TMI Blog1976 (3) TMI 49X X X X Extracts X X X X X X X X Extracts X X X X ..... rofit at the rate of 15 per cent. on total receipts for the assessment year 1965-66. In the total receipts of the assessee, the Income-tax Officer included the value of materials such as cement, iron, etc., supplied by the railway authorities and after arriving at the total figure, he calculated the net profits at the rate of 15 per cent. He worked out the net profit at Rs. 1,02,149 and the total taxable income was computed at Rs. 93,270. Against the decision of the Income-tax Officer, the assessee carried the matter in appeal and the Appellate Assistant Commissioner reduced the rate of net profit to 12.5 per cent. of the total receipts and held that the Income-tax Officer was not justified in including the value of the materials supplied by the railway authorities in the total receipts for the purpose of calculating the net profit by application of the rate. Against the decision of the Appellate Assistant Commissioner, the assessee went in appeal before the Tribunal and contended that the net profit should be calculated at 10 per cent. of the total receipts and this basis of 10 per cent. should have been adopted by the Income-tax Officer and the Appellate Assistant Commissio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to consider has to be decided in the light of this particular aspect of the matter. The Income-tax Officer noted in his order that cement and iron constituted one-third of the total cost of receipts and, hence, he took one-third of the total receipts for iron and cement which the railway supplied free to the assessee and on that basis taking the figure of Rs. 5,10,744 as the total receipts, he added one-third, namely, Rs. 1,70,248, in respect of the cement and iron as discussed above and then ascertained the amount of net profits on the basis of calculation at the rate of 15 per cent. of Rs. 6,80,992. Before we go on to discuss the authorities cited at the bar, before us, we must make it clear that the question referred to us has to be decided in the light of clear perception and appreciation of what is generally provided in building contracts of the type before us. From the point of view of the question referred to us, contracts for building construction or of similar type can be divided into two broad categories. Category No. (1) will cover contracts where, at the time of entering into the contract, the contractor is told that some of the materials required for construction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the materials supplied to the building contractor. In that eventuality, it is really the total figure of the original contract or figure worked out in accordance with the terms of the original contract which will constitute the original receipts of the building contractor and the fact that, instead of going into the market and purchasing the materials for himself, the contractor gets these materials for himself, the party to the contract, does not enter into the picture so far as this aspect of the case is concerned. The question as to under which particular category, category No. (1) or category No. (2) set out above, a particular contract falls, will have to be decided looking to the substance of the transaction between the parties in each individual case. If the case falls under the first category, then it is obvious that the cost of the materials supplied by the other party to the contract cannot be taken into consideration in arriving at the figure of the total receipts of the contractor in respect of the particular contract for building construction. On the other hand, if the case falls, on the facts and circumstances of the particular case, in the second category, then ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er a particular amount should or should not be considered to be trading receipt, it is the true nature and quality of the receipt, either actual or deemed, which has to be considered and not the outward form or the head under which the amount is entered in the account books of the assessee concerned. In Commissioner of Income-tax v. Bijli Cotton Mills (P.) Ltd., the Allahabad High Court was concerned with the collection of at sum of Rs. 74,261 which was received by the assessee before the Allalhabad High Court under the expectation that it might be required to pay additional excise duty on the yarn supplied by it to a party in Bombay. The assessee agreed to refund it to the party, if the additional excise duty was not collected. Additional excise duty was not in fact paid and the assessee refunded the amount of Rs. 7,239 only to the party from whom this amount was received. The amount was received in March, 1948, and in the calendar year 1950, the assessee credited the balance of Rs. 67,125 to the capital reserve fund account of the assessee. The question was regarding the inclusion of this amount of Rs. 67,125 in the assessee's income for assessment year 1951-52. On these facts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r Co. v. Commissioner of Income-tax which is printed as an Appendix to this decision of the Madras High Court, the same view was taken on similar facts by the, Kerala High Court. At page 92, Govindan Nair J., as he then was, in the Kerala High Court, mentioned that the assessee's contention was that the cost of the materials supplied by the Government should not be taken into consideration while considering the total receipts of the assessee while arriving at the figure of the net profits. He observed : " We may state at the outset that these amounts have been included for applying the percentage on the basis that these amounts representing the cost of the materials has contributed to the profits made. This is clear from the Tribunal's order as well as from the statement of the case. In the statement of the case, in paragraph 3, it is stated : ' The assessee was asked as to why the cost of materials and the hire charges had not been taken into account. The assessee's explanation was that, while tendering the cost of materials supplied the hire charges were not considered, as no profit was made thereon'." The Kerala High Court pointed out : " It is clear that the Trib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the price of the stores supplied by the military authorities was to be included before applying the flat rate to the assessee's receipts ? " The Punjab High Court held that if an assessee does not produce his accounts to satisfy the Income-tax Officer as to the true profits or income made by him from a contract and leaves it to him to determine, on the best judgment basis, the profits or income made by the assessee, the Income-tax Officer naturally will calculate and determine the net income assessable on the basis of the value of the contract as a whole and not on the value of the contract after deducting the cost of the materials supplied by the department. With respect, we are unable to agree with this conclusion of the learned judges of the Punjab High Court. The question that has to be determined even in best judgment basis is as to what is the profit from this particular construction work which the particular assessee has earned and in determining these profits, the main question is what was in substance the contract between the parties. It is that substance of the contract which matters and if, as we have pointed out in sub-category of category No. (1), the agreement betw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adopted by the Income-tax Officer also is quite reasonable. In fact, in respect of the contract relating to Rashtrapathi Nilayam, the Income-tax Officer himself adopted the net profit at 10 per cent. accepting the appellant's plea that the appellant had been allotted only a part of the work and that more profitable items of the contract were given to other contractors.' This above extract gives an indication that the assessee was to receive the gross amount and had to furnish the materials himself but since the Government furnished the materials, an inference would arise that they must have deducted those amounts from the payments, in which case the basis cannot be challenged." namely, the basis of estimation of profits on the gross amount instead of estimating on the net amount received by the assessee after deduction of cost of materials. It is thus clear from the passage that we have quoted above that, on the facts and circumstances of the particular case before the Andhra Pradesh High Court, it was a contract of the second category which we have set out hereinabove. The contract was as a whole and the contractor had to supply the materials but while the contract was b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e done while making out a bill in respect of the contract payment. Under these circumstances it must be held that since this particular contract falls in the first category where at the time of entering into the contract the quotation did not take into account the materials like iron and cement which were to be supplied by the railway authorities, all calculations at the time of entering into the contract were made on the footing that iron and cement were to be supplied by the railway authorities and it is obvious that these items could not be included in the total receipts of the assessee for the purpose of arriving at the figure of net profits by working out the percentages of that total figure. We find from the order of the Tribunal that the Tribunal fixed the figure of 10 per cent. of the total receipts only in view of the fact that the cost of the materials supplied by the railway authorities was to be taken into consideration at the time of fixing the receipts. Since we are holding in the instant case that the cost of these materials supplied by the railway authorities is not to be taken into consideration at the time of determining the receipts in the light of the facts a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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