1976 (3) TMI 49 - HC - Income Tax

Summary

Issues Involved: Inclusion of the value of materials supplied by railway authorities in the total receipts of the assessee for the purpose of estimating net profits.

Issue-Wise Detailed Analysis:

1. Inclusion of Material Value in Total Receipts:
The primary issue was whether the value of materials supplied by railway authorities should be included in the total receipts of the assessee for estimating net profits. The assessee, a Hindu undivided family engaged in building and maintenance work for railways, did not maintain books of accounts. The Income-tax Officer (ITO) included the value of materials supplied by the railway authorities in the total receipts and estimated net profit at 15%, resulting in a net profit of Rs. 1,02,149 and taxable income of Rs. 93,270. The Appellate Assistant Commissioner (AAC) reduced the net profit rate to 12.5% and excluded the value of materials from total receipts. The Tribunal partially allowed appeals from both parties, including the material value in receipts but reducing the profit rate to 10%.

2. Nature of the Contract:
The court examined the nature of the contract between the assessee and the railway authorities. The contract specified that materials like cement and iron would be supplied by the railway authorities, and no accounting for these materials was required in the contract payment bills. The court identified two categories of construction contracts:
- Category 1: Contracts where materials are supplied by the other party, and the contractor's quotation does not include these materials.
- Category 2: Contracts where the contractor supplies all materials, but some are later provided by the other party, and deductions are made accordingly.

3. Judicial Precedents:
The court reviewed several judicial precedents:
- Chowringhee Sales Bureau P. Ltd. v. Commissioner of Income-tax: The Supreme Court held that the nature and quality of the receipt, not its accounting head, determine its treatment as trading receipt.
- Commissioner of Income-tax v. Bijli Cotton Mills (P.) Ltd.: The Allahabad High Court emphasized that the nature of the receipt is fixed when received.
- Commissioner of Income-tax v. K. S. Guruswami Gounder & K. S. Krishnaraju: The Madras High Court held that the cost of materials supplied by the government should not be included in the contractor's total receipts.
- Brij Busan Lal v. Commissioner of Income-tax: The Punjab High Court included the cost of materials in total receipts, a view the Gujarat High Court respectfully disagreed with.
- V. D. Rajarathanam v. Commissioner of Income-tax: The Andhra Pradesh High Court included material costs in total receipts, considering the contract as a whole.

4. Conclusion and Decision:
The court concluded that the contract in question fell under Category 1, where materials supplied by the railway authorities were not part of the contractor's receipts. Therefore, these materials should not be included in the total receipts for calculating net profits. The court answered the referred question in the negative, favoring the assessee and against the revenue. The Tribunal was directed to determine the appropriate percentage of total receipts to estimate net profits, excluding the value of materials supplied by the railway authorities.

Final Judgment:
The Tribunal is instructed to fix the percentage of total receipts, excluding the value of materials supplied by the railway authorities, to determine the net profits. The Commissioner is ordered to pay the costs of the reference to the assessee.