V.K. Singhal, J. - (1.) THE Income-tax Appellate Tribunal was directed vide order dated April 4, 1979, to refer the following two questions of law arising out of its order dated December 29, 1973 : "1. Whether, on the facts and in the circumstances of the case, the Tribunal has rightly included the value of the material supplied by Hindustan Copper Ltd. and Instrumentation Ltd. to the assessee for calculating the gross profit rate ? 2, Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that estimating the income of the assessee no allowance need be given for security deposits deducted from the running bills of the assessee ?"
(2.) THE facts of the case are that the assessee received gross payments of Rs. 19,74,903 from Hindustan Copper Ltd., Khetri, and Rs. 2,15,726 from Instrumentation Ltd., Kota, for the works done for them. THE payments of Rs. 19,74,903 were made up as under : Judgement_510_ITR230_19981.HTM The above amounts of Rs. 19,74,903 also included an amount of Rs. 51,000 which was paid on June 13, 1968, i.e., in the accounting period relevant to the assessment year 1968-69. The Income-tax Officer, therefore, excluded this amount of Rs. 51,000 from the gross receipts and the taxable receipts for the assessment year 1970-71 under appeal were taken by him at Rs. 19,23,903 so far as receipts from Hindustan Copper Ltd., Khetri, are concerned. The details of receipts of Rs. 2,15,726 from Instrumentation Ltd., Kota are as under : Judgement_510_ITR230_19981.HTM The amount of Rs. 3,76,950 was adjusted in respect of material and Rs. 2,13,177 in respect of security. While making the assessment, the Income-tax Officer estimated net profits on the gross receipts of Rs. 19,23,903 from Hindustan Copper Ltd., Khetri, and of Rs. 2,15,726 from Instrumentation Ltd., Kota. The contention of the assessee that no profits could be estimated on the receipts of Rs. 3,76,950 by way of adjustment of material was not accepted by the Income-tax Officer. Similarly, in respect of the security amounts of Rs. 2,13,177 deducted from the bills (the contention that they) should be excluded while estimating the profits, was also rejected by the Income-tax Officer. The appeal before the Appellate Assistant Commissioner was allowed and the adjustment of Rs. 2,13,177 was held not includible in the receipts for the purpose of charging profits. It was also found that the assessee had received an amount of Rs. 27,245 by way of refund of security deducted in earlier years which were not subjected to tax for those years. An amount of Rs. 27,245 was adjusted against the security receipts by way of adjustment during the year at Rs. 2,13,177 and the balance amount of Rs. 1,85,932 was ordered to be excluded from the total receipts for the purpose of estimation of profits.
(3.) IN appeal before the INcome-tax Appellate Tribunal the assessee was aggrieved against the order of the Appellate Assistant Commissioner sustaining the inclusion of receipts aggregating to Rs. 3,76,950 and the Revenue was aggrieved against the reduction of the security amount of Rs. 1,85,932. The Tribunal observed that the receipts by way of adjustment of raw material as well as security deposits were to be included in the gross receipts for the purpose of estimation of profits. The decisions in the cases of M.P. Alexander and Co. v. CIT, 1973 92 ITR 92 (Appex) CIT v. K.S. Guruswami Gounder and K.S. Krishnaraju, 1973 92 ITR 90, Brij Bushan Lal v. CIT, 1971 81 ITR 497, and V.D. Rajara-thanam v. CIT, [1968] 68 ITR 19 (AP), were taken into consideration and it was found that the responsibility of supplying the material was on the contractor. They could purchase it from the market as well as from the Department at controlled prices. Since the purchase from the Department involve many advantages, the amount which has been deducted by the Department concerned from its bills could not be reduced. It was also observed that it was not shown while formulating their rates at the time of submission of tender, the assessee was influenced by any undertaking given by the corporation. The schedule of issue of material to the contractor makes it very clear that the corporation had agreed to supply cement and steel only in case they were available and for that purpose indent of 7 days was to be submitted in advance. If the cement and M. S. bars were not available in the central stores of the corporation, the corporation could have expressed its inability to supply the same and in that eventuality it was incumbent on the contractor to make its own arrangement. Since no funds were blocked and the assessee was relieved of the botheration of purchasing it in the market and transporting it to the work site it was considered that the tax is to be charged on the gross amount without deducting the adjustment made. The arguments of learned counsel for the parties have been heard. The decision in the case of Brij Bushan Lal, [1971] 81 ITR 497 (P & H), was overruled by the apex court in the case of Brij Bhushan Lal Parduman Kumar v. CIT, 1978 115 ITR 524, wherein it was observed that in supply of stores/materials by the Department there is not a theoretical element of profit being involved in the turnover represented by the cost of such stores/materials. 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/materials are supplied by the Government department at fixed rates for being used, fixed or incorporated in the work on terms indicated, there would be no element of profit involved in the turnover represented by the cost of such material. It was also observed that 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 several items that go to form such value of the contract, but 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, the real total value of the entire contract would be the value minus the cost of such stores/material so supplied. The above judgment was followed by this court in the cases of CIT v. Rameshwardass Narsinghdass and Co., 1985 155 ITR 270 and Addl. CIT v. Hemandas Dharajmal, 1985 155 ITR 533. The Tribunal after taking into consideration the various clauses of the contract found that the case of the assessee is having similar facts as were in the case of Brij Bhusan Lal v. CIT, [1971] 81 ITR 497, decided by the Punjab High Court. Since, the said decision has already been overruled, the natural corollary would be that the assessee would be entitled for deducting the cost of material supplied from the gross amount of the contract and the tax liability would be only on the balance payment. The second question relates with regard to liability of tax on security deducted while making the payment and contract executed by the assessee. The learned Appellate Assistant Commissioner was of the view that since the amount has not been received and the assessee was having the mercantile system, but was following the cash system with regard to security, therefore, the amount of security could be taxed only when the amount is received. It was found that the total amount of security is to be restricted to 10 per cent. of the value of total work and security was for due and faithful and efficient performance of the contract by contractors keeping in view the time schedule for completion of the work. The said security could be applied towards any sum due or payable by the contractor which has not been disbursed and has been retained with the corporation towards meeting wholly or in part any expenditure, damages or losses to which the corporation may be put as a result of any act of omission or commission, negligence or default on the part of the contractor in relation to the contract and/or for defending or settling claims with respect to sums owing by the contractor to other parties as a result of the contract. It was also contemplated that the contractor shall promptly deposit with the corporation such amount as is necessary to restore the security deposit to the full amount and the amount of security deposit was to become due for repayment to the contractor after deduction of such sums as are due to the corporation and such further sums as the corporation is or may be authorised or required to reserve or retain under the terms of contract or otherwise after the expiration of six calendar months reckoned from the date on which the entire work executed in strict conformity with the specification shall have been completed and handed over by the contractor to the corporation and accepted by the latter provided that as at the expiration of the said period of 6 months, the contractor shall have remedied all such defects and paid all such damages as he may have been asked by the corporation or pay in terms of the provisions of the contract. ;