RAMESH CHANDRA CHATURVEDI Vs. COMMISSIONER OF INCOME TAX
LAWS(PAT)-1979-9-2
HIGH COURT OF PATNA
Decided on September 10,1979

RAMESH CHANDRA CHATURVEDI Appellant
VERSUS
COMMISSIONER OF INCOME-TAX Respondents


Cited Judgements :-

KALPNATH RAI VS. COMMISSIONER OF INCOME TAX [LAWS(PAT)-1983-6-4] [REFERRED TO]
COMMISSIONER OF INCOME TAX VS. JAISWAL VERMA CONSTRUCTION COMPANY [LAWS(PAT)-1985-4-30] [REFERRED TO]
COMMISSIONER OF INCOME TAX VS. RAM DAYAL MODI AND SONS [LAWS(RAJ)-1984-1-44] [REFERRED TO]
COMMISSIONER OF INCOME TAX VS. AZAD BUILDERS NO 1 [LAWS(PAT)-1986-2-26] [REFERRED TO]
COMMISSIONER OF INCOME TAX VS. AZAD BUILDERS NO 2 [LAWS(PAT)-1986-5-25] [REFERRED TO]
BOHI CONSTRUCTION COMPANY VS. COMMISSIONER OF INCOME TAX [LAWS(PAT)-1987-3-34] [REFERRED TO]
KUNDAN LAL AND SONS VS. COMMISSIONER OF INCOME TAX [LAWS(DLH)-1985-4-32] [REFERRED]
COMMISSIONER OF INCOME TAX VS. AZAD BUILDERS [LAWS(PAT)-1986-1-30] [REFERRED TO]


JUDGEMENT

- (1.)PATNA Bench 'B' of the Income-tax Appellate Tribunal has asked for the opinion of this court on the question :
"Whether, on the facts and in the circumstances of this case, the Tribunal was correct in holding that profit from contract business for the assessment years 1972-73 and 1973-74, was to be calculated on the gross receipts excluding the recoveries for the materials supplied by the Government department ?"

(2.)WE have had some difficulty in understanding the question, particularly if it means that some part of the materials supplied to the assessee belonged to the Government department and always remained their property but used by the assessee in the execution of the contract. If this fact had been clearly indicated, it would have been easier to answer this question. The question, however, is restricted to the facts and circumstances of the case and, therefore, the facts and circumstances, as obtained in this case, are now being stated.
The assessee is a firm of contractors, registered under the I.T. Act. It is not known, however, as to what are the things which he undertook to execute as a contractor. The aforesaid question has been posed for the assessment years 1972-73 and 1973-74. For both these assessment years, assessment had been made by recourse to proviso to Section 145(1) of the I.T. Act, 1961, because it was found that the accounts did not reflect the true state of his business affairs. There is no dispute on the question that in the circumstances, his profit has to be estimated by recourse to the said provision of the Act.

For the assessment year 1972-73, the total gross receipt from the various contracts executed amounted to Rs. 19,41,472. Similarly, the gross receipts for the assessment year 1973-74 amounted to Rs. 22,86,353. The assessee claimed that while estimating the profits the value of the materials should be excluded from the gross receipts. The value of the materials was stated to be Rs. 1,27,215 for the assessment year 1972-73 and Rs. 4,82,527 for the assessment year 1973-74. The ITO, however, refused the assessee's contention and estimated its net profit at 10% of the gross receipts, without excluding the value of the materials from the gross receipts.

On appeal, the assessee succeeded before the AAC and the aforesaid amounts representing the value of the materials were directed to be deducted from his gross receipts for the purposes of estimating the assessee's net profits. The reason which weighed with the AAC was that according to the terms of the contract between the assessee and the other party, the assessee had no option but to accept the materials supplied by the other party in execution of the contract. The AAC found that the deductions of the value of the materials had been made from the gross payment. On these grounds he held that on the value of the materials the assessee could not have earned any profit and, therefore, the net profit should be assessed not on the gross receipts but on the gross receipts less the value of the materials in each year.

The department being aggrieved by the orders of the AAC, appealed to the Tribunal which set aside the order of the AAC and restored the order of the ITO. The Tribunal was apprised of the terms of the contract and also of the total value of the contracts, as also of the value, of the materials said to be deducted out of the gross receipts. The Tribunal, however, found that in the absence of stock register for the materials received, either from the department or purchased by the assessee himself, the actual position relating to the materials obtained from the department was not ascertainable. The Tribunal further found that even with regard to the materials said to have been supplied by the department, whether they remained under the control of the department or under the control of the contractor was not known. According to the Tribunal, in such circumstances, it could not be said that the assessee earned no profits on the materials used in the contract. These are the relevant facts, on which the aforementioned question has been referred for the opinion of this court.

(3.)MR. Rameshwar Prasad No. 2, appearing for the assessee, submitted that the assessee could not have had any profit on the materials used by it in the execution of the contract, because those materials were all supplied by the other party, in this case, certain departments of the State Government. According to MR. Prasad, it was incumbent on the assessee to accept whatever materials were delivered to it for use in the execution of the contract and in such a view of the matter, the assessee was wholly unconcerned with the value of such materials supplied to it. On the value of such materials, according to MR. Prasad, no profit could have accrued to the assessee and, therefore, in determining the assessee's net profit the value of such materials must be excluded from his gross turnover.
Mr. Rajgarhia, appearing for the department, however, submitted that the argument made on behalf of the assessee was wholly untenable in the absence of relevant facts, concerning the terms on which the materials, if any, were supplied to the assessee by the department concerned. Mr. Rajgarhia submitted that, may be that the entire materials used by the assessee in the contract might have been purchased by the assessee himself from the departments, or might have been purchased even from outside. On the use of such materials in the execution of the contracts, Mr. Rajgarhia submitted, an element of profit would always be present in the value of the materials used and, therefore, the Tribunal's order restoring the ITO's orders were valid and should be upheld. According to Mr. Rajgarhia, the question should be answered against the assessee.

There cannot be a hard and fast rule to determine the question as to whether the value of the materials should or should not be included in the gross turnover of an assessee who is a contractor, for determining his net profits. It all depends upon the manner in which the materials have come to be used in the execution of the contract. Generally contracts partake three forms-

(1) an overall contract wherein the contractor undertakes to execute the contract wholly supplying the labour and material, himself;

(2) works contract in which the contractor undertakes to supply only the labour. The contractor is not at all concerned with the materials used in the contract. He just puts the materials in the form in which he is asked to do and charges only for labour ; and lastly

(3) a lump sum contract.



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