High Court upholds exclusion of government-supplied materials cost from profit calculation

The High Court affirmed the Tribunal's decision to exclude the cost of materials supplied by the Government from the profit estimation of the assessee-firm. The Court relied on various High Court decisions and a Supreme Court ruling, emphasizing that no profit element was involved in the turnover represented by such materials. Therefore, the High Court answered the reference in the affirmative, supporting the exclusion of the material cost from the profit calculation.

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Issues:
1. Whether the cost of material supplied by the Government is includible in the gross receipts for estimating the net income of the assesseeRs.

Analysis:
The case involved a reference under section 256(1) of the Income Tax Act, 1961, where the Tribunal questioned the inclusion of the cost of material supplied by the Government in the gross receipts for assessing the net income of the assessee. The assessee, a contractor, had received bills amounting to Rs. 2,25,323 for construction works, including Rs. 36,825 for materials supplied by the Government. The Income Tax Officer rejected the books of account and estimated the net profit at 12.5%. The Appellate Authority reduced the profit estimate to 12% but still included the value of materials in the profit calculation. The Tribunal, relying on a Kerala High Court decision, excluded the material cost from the profit calculation. The Commissioner sought a reference to the High Court, which upheld the Tribunal's decision.

The High Court noted that various High Courts, including the Kerala High Court, Madras High Court, Gujarat High Court, and Andhra Pradesh High Court, had consistently held that the cost of materials supplied by the Government should not be included in profit calculations. The Supreme Court in Brij Bhushan Lal Parduman Kumar v. CIT also supported this view, emphasizing that no profit element was involved in the turnover represented by the cost of materials supplied by the Government. The Supreme Court's decision was followed by the Patna High Court in Ramesh Chandra Chaturvedi v. CIT. The High Court concluded that the Tribunal rightly excluded the material cost from the profit estimation based on the Supreme Court's decision.

Therefore, the High Court answered the reference in the affirmative, affirming the Tribunal's decision to exclude the sum of Rs. 36,825, the value of materials supplied by the Government, from the profit estimation of the assessee-firm.

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