1976 (5) TMI 36 - AT - Income Tax

Summary

Issues:
1. Estimation of net profit by including cost of materials supplied by Railways and M.E.S.
2. Dispute over the additions made by the ITO and deletion by the AAC.
3. Interpretation of terms in contracts with Railways and M.E.S.
4. Applicability of previous court decisions to the current case.

The judgment involves the assessment of the assessee, a civil engineering contractor, who executed works contracts for Central Railways and the M.E.S. The ITO estimated the cost of materials supplied by these entities to the assessee for executing works and added it to the bill amounts, affecting the net profit calculation. The AAC deleted these additions based on previous Tribunal orders for earlier years. The Department appealed to the Tribunal against this decision.

During the appeal, the counsel for the assessee presented the original contracts with the Railways and M.E.S. It was revealed that the agreements specified the supply of materials like cement at predetermined rates by the entities for the execution of works. The contracts clearly outlined the terms of material supply and deductions, indicating an understanding between the assessee and the Railways and M.E.S. that the required materials would be provided by the departments, influencing the quoted rates by the assessee.

The Tribunal analyzed the terms of the contracts and concluded that there was a clear agreement for the supply of materials by the Railways and M.E.S. at specified rates, eliminating the need for the assessee to purchase these materials externally. The Tribunal found no evidence to suggest that the assessee profited from the materials supplied by the departments for executing the works contracts. Relying on precedents from the Madras and Kerala High Courts, the Tribunal determined that the cost of supplied materials should not be included in estimating the assessee's net profit from the contract business.

In light of the contractual terms and the absence of evidence showing profit from supplied materials, the Tribunal upheld the AAC's decision and dismissed the Department's appeal. The judgment emphasized the applicability of previous court decisions to the current case, reinforcing the principle that the cost of supplied materials should not impact the assessment of the assessee's net profit.