1. In this case at the instance of the assessee the following two questions have been referred to us for our opinion :
'(1) Whether the Tribunal was justified in law in holding that the cost of materials supplied by the Government to the extent of Rs. 2,62,552 and Rs. 8,01,375 for the assessment years 1968-69 and 1969-70, respectively, was includible in the total receipts for the purpose of applying the rate of gross profit
(2) Whether, on the facts and in the circumstances of the case, and in view of clause 12 of the contract in question, the Tribunal was justified in law in holding that the cost of materials supplied by the Government could partake the character of trading receipt ?'
2. In this reference we are concerned with assessment years 1968-69 and 1969-70. The assessee is a registered partnership firm and carried on business as contractors. The Income-tax Officer while working out the figure of the total receipts of the assessee for each of these two assessment years under reference included the amount representing the cost of materials supplied by the Government for the construction work in each of these two years under reference and thereafter applied the percentage rate to these total receipts. The Tribunal held that these amounts were includible and held that the cost of materials supplied by the Government was an integral part of the trading receipts and confirmed the orders of the Income-tax Office and of the Appellate Assistant Commissioner who upheld that view.
3. We find that in annexure 'E' to the statement of the case, various clauses of the contract between the parties have been set out. Under clause 12, it was provided as follows :
'If the specification or estimate of the work provides for the use of any special description of materials to be suppled from the store of the P.W.D. or if it is required that the contractor shall use certain stores to be provided by the engineer-in-charge ...the contractor shall be supplied with such materials and stores as may be required from time to time to be used by him for the purpose of the contract only, and the value of the full quantity of materials and stores so supplied shall be set off or deducted from any sums then due or thereafter to become due to the contractor under the contract....'
4. The said clause 12 also provided.
'All materials supplied to the contractor shall remain the absolute property of Government, and shall on no account be removed from the site of the work, and shall at all times be open to inspection by the engineer-in-charge. Any such materials unused and in perfectly good condition at the time of completion or determination of the contract shall be returned to the Public Works Department stores of the engineer-in-charge....'
5. Annexure 'A' to the statement of the case is a copy of the contract between the assessee and the Government. The original of the contract was produced at the time of the hearing before us and we find that schedule 'A' to the contract set out the materials to be supplied from the Public Works Stores for works contracted to be executed, their quality and the rates at which they were charged for. Thus, it is clear that by the very terms of the contract the items set out in the schedule 'A' to the contract, namely, cement, steel, G.I. pipes, that is, galvanized iron pipes and bricks in the quantities and at the rates set out in the schedule were to be supplied by the Public Works Department to the assessee in respect of the contract under consideration. It is equally clear, therefore, that at the time when the parties entered into this contract, that is, when the Government of Gujarat and the assessee before us entered into this particular contract, it was clearly contemplated that these materials were to be supplied by the Government and at the specified rates. It is thus obivous that the total amount would be earned by the contractor in respect of these materials, namely, cement, steel, galvanised iron pipes, and bricks. In our judegment delivered today in Income-tax Reference No. 140 of 1974 Trilokchand Chunilal v. Commissioner of Income-tax), we have referred to two categories of building contracts for construction work of the kind before us. We have discussed in that judgment fully what these two categories are and what is the consequence of a particular contract being found in substance to belong to one or the other of these two categories. We have their held that if the contract falls in category (1), cost of materials supplied for the construction work by the other party to the contract is not to be included in the total receipts of the contractor concerned. If, however, it falls in category (2) the cost of materials supplied to the contractor is to be included in the total receipts. In the instant case it is obvious that the contract entered into by the assessee firm falls in category (1) since, at the time of entering into the contract, it was clearly agreed between the Government (Public Works Department) and the assessee firm as to the materials which were to be supplied and the price which was to charged by the Government for the supply of these materials. It was on the footing that these quantities at these rates were to be supplied, that the contractor agreed to receive a particular amount as and by way of consideration for carrying out this contract. In view, of the fact that the total amount of the contract included all these items, cost of materials is totally immaterial since, in substance, the cost of materials supplied by the Government. It was on that footing that the contract was entered into and calculation of either of two parties, regarding the expectation of earning the profit on the basis of which the contract was entered into.
6. For the reasons recorded by us in our decision in Income-tax Reference No. 140 of 1974 (Trilokchand Chunilal v. Commissioner of Income-tax), we hold in instance case that in each of these two years under reference, the cost of materials supplied by the Government for assessment years 1968-69 and 1969-70, respectively, was not includible in the total receipts for the purpose of applying the rate which would determine the profits of the assessee. We, therefore, answer question No. (1) referred to us in the negative, that is, in favour of the assessee and against the revenue. Question No. (2) is also answered in negative, that is in favour of the assessee and against the revenue. These was no question of cost of these materials ever partaking the character of trading receipts since they were not to form part of the consideration under the contract.
7. The question referred to us are answered accordingly. The Commissioner will pay the costs of this reference to the assessee.