Estimation of profits: where books are absent, assess taxable profit from gross contract receipts inclusive of supplied materials.

Where a contractor fails to produce books of account, taxable profits must be estimated from gross contract receipts inclusive of materials supplied under the contract rather than from amounts purporting to be net after deduction of such materials. The court applied the principle that, in absence of accounts, the contract as a whole and the gross value of bills govern profit estimation; when materials are government supplied but bills are gross, an inference that receipts include material value is drawn. Prior decisions applying a flat rate to gross receipts in comparable facts were followed and the issue resolved against the assessee.

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Issues: Whether the net profits of a contractor who failed to produce accounts should be estimated on the net amount received after deducting the cost of materials supplied by the Government, or on the gross value of the bills inclusive of materials supplied.

Analysis: The Court examined the factual position that the assessee did not maintain or produce accounts and only produced receipts of amounts received. Prior decisions were considered which held that where an assessee places no accounts before the tax authorities the assessment of profits must be made on the basis of the contract as a whole. The Court noted that when materials are supplied by the Government but the contract payments are on gross bills, an inference arises that the contract value and receipts should be treated inclusive of such materials for estimating profits, particularly where no accounts are produced to show otherwise. Comparative authorities applying a flat rate on the gross value of receipts in similar factual situations were relied upon to support this approach.

Conclusion: The issue is answered against the assessee; net profits are not to be estimated on the net receipts after deduction of materials but on the gross value of the bills inclusive of materials when the assessee fails to produce accounts.

Ratio Decidendi: Where an assessee who carries out contract work fails to produce or place before the tax authorities books of account, the proper basis for estimating taxable profits is the gross contract receipts (inclusive of the value of materials supplied under the contract) rather than amounts shown as net after deduction of materials supplied by the Government.

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