JUDGMENT
Uday Sinha, J.
1. This is an application under Articles 226 and 227 of the Constitution of India by M/s. Kalpnath Rai, a registered firm, for quashing annexures 2 and 3 of this application. By annexure 2, the ITO, West Circle, Muzaffarpur, assessed the petitioner to tax in terms of Sections 144 and 146 of the I.T. Act, 1961, for the assessment year 1973-74. By annexure 3, the revisional application of the petitioner was rejected by the CIT in terms of Section 264(1) of the said Act.
2. The petitioner carried on the business of executing works contracts. In that connection, it entered into an agreement with the Executive Engineer, Tirhut Canal Division, Gandak Project, Hajipur, for execution of works contract in relation to the Project. The case of the petitioner is that it entered into a lump sum agreement with the State of Bihar and in terms thereof, it was supplied with cement, steel, copper sheets, rubber seal, bricks, etc., by the Department. These materials, according to the petitioner, were always to remain the properties of the Department. After the completion of the works, a composite bill for Rs. 11,12,985 (which will be referred hereafter for brevity as “eleven lakhs odd”) was submitted by the petitioner. Out of this gross amount, a sum of Rs. 4,37,609.02 was deducted by the Department as cost of materials supplied to the petitioner by it. As the firm did not submit any return, the ITO passed best judgment assessment in terms of Sections 144/182(1)/146 of the I.T. Act (hereinafter referred to as “the Act”). The ITO assessed the income/profit of the petitioner at 10% of the amount received by it, i.e., eleven lakhs odd. On that basis, the income/profit was assessed at Rs. 1,11,468. The petitioner moved the Commissioner in revision, but having failed in revision too, has moved this court by the present application.
3. The only grievance of the petitioner is that the taxing authorities were not justified in assessing income at the rate of 10% on the gross amount of rupees eleven lakhs odd. The contention is that Rs. 4,37,609 having been deducted from the total bill of rupees eleven lakhs odd as price of materials supplied by the Department, that sum ought not to have been taken into account and that the profit should have been assessed at 10%
only on Rs. 5,96,689.98. The petitioner’s case is that the materials supplied by the Department–and which was the property of the Department at all times–did not go to form part of the profit of the firm and, therefore, the said sum was liable to be deducted from gross figure of rupees eleven lakhs odd for the purpose of assessing the profit of the petitioner.
4. At this stage, it is relevant to state that originally the petitioner was assessed in terms of Section 144 of the Act. After the assessment had been made, the petitioner filed an application for review of the assessment. The application for review was allowed by order dated April 30, 1976. Thereafter, the assessment proceeding was adjourned on several dates, but the petitioner failed to appear on any of the dates. The ITO, therefore, again proceeded to assess in terms of Section 144 of the Act. The assessment order shows that there were only two items of income of the firm, viz.,
(i) Income from business as per original assessment–Rs. 1,11,468 ; and
(ii) Income from undisclosed sources as determined
in original assessment –Rs. 2,86,292.
5. After this assessment, the petitioner moved the Commissioner in revision. The Commissioner remanded the matter on a limited point in regard to the addition of Rs. 2,86,292 representing the income from undisclosed sources. The Commissioner observed as follows :
” On this limited point, therefore, the assessment is set aside and the ITO is directed to examine the matter afresh and redo the assessment in accordance with law after affording proper opportunities to the parties concerned.”
6. The Commissioner in unequivocal terms rejected the stand of the petitioner that the value of the properties supplied by the Department was deductible from the gross amount of the bill for the purpose of assessing the net profit at the rate of 10%. After remand, the ITO knocked off the figure of Rs. 2,86,292 from the total assessable income of the petitioner. That, in short, is the history.
7. The petitioner’s case is that the materials supplied by the Department to the petitioner did not go to form part of the profit of the firm as it always remained the property of the Department and, therefore, the said sum was liable to be deducted. His submission is based upon the provisions of Clause (9) of the conditions of contract which was in Form F-2. Clause (9) reads as hereunder stated :–
” Clause 9. If the specification or estimate of the work provides for the use of any special description of material to be supplied from the engineer-in-charge store, or if it is required that the contractor shall use certain stores to be provided by the engineer-in-charge under the conditions of this contract (such materials and stores, and the prices to be charged therefor as hereinafter mentioned being so far as practicable for the convenience of the contractor, but not so as in any way to control the meaning or effect of this contract are specified in the schedule or memorandum hereto annexed), the contractor shall be supplied with such materials and stores noted in the annexed schedule as are required from time to time to be used by him for the purpose of the contract only, and the value of the full quantity of materials and stores so supplied at the rates specified in the said schedule may be set off or deducted from any sums then due, or thereafter to become due to the contractor under the contract or otherwise, or against or from the security deposit, or the proceeds of sale thereof, if the same is held in Government securities, the same or a sufficient portion thereof being in this case sold for the purpose. All materials supplied to the contractor shall remain the absolute property of Government and shall not on any account be removed from the site of the work, and shall at all times be open to inspection by the engineer-in-charge. Any such materials unused and in perfectly good condition at the time of the completion or determination of the contract shall be returned to the engineer-in-charge’s store, at the prevailing market rate or at the issue rate, whichever is less, if by a notice in writing under his hand he shall so require ; but the contractor shall not be liable to return any such materials unless with such consent, and shall have no claim for compensation on account of any such materials so supplied to him as aforesaid being unused by him or for any wastage in or damage to any such materials.”
8. The petitioner has relied upon Brij Bhushan Lal Parduman Kumar v. CIT [1978] 115 ITR 524 (SC) equivalent to (which has overruled the decision in) Brij Bhushan Lal v. CIT [1971] 81 ITR 497 (Punj) in support of its stand.
9. Learned standing counsel for Income-tax Department did not dispute the law laid down in Brij Bhushan Lal’s case [1978] 115 ITR 524 (SC) which was the last word on the subject. He, however, contended that on the facts of the present case, it is not possible to extend the benefit of the Supreme Court case to the petitioner. It was contended that the petitioner neither filed before the income-tax authorities the agreement with the Department nor did it furnish details of the materials supplied. The petitioner was given opportunity time and again to do so, but it failed in that behalf. According to him, the facts of the present case were akin to those of Rameshchandra Chaturvedi v. CIT [1980] 121 ITR 116 (Pat), and must be decided on that footing. That being the position on facts, contended the learned standing counsel, the claim of the petitioner for the deduction was untenable and no writ can issue quashing the assessment order.
10. It is well-settled that in the matter of making a best judgment assessment, an amount of guess-work or arbitrariness is inevitable, but the revenue must make an honest and fair estimate of the income of the assessee. In regard to assessment of profit arising out of works contract, the Supreme Court laid down in the case of Brij Bhushan Lal [1978] 115 ITR 524, that if the stores/materials always remain the property of the Department, and the contractor has merely the custody of it and he fixes or incorporates the same into the works, there is no theoretical possibility of any element of profit being involved in the turnover represented by the cost of such stores/materials. When, however, the contractor himself purchases materials in the open market and supplies the same to the Department by using, fixing or incorporating the same in the works, as in the case of materials other than those specified in the schedule, some profit element would be made in the turnover represented by the cost of such materials. The only hurdle in the way of the petitioner is that the entire agreement was not filed before the taxing authorities despite the protestation of the counsel for the petitioner. That must be accepted to be so. Even so, a copy of Clause (9) having been filed, there was no escape from the position that the stores/materials supplied by the Department would remain the property of the Department. All works contracts in the State are executed in Form F-2 prescribed by the Bihar Public Works Department. Although the contract in this case was between the Irrigation Department and the petitioner, the standard form applies in all works contracts for the same. I am, therefore, inclined to take the view that Clause (9), a copy of which was filed before the Commissioner, which is quoted earlier in this judgment, represented one of the terms of the agreement. It must, therefore, be accepted that the stores/materials at all times belonged to the Department. The value of those stores, therefore, did not enter into the profit of the petitioner. Annexure-1 to this application is the payment certificate to the petitioner for the accounting year 1972-73. Column 8 of that certificate shows that a sum of Rs. 4,37,609.02 was deducted on account of supply of materials. That not having been paid to the petitioner, I see no justification for including these in its profit. The orders of the ITO and the Commissioner in that regard suffer from serious legal infirmity. Learned counsel for the petitioner in support of the proposition relied upon Addl. CIT v. Trikamji Punia and Sons [1977] 106 ITR 597 (AP) [FB] and CIT v. Bikari Charan Panda [1976] 104 ITR 73 (Orissa). The reliance placed upon these two decisions is well placed and must be accepted. There is no conflict in the ratio of Brij Bhushan Lal’s case [1978] 115 ITR 524 and that of Rameshchandra Chaturvedi [1980] 121 ITR 116 (Pat).
11. For the reasons, stated above, the application is allowed. Annexures 2 and 3 are quashed and the matter is remanded to Commissioner for passing
judgment in terms of my order after deducting the sum of Rs. 4,37,609.02 from the total sum of Rs. 11,00,000 odd for the purpose of ascertaining the income/profit during the assessment year 1973-74. In the circumstances of the case, there shall be no order as to costs.
Prabha Shanker Mishra , J.
12. I agree.
