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Addl. Commissioner of Income-tax Vs. Hemandas Dharajmal - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtRajasthan High Court
Decided On
Case NumberD.B. Income-tax Reference No. 9 of 1973
Judge
Reported in(1984)40CTR(Raj)72; [1985]155ITR533(Raj)
AppellantAddl. Commissioner of Income-tax
RespondentHemandas Dharajmal
Appellant Advocate J.P. Joshi, Adv.
Respondent Advocate A.L. Mehta, Adv.
Excerpt:
- - on further appeal to the income-tax appellate tribunal (hereinafter called 'the tribunal'), both by the assessee as well as by the department, the tribunal came to the conclusion that the estimate of net profits at 121/2% in respect of the contracts directly executed by the assessee was fair and reasonable......since no element of profit was involved in the turnover represented by the cost of stores/material supplied by the m.e.s. to the assessee firms, the income &r; profits derived by the assessee firms from such contracts will have to be determined on the basis of the value of the contracts represented by the cash payments received by the assessee firms from the m.e.s. department exclusive of the cost of the material/stores received for being used, fixed or incorporated in the works undertaken by them,' (emphasis* added)5. thus, following the principles laid down by their lordships of the supreme court, we hold that the value of the materials supplied by the state government to the contractor for being exclusively used for the execution of the work is to be excluded while.....
Judgment:

Dwarka Prasad, J.

1. The assessee-firm had undertaken a contract for construction of canals, etc., in connection with the Vallabh Nagar Project from the Irrigation Department of the Government of Rajasthan. In execution of the aforesaid work, the State Government supplied cement and other materials to the assessee for being directly utilised in the completion of the work. After the completion of the contract, the State Government made payment of the gross amount due to the assessee in respect of the completed contract, after deducting the value of the materials supplied to the assessee for the execution of the contract. The ITO rejected the books of account maintained by the assessee on the ground that they suffered from certain defects and applied a net profit of 121/2%.

2. On appeal by the assessee, the AAC while maintaining the estimate of net profits at the rate of 121/2% in respect of the contracts directly executed by the assessee, applied 71/2% profit rate in respect of the contracts which were supervised by other persons employed by the assessee. On further appeal to the Income-tax Appellate Tribunal (hereinafter called 'the Tribunal'), both by the assessee as well as by the Department, the Tribunal came to the conclusion that the estimate of net profits at 121/2% in respect of the contracts directly executed by the assessee was fair and reasonable. The Tribunal also found that the estimate of net profits in respect of contracts executed through the other persons employed by the assessee at 71/2% was also fair and reasonable. However, the Tribunal, in its order dated February 3, 1972, held that the amount of the bills relating to the Value of the materials supplied by the State Government should be excluded from the gross receipts of the assessee.

3. On the request of the Additional Commissioner of Income-tax, Rajasthan, Jaipur, the Tribunal referred the following question of law to this court, arising out of its order dated February 3, 1972 :

'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the cost of materials supplied by the Government is not to be included in the gross receipts of the business for calculation of the profit of the assessee's business at the estimated rate of net profit adopted for the purpose ?'

4. A similar question was referred to this court in CIT v. Rameshwardass Narsingh Dass & Co. (D. B. Income-tax Reference No. 21 of 1972, decided on December 3, 1983) [See ]. In that case, this court observed that since the legal position has been decided by their Lordships of the Supreme Court in Brij Bhushan Lal Parduman Kumar v. CIT : [1978]115ITR524(SC) the said question did not require elaborate consideration and the law on the point has been set at rest by the decision of their Lordships of the Supreme Court in Brij Bhaushan Lal's case. Their Lordships of the Supreme Court observed as under in Brij Bhushan Lal's case (p. 532) :

'In substance and in reality, such stores/material always remains the property of the Department and the contractor has merely the custody of it and he fixes or incorporates the same into the works. It seems to us clear that in such circumstances and having regard to the terms and conditions on which such supply of stores/materials is made, there is not even a theoretical possibility of any element of profit being involved in the turnover represented by the cost of such stores/material. It is conceivable that when the contractor himself purchases materials in the open market and supplies the same to the Department by using, fixing or incorporating the same in the works, as in the case of materials other than those specified in Schedule 'B', some profit element would be embedded in the turnover represented by the cost of such material but when stores/material is supplied by the Government Department at fixed rates for being used, fixed or incorporated in the work on terms indicated above, there would be no element of profit involved in the turnover represented by the cost of such material. It is true that, ordinarily, when a works contract is put through or completed by a contractor the income or profit derived by the contractor from such contract is determined on the value of the contract as a whole and cannot be determined by considering several items that go to form such value of the contract but in our view where certain stores/ material is supplied at fixed rates by the Department to the contractor solely for being used or fixed or incorporated in the works undertaken on terms and conditions mentioned above, the real total value of the entire contract would be the value minus the cost of such stores/material so supplied. Therefore, since no element of profit was involved in the turnover represented by the cost of stores/material supplied by the M.E.S. to the assessee firms, the income &r; profits derived by the assessee firms from such contracts will have to be determined on the basis of the value of the contracts represented by the cash payments received by the assessee firms from the M.E.S. Department exclusive of the cost of the material/stores received for being used, fixed or incorporated in the works undertaken by them,' (emphasis* added)

5. Thus, following the principles laid down by their Lordships of the Supreme Court, we hold that the value of the materials supplied by the State Government to the contractor for being exclusively used for the execution of the work is to be excluded while determining the turnover of the contractor-assessee. In our opinion, the Tribunal was, therefore, right in holding that the cost of materials supplied by the State Government should not be included in the gross receipts of the business of the assessee while calculating the net profits of the assessee's business. Thus the question referred to us is answered in the affirmative, in favour of the assessee and against the Department.

6. The parties shall bear their own costs.


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