tribunal reasoned that the contractor, as an experienced professional, would have made a proper estimate of expenses and provided for reasonable profit in his tender. The High Court affirmed this view, stating that the Tribunal was justified in upholding the AAC's decision to compute the profit by applying a flat rate on the gross job value of the bills. The Court also noted that the contractor had not been able to provide clear evidence of the contract terms and the stipulation regarding the cost of materials supplied by the contractee.

Conclusion:

In the aforesaid view of the matter, both questions were answered in the affirmative and in favor of the revenue. Each party was to bear and pay its own costs.