TMI Blog1974 (9) TMI 4X X X X Extracts X X X X X X X X Extracts X X X X ..... 974, in the I. T. Reference No. 199 of 1971, Commissioner of Income-tax v. Mehar Singh Co. (P.) Ltd. [1978] 113 ITR 426 (Cal) (Appendix No. 3), we answer the first question in the affirmative and in favour of the revenue. 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 12 1/2% of the receipts. The assessee appealed before the Appellate Assistant Commissioner. The assessee claimed that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r. He found that the assessee's income was grossly under-assessed by the application of a gross profit rate of 12 1/2% on the net payments. He gave due notice of the enhancement to the assessee. 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 co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tractor might make any profit on the materials supplied by the department. The Tribunal was of the opinion that the accounts were properly maintained and there was no reason for rejecting the same as the determination of profits did not present any difficulty. But where the accounts were rejected the Income-tax Officer has to determine as to what would be the correct profit and in that case it was natural to take recourse to an estimate. The Tribunal thus applied a flat rate on the value of the contracted job, after taking into consideration as to what should be the normal expected rate in such type of business. The contractor, according to the Tribunal, submitted tender for obtaining contracts and as an experienced contractor he was expected to make proper estimate of expenses while submitting his tender. He would provide for reasonable profit, at the same time taking care that his tender was made as low as possible, so that it would be accepted. The assessee, according to the Tribunal, was an experienced contractor and he had a qualified engineer having technical knowledge of the work. In these circumstances, the Tribunal was of the opinion that the assessee's tenders were based ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t and taking that into consideration, the Appellate Assistant Commissioner was justified in computing the profit by applying a flat rate on the gross job value of the bills. In the aforesaid circumstances, the two questions, mentioned hereinabove, have been referred to this court under section 66(2) of the Indian Income-tax Act, 1922. Counsel for the assessee contended before us that in a case where the contractor had to quote at a particular rate and not beyond that and that rate was excluding the value of the materials supplied by the Government or contractee, in such a case, there was no question of the contractor providing higher rate of profit or return on the remaining part of the job because he was precluded by the terms of the contract from doing so. It was, secondly, submitted that in any event no profit could be expected from the materials supplied by the Government. In this connection counsel relied on a decision of the Madras High Court in the case of Commissioner of Income-tax v. K. S. Guruswami Gounder K. S. Krishnaraju [1973] 92 ITR 90. There the Division Bench of the Madras High Court held that the cost of materials supplied by the Government for the purpose o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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