Net receipts and lower profit rate applied to road contract income after excluding government-supplied materials and allied charges.

Contract income from road works was to be computed on net receipts where the contract terms showed that bitumen was supplied by the Government and roller hire charges were borne under the departmental arrangement; the relevant amounts were therefore deductible before estimating taxable profit. The estimated net profit rate of 15 per cent was also considered excessive on the facts and in light of comparable cases, so it was reduced to 12-1/2 per cent on net receipts. The assessment was accordingly revised on the basis of net receipts and a lower profit rate, granting partial relief to the assessee.

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Issues: (i) whether the profit from road contract work was to be computed on net receipts after excluding the amounts representing bitumen and roller hire charges supplied or borne through the Government arrangement; and (ii) whether the net profit rate of 15 per cent required reduction.

Issue (i): whether the profit from road contract work was to be computed on net receipts after excluding the amounts representing bitumen and roller hire charges supplied or borne through the Government arrangement.

Analysis: The contract terms showed that bitumen was supplied by the Government and the contractor also paid hire charges for the rollers supplied by the Department. In these circumstances, the deduction of the relevant amounts from total receipts was justified and only the net receipts could properly be taken into account for estimating income.

Conclusion: The issue was decided in favour of the assessee.

Issue (ii): whether the net profit rate of 15 per cent required reduction.

Analysis: The rate of 15 per cent was found to be on the high side. Having regard to comparable cases and the facts of the contract business, a lower rate of 12-1/2 per cent on net receipts was considered appropriate.

Conclusion: The issue was decided in favour of the assessee to the extent of substitution of 12-1/2 per cent for 15 per cent.

Final Conclusion: The assessment of contract income was revised by adopting net receipts as the base and reducing the estimated profit rate, resulting in partial relief to the assessee.

Ratio Decidendi: Where contract receipts include amounts referable to materials supplied by the Government and allied charges borne under the contract terms, income may be estimated on net receipts, and the profit rate must be fixed with reference to comparable cases and the facts of the business.

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