GOPENDRA KRISHNA SAHA Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) In this reference under Section 66(2) of the Indian Income-tax Act, 1922, the Tribunal has referred two questions to this court, namely :

(2.) In view of the facts of this case and in view of the decision given by us on 24th September, 1974, in the I. T. Reference No. 199 of 1971, Commissioner of Income-tax v. Mehar Singh & Co. (P.) Ltd. (Appendix No. 3), we answer the first question in the affirmative and in favour of the revenue.

(3.) This reference relates to the assessment of the assessee for the assessment year 1959-60, the previous year of which ended on March 31, 1959. The assessee, is a contractor. In the year in question, he had undertaken the construction of 44 ' K-1' Type houses and 94 ' L-2 ' Type houses under Durgapur Project. The expenditure incurred on the jobs during the year was shown at Rs. 4,45,904 and this was treated by the assessee as work-in- progress and a sum of Rs. 3,21,358 was shown as received against the contracts from the Executive Engineer, The assessee did not show any profit or loss from the jobs and, claiming overhead expenses at Rs. 12,764, a net loss was returned. The Income-tax Officer considered that a profit had to be calculated on the basis of the receipts from the authorities and he had accordingly computed the gross profit of Rs. 40,169 at 121/2% of the receipts. The assessee appealed before the Appellate Assistant Commissioner. The assessee claimed that the accounts were maintained on what was known as the completed job basis and this was the recognised system of accounting. It was contended that the accounts having been maintained in a proper manner, the proviso to Section 13 of the Indian Income-tax Act, 1922, could not be invoked. The Appellate Assistant Commissioner did not accept the assessee's contention. According to the Appellate Assistant Commissioner, the tax had to be levied on the total income of the previous year and not on the total income of a period of 2, 3, 4 or more years, the period that would be required for completing any contracted work. He was of the opinion that the assessee had not followed any recognised method of accounting. He further observed that, so far as the 44 houses of 'K-L' type were concerned, these appeared to have been completed in the year of account. It appeared that although payments in respect of the work were drawn up to the end of the financial year 1962-63, the final trading and profit and loss account was drawn up at the end of the financial year 1959-60. This the Appellate Assistant Commissioner considered as inconsistent with what the assessee claimed to be his method of accounting. The Appellate Assistant Commissioner concluded that the final trading and profit and loss account, as drawn up by the assessee, could not be taken as depicting the correct profit of the business. After discussing elaborately the nature of the contract jobs and the accounting, he came to the conclusion that the Income-tax Officer's action in invoking the provisions of Section 13 of the Indian Income-tax Act, 1922, for computing the assessee's income was justified. As regards the computation of income, it was contended on behalf of the assessee before the Appellate Assistant Commissioner that the estimate of gross profit at the rate of 121/2%, adopted by the Income-tax Officer, was excessive. The Income-tax Officer had applied that rate on the net payment of Rs. 5,21,358 which was arrived at after deducting, (I) security deposit, (2) cost of materials, and (3) water charges. According to the Appellate Assistant Commissioner the profit of the contractor was on the work as a whole and not restricted to only the net payments. According to him the value of the work as a whole was Rs. 8,39,412 as per details, given by him at paragraph 3 of the order of the Appellate Assistant Commissioner. He found that the assessee's income was grossly under-assessed by the application of a gross profit rate of 121/2% on the net payments. He gave due notice of the enhancement to the assesses. The assessee's contention before the Appellate Assistant Commissioner was that there was no profit on that part of the contract job which was equivalent to the cost of materials supplied by the contractee and that the quotation was made, on the basis of 10% gross profit on all the items of work after specifically excluding the cost of materials, namely, brick, cement, steel, etc., to be supplied by the contractee. The Appellate Assistant Commissioner observed that procurement of building materials from the open market for construction works was a very tough problem and where the contractee undertook the supply of these essential materials, the contractor was definitely at a more advantageous position than the contractor who had to purchase materials from the open market on his own account. The Appellate Assistant Commissioner did not accept the contention that there was no profit on the part of the contract work which was covered by the materials supplied by the contractee. As regards the contention that the quotation for different types of work had been made with stipulation of 10% gross profit after excluding the cost of materials to be supplied by the contractee, the Appellate Assistant Commissioner observed that no data had been given by the assessee in support of his contention. In those circumstances the Appellate Assistant Commissioner did not accept such contention and observed that the normal margin of profit in such cases had been found to vary from 121/2% to 15% and considered the rate of 121/2%, as applied by the Income-tax Officer, to be quite reasonable. But according to the Appellate Assistant Commissioner, the rate was to be applied on the gross value of the work done and not on the net payments received by the assessee. He computed the gross profits at Rs. 1,04,926 by applying the rate of 121/2-% on Rs. 8,29,412 as the gross value of the work done during the previous year.