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TMI Blog1976 (9) TMI 41X X X X Extracts X X X X X X X X Extracts X X X X ..... circumstances of the case, the Tribunal was justified in law in giving directions to the Appellate Assistant Commissioner that the value of the materials should not be taken into consideration for estimating the net income for the assessment years 1964-65 to 1967-68 ? " We are concerned with the assessment years 1964-65 to 1967-68. The assessee is a registered partnership firm and carries on business as railway contractors. The relevant years of account are the four years ending with Deepavali of each Hindu calendar year. For the assessment year 1964-65, in the first instance, the assessee filed a return disclosing an income of Rs. 47,535 and the return was based on the books of account maintained by the firm. Subsequently, the assessee filed a revised return declaring a total income of Rs. 1,04,609 estimating the same at 10% of its receipts. The Income-tax Officer found that the accounts kept by the assessee-firm were not reliable. He found that the total receipts during the year amounted to Rs. 10,34,350. He also found that the assessee-firm had received materials of the value of Rs. 72,584 from the railway authorities. He estimated the total receipts at Rs. 11,10,000 and estim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refundable to the assessee on the basis of such assessment. Thus, section 144 provides for best judgment assessment and if the conditions mentioned in section 145(2) are satisfied, as they were satisfied in the instant case, the best judgment assessment could be made by the Income-tax Officer. It must be pointed out that the best judgment assessment referred to in section 144 is regarding the figure of income, which, in the opinion of the Income-tax Officer, is the proper figure of income and he makes the assessment of the total income to the best of his judgment after taking into account all relevant material which he has gathered. The principles to be followed by the Income-tax Officer or the Sales Tax Officer when making best judgment assessment have been culled out by the Supreme Court in Commissioner of Sales Tax v. H. M. Esufali [1973] 90 ITR 271 (SC). At page 278 of the report, Hegde J., speaking for the Supreme Court, has pointed out that the law relating to " best judgment assessment " is the same both in the case of income-tax assessment as well as in the case of sales tax assessment. He has pointed out that the scope of " best judgment assessment " under the income-t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... judgment assessment under section 144, the Income-tax Officer in the instant case has followed the correct principles. We may mention at the outset that, in this case, as shown by the material papers filed in this case, it was obligatory on the part of the assessee to obtain the cement required for the work from the railway authorities on the conditions laid down in the contract and that bazaar cement was not allowed to be used. The conditions relating to the supply of cement are as follows : " Issues will be made daily by the railway in such quantities as are actually required for the operation in hand and in accordance with the quantities indicated against the relevant items. Deductions will be made for the bulk quantities of cement supplied from time to time, irrespective of the control over daily issues above referred to at an all-inclusive rate of Rs. 120 per ton. Cement left over on completion of the work will be adjusted in the final bill and will be taken over by the railway. " The Chief Engineer (Construction), South Central Railway, Secunderabad, has, issued a certificate on October 23, 1972, to the following effect : " This is to certify that in all types of co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... High Court in M. P. Alexander Co. v. Commissioner of Income-tax [1973] 92 ITR 92 (Ker) decided on July 10, 1966, by a Division Bench consisting of M. S. Menon C. J. and P. Govindan Nair J. (as he then was). In that case, the assessee entered into two contracts for the execution of certain works for the State Government, and the question was whether the cost of materials supplied by the Government should be included for the purpose of computation of profits earned by the assessee. In that case also, the accounts of the assessee were rejected and an estimate was, therefore, made. Govindan Nair J., speaking for the Division Bench, observed : " We may state at the outset that these amounts have been included for applying the percentage on the basis that these amounts representing the cost of the materials had contributed to the profits made. " The learned judge further observed : " It is clear that the Tribunal has proceeded on the basis that there is an element of profit involved even in the supply of materials by the State Government. Even so they were prepared to say that there was no such element involved in the hire charges. We are unable to discern any difference between ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... could not be obtained by the assessee in the open market at the rates at which the Government supplied them, even if he could obtain them in the open market. According to Jaganmohan Reddy C. J., the order of the Appellate Assistant Commissioner gave an indication that the assessee was to receive the gross amount and had to furnish the materials himself but since the Government furnished the materials, an inference would arise that they must have deducted these amounts from the payments, in which case the basis adopted by the income-tax authorities could not be challenged and it was held that the cost of materials supplied by the Government should be included in the figure on the basis of which the percentage of profit could be worked out. Thus, it is clear from what has been pointed out by Jaganmohan Reddy C.J. that, in that particular case, the contract was that the contractor should furnish the materials himself and for that purpose he had to receive a particular gross amount ; but since the Government had furnished some of the materials, the amount representing the cost of those materials was deducted before actual payments were made. Thus, the deduction in V. D. Rajarathanam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Alexander Co. v. Commissioner of Income-tax [1973] 92 ITR 92 (Ker) was pointed out to the Division Bench but the Division Bench saw no reason to depart from the view taken in Brij Bushan Lal v. Commissioner of Income-tax [1971] 81 ITR 497 (Punj). It may be pointed out that, in the second case decided by the Punjab and Haryana High Court, the assessee was a registered firm having its income from contract business and the question was whether the value of the stores supplied by the Government was to be excluded or not in assessing the income of the assessee on the basis of the best judgment assessment and the question was decided in favour of the department and against the assessee. In Commissioner of Income-tax v. K. S. Guruswami Gounder K. S. Krishnaraju [1973] 92 ITR 90, 91 (Mad), a Division Bench of the Madras High Court held that the cost of materials supplied to the contractor by the Government for the purpose of construction on their behalf undertaken by him cannot be included in his total receipts for the purpose of computing the income of the contractor and that such income has to be calculated only on the actual receipts from the Government. The Division Bench obser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stimated on the contract as a whole and not on the net receipts arrived at after deducting the cost of materials supplied by the Government, inasmuch as the assessee had not maintained any accounts, but left the assessment to be made by the Income-tax Officer on the basis of the receipts. We have referred to the case papers in R.C. No. 9 of 1973, the decision in which is reported as Commissioner of Income-tax v. K. S. Reddy [1976] 103 ITR 822 (AP). We find from the order of the Tribunal in that case that a certificate was issued by the Executive Engineer, Drainage Division. As per the terms of the tender, the contractor was bound to use the material supplied by the department and the contractor did not get any commission or profit on such supplies. Thus, the contract, which was for the construction of drainage and roads by the assessee in that particular case, was on the footing that certain materials were to be supplied by the department and it was not open to that particular contractor to use any outside materials of that category and he was bound to use the materials supplied by the department. The facts of that case were, therefore, different from the facts which were before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly and on the face of it the contract has been entered into for a much larger amount and on the footing that the contractor is to supply all the materials, because of the clear agreement between the parties about the materials to be supplied by the other party to the contract and also about rates at which those materials are to be supplied, it is clear that in fact and in substance the parties have entered into the contract where certain specified materials are to be supplied not by the contractor but by the other party to the contract and the contractor right from the beginning enters into the contract on this footing and puts forward his quotation and ultimately gets the contract for the amount where he does not take into consideration supply of those particular materials or rates for those materials. Category No. (2) of contracts is the type where, right from the beginning, the contractor enters into the construction contract on the footing that he has to supply all the materials but while the contract is being executed, the other party to the contract supplies some of the materials and when the bill is finally paid, the other party to the contract claims credit for the price of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... K. S. Krishnaraju [1973] 92 ITR 90 (Mad) and of the Kerala High Court in M. P. Alexander Co. v. Commissioner of Income-tax [1973] 92 ITR 92 (Ker). In our opinion, the facts and circumstances of each case will determine as to whether the cost of materials can or cannot be taken into consideration in determining the profits of a particular contractor on the best judgment assessment basis. It must be borne in mind that what the Income-tax Officer has to determine is the profit of the assessee and the question whether the assessee was not maintaining his accounts properly, which was a fact which weighed with the Punjab and Haryana High Court in Brij Bushan Lal v. Commissioner of Income-tax [1971] 81 ITR 497 (Punj) and the Andhra Pradesh High Court in Commissioner of Income-tax v. K. S. Reddy [1976] 103 ITR 822 (AP), is an irrelevant factor. With respect to the learned judges, who decided these cases, we are unable to agree with the conclusion reached by them. The question is of determining the profits which the assessee can be said to have earned and if the cost of materials supplied by the department concerned was never intended to contribute to the profits earned or to be earned ..... X X X X Extracts X X X X X X X X Extracts X X X X
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