TMI Blog1978 (10) TMI 2X X X X Extracts X X X X X X X X Extracts X X X X ..... g different High Courts. 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 Parduman Kumar of Ambala Cantonment), a registered firm, is a Military Engineering Services (M.E.S.) contractor, 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 materials 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) as 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 October 1, 1964, and ended on September 30, 1965. The assessee-firm had taken two contracts, one at Delhi and the othe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 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 materials supplied by the Government 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 September 26, 1973, and in doing so the High Court followed its own earlier judgment in the case of Brij Bushan Lal v. CIT [1971] 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. Civil Appeals Nos. 1702 1703 of 1974 relate to the assessments of M/s. Brij Bushan 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s has contended that it was well settled that even while making a best judgment assessment the ITO must make an honest and fair estimate of the income of the assessee and that having regard to the terms and conditions of the contract (a specimen whereof was produced during the hearing before us) and particularly the terms on which the stores/materials were supplied by the military authorities to the assessee for being used in the works undertaken by the firm, it was clear that no element of profit was embedded in such stores/materials that were made available to the contractor for being used in the works entrusted to the contractor and as such the cost or value of such stores/ materials could not be added to the total cash payments received by the contractor from the department under the contract for the purpose of estimating the income or profits derived by the contractor from such contract. He pointed out that under the terms and conditions of the contract such stores/ material was never " sold " by the department to the contractor but the same always remained the property of the department and the contractor had merely handled, manipulated or used the same in the works completed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment to the best of his judgment against a person who is in default as regards supplying information. He must not act dishonestly or vindictively or capriciously because he must exercise judgment in the matter. He must make what he honestly believes to be a fair estimate of the proper figure of assessment, and for this purpose he must, their Lordships think, be able to take into consideration local knowledge and repute in regard to the assessee's circumstances, and his own knowledge of previous returns by and assessments of the assessee, and all other matters which he thinks will assist him in arriving at a fair and proper estimate ; and though there must necessarily be guesswork in the matter, it must be honest guesswork. In that sense, too, the assessment must be, to some extent, arbitrary." Since the law relating to " best judgment assessment " is the same both in the case of income-tax assessment and sales tax assessment, the following observations of this court in Raghubar Mandal Harihar Mandal v. State of Bihar [1957] 8 STC 770 , 778 (SC), a case under the Bihar Sales Tax Act, would be material : " No doubt it is true that when the returns and the books of account are rej ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the specifications and schedules annexed thereto. In " lump sum contracts " of M.E.S. department two salient features are always present, namely, (1) there is a Schedule " B " which specifies the items of stores/material to be supplied by the department to the contractor solely for being used, fixed or incorporated in the works together with the fixed rates at which the same will be supplied and such supply is governed by General Conditions Nos. 10 and 33 ; apart from the stores/material specified in Schedule " B ", the contractor also brings his own stores/ material to site for the purposes of the works which is also governed by some paragraphs of General Conditions Nos. 10 and 33 ; and (2) the final financial liability of the Government is fixed on completion of the contract on the basis of the actual measurements and on the basis of the rates which are already standardised; a detailed measurement is undertaken at the end of the work at which the Garrison Engineer and the assessee's representative remain present and the measurements are entered in Measurement Books and after the measurements, final bills are prepared as per the M.E.S. Schedule and payments are made after making ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he said stores and materials were originally issued to him but due consideration shall be given to and allowance claimed by Government in respect of any depreciation or damage suffered by the stores and/or materials whilst in the custody of the contractor." From the tender documents that are made available to the contractor and the aforesaid terms and conditions of the "Lump Sum Contracts", two or three aspects emerge very clearly. In the first place, the contractor becomes aware that certain specified stores/materials will be supplied to him by the department at fixed rates for being used in the works to be undertaken by him for which he has not to pay from his pocket and it is on that footing that he submits his tender quoting a particular figure for the entire work ; secondly, such stores/material so supplied by the M.E.S. department has to be used, fixed or incorporated by the contractor in the works undertaken by him and the surplus, if any, that would remain after the completion of the work is to be returned to the department ; thirdly, since for accounting purposes the initial supply is debited to the contractor at the specified fixed rates, credit for the balance of the s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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