1989 PLP 345 (PTD)

UDAY SINGHA, J.--This is a reference under Section 256(2) of the Income Tax Act, 1961. The following question has been referred to us for our opinion: "Whether, on the facts and in the circumstances of this case, the cost of materials supplied by the Government was liable to be included in the total receipts of the assessee for calculating its profits for the assessment year 1968-69 (appears to be a typing mistake for 1974-75)?" The relevant assessment year is 1974-75. This reference is concluded by a Division Bench decision of this Court in the case of this very assessee in Taxation Case No.57 of 1975 disposed of on November 21, 1984 (C I T v. S.P. viz. Construction Co.--[1987] 163 I T R 666) to which I was a party. The assessee is a contractor. During the relevant assessment year, the assessee admitted before the Income-Tax Officer that he had executed works of the Army of the value of Rs.15,91,

271. That was confirmed by the Garrison Engineer Ranchi. The Engineer also informed the Income Tax Officer that out of the said payment of Rs.15,91,270.74, a sum of Rs.5,29,270.74 had been deducted from the gross sum and that only a net sum of Rs.10,28,902 had been paid to the assessee. A deduction of Rs.33,098 as income-tax was also made by the Garrison Engineer from the total payment. The Income Tax Officer was of the view that as income-tax is deducted at the rate of 2% on the payment, the gross receipt was Rs.16,54,900 and not Rs.15,91,270.74. The Income-Tax Officer held that the gross receipt of the assessee was Rs.16,54,

900. He also held that the net profit of the assessee should be estimated at 10% on the gross receipt. He accordingly assessed the net profits as such. The assessee appealed against the order of the Income- Tax Officer. The Appellate Assistant Commissioner being in agreement with the view of the Income-Tax Officer dismissed the appeal. Thereafter, the assessee filed an appeal before the Income Tax Appellate Tribunal. The Tribunal held that the profit rate of 10% should be adopted on the net receipt and not on the gross receipt. The assessee succeeded to that extent. The Revenue claimed reference in terms of Section 256(1) of the Income Tax Act, 1961, but without any success. The Revenue moved this Court in terms of Section 256(2) of the Act and High Court called for a reference on the question mentioned above. During the assessment proceedings, the assessee filed the agreement between the Army and the assessee. Paragraph 33 of the conditions of the contract reads as follows: "All stores and materials brought to the site shall become and remain the property of the Government and shall not be removed off the site without the proper written approval of the G.E. But whenever the works are, finally completed, the contractor shall at his own expense forthwith remove from the site all surplus stores and materials originally supplied by him and upon such removal the same shall revest in and become the property of the contractor for incorporation or fixing in the works and which, making due allowance for reasonable wear and tear and/or waste, have not on completion of the works been so incorporated or fixed shall be returned by the contractor at his own expense to the place of issue. Surplus stores and /or materials returned by the contractor will be credited to him at a price not exceeding that at which the said stores and materials were originally issued to him but due consideration shall be given to and allowance claimed by the Government in respect of any depreciation or damage suffered by the, stores and/or materials while in the custody of the contractor." In paragraph 8 of its order, the Tribunal found as a fact that the assessee had no control over the materials supplied by the military authority. It also held that the materials supplied by the Department were utilised by the assessee in the works and thus the assessee had no profit from the materials supplied by the Department. The finding of fact thus was that there was no element of profit arising out of the works contract in respect of the simple reason that they always remained the property of the Department and the assessee, contractor, had merely the custody of them. The earlier taxation case was decided in favour of the assessee on the authority of the decision of the Supreme Court in IC I T v. S.P. Jain [19731 87 I T R 370, and an earlier Division Bench decision of this Court in Kalpnath Rai v. C I T [1985] 151 I T R

281. The question referred to us in regard to this very assessee for the assessment year 1968-69, subject-matter of Taxation Case No.57 of 1975 disposed of on November 21, 1984 [1987] 163 I T R 666, having been answered in favour of the assessee and against the Revenue. I therefore, hold that, on the facts and in the circumstances of this case, the cost of materials supplied to the assessee by the military authority was not of the assessee for calculating its profits liable to be included in the total receipts for the assessment year 1974-75. The reference is thus answered in favour of the assessee and against the Revenue, but without costs. Let a copy of this judgment be transmitted to the Assistant Registrar, Income-tax Appellate Tribunal, in terms of section 260 of the Income-tax Act, 1961. M.BA.495/T References answered in favour of assessee.