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PETITIONER: BRIJ BHUSHAN LAL PARDUMAN KUMAR ETC.

       Vs.

RESPONDENT: COMMISSIONER OF INCOME TAX, HARYANA, HIMACHAL PRADESH ANDNEW

DATE OF JUDGMENT06/10/1978

BENCH: TULZAPURKAR, V.D. BENCH: TULZAPURKAR, V.D. BHAGWATI, P.N.

CITATION:  1979 AIR  209            1979 SCR  (2)  16  1979 SCC  (3)  14  CITATOR INFO :  RF         1989 SC 285  (9)

ACT:      Liability to  tax-Whether in a lump sum contract, where the stores and materials are supplied by the Government, the cost thereof  was liable  to be  taken  into  account  while estimating the income or profits of the assessee contractor- Best Judgment assessment, principle to be followed.

HEADNOTE:      The  appellant   assessees  are   Military  Engineering Services’ contractors  and as  such  carry  on  business  of executing contracts  and work  on behalf  of the Government. Their contracts are "Lumpsum contracts" where the department supplies 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  flat  rate  to  the  assessee’s  receipts  and estimating 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  following  its  own earlier Judgments  in the case of Brij Bhushan Lal v. C.I.T. Delhi, ( 1971 ) 81 I.T.R. 497.      Allowing the appeals by special leave, the Court, ^      HELD: l. The law relating to ’best judgment assessment’ is same  both in  the case  of income tax assessment and the sales tax  assessment. The  authority making a best judgment assessment must  make an  honest and  fair estimate  of  the income of  the assessee  and though  arbitrariness cannot be avoided in  such estimate  the same  must not be capricious, but should have a reasonable nexus to the available material and the circumstances of the case. [22G-H, 23D-E]      Commissioner of  Income Tax  v.  Laxminarain  Badridas, (1937) S  I.T.R. 170 (PC), Raghubar Mandal Harihar Mandal v. State of  Bihar, (1957)  7 S.T.C. 770 at p. 778 and State of Kerala v. C. Velukutty, (1966) 60 I.T.R. 239; referred to.      2. Ordinarily  when a  works contract is put through or completed by  a contractor  the income or profits derived by the contractor from such contract is determined on the value of the  contract as  a whole  and cannot  be  determined  by considering several  items that go to form such value of the

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contract but  where certain  stores/material is  supplied at fixed rates  by the  Department to the Contractor solely for being used for fixed or incorporated in the works undertaken on terms  and conditions mentioned in the contract, the real total value  of the entire contract would be the value minus the cost  of such  stores/matrial  so  supplied.  Therefore, since no  element of  profit was  involved in  the  turnover represented by  the cost  of stores/material supplied by The M.E.S. to  the assessee firms, the income or profits derived by the  assessee firms  from such  contracts will have to be determined on  the basis  of  the  value  of  the  contracts represented by the cash payments received by the assessee 17 firms from  the M.E.S.  Department exclusive  of the cost of the  material/stores  received  for  being  used,  fixed  or incorporated in the works undertaken by them. [26E-H]      In Lumpsum  contracts of‘ M.E.S. Department two salient features are  always present  namely,  (  1  )  there  is  a Schedule ’B’ which specifies the items of stores/material to be supplied  by the  Department to the contractor solely for being used, fixed or incorporated in the works together with the fixed  rates R  at which  the same  will be supplied and such supply  is governed  by General  Conditions Nos. 10 and 33; apart from the stores/material specified in Schedule ’B’ the contractor  also brings  his own stores/material on site for the purposes of the works which is also governed by some Paragraphs of General Conditions Nos. 10 and 33; and (2) the final financial  liability of  the Government  is  fixed  on completion of  the contract  on  the  basis  of  the  actual measurements and on the basis of the rates which are already standardised; a  detailed measurement  is undertaken  at the end of  the work  at which  the Garrison  Engineer  and  the Assessee’s   representative    remain   present    and   the measurements, are entered in Measurement Books and after the measurements final  bills are  prepared as  per  the  M.E.S. Schedule and  payments are made after making adjustments for the advances already made. [24A-D]      From the  tender documents  that are  made available to contractor and  the aforesaid  terms and  conditions of  the "Lump Sum  Contracts"  two  or  three  aspects  emerge  very clearly. In  the first  place the  contractor becomes  aware that certain  specified stores/materials will be supplied to him by  the Department  at fixed rates for being used in the works to  be undertaken  by him  for which he has not to pay from his  pocket and  it is  on that footing that he submits his tender  quoting a particular figure for the entire work; Secondly, such  stores/material so  supplied by  the  M.E.S. Department has  to be  used, fixed  or incorporated  by  the contractor in  the works  undertaken by him and the surplus, if any,  that would  remain after the completion of the work is to  be returned  to the  Department; thirdly,  since  for accounting purposes  the initial  supply is  debited to  the contractor at  the specified  fixed rates,  credit  for  the balance of tho stores/materials so returned is also given at the same rates, some adjustment being made in respect of the wear and  tear of  such stores/material but in regard to the stores material  out of  such supply  as is  actually  used, fixed or  incorporated into the works, no accounting is done viz-a-viz  the   contract  payment   that  is  made  to  the contractor. In other words, in substance and in reality such stores/material  always   remains  the   property   of   the Department and  the contractor  has merely the custody of it and he  files or  incorporates the  same into  the works. In such circumstances having regard to the terms and conditions on which  such supply  of stores/materials  is made there is

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not even  a theoretical possibility of any element of profit being involved  in the  turnover represented  by the cost of such stores/materials.  It  is  conceivable  that  when  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 specified  in Schedule ’B’ some profit element would be embedded in the turnover represented by the cost of such martial but when stores/material is supplied by the Government  Department at  fixed rates  for being  used, fixed or  incorporated in  the work on terms indicated above there would be no element of profit involved in the turnover represented by the cost of such material. [25G-H, 26A-E] 18      Brij Bhushan  Lal v. Commissioner of Income Tax, Delhi, (1971) 81 I.T.R. 497 (Pb and Haryana); overruled.      M. P.  Alexander and  Co. v. Commissioner of Income Tax (1973) 92  I.T.R., 92  (Kerala); Commissioner of Income Tax, Madras v.  K. S.  Guruswami Gounder  and  K  S.  Krishnaraju (1973)  72  I.T.R.  90  (Madras);  Trilokchand  Chunilal  v. Commissioner of  Income Tax  Gujarat (1976)  107 I.T.R.  732 (Gujarat), Additional Commissioner of Income Tax v. Trikamji Punia and Sons, (1977) 106 ITR 597 [AP (F.B.)]; approved.

JUDGMENT:      CIVIL APPELLATE  JURISDICTION: Civil  Appeal Nos.  1701 1703 of 1974.      Appeal by  Special Leave  from the  Judgment and  order dated 26-9-73  of the  Punjab & Haryana High Court in Income Tax Reference Nos. 38/72, 2/73, 3/73.      S. T. Desai and Ramesh Chand for the Appellant.      P.  G.   Gokhale  and   Miss  A.   Subhashini  for  the Respondent.      The Judgment of the Court was delivered by      TULZAPURKAR, J.-The  short  question  raised  in  these appeals by  special leave  is whether  the cost of materials supplied by  the Government  (M.E.S. Department)  for  being used in  the execution  of works  is liable to be taken into consideration while  estimating the  profits of a contractor and the  question  has  assumed  general  importance  as  it affects the  entire class of contractors who undertake works on behalf  of the  Government and  in view  of a conflict of decisions on the point among different High Courts.       The  facts in  all the three appeals are substantially the same though the assessees are different. In Civil Appeal No. 1701  of 1974 the material facts are these: The assessee (M/s. Brij Bhushan Lal Praduman Kumar of Ambala Cantonment), a  registered  firm,  is  a  Military  Engineering  Services (M.E.S.) contractor  and as  such carries on the business of executing contracts  and works  on behalf of the Government. For the  execution of  the works  undertaken by the assessee certain material  such as  cement, coal, items of steel etc. is supplied  at the fixed rates specified in Schedule to the contract by the Government for being used in the works. Such material though  in custody of the contractor always remains the property  of the Government and if any surpluses is left at the completion of the contract, the contractor (assessee) has to  account for it at the same rates at which the supply was made to him (wear and tear excepted) and return the same to the  Government. The assessment year involved was 1966-67 for which  the accounting  year commenced  on 1-10-1964  and ended on September 19

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30, 1965.  The assessee-firm had taken two contracts, one at Delhi A  and the  other at  Ambala. For  the said assessment year it  filed its  return of income declaring income of Rs. 44,462 being  10% of the total cash payments of Rs. 4,44,622 received  from   the  military  authorities.  The  assessee, however, did  not  furnish  any  figures  about  the  stores (material) received  by it  from the  M.E.S. The  Income-tax officer called  upon the  assessee to  produce the  relevant certificates in  respect of  such stores  but  the  assessee failed to  do so on the ground that the Departments were not cooperating with  it.  The  Income-tax  officer,  therefore, estimated the  cost of  such material  at 50%  of  the  cash payments, namely,  at Rs. 2,22,311 and by adding this figure to the net cash receipts of Rs. 4,44,622 he arrived at total receipts (including  the cost  of material)  of Rs. 6,66,933 and after  rejecting the book results applied a flat rate of 10% and worked out net income or profits at Rs. 66,693 which was rounded  upto Rs.  66,690 and  on that basis the tax was levied after  allocating the  said profits  among the  three partners of  the firm.  The assessee  preferred an appeal to the Appellate  Assistant Commissioner  contending  that  the addition of  the cost of material supplied by the Government to the  figure of  cash receipts  received by  it during the year for  applying the  Hat rate of 10% was erroneous and in any case  the estimate of the value of such stores at 50% of the cash  payments was  excessive. The  Appellate  Assistant Commissioner rejected  the first  contention but reduced the estimate  of  the  value  of  the  stores  supplied  by  the Government  to   25%  and  con-fined  the  addition  to  Rs. 1,11,155. Aggrieved  by that  order the  assessee  preferred further appeal  to the Income Tax Appellate Tribunal and the Tribunal accepted  the contention  of the  assessee that the cost of the stores or material supplied by the Government to the assessee  could not  be added  to  the  figure  of  cash payments received  by the  assessee on  the ground  that the stores (material)  supplied by  the Government F were ’never sold’ to  the contractor,  that the same always remained the property of  the Government and that no profit could be said to have  arisen to  the assessee when such stores (material) was merely  handled and  manipulated by  the assessee in the execution of  the works  under the  contract.  The  Tribunal followed the  decision of  the Kerala  High  Court  in  M.P. Alexander &  Co. v. Commissioner of Income-tax(l) where that Court has  taken the  view that  the cost  of such  material supplied by  the Government  was not  to be  included  while estimating the profits of a contractor. The Revenue sought a reference to the Punjab & Haryana High Court on the question whether on  the facts  and circumstances  of the  case,  the Tribunal was  justified in  holding   that the  cost of  the material supplied by the Government was not to be      (1) (1973) 92 I.T.R. 92. 20 included while  estimating the  profits of  a contractor and the High  Court in  Reference No.  38 of  1972 answered  the question  against   the  assessee   and  in  favour  of  the Department and  restored the  view of the taxing authorities by its  order dated  September 26,  1973 and in doing so the yearly income  tax paid  by them  is Rs.  70 to Rs. 80 only. There is Bhushan Lal v. Commissioner of Income-Tax, Delhi(l) where it had held that the cost of the materials supplied by the military  authorities was  liable tc  be included before applying the flat fate to the assessees rceipts.      Civil Appeals  Nos 1702  & 1703  of 1974  relate to the assessments of  M/s. Brij  Bhushan Lal  Ramesh Kumar for the assessment  years   1965-66  and   1966-67,   the   relevant

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accounting years  being the  ones which  ended on  March 31, 1965 and  March 31,  1966 respectively. The assessee firm, a M.E.S. Contractor,  carried on  the  business  of  executing works on  behalf of  the  Government  under  similar  M.E.S. contracts  wherein  stores/materials  are  supplied  by  the military authorities to the firm on identical terms. For the assessment  year  1965-66  the  assessee  filed  its  return declaring an  income of  Rs. 18,684  and disclosing net cash receipts from  the Government  at Rs.  2,63,853. Though this income was  based on  books of  accounts maintained  by  the firm,  the   assessee  during   the  course   of  assessment proceedings offered  that a  flat rate  of 9%  on  the  cash receipts of  Rs. 2,66,853  may be  applied. The  Income  Tax officer did  not accept the offer but applied a flat rate of 10% on  Rs. 3,07,605  which included the value of the stores supplied by  the Department to the assessee with the. result that the  profits were  assessed at  Rs. 3,07,60  and  after allowing deprecation  of Rs. 5107 the net taxable income was determined at Rs. 25,653 which was rounded up to Rs. 25,650. For the  assessment year 1966-67 the firm declared an income of Rs.  62414 calculated by adopting the flat rate of 10% on the cash  receipts of  Rs. 6,24,144.  The firm  had received stores/material of  the  value  of  Rs.  1,36,520  from  the military authorities and the Income Tax Officer after adding the value  of the  stores to  the cash receipts arrived at a total receipt  of Rs. 7,60,664 and by applying the flat rate of 10%  determined the  taxable income  at Rs.  76,070.  The assessee’s appeals  for both  the  years  to  the  Appellate Assistant Commissioner  were  unsuccessful  but  in  further appeals the  Appellate Tribunal  by its  order dated October 31, 1970  accepted the  assessee’s contention  and held that the cost  or the  value of  the stores/material  supplied by Government to  the contractor  was not liable to he included while estimating the profits or income of the contractor. In coming to  this  conclusion,  as  in  the  other  case,  the Tribunal followed  the Kerala High Court’s decision in M. P. Alexander’s case (supra).      (1) (1971) 81 ITR 497. 21 At the  instance of the Revenue two references (being Income Tax References  Nos. 2  and 3  of 1973)  were   made to  the Punjab &  Haryana High  Court and  the High  Court following its earlier  decision in  Brij Bhushan  Lal’s  case  (supra) answered the  questions referred  to it in the negative i.e. in favour  of the  Department and against the assessee. Both the assessees  have come  up to  this Court by special leave challenging the view taken by the High Court.      In support  of these appeals counsel for the appellants has contended  that it  was well  settled  that  even  while making a  best judgment  assessment the  Income-Tax  officer must make  an honest  and fair estimate of the income of the assessee and  that having regard to the terms and conditions of the  contract (a specimen whereof was produced during the hearing before  us) and  particularly the terms on which the stores/materials were  supplied by  the military authorities to the  assessee for  being used  in the works undertaken by the firm,  it was  clear  that  no  element  of  profit  was embedded  led   in  such  stores/materials  that  were  made available to  the contractor  for being  used in  the  works entrusted lo the contractor and as such the cost or value of such stores/material  could not  be added  to the total cash payments received  by the  contractor  from  the  Department under the  contract for the purpose of estimating the income or profits  derived by the contractor from such contract. He pointed out  that under  the   terms   and conditions of the

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contract such  stores/material  were  never  ’sold’  by  the Department to  the contractor  but the  same always remained the property  of the  Department and  the 15  contractor had merely handled,  manipulated or  used the  same in the works completed by him and the surplus of such stores/material, if any, that  remained was  required to  be  and  was  actually returned by  the contractor to the Department and this being the true  nature of  the supply of such stores/material, the cost or  the value thereof could not be included or added to the total  cash payment received by the contractor under the contract for  computing his  income or profits From the said contract. In  support of  his contention reliance was placed upon  M.P.Alexander’s  case  (supra),  Madras  High  Court’s decision in  Commissioner   of Income-tax  Madras v.  K.  S. Guruswami Gounder  & K.  S.  Krishanaraju(l);  Gujarat  High Court’s decision  in Trilokchand Chunilal v. Commissioner of Income-Tax, Gujarat(2) and Full Bench decision of the Andhra Pradesh High  Court in Additional Commissioner of Income-tax v. Trikamji Punia & Sons(2).      on the  other hand,  counsel for  the Revenue contended that not  only the  cash payments  received by  the assessee under the contract but      (1) (1973) 92 ITR 90.      (2) (1976) 107 ITR 732.      (3) (1977) 106 ITR 597. 22 also  the   cost  of  the  store\material  supplied  by  the Department to  the contractor-both  together represented the real value  of the  contract to  the contractor and as such, since the book results were rejected, the Taxing Authorities and the  High Court  were right  in coming to the conclusion that the  income or  profits derived  by the contractor from such contracts  was liable  to be determined by applying the flat rate  to the  entire value  of the  contract. In  other words, it  was  contended  by  him  that  the  cost  of  the stores/material supplied by the Government to the contractor was liable  to be  taken into  account while  estimating the income or  profits of the contractor under such contract and in that behalf he pressed for our acceptance the view of the Punjab &  Haryana High  Court in  Brij  Bhushan  Lal’s  case (supra).      At the  out set  it may  be stated  that in the case of both the  assessees  their  returns  and  book-results  were rejected on  the ground  that proper  and reliable  books of account had  not been  maintained and the Income tax officer was required  to make  the assessments  on "best  judgement" basis. However, the principles to be followed by the lncome- tax officer  while making  a best  judgment assessment  have been clearly  laid down by the Privy Council as also by this Court in  a number  of decisions. In commissioner of Income- Tax v.  Laxminarain Badri  das(1), their  Lordships  of  the Privy Council observed as follows:           "The officer  is to make an assessment to the best      of his  judgment against  a person who is in default as      regards  supplying   information.  He   must  not   act      dishonestly or  vindictively or capriciously because he      must exercise judgment in the matter. He must make what      he honestly  believes to  be a  fair  estimate  of  the      proper figure  of assessment,  an(l for this purpose he      must, their  Lordships think,  be  able  lo  take  into      consideration local  knowledge and  repute in regard to      the assessee’s  circumstances, and his own knowledge of      previous returns  by and  assessments of  the assessee,      and all  other matters  which he thinks will assist him      in arriving  at a  fair and proper estimate; and though

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    there must  necessarily be  guesswork in the matter, it      must be  honest guesswork.  In  that  sense,  too,  the      assessment must be to some extent arbitrary".      Since the law relating to "best judgment assessment" is the same  both in  the case of income-tax assessment and the sales-tax assessment  and the following observations of this Court  in  Raghubar  Mandal  Harinder  Mandal  v.  State  of Bihar,(2) a  case under  the Bihar  Sales Tax  Act, would be material:      (1) (1937) S I.T.R. 170 (PC).      (2) (1957) 7 STC 770 at p. 778. 23           "No doubt it is true that when the returns and the      books   of account  are rejected, the assessing officer      must make  an estimate, and to that extent he must make      a guess:  but the  estimate must  be  related  to  some      evidence or material and it must be something more than      mere suspicion."      Again in  State of Kerala v. C. Velukutty,(l) which was a case  1 under the Travancore-Cochin General Sales Tax Act, Subba Rao,  J. (as  he then  was), speaking  for this  Court observed at page 244 of the report thus:           "The limits  of the  power  are  implicit  in  the      expression  ’best  of  his  judgment’.  Judgment  is  a      faculty  to   decide  matters  with  wisdom  truly  and      legally. Judgment  does not  depend upon  the arbitrary      caprice of  a judge,  but  on  settled  and  invariable      principle, of  justice. Though  there is  an element of      guesswork in a ’best judgment assessment.’ it shall not      be a wild one, but shall have a reasonable nexus to the      available material and the circumstances of each case."      It will appear clear from what has been said above that the authority making a best judgment assessment must make an honest and  fair estimate  of the income of the assessee and though arbitrariness  cannot be avoided in such estimate the same must  not be  capricious but  should have  a reasonable nexus to the available material and the circumstances of the case. It  is with  reference to  these principles  that  the question raised  before us  will have  to be  considered and looking at  it from  that point of view the real question is whether  the   turnover  represented  by  the  cost  of  the stores/material supplied  by the  M.E.S. Department involves any element  of  profit  having  regard  to  the  terms  and conditions on  which such  supply is  made ? If it does then cost of  such stores/material  will have  to be  taken  into account but  if it  does not  such  cost  will  have  to  be excluded.      In order  to decide  the aforesaid  question it will be necessary to  advert to the terms and condition of the works contracts undertaken  by the  two assessee  firms, which  as stated earlier,  are common.  The assessee firms in both the cases are  M.E.S. Works  Contractor tendering  and obtaining from the  M.E.S. Department  what are  known as  ’’Lump  sum contracts which  arc governed  by the  General Conditions of contracts I.A.F.W.  2249 (1963  print). In  addition to  the general conditions  the particular  work undertaken  by  the contractor is  also governed  by special  terms contained in the  Acceptance   of  Tender,   and  the  specification  and Schedules annexed thereto. ’’In Lump      (1) (1966) 60 I.T.R. 239. 24 Sum Contracts" of M.E.S. Department two salient features are always present,  namely, (l)  there is  a Schedule ’B’ which specifies the items of stores/material to be supplied by the Department to ’he contractor solely for being used, fixed or

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incorporated in  the works  together with the fixed rates at which the  same will be supplied and such supply is governed by General  Conditions  Nos.  10  and  33:  apart  from  the stores/material specified  in Schedule  ’B’  the  contractor also brings his own stores/material on site for the purposes of the  works which  is also  governed by some Paragraphs of General Conditions  Nos.  10  and  33:  and  (2)  the  final financial liability of the Government is fixed on completion of the  contract on the basis of the actual measurements and on the  basis of the rates which are already standardised; a detailed measurement is undertaken at the end of the work at which   the    Garrison   Engineer    and   the   assessee’s representative  remain  present  and  the  measurements  are entered in  Measurement Books  and after  the  measurements. final bills  are prepared  as per  the M.E.S.  Schedule  and payments are  made after making adjustments for the advances already made.  With regard to stores/material Condition Nos. 10 and  33 of the General Conditions are material. Condition No. 10 so far as is material runs thus:      "Condition 10-Stores and Materials-           The Contractor  shall at  his own  expense, supply      all stores  and materials  required for  the  Contract,      other than those listed in Schedule ’B’ which are to be      provided  by  the  Government  by  the  rates  detailed      therein.           .......... .... .... .... .... .... ......           .......... .... ... . ... .... .... ......           All stores  and materials  to be  supplied by  the      Contractor shall  be the  best of  the respective kinds      described in  the  Specifications  and  the  Contractor      shall  upon   the  request  of  the  Engineer-in-Charge      furnish him  with proof  to his  satisfaction that  the      stores and materials so comply.           ....... ....... .................................           .. .. . .... . . . . . . ... . . .... .. ... . ...           In the case of stores provided under Schedule ’B’,      the  Contractor   shall  bear   the  cost  of  loading,      transporting to site, unloading, storing under cover as      required, assembling  and jointing  the  several  parts      together as  necessary  and  incorporating  and  fixing      these stores  and materials in the Works, including all      preparatory work of whatever description as may 25      be required,  and of  closing, preparing,  loading  and      returning empty  cases or  containers to  the place  of      issue without any extra charge."      condition No. 33 SO far as is material runs thus:      "Condition 33-Stores and Materials on site-           Stores and materials required for the Works are to      be deposited  by the  Contractor only  in places  to be      indicated by the Engineer-in-Charge.           ................... .. ...... .... ....           ............... .......................           All stores and materials brought to the site shall      become and  remain the property of Government and shall      not be  removed off  the site without the prior written      approval of the G.E. But whenever the Works are finally      completed the  Contractor  shall  at  his  own  expense      forthwith remove  from the  site all surplus stores and      materials originally  supplied by  him  and  upon  such      removal, the  same  shall  revest  in  and  become  the      property of  the Contractor.  All Government stores and      materials Issued to the Contractor for incorporation or      fixing in the Works and which, making due allowance tor      reasonable wear  and tear  and or  waste, have  not  on

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    completion of  the Works  been so incorporated or fixed      shall be returned by the Contractor at his own expenses      to the place of issue.           Surplus stores  and/or materials  returned by  the      Contractor will  be credited  to him  at  a  price  not      exceeding that  at which  the said stores and materials      were originally  issued to  him but  due  consideration      shall be  given to  and allowance claimed by Government      in respect  of ally  depreciation or damage suffered by      the Stores  and/or materials  whilst in  the custody of      the Contractor "      From the  tender documents  that are  made available to contractor and  the aforesaid  terms and  conditions of  the "Lump Sum  Contracts"  two  or  three  aspects  emerge  very clearly. In  the first  place the  contractor becomes  aware that certain  specified stores/materials will be supplied to him by  the Department  at fixed rates for being used in the works to  be undertaken  by him  for which he has not to pay from his  pocket and  it is  on that footing that he submits his tender  quoting a particular figure for the entire work; secondly, such  stores/material so  supplied by  the  M.E.S. Department has to be used, fixed or incorporat-      3- 817 SCI/78 26 ed by  the contractor in the works undertaken by him and the surplus, if  any, that  would remain after the completion of the work is to be returned to the Department; thirdly, since for accounting purposes the initial supply is debited to the contractor at  the specified  fixed   rates, credit  for the balance of the stores/materials so returned is also given at the same rates, some adjustment being made in respect of the wear and  tear of  such stores/material but in regard to the stores/material out  of such  supply as  is  actually  used, fixed or  incorporated in  the works,  no accounting is done vis-a-vis  the   contract  payment   that  is  made  to  the contractor. In other words, in substance and in reality such stores/material  always   remains  the   property   of   the Department and  the contractor  has merely the custody of it and he  fixes or  incorporates the  same into  the works. It seems to  us clear  that in  such circumstances  and  having regard to  the terms  and conditions on which much supply of store/materials is  made there  is not  even  a  theoretical possibility of  any element  of profit being involved in the turnover represented by the cost of such stores/material. It is conceiveable  that when  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 specified in Schedule ’B’  some profit  element would  be embedded in the turnover represented  by the  cost of such material but when stores/material is  supplied by the Government Department at fixed rates  for being  used, fixed  or incorporated  in the work on  terms indicated  above there would be no element of profit involved  in the  turnover represented by the cost of such material.  It is  true that  ordinarily  when  a  works contract is  put through  or completed  by a  contractor the income or  profits  derived  by  the  contractor  from  such contract is  determined on  the value  of the  contract as a whole and  cannot be determined by considering several items that go  to form  such value of the contract but in our view where certain  stores/material is supplied at fixed rates by the Department  to the  Contractor solely  for being used or fixed or  incorporated in  the works undertaken on terms and conditions mentioned  above, the  real total  value  of  the entire contract  would be  the value  minus the cost of such

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stores/material so  supplied. Therefore, since no element of profit was  involved in the turnover represented by the cost of stores/material  supplied by  the M.E.S.  to the assessee firms, the  income or  profits derived by the assessee firms from such  contracts will have to be determined on the basis of the  value of  the  contracts  represented  by  the  cash payments received  by the  assessee firms  from  the  M.E.S. Department exclusive  of the  cost  of  the  material/stores received for  being used, fixed or incorporated in the works undertaken by them. 27      Having regard  to our  aforesaid  conclusion  the  view taken by  the Punjab  and Haryana High Court in Brij Bhushan Lal’s case  (supra) must  be regarded  as erroneous  and  we approve the  view taken  by the  Kerala High  Court  (M.  P. Alexander &  Co. case),  Madras High  Court (K.S.  Guruswami Gounder’case). Gujrat  high  Court  (Trilokchand  Chunilal’s case) and Andhra Pradesh High Court (Trikamji Punia’s case).      In the  result the  appeals are  allowed, the  impugned orders of  the High  Court are  set aside  and those  of the Appellate Tribunal  are restored.  The Revenue  will pay the costs of the appeals to the assessee firms. S.R.                                        Appeals allowed. 28