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

- **Citation:** [1979] 2 S.C.R. 16
- **Court:** Supreme Court of India
- **Decided:** 1978-10-06
- **Bench:** P. N. Bhagwati, V. D. TULZAPUllKAR
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/brij-bhushan-lal-parduman-kumar-etc-v-commissioner-of-income-tax-haryana-7493
- **Pages:** 12

## Headnote

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 contractor-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 department 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 estimatD
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 following it~ own earlier Judgments in the case· of Brij Bhushan Lal v. C.l.T. Delhi,
(1971) 81 I.T.R. 497.
E
F
Allowing the appeals by special leave, the Court,
HELD : 1. 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 assessn1ent 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) 5 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 Kuala 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
oontra..:t is determined on the value of the contract as a whole and cannot
G
be determined by considering several items that go to form such value of the
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 v;'orks undertaken on terms oo.d conditions mentioned in the contract,
the real totnl value of the entire contract would be the value minus the cost of
such
sto•·e~.;n1atrial so supplied.
Therefore, since nJ. element of profit was
H
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 payment."! received by the asscssee
..
•
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'
1
BRIJ BHUSHAN v. c. I. T. (Tulzapurkar, J.)
17
firms fron1 the M.E.S. Department cxclusi\c of the cost of the ;material/stores
''A
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 1hc Oepaitment to the contractor solely
'for being used, fixed or incorporated in the \vorks together with the fixed rates
, B
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/n1aterial 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 hasis of the actual measurements and
on the basis of the rates \\1hich are already standardised; a detailed
measureC
nlent is undertaken at the end of the \\-ork at which the Garrison Engineer and
the As~cssee·s representative remain present and the measurements, are entered
in

## Text

A
B
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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 contractor-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 department 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 estimatD
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 following it~ own earlier Judgments in the case· of Brij Bhushan Lal v. C.l.T. Delhi,
(1971) 81 I.T.R. 497.
E
F
Allowing the appeals by special leave, the Court,
HELD : 1. 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 assessn1ent 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) 5 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 Kuala 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
oontra..:t is determined on the value of the contract as a whole and cannot
G
be determined by considering several items that go to form such value of the
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 v;'orks undertaken on terms oo.d conditions mentioned in the contract,
the real totnl value of the entire contract would be the value minus the cost of
such
sto•·e~.;n1atrial so supplied.
Therefore, since nJ. element of profit was
H
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 payment."! received by the asscssee
..
•
\.
'
1
BRIJ BHUSHAN v. c. I. T. (Tulzapurkar, J.)
17
firms fron1 the M.E.S. Department cxclusi\c of the cost of the ;material/stores
''A
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 1hc Oepaitment to the contractor solely
'for being used, fixed or incorporated in the \vorks together with the fixed rates
, B
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/n1aterial 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 hasis of the actual measurements and
on the basis of the rates \\1hich are already standardised; a detailed
measureC
nlent is undertaken at the end of the \\-ork at which the Garrison Engineer and
the As~cssee·s representative remain present and the measurements, are entered
in Measurement Books and after the n1easurements final bills are prepared as
per the M.E.S. Schedule and payments are made after making adjustments for
the advances already ma<le. [24.:\-D)
From the tender documents that are made available to contractor and the
D
aforesaid terms and conditions of the ''Lun1p Sum Contracts" two or three
. aspects emerge very clearly.
Tn the first place the contractor becomes aware
that certain specified stores/materials \Vil! 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 quotin£ 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 \vorks 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 spec'ified fixed rates, credit for the balance of
·the stores/materials so returned is also given at the same rates, some adjust·
ment 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 ma.de to the contractor. In other words, in substance and in
reality suci:t stores /material alway~ 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. In such circumstances having regard to the terms
and conditions on which such supply of stores/materials is ma.de there is· not
even a theoretical possibility of any
clement 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 ivorks, 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 n1artial 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 n1aterial.
1{25G-H, 26A-E]
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B
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18
SUPREME COURT REPORTS
[1979] 2 S.C.K>
Brii Bltushan Lal v. Co1n1nissioner of /11con1e Tax, Delhi, (1971) 81 I.T.R.
497 (Pb and Haryana); overruled.
M. P. Alexander and Co. v. Comtnissioner of lnconJe Tax (1973) 92 LT.R.,
92 (Kerala); Co1nn1is.sioner of lncon1e Tax, Madra.<J v. K. S. Guruswami
Gounder and K. S. Krishnaraiu (1973) 72 I.T.R. 90 (Madras); Trilokchand
Chuni/al v. Commissioner of Income Tax Gujarat
(1976)
107 I.T.R.
732
(Gujarat), Ad"itional Commissioner of Income Tax v. Trikamji Punia
and
Sons, (1'77) 106 lTR 597 [AP (F.B.)]; approved.
CNIL APPELLATE JURISDICTION :
Civil
Appeal Nos. 17011703 of 1974.
Appeal by Special Leave from the Judgment and Order
dated
26-9-73 of the Punjab & Haryana High Conrt 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.
P
The Judgment of the Court was deliwred by
TuLZAPURKAR, J.-The short question raised in these appeals by
Sp;!cial leave is whether the cost of materials supplied by the Government (M.E.S. Department) for being used i:l the execution of workS
is liable to be taken into consideration while estimating the profits of a
E
contractor and the question has assum~d general importance as it affects
the entire class of contractors who undertake works on behalf of the
Govemme:it and in view of a conflict of decisions on the point among
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different High Courts.
.--
F
G
B
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 asses see (Ml s. Brij Bhushan Lal Praduman Kumar of Ambala Cantonment), a registerod firm, is a Military
Engineering Servic~ (M.E.S.) contractor and as such carries on the
business of executrng 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 rntes specified in Schedule B to the contract by the Govcrmnent
for being used in the works. Such material though in custody of the
contractor always remains the property of the Government aTid 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 ass•essment year involved was 1966-67 for which·
the accounting year commenced on 1-10-1964 and ended on September
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.(
BRIJ BHUSHAN v. c. I. T. (Tulzapurkar, !.)
19
30, 1965. The assessee-firm had taken two contracts, one at Delhi
and the oth~r )It Ambala.
For the said assessment year it filed its
return of income <leclaring 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 fi&'llres 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 COO)J"'rating with it.
The Income-tax
Officer, therefore, <Y.;timated the cost of such ma:terial at 50% of the
cash payments, namely, at Rs. 2,22,311 and by adding this figure to
tho;, 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 posuli:'s applied a flat rate of 10% and worked out net income
or prol.its at Rs. 66,693 which was rou~ded 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 preferP~d 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 Jlat rate of 10%
was erroneous and in any case tbe 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 confrned the adclit;on 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 co:itention of the asscssec 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
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
fiigh Court in M.P. Alexander & Co. v. Commissioner of Income-tax(')
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
(!) (1973) 92 l.T.R. 92.
A
B
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SUPREME COURT REPORTS
[ 1979] 2 S.C.R.
included while estimating the profits of a contractor and the High Court
in Reference No. 38 of 1972 answered the question against the assessec
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, Deihh') where it had
held that the cost of the materials supplied by the military authorities
wa5 liable tc be included before applying tlm tfat rate to the assessee's
receipts.
Civil Appeals Nos. 1702 & 1703 of 1974 relate to the a'8essments
of M/s. Brij Bhushan Lal Ramesh Kumar for the assessment yearn
1965-66 and 1966-67, the relevant 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 were supplied by the military authorities to the firm on identical terms.
For the assessment year 196566 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. 3,07,6:)5 which included the value of
the
stores supplied by the Department to the assessee with the result that
the profits were assessed at Rs. 30760 and after allowing d"rreciation
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
fiat 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 tbe 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
assessec's contention and held tliat the cost or the value of the stor~s/
material supplied by Government to the contractor was not liable to be
included while estimating the prcfits 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 (•upra).
-(1)(197i)sl1i"R 497.
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1
BRIJ BHUSHAN v. c. I. T. (Tulzapurkar, !.)
21
At the instance of the Revenue two references (being Income Tax ReA
ferences Nos. 2 and 3 of 1973) wne made to the Punjab & Haryana
High Court and the High ( ourt following its earlier decision in Brij
Bhushan Lat's case (supra) answered the questions referred to it in the
negative i.e. in favour of the Department and ai,'llinst the assessee. Both
the assessces liave come up to this Court by special leave challenging
the view taken by the High Court.
B
In support of these appeals counsel for the appellants has ~ontended
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 lerms
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 asscssee for
being used in the works undertaken by the firm, it was dear that no
element of profit was embcclcled in such stores/materials that wc1e made
available to the contractor for being used in the works entrusted ro the
contractor and as sucl: 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 :Le terms and conditions of the contract such
stores/material were never 'sold' by the Department to the contractor
but the same always remained the property of the Departmem and the
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 :iy
the contractor to the Dcpanment 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 profit'l from
the said contract.
In suppor( cf his contention reliance 1>as placed
upon M.P. Alexander's case (supra), Madras High Court's decision ii:
Cornnzissioner of Income-tax A1adras v. K. S. Guruswami Gounder &
K. S. Krislmaraju('); Gujarat High Court's decision in Trilokchaiid
Chunilal v. Commissioner of Income-Tax, Gujarat(") and Full Bench
decision of the Andhra Pradesh High Court in Additional Commissioner of Income-tax v. Trikamji Punia & Sons(').
On the other hand, ccunsd for the Revenue contendeJ that not
only the cash payments received hy the assessee under the -:ontract but
---- ·---------
(!) (1973) 92 !TR 90.
(2) (1976) 107 !TR 732.
(3) (1977) !06 !TR 597.
c
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22
SUPREME COURT REPORTS
[1979] 2 s.c.R.
also the cost of the stores/matcria1 supplied by the Department to the
contractor-both together rt'prrsented the real value of the conirnct to
the contractor and as such, sh1l'.e the book results were rcjec.:~cd, the
Taxing Authorities and the High Court were right in coming to the
conclusioil that the income or profits derived by the contractor from
such contracts was liable t0 be determined by a;:plying the ftat 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 contr~ctor under such contract and in that
behalf he pressed for our acceptance the view of the Punjab & Haryana
High Conrt in Brij Bhushan Lal's case (supra).
At the out set it may be stat<d 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 Incomctax Officer was required to make the assessments on "best judgment"
basis.
However, the prim:iplcs to be followed by the Income-t:ix
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 Commissio11er oj Income-Tax v. Laxminarai11 Badridas('), 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 beijcves to
be a fair estimate of the proper figure of assessment, and for
this purpose he must, their Lordships think, be able 10 t:ike
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 there must necessarily
be
guesswork in the matter, it must be honest guesswork. In that
sense, too, the assessn1l~nt 1nust 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 asse~sn1ent,
the· following observations of this Court in Raghubar Manda/ Jlarihar
Mandal v. State of Bihar,( 2 ) a case under the Bihar Sales Tax Act,
would be material :
(1) (1937) 5 I.T.R. 170 (PC).
(2) (1957) 7 STC 770 at p. 778.
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BRIJ BHUSHAN v. c. I. T. (Tulzapurkar, !.)
23
"No doubt it is true that when the returns and the books
of account are 1cjected, the assessing officer must make
an
estimate, and lo ~hat e·<tent 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."
Aga;n in State of Kera/a v. C. Velukutty,(')
which was a case
under the Travancore-Cochin General Sales Tax Act, Subba Rao, J.
(as he then was), speaking tor thh 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 t.o decide matters with wisdom truly and legally.
Judgment does
not
depend npon the arbitrm y capnce of a judge, but on settled
and invariable principles 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 wllat has been said above that the authority making a best judzment 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 bnt should
have a reasonable nexus to the available material and the drcumstance.s
·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 turnovter represented by
the coit 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 ccnd1tions of the works contracts undertaken
by the two assc~see fitms, wh'ch as stated earlier, are common.
1 he
assessee firms in both the cases are M.E.S. Works Contractors tendering and obtaining from the l'l'l.E.S.
Department what are known
as "Lump sum contracts" wl1ich arc governed by the General Conditions of contracts I.A.F.\V.
'.!249 (1963 print).
In addition
to
the general condition~. the pnrti•:ular work undertaken by the contractor
is also governed by special terms crntained in the Acce_ptance of Tender, and the specificalioLs and Schc<luks annexed thereto.
Jn ''Lump
(1) (1966) 60 I.T.R. 239.
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SUPREME COURT REPORTS
[1979] 2 s.c.R.
Sum Contracts" cf 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 ~he contractor
solely for being used, fixed or in~orporated in the works together with
the fixed rates at which the snmc 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 Paragrap;1s of General Conditions Nos. 10 and 33 :
and (2) the final financial hability oi the Government is fixed on completion of the contract on the basi; of the actual measurements and on
the basis of the rates which ar~ 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 measurement$.
final bills are prepared as per the .M.E.S.
Schedule and payments are
made after making adjmtments for the advances already made.
With
D
regard to stores/material Conditions Nos. 10 and 33 of the General
Conditions are material.
Cond:l!on No. 10 so far as is material runs.
thus :
"Condition 10-Stores and MmerialsThe Contractor shall, r.t his own expense, supply all stores
E
and materials required for the Contract, other than those listed in Schedule 'B' which me to be provided by the Government at the rates detailed therein.
F
G
II
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 covo! as required, assembling and
jointing the several parts together as necessary and incorporating and fixing these · s'.rres and materials in the Works, including all preparatory work of whatever description as may
.
,
k,
' I .. 1
.-.,.
~
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·-
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T
f
BRIJ BHUSHAN v. c. I. T. (Tulzapurkar, l.)
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 sc far as is material runs thus
"Co11ditio11 33~tores and Materials on siteStores and materials required for the Works are to
be
deposited by the Contractor only irt places to be indicated by
the Engineer-in-Charge.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...
All stores and materials brought to tbe site shall become
and remain the property of Government and shall uot be
removed off the site without tbe 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 tbe Contractor. All Government
stores and materials l>SW'd tc the Contractor for incorporation
or fixing in the Works and which, making due allowance for
reasonable wear and tear a11d/01 waste, have not on completion of the Works been so incor11orated 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 m~terials were originally issued
to him but due consideration shall be given to and allowance
claimed by Government in respect of any 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 I'\·r1>rtment at fixed rates for being used in the
works to be undertaken by him for which he has not to pay from his
poc.ket and it is on that footing tbat 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 incorporat3-817 SCI/78
A
B
c
fJ
E
F
G
B
A
B
c
D
E
F
G
ll
26
SUPREME COURT REPORTS
[1979] 2 S.C.R.
ed by the contractor in the works undertaken by him and t]1e sin plus,
if any, that would remain ofter the comp!ction of the wurk is to be
returned to the Department;
thirdly, since for accounting purposes
the initial supply is debited to the contractor at the specified lhed tates,
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 into 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 Ikpartment
and the contractor has m~rely 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
such supply of stores/materials is made there is not even a theorotical
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 Ikpartment by using, fixing or
incorporating the same in the works, as in the case of materials other
than specified iti Schedule 'B' some profit element would be embedded
in the turnover represented by the cost of such material bu~ when
stores/material is supplied by the Government Department at fiXed
rates for being used, fixed or i.-1corporated 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
determin~d by considering several items that go to form such value
of the contract bnt 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 stores/material so su;iplied.
Therefore, since no element of profit was involvod 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 incorpora~~d in
the works undertaken by them.
••
,.
..
'
).
•
f
llRIJ BHUSHAN v. c. !. T. (Tulzapurkar, J.)
27
Having· regard to our aforesaid conclusion the view tahln 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. G11ruswami Gounder's case), Gujarat Higb 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 stt 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.
B