1976 (3) TMI 50 - HC - Income Tax

Summary

Issues:
1. Inclusion of the cost of materials supplied by the Government in the total receipts for the purpose of applying the rate of gross profit.
2. Whether the cost of materials supplied by the Government could partake the character of trading receipt.

Analysis:
In this case, the High Court of Gujarat was tasked with determining the inclusion of the cost of materials supplied by the Government in the total receipts of the assessee for the assessment years 1968-69 and 1969-70. The assessee, a registered partnership firm engaged in contracting business, contested the Income-tax Officer's decision to include the cost of materials supplied by the Government in the total receipts. The Tribunal upheld the inclusion, considering the cost of materials as part of the trading receipts. The Court examined the contract clauses between the parties, particularly focusing on clause 12, which outlined the provision of materials by the Government. The contract specified that materials supplied by the Government were to remain the Government's property and were not to be removed from the work site. The Court emphasized that the contract clearly outlined the materials to be supplied by the Government and the rates at which they would be charged, indicating that no profit was intended to be earned by the contractor on these materials.

The Court referred to a previous judgment regarding building contracts and categorized them into two types. Category (1) contracts excluded the cost of materials supplied for construction work from the total receipts, while category (2) contracts included such costs. In this case, the Court determined that the contract between the assessee and the Government fell under category (1) as it was agreed upon that the materials would be supplied at specified rates, and the contractor would receive consideration net of these material costs. Therefore, the cost of materials supplied by the Government was not to be included in the total receipts for calculating profits. The Court held in favor of the assessee, answering both questions in the negative, indicating that the cost of materials did not partake the character of trading receipts as they were not intended to be part of the consideration under the contract.

Ultimately, the Court ruled in favor of the assessee, concluding that the cost of materials supplied by the Government should not be considered in the total receipts for profit calculation. The Commissioner was directed to pay the costs of the reference to the assessee, and the questions were answered in the negative, in favor of the assessee.