1987 (7) TMI 85 - HC - Income Tax

Summary

Issues:
1. Inclusion of the cost of materials supplied by the Government in the total receipts of the assessee for calculating profits for the assessment year 1974-75.

Analysis:
The judgment is a reference under section 256(2) of the Income-tax Act, 1961, regarding the inclusion of the cost of materials supplied by the Government in the total receipts of the assessee for the assessment year 1974-75. The assessee, a contractor, had executed works for the Army during the relevant assessment year. The Income-tax Officer initially considered the gross receipt to be higher due to the deduction of income tax at 2% by the Garrison Engineer. The Income-tax Officer assessed the net profits at 10% of the gross receipt. The Appellate Assistant Commissioner upheld this view, but the Income-tax Appellate Tribunal held that the profit rate of 10% should be calculated on the net receipt, not the gross receipt.

The Tribunal found that the assessee had no control over the materials supplied by the military authority and that the materials supplied were utilized in the works without any profit to the assessee. The materials always remained the property of the Department, and the assessee only had custody of them. The Tribunal's decision was based on previous court rulings and the Supreme Court decision in CIT v. S. P. Jain [1973] 87 ITR 370. The Tribunal's finding was that there was no profit arising from the works contract concerning the materials supplied by the Department. Therefore, the inclusion of the cost of materials supplied by the Government in the total receipts for calculating profits was not justified.

The judgment concluded that the cost of materials supplied by the military authority should not be included in the total receipts of the assessee for calculating profits for the assessment year 1974-75. The reference was answered in favor of the assessee and against the Revenue. The judgment was transmitted to the Assistant Registrar, Income-tax Appellate Tribunal, in accordance with the Income-tax Act, 1961.