Judgment

TULZAPURKAR, J.:- The short question raised in these appeals by special leave is whether the cost of materials supplied by the Government (M. E. S. Department) for being used in the execution of works is liable to be taken into consideration while estimating the profits of a contractor and the question has assumed general importance as it affects the entire class of contractors who undertake works on behalf of the Government and in view of a conflict of 211 decisions on the point among different High Courts.

2. 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 Praduman Kumar of Ambala Cantonment), a registered firm, is a Military Engineering Services (M.E.S.) contrator 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 material 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) has 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 1-10-1964 and ended on September 30, 1965. The assessee-firm had taken two contracts one at Delhi and the other at Ambala. For the said assessment year it filed its return of income declaring income of Rs.44,462 being 10% of the total cash payments of Rs.4,44,622 received from the military authorities. The assessee, however, did not furnish any figures about the stores (material) received by it from the M.E.S. The Income-tax Officer called upon the assessee to produce the relevant certificates in respect of such stores but the assessee failed to do so on the ground that the Departments were not co-operating with it. The Income-tax Officer, therefore, estimated the cost of such material at 50% of the cash payments, namely, at Rs.2,22,311 and by adding this figure to the net cash receipts of Rs.4,44,622 he arrived at total receipts (including the cost of material) of Rs.6,66,933 and after rejecting the book results applied a flat rate of 10% and worked out net income or profits at Rs.66,693 which was rounded upto Rs.66,690 and on that basis the tax was levied after allocating the said profits among the three partners of the firm. The assessee preferred an appeal to the Appellate Assistant Commissioner contending that the addition of the cost of material supplied by the Government to the figure of cash receipts received by it during the year for applying the flat rate of 10% was erroneous and in any case the estimate of the value of such stores at 50 per cent of the cash payments was excessive. The Appellate Assistant Commissioner rejected the first contention but reduced the estimate of the value of the stores supplied by the Government to 25 per cent and confined the addition to Rs.1,11,155. Aggrieved by that order the assessee preferred further appeal to the Income-tax Appellate Tribunal and the Tribunal accepted the contention of the assessee that the cost of the stores or material supplied by the Government to the assessee could not be added to the figure of cash payments received by the assessee on the ground that the stores (material) supplied by the Govt. were never sold to the contractor, that the same always remained the property of the Government and that no profit could be said to have arisen to the assessee when such stores/material was merely handled and manipulated by the assessee in the execution of the works under the contract. The Tribunal followed the decision of the