The cost of materials supplied by the military authorities to a contractor for use in construction works is to be included before applying a flat rate to determine the contractor's net profits for the purpose of income tax assessment.

1. The assessee, Brij Bhushan Lal, was a contractor who used to undertake the construction of building works for the M. E. S. Department. For the assessment years 1950-51, 1951-52, 1952-53 and 1954-55 assessments were made under the Indian Income-tax Act, 1922 (hereinafter referred to as the "the Act"), on the basis of the net profits determined at 10 per cent., 12.5 per cent., 12.5 per cent. and 10 per cent., respectively, of the amounts received by the assessee from M. E. S. Department. Later on, it came to the knowledge of the Income-tax Officer that the cost of materials supplied by the military authorities to be used in the building works by the assessee had not been disclosed by him and, therefore, notices under section 34 of the Act were issued to him. The orders of reassessment were made by adding the amounts representing the cost of èmaterials supplied by the military authorities, which amounts were Rs. 23,234, Rs. 8,940, Rs. 26,636 and Rs. 46,424, respectively, for the four years mentioned above. The same percentages were applied to determine the net profits on these amounts and the amount of income-tax levied was accordingly enhanced. The assessee filed appeals before the Appellate Assistant Commissioner who upheld the orders of reassessment made by the Income-tax Officer with regard to the addition of amounts made but determined the net income from the added amounts at the rate of 6 1/4 per cent. instead of the percentages applied by the Income-tax Officer.

2. The assessee as well as the Income-tax Officer filed appeals before the Income-tax Appellate Tribunal and the Tribunal made the percentage uniform at 10 per cent. of the entire amount and thus accepted the appeals in part. The assessee then applied for a reference under section 66(1) of the Act which was rejected by the Income-tax Appellate Tribunal. On the application of the assessee under section 66(2) of the Act this court directed the Income-tax Appellate Tribunal to state the case and refer the following questions of law for opinion to the High Court, by order dated December 9, 1965 :

"1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee had waived his objection to validity of the notices under section 34(1) of the Income-tax Act, 1922 ?

2. If the answer to question No. 1 is in the negative, whether the Tribunal was justified in law in holding that the case fell under section 34(1) (a) of the Act of 1922 ?

3. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the price of the stores supplied by the military authorities was to be included before applying the flat rate to the assessees receipts ?

4. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in applying the same flat rate to the price of stores supplied by the department as was applied to the other receipts of the assessee ?"

3. The learned counsel for the petitioner has vehemently argued that the materials supplied by the M. E. S. Department were the property of that department and were to be used only in the construction of the works undertaken by the assessee. Those materials were to remain in the custody of the M. E. S. Department and the petitioner cannot be said to be made any profits with regard to them. According to the contracts, the cost of those materials was included in the amount of the contract and was deducted from the bills of the petitioner after works were completed. After careful consideration of the arguments, we are of the opinion that the submission made by the learned counsel is without any substance. 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 i