High Court ruling: No profit element in materials supplied for construction works

The High Court of GAUHATI ruled in favor of the building contractor, holding that no profit element should be considered in the materials supplied by the M.E.S. department for construction works. The court affirmed the Tribunal's decision that net profit should be calculated based on net receipts without adding a percentage for the materials supplied. The judgment aligned with precedents from the Madras and Kerala High Courts, rejecting the department's argument supported by the Punjab and Haryana High Court decision. Judges D. PATHAK and M. C. PATHAK concurred with the decision, resolving the issue in favor of the assessee without awarding costs.

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Issues:
Calculation of net profit for a building contractor based on materials supplied by M.E.S. department for construction works.

Detailed Analysis:

The High Court of GAUHATI was presented with a question of law regarding the calculation of net profits for an assessee, a building contractor, for the assessment years 1965-66, 1966-67, and 1967-68. The primary issue revolved around whether the cost of materials supplied by the M.E.S. department should be included in the total receipts of the assessee for calculating net profits. The assessee contended that since the materials were supplied by the M.E.S. department under the contract terms, no profit accrued on these materials, and therefore, they should not be considered in income calculations. The Income-tax Officer estimated 10% of the net contract payments as the value of materials supplied by the M.E.S. department and added this amount to the net contract value to determine gross receipts. The Appellate Assistant Commissioner disagreed with the assessee's contention and calculated income at 11 1/2% on gross receipts, leading to the assessee appealing to the Income-tax Appellate Tribunal.

The Tribunal, in a consolidated order, held that net profit should be calculated based on net receipts, disregarding the 10% addition for materials supplied by the M.E.S. department. The Tribunal emphasized that when the department supplies materials to the contractor, no profit is estimated on those materials. The Tribunal's decision was supported by the Madras High Court and Kerala High Court judgments. However, the department's standing counsel referred to a Punjab and Haryana High Court decision, which the High Court of GAUHATI disagreed with, aligning with the Madras High Court's view.

In conclusion, the High Court of GAUHATI affirmed the Tribunal's decision, stating that no profit element existed in the materials supplied by the M.E.S. department. The question of law was answered in favor of the assessee, and no costs were awarded. Both Judges, D. PATHAK and M. C. PATHAK, agreed with the decision.

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