ADDL. COMMISSIONER OF INCOME TAX vs SOM DUTTA and CO.

Nagendra Prasad Singh, J. - Pursuant to an order u/s 256(2) of the IT Act, 1961 (hereinafter to be referred to as the Act) the Income Tax Appellate Tribunal, Patna hereinafter to be referred to as "the Tribunal) submitted statement of the case on the following question of law :

"Whether, on the facts and in the circumstances of the case, when the profit of the assessee for the past years has been assessed at more than ten per cent of gross receipts, the Tribunal was justified in law in assessing the profits at the rate of ten per cent of the net receipts for the assessment year".

The two taxation cases relate to two asst. yrs. 1964-65 and 1966-67. The assessee for the two assessment years disclosed gross receipts from contract at Rs. 1,37,60,117 and Rs. 18,70,151. This included the cost of materials at Rs. 35,67,045 and Rs. 6,41,572. The ITO observed that the trading result shown by the assessee was not fair and so he was of the opinion that it was a fit case for rejecting the trading result. He further held that 10 per cent of the net profits before depreciation allowances, was fair for the cases. In that very order he further directed a sum of Rs. 56,000 to be added to the trading account to raise the gross profit approximately to 10 per cent of the gross receipts before deprecation in respect of the asst. yr. 1966-67 and Rs. 47,500 in respect of the asst. yr. 1964-65.

The assessee filed appeals. The AAC observed that when the assessee had maintained proper books of accounts, the ITO should not have rejected the books and estimated net profit at 10 per cent in face of net profit shown by the assessee at 9.5 per cent. The AAC was of the view that addition of Rs. 56,000 for asst. yr. 1966-67 and Rs. 47,000 for asst. yr. 1964-65 in the trading account was excessive. On that opinion, he deleted Rs. 46,000 from the assessment order in respect of asst. yr. 1966-67 and Rs. 37,500 from the assessment order for the asst. yr. 1964-65 and he retained under that head Rs. 10,000 for both the assessment years.

The department filed appeals which were heard by the Income Tax Appellate Tribunal. The Tribunal was of the view that the addition made by the ITO was on the higher side and the reliefs granted by the AAC were justified. The Tribunal was of the view that the net profit calculated on the basis of 10.6 per cent and 9.5 per cent of the net receipts for the two assessment years was a reasonable one. It may be pointed out that by the net receipt the Tribunal meant after deducting Rs. 35,67,045 from the gross receipts of Rs. 1,37,60,117 for the asst. yr. 1964-65 and Rs. 6,41,572 out of the gross receipts of Rs. 18,70,151 for the asst. yr. 1966-67. This Court on an application being filed on behalf of the department directed the Tribunal to submit case on the question of law mentioned above.

On behalf of the assessee it was pointed out that when this court directed the Tribunal to submit the statement of case on the question of law aforesaid, the assessee had not appeared and, as such, the assessee should be permitted to urge that this court should not have exercised its power u/s 256(2) in the facts and circumstances of the present case.

On behalf of the revenue the order of the Tribunal was challenged on two grounds. Firstly, as to whether the net profit should have been calculated at 10 per cent of the receipt, and secondly, whether this 10 per cent should be of the gross receipts or of net receipts. Learned Standing Counsel appearing for the revenue submitted that from the records it shall appear that in past the profit of the assessee had been assessed at more than 10 per cent of the gross receipts, and, as such, the Tribunal was not justified in assessing the profit at 10 per cent of the net receipt. On behalf of the assessee an objection was taken that either before the ITO or before the AAC or the Tribunal there was no controversy as to whether the income is to be calculated taking the gross receipt or the net receipt in the present case. The only controversy was as to at what percentage this income should be fixed. In this connection, the counsel for the assessee has drawn our attention to the assessment order of the ITO as well as of the AAC.

While passing an assessment order in respect of the incomes derived from contract, specially building contracts, where in many cases under the terms of the contract, materials are supplied by the department concerned controversy is raised as to whether the cost of the materials supplied by the department concerned has to be included in the gross receipt for the purpose of assessment or such cost has to be excluded. The Supreme Court in the case of Brij Bhushan Lal Parduman Kumar Vs. Commissioner of Income Tax , Haryana Himachal Pradesh and New Delhi III, has discussed this aspect of the matter in detail and has pointed out that in such cases the terms of the contract should be looked into before cost of the materials are included in the gross receipt. This court has also examined that question in the case of Ramesh Chandra Chaturvedi Vs. Commissioner of Income Tax, and has pointed out that such contracts partake three forms :

(1) an overall contract wherein the contractor undertakes to execute the contract wholly supplying the labour and material, himself;

(2) works contract in which the contractor undertakes to supply only the labour. The contractor is not at all concerned with the materials used in the contract. He just puts the materials in the form in which he is asked to do and charges only for labour and lastly

(3) a lump sum contract.

It was then pointed out by this court in that judgment that a lump sum contract can be sub-divided into further sub-heads as follows :

"(a) where the contractor is given to understand that the total value of the contract shall be of a certain amount and materials to be used therein shall be roughly of so much value, a part of which is supplied by the department concerned to be exclusively used in the contract and part of which the contractor may himself acquire from his ow resources;

(b) where the department itself supplies the entire materials in the execution of the contract and pays to the contractor only for his labour, but all the same, in order to complete its accounts the department calculates the value of the contract on a lump sum basis, namely, the value of the materials supplied as also the payment made towards labour cost in the execution of the contract".

Then it was pointed out that in overall contract net profit will have to be ascertained upon the entire value of the contract including the value of the materials also. On the other hand, in a works contract, the value of the materials has to be wholly excluded because the contractor has no concern whatsoever with the materials except for the purpose of putting them into the shape as desired by the person giving the contract. In a lump sum contract, referred to above, in the first sub-head the part of the value of the material which the assessee arranged himself has to be included in determining his net profit from the contract. Regarding the contracts where materials are supplied by the department concerned, it was observed as follows :

"Now, so far as the supply of materials made by the department is concerned, it has again to be seen, whether the supply was made by the department to the assessee just as one selling its goods to a purchaser or whether the supplies were made to the assessee keeping the ownership over the materials supplied by the supplier himself. In the latter case the value of the materials cannot be included in the gross receipts from the contract, because the assessee had no control whatsoever over the materials".

Thus, whether the net income is to be calculated to the basis of the gross receipt or the net receipt excluding the cost of the materials supplied by the department concerned has to be decided on facts of each case. In the aforesaid Supreme Court case (1979) 115 ITR 524 as well as in the case of Ramesh Chandra Chaturvedi Vs. Commissioner of Income Tax, different materials included in the agreement had been examined by the Tribunal. In case of Ramesh Chandra Chaturvedi Vs. Commissioner of Income Tax, the Tribunal had recorded a categorical finding that there was no material to show that the materials supplied were throughout under the control of the department and were not under the control of the contractor, and, as such, gross receipt was taken as the basis for calculating the net profit. In the instant case, I am inclined to accept the contention of the assessee that neither the ITO nor the AAC nor the Tribunal has examined this aspect of the matter perhaps, because this question was never raised before them. It does not appear from the order of the Tribunal that on behalf of the department any objection had been taken that from gross receipt there should not be deduction of Rs. 35,67,045 and Rs. 6,41,572 as cost of materials for the two assessment years. In absence of the question having been raised and decided by the Tribunal, it is difficult to hold that the Tribunal was not justified in calculating the net profit on basis of the net receipt and it should have been calculated on basis of gross receipt only. So far as the question which has been agitated before the ITO, the AAC and the Tribunal as to whether the net profit should be calculated at 10 per cent of the net receipt, the AAC and the Tribunal have given cogent reasons for the same. Merely in the past it had been calculated at some higher percentage by itself shall not make the orders of the AAC and the Tribunal invalid. In such a situation, the answer to the question framed regarding the percentage at which the net profit should have been calculated, it has to be against the department.In other words, it cannot be held that the Tribunal was not justified in assessing the profit at 10 per cent of the net receipt for the assessment years in question.

Ashwini Kumar Sinha, J. - I agree.