The cost of materials supplied by the railway authorities could not be included for the purpose of calculating the gross profits of the assessee.

B. J. DIVAN C.J. :- This case was referred by myself and Raghuvir, J. to a Full Bench in view of the fact that the view taken by this High Court in V. D. Rajaratnam v. Commr. of Income Tax, 68 ITR 19 and Commr. of Income-tax v. K.S. Reddy, 103 ITR 822 : (1975 Tax LR 869) (Andh Pra) is contrary to the view taken by the Madras High Court, Kerala High Court and Gujarat High Court and I myself sitting in the Gujarat High Court in a Division Bench specifically dissented from the view taken by this High Court in Commissioner of Income-tax v. K.S. Reddy, 103 ITR 822 : (1975 Tax LR 869) (Andh Pra) and under these circumstances we felt it desirable that the question is finally settled by a larger Bench.

2. The question, which has been referred to the High Court by the Income-tax Appellate Tribunal is as follows:

'Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in giving directions to the Appellate Assistant Commissioner that the value of the materials should not be taken into consideration for estimating the net income for the assessment years 1964-65 to 1967-68?"

3. We are concerned with assessment years 1964-65 to 1967-68. The assessee is a registered partnership firm and carries on business as railway contractors. The relevant years of account are the four years ending with Deepavali of each Hindu Calendar year. For the assessment year 1964-65, in the first instance the assessee filed a return disclosing an income of Rs. 47,535/- and the return was based on the books of account maintained by the firm. Subsequently, the assessee filed a revised return declaring total income of Rs. 1,04,609/- estimating the same at 10% of its receipts. The Income-tax Officer found that the accounts kept by the assessee-firm were not reliable. He found that the total receipts during the year amounted to Rs. 10,34,350/-. He also found that the assessee-firm had received materials of the value of Rs. 72,584/- from the Railway authorities. He estimated the total receipts at Rs. 11,10,000/- and estimating the gross profit at 15% thereon, he finally determined the total income at Rs. 1,03,611/-. Similarly, for subsequent years also, the Income-tax officer added the cost of materials supplied by the Railway authorities to the assessee-firm. The additions trade by the Income-tax Officer for all the four years were challenged in different appeals before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner took the view that the cost of materials should be included for the purpose of calculating the gross profit earned by the assessee-firm. He, however, held that the profit estimated by the Income-tax Officer for assessment years 1965-66 and 1966-67 was excessive and be reduced the amount of income by Rs. 5,000/- and Rs. 20,000/- respectively.

4. Against the decision of the Appellate Assistant Commissioner, the assessee took the matter on further appeal to the Income-tax Appellate Tribunal and before the Tribunal, the main controversy was whether, in law the amount of materials supplied by the Railway authorities could be included for the purpose of calculating the gross profits of the assessee. Relying on the judgment of the Kerala High Court in M.P. Alexander and Co. v. Commr. of Income-tax (1973) 92 ITR 92 (Ker) the Tribunal held that there was no element of profit involved in the supply of the materials by the railway authorities to the assessee. It further held that the decision of the Andhra Pradesh High Court in V.D. Rajaratnam v. Commr. of Income-tax (1968) 68 ITR 19 was not applicable to the facts of the assessee's case. Therefore, at the instance of the Revenue, the question set out hereinabove has been referred for the opinion of this Court.

5. It is clear from the narration of the facts hereinabove set out that the books of account were not found reliable and correct by the Income Tax Officer; Under Section 145 (2) of the Income-tax Act, 1961, since the Income-tax Officer was