Sabyasachi Mukharji, J.
1. In this reference under Section 66(2) of the Indian Income-tax Act, 1922, the Tribunal has referred two questions to this court, namely :
'(1) Whether, en the facts and circumstances of the case, and specially in view of the Tribunal having held that the completed job basis of accounting was a recognised method of accounting, the Tribunal was right in holding that determination of profit on estimate by application of the proviso to Section 13 of the Indian Income-tax Act, 1922, was justified ?
(2) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in holding that the Appellate Assistant Commissioner of Income-tax was justified in computing profits by applying a flat rate on the gross value (as distinguished from the net value) of the contract jobs ?'
2. In view of the facts of this case and in view of the decision given by us on 24th September, 1974, in the I. T. Reference No. 199 of 1971, Commissioner of Income-tax v. Mehar Singh & Co. (P.) Ltd. : 113ITR426(Cal) (Appendix No. 3), we answer the first question in the affirmative and in favour of the revenue.
3. This reference relates to the assessment of the assessee for the assessment year 1959-60, the previous year of which ended on March 31, 1959. The assessee, is a contractor. In the year in question, he had undertaken the construction of 44 ' K-1' Type houses and 94 ' L-2 ' Type houses under Durgapur Project. The expenditure incurred on the jobs during the year was shown at Rs. 4,45,904 and this was treated by the assessee as work-in-progress and a sum of Rs. 3,21,358 was shown as received against the contracts from the Executive Engineer, The assessee did not show any profit or loss from the jobs and, claiming overhead expenses at Rs. 12,764, a net loss was returned. The Income-tax Officer considered that a profit had to be calculated on the basis of the receipts from the authorities and he had accordingly computed the gross profit of Rs. 40,169 at 121/2% of the receipts. The assessee appealed before the Appellate Assistant Commissioner. The assessee claimed that the accounts were maintained on what was known as the completed job basis and this was the recognised system of accounting. It was contended that the accounts having been maintained in a proper manner, the proviso to Section 13 of the Indian Income-tax Act, 1922, could not be invoked. The Appellate Assistant Commissioner did not accept the assessee's contention. According to the Appellate Assistant Commissioner, the tax had to be levied on the total income of the previous year and not on the total income of a period of 2, 3, 4 or more years, the period that would be required for completing any contracted work. He was of the opinion that the assessee had not followed any recognised method of accounting. He further observed that, so far as the 44 houses of 'K-L' type were concerned, these appeared to have been completed in the year of account. It appeared that although payments in respect of the work were drawn up to the end of the financial year 1962-63, the final trading and profit and loss account was drawn up at the end of the financial year 1959-60. This the Appellate Assistant Commissioner considered as inconsistent with what the assessee claimed to be his method of accounting. The Appellate Assistant Commissioner concluded that the final trading and profit and loss account, as drawn up by the assessee, could not be taken as depicting the correct profit of the business. After discussing elaborately the nature of the contract jobs and the accounting, he came to the conclusion that the Income-tax Officer's action in invoking the provisions of Section 13 of the Indian Income-tax Act, 1922, for computing the assessee's income was justified. As regards the computation of income, it was contended on behalf of the assessee before the Appellate Assistant Commissioner that the estimate of gross profit at the rate of 121/2%, adopted by the Income-tax Officer, was excessive. The Income-tax Officer had applied that rate on the net payment of Rs. 5,21,358 which was arrived at after deducting, (I) security deposit, (2) cost of materials, and (3) water charges. According to the Appellate Assistant Commissioner the profit of the contractor was on the work as a whole and not restricted to only the net payments. According to him the value of the work as a whole was Rs. 8,39,412 as per details, given by him at paragraph 3 of the order of the Appellate Assistant Commissioner. He found that the assessee's income was grossly under-assessed by the application of a gross profit rate of 121/2% on the net payments. He gave due notice of the enhancement to the assesses. The assessee's contention before the Appellate Assistant Commissioner was that there was no profit on that part of the contract job which was equivalent to the cost of materials supplied by the contractee and that the quotation was made, on the basis of 10% gross profit on all the items of work after specifically excluding the cost of materials, namely, brick, cement, steel, etc., to be supplied by the contractee. The Appellate Assistant Commissioner observed that procurement of building materials from the open market for construction works was a very tough problem and where the contractee undertook the supply of these essential materials, the contractor was definitely at a more advantageous position than the contractor who had to purchase materials from the open market on his own account. The Appellate Assistant Commissioner did not accept the contention that there was no profit on the part of the contract work which was covered by the materials supplied by the contractee. As regards the contention that the quotation for different types of work had been made with stipulation of 10% gross profit after excluding the cost of materials to be supplied by the contractee, the Appellate Assistant Commissioner observed that no data had been given by the assessee in support of his contention. In those circumstances the Appellate Assistant Commissioner did not accept such contention and observed that the normal margin of profit in such cases had been found to vary from 121/2% to 15% and considered the rate of 121/2%, as applied by the Income-tax Officer, to be quite reasonable. But according to the Appellate Assistant Commissioner, the rate was to be applied on the gross value of the work done and not on the net payments received by the assessee. He computed the gross profits at Rs. 1,04,926 by applying the rate of 121/2-% on Rs. 8,29,412 as the gross value of the work done during the previous year.
4. Thereafter, there was an appeal before the Tribunal. Before the Tribunal it was contended on behalf of the assessee that the Appellate Assistant Commissioner should have held that the method of accounting followed by the assessee on completed job basis was in accordance with the recognised principles of accounting and, therefore, the proviso to Section 13 of the Indian Income-tax Act, 1922, was not applicable. The Tribunal negatived this contention. In view of the answers we have already given on this aspect of the matter, we need not discuss in detail the points upon which the Tribunal rejected this contention of the assessee.
5. On the question as to whether the rate of gross profit was to be applied on the value of the bills or on the net value, the assessee's contention before the Tribunal was that the contractor could not make any profit on the materials supplied by the department and an estimate of profit on these materials was not justified. So far as the security deposit wasconcerned, the Tribunal held that the assessee had no point and it had not been disputed that the security deposits were the assessee's moneys which were to be ultimately refunded. Any deduction for any defect in the work that might be found out could only be considered to be a contingent liability which could not be deducted in determining the profits until the contingency actually arose. As regards the materials it was not the question, according to the Tribunal, that the contractor might make any profit on the materials supplied by the department. The Tribunal was of the opinion that the accounts were properly maintained and there was no reason for rejecting the same as the determination of profits did not present any difficulty. But where the accounts were rejected the Income-tax Officer has to determine as to what would be the correct profit and in that case it was natural to take recourse to an estimate. The Tribunal thus applied a flat rate on the value of the contracted job, after taking into consideration as to what should be the normal expected rate in such type of business. The contractor, according to the Tribunal, submitted tender for obtaining contracts and as an experienced contractor he was expected to make proper estimate of expenses while submitting his tender. He would provide for reasonable profit, at the same time taking care that his tender was made as low as possible, so that it would be accepted. The assessee, according to the Tribunal, was an experienced contractor and he had a qualified engineer having technical knowledge of the work. In these circumstances, the Tribunal was of the opinion that the assessee's tenders were based on certain estimates prepared by him. Such estimates were not, however, placed before the Tribunal. When the contractee authority undertook the supply of certain materials, required in the execution of the contract, it only meant that the contractor was saved from the worry of procuring these materials from the market. The contractor paid a reasonable price for the materials supplied, while if he had to procure these himself from the open market, he might have been required to pay black market prices. The profit, the contractor wanted to retain for himself, was not normally affected by the value of the materials supplied to him. In preparing his estimate he had to take into consideration the cost of the materials, labour, supervision cost, etc., and the contractor had also to take into consideration the likelihood of certain costs going up by the time the jobs were completed. In these circumstances, according to the Tribunal, when making the tender, the contractor provided for reasonable profit for himself, which was taken at a certain percentage of the value of the work. If the department supplied a part of the materials, it meant to that extent the expenditure would not be fluctuating. The profit margin that the contractor expected and provided for in the tender could not depend on or vary with the value of the materials that would be supplied by the department. The value of thejob was taken as a composite whole. Taking the case of a contractor executing contracts in a year for Rs. 8 lakhs, if 121/2% was the margin to be retained, it would amount to Rs. 1 lakh. If Rs. 5 lakhs was the value of the materials, the net amount of the bills would be Rs. 3 lakhs. If the profit margin of Rs. 1 lakh was worked out on the net value of the work the percentage would come to 331/2%. If again, in a similar job, the value of the materials supplied was only Rs. 3 lakhs, the net value would be Rs. 5 lakhs and the profit margin thereon would work out to 20%. The profit margin would then fluctuate widely if worked on the net value. As the Tribunal was concerned with the normal rate of profit expected by the contractor, which might be termed as the standard rate of profit, the Tribunal felt that in submitting the tenders as an experienced contractor in this case, the contractor was expected to have made a proper estimate of his expenses and provide for his reasonable profit and taking that into consideration, the Appellate Assistant Commissioner was justified in computing the profit by applying a flat rate on the gross job value of the bills.
6. In the aforesaid circumstances, the two questions, mentioned herein-above, have been referred to this court under Section 66(2) of the Indian Income-tax Act, 1922.
7. Counsel for the assessee contended before us that in a case where the contractor had to quote at a particular rate and not beyond that and that rate was excluding the value of the materials supplied by the Government or contractee, in such a case, there was no question of the contractor providing higher rate of profit or return on the remaining part of the job because he was precluded by the terms of the contract from doing so. It was, secondly, submitted that in any event no profit could be expected from the materials supplied by the Government. In this connection counsel relied on a decision of the Madras High Court in the case of Commissioner ofIncome-tax v. K.S. Guruswami Gounder & K.S. Krishnaraju : 92ITR90(Mad) . There the Division Bench of the Madras High Court held that the cost of materials supplied by the Government for the purpose of construction on their behalf undertaken by the contractor could not be included in his total income for the purpose of computing the total income of the contractor. Such income had to be calculated on the actual receipts from the Government. In that case, however, there was no question of estimating a particular rate of profit earned by applying the proviso to Section 13 of the Indian Income-tax Act, 1922. In the instant case, the contractor had not been able to satisfy the authorities below as to what were the terms of the contract with the contractee and in what terms and consideration the materials were supplied by the contractee to the contractor. Furthermore, in this case as we have been in mind, the total amount of profit had to be computed byapplying the proviso to Section 13 of the Indian Income-tax Act, 1922. The rate of profit had also to be determined by applying the proviso to Section 13 of the Indian Income-tax Act, 1922. As the Tribunal has pointed out that if the normal experience and expectation of a contractor as to how the profit would vary, were taken into consideration and in the circumstances where the contractor had not been actually able to satisfy the terms of the contract and where the estimates were to be based by applying the provisions to Section 13 of the Indian Income-tax Act, 1922, it cannot be said, in our opinion, that the Tribunal was not justified in upholding the decision of the Appellate Assistant Commissioner in the manner as it did. In cases where there was clear and unambiguous evidence that there was contract which provided sufficient limit, beyond which the tender could not be quoted and there was a stipulation that the contract was to be quoted at a particular rate, excluding the cost of materials, to be supplied by the contractee, other considerations might apply.
8. In the aforesaid view of the matter, both the questions are answered in the affirmative and in favour of the revenue. Each party will bear and pay its own costs.
9. I agree.