High Court excludes material costs from turnover for profit determination, aligning with Supreme Court principles.

The High Court, following Supreme Court principles, ruled in favor of the assessee, directing the exclusion of material costs supplied by a government department from turnover calculations for profit determination. The judgment clarified that no profit accrues from such materials in contract execution, aligning with previous decisions from various High Courts. Each party was ordered to bear their own costs in the reference.

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Issues:
Calculation of profit for a building contractor based on materials supplied by a government department.

Analysis:
The judgment pertains to a reference made by the Commissioner of Income-tax regarding the inclusion of the cost of materials supplied by the M.E.S. department in the gross receipts of a building contractor for profit calculation. The contractor executed works on behalf of M.E.S., and the Income Tax Officer applied a net profit rate of 12%, later reduced to 10% by the Appellate Authority. The Tribunal upheld the 10% profit rate and excluded the value of materials supplied by M.E.S. from the turnover calculation, as no profit was deemed to accrue from those materials. The Commissioner sought a reference to the High Court, which was granted.

The High Court referenced decisions from various High Courts and a Full Bench of the Andhra Pradesh High Court, where it was held that no profit was involved in materials supplied by government departments for contract execution. The Punjab and Haryana High Court, however, held a contrary view. The Supreme Court in a related case clarified that materials supplied by the government department for works contracts do not involve any element of profit for the contractor. Therefore, the turnover should be determined excluding the cost of such materials.

Based on the Supreme Court's principles, the High Court held that the value of materials supplied by the government department to the contractor should be excluded while determining the turnover. The legal position was clarified by the Supreme Court, and the question was answered in favor of the assessee, directing the exclusion of material costs from turnover calculation. Each party was ordered to bear their own costs in the reference.

In conclusion, the judgment establishes that the value of materials supplied by a government department to a contractor should not be included in turnover calculations for profit determination, as clarified by the Supreme Court's principles.

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