BRIJ BHUSHAN LAL PARDUMAN KUMAR ETC. vs. COMMISSIONER OF INCOME TAX, HARYANA, HIMACHAL PRADESH AND NEW DELHI-III

CIVIL APPEAL No. 1701/1974Supreme Court[1979] 2 S.C.R. 1606 October 1978Bench: 2 JudgesAuthor: P.N. BHAGWATI, V.D. TULZAPURKAR B12 pages
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What did the Supreme Court hold?

The Supreme Court held that the cost of materials supplied by the Government (MES) at fixed rates for use in works contracts should not be included when estimating the contractor's profits. The Court reasoned that in such contracts, the materials remain the property of the Government, and the contractor merely has custody. There is no element of profit involved in the turnover represented by the cost of these supplied materials. The real total value of the contract for profit calculation should be the contract value minus the cost of government-supplied stores/materials. The Court overruled the Punjab and Haryana High Court's decision in Brij Bhushan Lal v. C.I.T. (1971) 81 I.T.R. 497 and approved decisions from the Kerala, Madras, Gujarat, and Andhra Pradesh High Courts. The appeals were allowed, setting aside the High Court's orders and restoring those of the Appellate Tribunal.

What were the facts?

The appellants are Military Engineering Services (MES) contractors engaged in executing works for the Government under 'lump sum contracts'. In these contracts, the department supplies materials at fixed rates. The revenue contended that the cost of these government-supplied materials should be included when estimating the assessee's profits for tax purposes. The Punjab and Haryana High Court, following its earlier judgments, confirmed this view. The appeals were filed against this High Court decision. The assessment years are not explicitly stated, but the dispute concerns the tax liability arising from these contracts.

What were the issues?

1. Whether, in a lump sum contract where stores and materials are supplied by the Government at fixed rates, the cost of such materials is liable to be taken into account while estimating the income or profits of the assessee contractor for tax purposes, under the principles of best judgment assessment? Assessee's contention: The assessee argued that since the government-supplied materials were not purchased by the contractor and no profit element was involved in their cost, their value should be excluded from the computation of profits. They relied on the principle that profit is derived from the contractor's own contribution and labour. Revenue's contention: The revenue contended that the cost of government-supplied materials should be included in the total contract value before applying any rate to estimate profits. They relied on the High Court's previous judgments which held this position.

Which sections of the Income-tax Act were involved?

Section 68

AI-generated summary — verify with the full judgment below

A B c 16 BRIJ BHUSHAN LAL PARDUMAN KUMAR ETC. v. COMMISSIONER OF INCOME TAX, HARYANA, HIMACHAL PRADESH AND NEW DELHI-III October 6, 1978 (P. N. BHAGWATI AND V. D. TULZAPUllKAR, JJ.] Liability to tax-Whet~r in a lun1p sum contract, where the stores and n1aterials are Jupplied by the Govern1ncnt, the cost thereof was liable to be taken into account while estiJnating the inco1ne or profits of the assessee con- tractor-Best Judgment assess1nent, principle to be followed.

The appellant assessees are ~1ilitary Engineering Services' contractors and as such carry on business of executing contracts and work on behalf of the Government.. 'fheir contracts are '·Lumpsum contracts"' where the depart- ment suppli~s the materials at fixed rates. The revenue was of the opinion that the cost of the materials supplied by the military authorities was liable to be included before applying the fiat rate to the assessee's receipts and estimat- D ing the profits for the purposes of tax liability.

The High Court of Punjab and Haryana on a reference at the instance of the Revenue confirmed it follow- ing it~ own earlier Judgments in the case· of Brij Bhushan Lal v. C.l.T. Delhi,

The order continues below.

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