BRIJ BHUSHAN LAL PARDUMAN KUMAR BRU BHUSHAN LAL RAMESH KUMAR Vs. COMMISSIONER OF INCOME TAX HARYANA HIMACHAL PRADESH AND NEW DELHI III:C I T HARYANA HIMACHAL PRADESH AND NEW DELHI III

JUDGEMENT

(1.) The short question raised in these appeals by special leave is whether the cost of materials supplied by the Government (M. E. S. Department) for being used in the execution of works is liable to be taken into consideration while estimating the profits of a contractor and the question has assumed general importance as it affects the entire class of contractors who undertake works on behalf of the Government and in view of a conflict of decisions on the point among different High Courts.

(2.) The facts in all the three appeals are substantially the same though the assessees are different. In Civil Appeal No. 1701 of 1974 the material facts are these:The assessee (M/s. Brij Bhushan Lal Praduman Kumar of Ambala Cantonment), a registered firm, is a Military Engineering Services (M.E.S.) contrator and as such carries on the business of executing contracts and works on behalf of the Government. For the execution of the works undertaken by the assessee certain material such as cement, coal, items of steel etc. is supplied at the fixed rates specified in Schedule B to the contract by the Government for being used in the works. Such material though in custody of the contractor always remains the property of the Government and if any surplus is left at the completion of the contract, the contractor (assessee) has to account for it at the same rates at which the supply was made to him (wear and tear excepted) and return the same to the Government. The assessment year involved was 1966-67 for which the accounting year commenced on 1-10-1964 and ended on September 30, 1965. The assessee-firm had taken two contracts one at Delhi and the other at Ambala. For the said assessment year it filed its return of income declaring income of Rs.44,462 being 10% of the total cash payments of Rs.4,44,622 received from the military authorities. The assessee, however, did not furnish any figures about the stores (material) received by it from the M.E.S. The Income-tax Officer called upon the assessee to produce the relevant certificates in respect of such stores but the assessee failed to do so on the ground that the Departments were not co-operating with it. The Income-tax Officer, therefore, estimated the cost of such material at 50% of the cash payments, namely, at Rs.2,22,311 and by adding this figure to the net cash receipts of Rs.4,44,622 he arrived at total receipts (including the cost of material) of Rs.6,66,933 and after rejecting the book results applied a flat rate of 10% and worked out net income or profits at Rs.66,693 which was rounded upto Rs.66,690 and on that basis the tax was levied after allocating the said profits among the three partners of the firm. The assessee preferred an appeal to the Appellate Assistant Commissioner contending that the addition of the cost of material supplied by the Government to the figure of cash receipts received by it during the year for applying the flat rate of 10% was erroneous and in any case the estimate of the value of such stores at 50 per cent of the cash payments was excessive. The Appellate Assistant Commissioner rejected the first contention but reduced the estimate of the value of the stores supplied by the Government to 25 per cent and confined the addition to Rs.1,11,155. Aggrieved by that order the assessee preferred further appeal to the Income-tax Appellate Tribunal and the Tribunal accepted the contention of the assessee that the cost of the stores or material supplied by the Government to the assessee could not be added to the figure of cash payments received by the assessee on the ground that the stores (material) supplied by the Govt. were 'never sold' to the contractor, that the same always remained the property of the Government and that no profit could be said to have arisen to the assessee when such stores/material was merely handled and manipulated by the assessee in the execution of the works under the contract. The Tribunal followed the decision of the Kerala High Court in M. P. Alexander and Co. v. Commr. of Income-tax, (1973) 92 ITR 92 where that Court has taken the view that the cost of such material supplied by the Govt. was not to be included while estimating the profits of a contractor. The Revenue sought a reference to the Punjab and Haryana High Court on the question whether on the facts and circumstances of the case, the Tribunal was justified in holding that the cost of the material supplied by the Govt. was not to be included while estimating the profits of a contractor and the High Court in Reference No. 38 of 1972 answered the question against the assessee and in favour of the Department and restored the view of the taxing authorities by its order dated Sept. 26, 1973 and in doing so the High Court followed its own earlier judgment in the case of Brij Bhushan Lal v. Commissioner of Income-tax, Delhi, 81 ITR 497 where it had held that the cost of the materials supplied by the military authorities was liable to be included before applying the flat rate to the assessee's receipts.

(3.) Civil Appeals Nos. 1702 and 1703 of 1974 relate to the assessments of M/s.Brij Bhushan Lal Ramesh Kumar for the assessment years 1965-66 and 1966-67, the relevant accounting years being the ones which ended on March 31, 1965 and March 31, 1966 respectively. The assessee firm a M.E.S. Contractor, carried on the business of executing works on behalf of the Government under similar M.E.S. contracts wherein stores/materials were supplied by the military authorities to the firm on identical terms. For the assessment year 1965-66 the assessee filed its return declaring an income of Rs.18,684 and disclosing net cash receipts from the Government at Rupees 2,63,853. Though this income was based on books of accounts maintained by the firm, the assessee during the course of assessment proceedings offered that a flat rate of 9 per cent on the cash receipts of Rs.2,66,853 may be applied. The Income-tax Officer did not accept the offer but applied a flat rate of 10% on Rs.3,07,605 which inclded the value of the stores supplied by the Department to the assessee with the result that the profits were assesseed at Rupees 30,760 and after allowing depreciation of Rs.5107 the net taxable income was determined at Rs.25,653 which was rounded up to Rs.25,650. For the assessment year 1966-67 the firm declared an income of Rs.62,414 calculated by adopting the flat rate of 10% on the cash receipts of Rs.6,24,144. The firm had received stores/material of the value of Rs.1,36,520 from the military authorities and the Income-tax Officer after adding the value of the stores to the cash receipts arrived at a total receipt of Rs.7,60,664 and by applying the flat rate of 10% determined the taxable income at Rs.76,070. The assessee's appeals for both the years to the Appellate Assistant Commissioner were unsuccessful but in further appeals the Appellate Tribunal by its order dated Oct. 31, 1970 accepted the assessee's contention and held that the cost or the value of the stores/material supplied by Government to the contractor was not liable to be included while estimating the profits or income of the contractor. In coming to this conclusion, as in the other case, the Tribunal followed the Kerala High Court's decision in M. P. Alexander's case (supra). At the instance of the Revenue two references (being Income-tax References Nos. 2 and 3 of 1973) were made to the Punjab and Haryana High Court and the High Court following its earlier decision in Brij Bhushan Lal's case (supra) answered the questions referred to it in the negative i.e. in favour of the Deparmtent and against the assessee. Both the assessees have come up to this Court by special leave challenging the view taken by the High Court.