Dwarka Prasad, J. - (1.) THE assessee is a building contractor and had undertaken contracts for construction of buildings for Central Government departments for a sum of Rs. 5,37,766. THE Government had supplied some materials to the assessee such as cement, iron and steel etc., of the value of Rs. 1,02,196 for the purpose of execution of the contracts. After the completion of the contracts, the Government departments made payment of the balance amount to the contractor after deducting a sum of Rs. 1,02,196, representing the value of the material supplied to him for execution of the works. THE ITO rejected the accounts maintained by the assessee, holding that they were not correct and complete and he applied a not profit rate of 15% to the turnover of the assessee. On appeal, the AAC considered it to be reasonable to apply a net profit rate of 12 1/2% on the turnover of the assessee. Before the Income-tax Appellate Tribunal, Jaipur (hereinafter referred to as "the Tribunal"), the assessee, on further appeal, raised the question that no amount of profit should be calculated on the value of the material supplied to him by the Government departments for the purpose of execution of the works in question. THE Tribunal by its order dated September 6, 1971, while applying the net profit rate of 12.5%, also upheld the contention advanced on behalf of the assessee that there was no possibility of any profit accruing on the value of the material, which was supplied by the Government departments for being utilised on the works and value of which was deducted from the bills, as such the value of the materials supplied by the Government departments to the assessee was excluded by the Tribunal from the calculation of the turnover of the assessee, while estimating the net income. THE Commissioner of Income-tax, Rajasthan, Jaipur, applied to the Tribunal for making a reference to this court under Section 256 of the I.T. Act, 1961, and the following question of law has been referred to us by the Tribunal as arising out of its order dated September 6, 1971: "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 includible in the gross receipts for the purpose of estimating the net income of the assessee ?"
(2.) AS the question which has been referred to us has since then been decided by their Lordships of the Supreme Court, it is not necessary for us to discuss the matter in detail. It appears that the Kerala High Court in M.P. Alexander & Co. v. CIT [1973] 92 ITR 92, the Madras High Court in CIT v. K.S. Guntswami and K.S. Krishnaraju [1973] 92 ITR 90, the Gujarat High Court in Trilok Chand Chunnilal v. CIT [1976] 104 ITR 732 and a Full Bench of the Andhra Pradesh High Court in Addl. CIT v. Trikamji Puma and Sons [1977] 106 ITR 597, took the view which the Tribunal has taken in the present case, that as no amount of profit was involved in respect of the material supplied by the Government departments for the execution of the contracts, as such, in best assessment judgment, the value of the materials supplied by the Government departments should not be included while applying the net profit rate to the income of the assessee. However, the Punjab and Haryana High Court in Brij Bhusan Lal v. CIT [1971] 81 ITR 497 (Punj) and again in CIT v. Brij Bhusanlal Ramesh Kumar [1976] 102 ITR 430 (P & H) took a contrary view and held that the percentage of profit in the case of such a contractor is not determined with respect to each item of the materials involved in the performance of the contract, but on the amount of the whole contract and the same could not be divided in different parts according to the nature and source of supply of the materials used for that purpose. In Brij Bhusanlal's case [1976] 102 ITR 430 (P & H), an appeal was taken by the contractor against the judgment of the Punjab and Haryana High Court to the Supreme Court, and their Lordships of the Supreme Court while deciding the appeal in Brij Bhusanlal Pardtiman Kumar v. CIT [1978] 115 ITR 524 (SC) held as under (p. 532): "In substance and in reality, such stores/materials 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 /materials...... when stores/materials are, supplied by the Government department at fixed rates for being used, fixed or incorporated in the works 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 profits derived by the contractor from such contract is determined on the value of the contract as a whole and cannot be determined by considering the several items that go to form such value of the contract but in our view where certain stores/materials are, 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/materials supplied by the M.E.S. to the assessee-firms, the income or 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 materials/stores received for being used, fixed or incorporated in the works undertaken by them." Thus, following the aforesaid principles laid down by their Lordships of the Supreme Court, we hold that the value of the material supplied by the Government departments to the contractor for being used for the execution of the works is to be excluded while determining the turnover of the contractor-assessee. After the decision of their Lordships of the Supreme Court in Brij Bhusan Lal's case [1978] 115 ITR 524, the legal position in respect of the question referred to us has been set at rest. Consequently, we answer the question referred to us in the affirmative, in favour of the assessee and against the Department. In the circumstances of the case, the parties shall bear their own costs of this reference.;