GIRDHARILAL & CO. VS COMMISSIONER OF INCOME-TAX
1999 P T D 3659
[230 I T R 510]
[Rajasthan High Court (India)]
Before V. K. Singhal and M. A. A. Khan, JJ
GIRDHARILAL & CO.
Versus
COMMISSIONER OF INCOME-TAX
D.B.T. Reference No.33 of 1985, decided on 25/04/1996.
Income-tax---
----Income---Works contract---Computation of income---Cost of material supplied to contractor was deductible from gross amount received---Security deposits deducted from running bills not to be taken into account---Indian Income Tax Act, 1961.
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 where certain stores/materials are 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 the real total value of the entire contract would be the value minus the cost of such stores/materials so supplied.
The assessee received gross payments of Rs.19,74,903 from H out of which Rs.51,OMrelated to the earlier year 1968-69 and Rs.2,15,726 from I for works done for them. The amount of Rs.3,76,950 was adjusted in respect of material and Rs.2,13,177 in respect of security. While making the assessment for the assessment year 1970-71, the Income-tax Officer estimated net profits on the gross receipts of Rs.19,23,903 (Rs.19,74,903- Rs.51,000) from H and of Rs.2,15,726 from I. The contention of the assessee that no profits could be estimated on the receipts of Rs.3,76,950 by way of adjustment of material was 'not accepted by the Income-tax Officer. Similarly, the contention that in respect of the security, amounts of Rs.2,13,177 deducted from the bills should be excluded while estimating the profits, was also rejected by the Income-tax Officer. The Tribunal held that the receipts by way of adjustment of raw materials as well as security deposits were to be included in the gross receipts for the purpose of estimation of profits. On a reference:
Held, (i) that the assessee would be entitled to deduct the cost of material supplied from the gross amount of the contract and the tax liability would be only on the balance payment.
Brij Bhushan Lai Parduman Kumar v. CIT (1978) 115 ITR 524 (SC) fol.
(ii) that it was found that after the work was performed in part or full, the amount of 10 percent was deducted from the running bills. The total amount of security had to be 10 percent of the work done. This amount was for due and satisfactory performance of the contract. The amount which had become due and payable and for which the bill was prepared was the amount, which had been considered as receipt by the assessee. The nature of security deposit was like an amount, which was kept in trust with the corporation on behalf of the assessee and the corporation was bound to refund the said amount on faithful completion of work. The Tribunal was right in holding that in estimating the income of the assessee no allowance need be given for security deposits deducted from the running bills of the assessee.
Brij Bushan Lai v. CIT (1971) 81 ITR 497 (P&H); CIT (Addl.) v. Hemandas Dharajmal (1985) 155 ITR 533 (Raj.); CIT v. K. S. Guruswami Gounder and K. S. Krishnaraju (1973) 92 ITR 90 (Mad.); CIT v. Rameshwardass Narsinghdass & Co. (1985) 155 ITR 270 (Raj.); M. P. Alexander & Co. v. CIT (1973) 92 ITR 92 (Ker.) (Appex) and V. D. Rajarathanam v. CIT (1968) 68 ITR 19 (AP) ref.
S. M. Mehta, Senior Advocate and Mrs. Sonal Mehta for the Assessee
G.S. Bapna for the Commissioner.
JUDGMENT
V. K. SINGHAL, J.----The Income-tax Appellate Tribunal was directed vide order dated April 4, 1979, to refer the following two questions of law arising out of its order dated December 29, 1973
"(1) Whether, on the facts and in the circumstances of the case, the Tribunal has rightly included the value of the material supplied by Hindustan Copper Ltd. and Instrumentation Ltd. to the assessee for calculating gross profit rate ?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that estimating the income of the assessee no allowance need be given for security deposits deducted ' from the running bills of the assessee ?"
The facts of the case are that the assessee received gross payments of Rs.19,74,903 from Hindustan Copper Ltd., Khetri, and Rs. 2,15,726 from Instrumentation Ltd., Kota, for the works done for them. The payments of Rs.19,74,903 were made up as under:
| | | (Rs.) |
| (1) | Net payments received | 14,19,516 |
| (2) | Amount received by way of adjustment against securities to be made | 1,97,490 |
| (3) | Amount received by way of adjustment against cement supplied | 2,12,362 |
| (4) | Amount received by way of adjustment against steel supplied | 1,42,357 |
| (5) | Amount received by way of adjustment against water charges for supply of water | 3,188 |
| | Total | 19,74,903 |
The above amounts of Rs.19,74,903 also included an amount of Rs.51,000 which was paid on June 13, 1968, .i.e., in the accounting period relevant to the assessment year 1968-69. The Income-tax Officer, therefore, excluded this amount of Rs.51,000 from the gross receipts and the taxable receipts for the assessment year 1970-71 under appeal were taken by him at Rs.19,23,903, so far as receipts from Hindustan Copper Ltd., Khetri, are concerned.
The details of receipts of Rs.2,15,726 from Instrumentation Ltd., Kota are as under:
| | | (Rs) |
| (1) | Net payments received | 1,73,714 |
| (2) | Amount received by way of adjustment against security deposit to be made | 15,687 |
| (3) | Amount received by way of adjustment of rebate | 833 |
| (4) | Amount received by way of adjustment against cement supplied | 19,998 |
| (5) | Amount received by way of adjustment against water charges | 3,237 |
| (6) | Amount received by way of adjustment against steel supplied | 2,235 |
| (7) | Amount received by way of adjustment against miscellaneous items | 22 |
| | Total | 2,15,726 |
The amount of Rs.3,76,950 was adjusted in respect of material and Rs.2,13,177 in respect of security' While making the assessment, the Income-tax Officer estimated net profits on the gross receipts of Rs.19,23,903 from Hindustan Copper Ltd., Khetri and of Rs.2,15,726 from Instrumentation Ltd., Kota. The contention of the assessee that no profits could be estimated on the receipts of Rs.3,76.950 by way of adjustment of material was not accepted by the Income-tax Officer. Similarly, in respect of the security amounts of Rs.2,13,177 deducted from the bills (the contention that they) should be excluded while estimating the profits, was also rejected by the Income-tax Officer.
The appeal before the Appellate Assistant Commissioner was allowed and the adjustment of Rs.2,13,177, was held not includible in the receipts for the purpose of charging profits. It was also found that the assessee had received an amount of Rs.27,245 by way of refund of security deducted in earlier years which were not subjected to tax for those years. An amount of Rs.27,245 was adjusted against the security receipts by way of adjustment during the year at Rs.2,13,177 and the balance amount of Rs.1,85,932 was ordered to be excluded from the total receipts for the purpose of estimation of profits.
In appeal before the Income-tax Appellate Tribunal the assessee was aggrieved against the order of the Appellate Assistant Commissioner sustaining the inclusion of receipts aggregating to Rs.3,76,950 and the Revenue was aggrieved against the reduction of the security amount of Rs.1,85.932. The Tribunal observed that the receipts by way of adjustment of raw material as well as security deposits were to be included in the gross receipts for the purpose of estimation of profits. The decisions in the cases of M. P. Alexander and Co. v. CIT (1973) 92 ITR 92, (Ker) (Appex) CIT v. K. S. Guruswami Gounder and K. S. Krishnaraju (1973) 92 ITR 90 (Mad), Brij Bushan Lai v. CIT (1971) 81 ITR 497 (P & H), and V. D. Rajarathanam v. CIT (1968) 68 ITR 19 (AP), were taken into consideration and it was found that the responsibility of supplying the material was on the contractor. They could purchase it from the market as well as from the Department at controlled prices. Sine the purchase from the Department involve many advantages, the amount, which has been deducted by the Department concerned from its bills could not be reduced. It was also observed that it was not shown while formulating their rates at the time of submission of tender, the assessee was influenced by any undertaking given by the corporation. The schedule of issue of material to the contractor makes it very clear that the corporation had agreed to supply cement and steel only in case they were available and for that purpose indent of 7 days was to be submitted in advance. If the cement and M. S. bars were not available in the central stores of the corporation, the corporation could have expressed its inability to supply the same and in that eventuality it was incumbent on the contractor to make its own arrangement. Since no funds were blocked and the assessee was relieved of the botheration of purchasing it in the market and transporting it to the work site it was considered that the tax is to be charged on the gross amount without deducting the adjustment made.
The arguments of learned counsel for the parties have been heard. The decision in the case of Brij Bushan Lai (1971) 81 ITR 497 (P & H), was overruled by the apex Court in the case of Brij Bhushan Lai Parduman Kumar v. CIT (1978) 115 ITR 524, wherein it was observed that in supply of stores/materials by the Department there is not a theoretical 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 those specified in Schedule "B", some profit element would be embedded in the turnover represented by the cost of such material, but when stores/materials are supplied by the Government department at fixed rates for being used, fixed or incorporated in the work on terms indicated, there would be no element of profit involved in the turnover represented by the cost of such material. It was also observed that 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 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, the real total value of the entire contract would be the value minus the cost of such stores/material so supplied. The above judgment was followed by this Court in the cases of CIT v. Rameshwardass Narsinghdass and Co. (1985)) 155 ITR 270 and Addl. CIT v. Hemandas Dharajmal (1985) 155 ITR 533. The Tribunal after taking into consideration the various clauses of the contract found that the case of the assessee in having similar facts as were in the case of Brij Bhusan Lal v. CIT (1971) 81 ITR 497, decided by the Punjab High Court. Since, the said decision has already been overruled, the natural corollary would be that the assessee would be entitled for deducting the cost of material supplied from the gross amount of the contract and the tax liability would be only on the balance payment.
The second question relates with regard to liability of tax on security deducted while making the payment and contract executed by the assessee. The learned appellate Assistant Commissioner was of the view that since the amount has not been received and the assessee was having the mercantile system, but was following the cash system with regard to security, therefore, the amount of security could be traced only when the amount is received. It was found that the total amount of security is to be restricted to 10 percent of the value of total work and security was for due and faithful and efficient performance of the contract by contractors keeping in view the time schedule for completion of the work. The said security could be applied towards any sum due or payable by the contractor which has not been disbursed and has been retained with the corporation towards meeting wholly or in part any expenditure, damages or losses to which the corporation may be put as a result of any act of omission or commission, negligence or default on the part of the contractor in relation to the contract and/or for defending or settling claims with respect to sums owing by the contractor to other parties as a result of the contract. It was also contemplated that the contractor shall promptly deposit with the corporation such amount as is necessary to restore the security deposit to the full amount and the amount of security deposit was to become due for repayment to the contractor after deduction of such sums as are due to the corporation and such further sums as the corporation is or may be authorised or required to reserve or retain under the terms of contract or otherwise after the expiration of six calendar months reckoned from the date on which the entire work executed in strict conformity with the specification shall have been completed and handed Aver by the contractor to the corporation and accepted by the latter provided that as at the expiration of the said period of 6 months, the contractor shall have remedied all such defects and paid all such damages as he may have been asked by the corporation or pay in terms of the provisions of the contract.
An argument was raised before the Tribunal that the security, deposit is in the nature of earnest money and that the assessee has followed no system of accountancy. The Tribunal after taking into consideration the terms of contract and the arguments of learned counsel for the parties came to the conclusion that in the present matter the assessee has not followed any system of accounting and even has not shown the opening and closing stock or work-in- progress the expenses are not fully vouched. It was found that the assessment was framed by invoking the provisions of section 145(2) as no proper books of account were maintained and the profits were estimated in the manner indicated in section 144. For the deduction of the security deposit, it was observed that it formed part of the gross receipt because same are appropriated towards the security deposits. The security deposit was required to be deducted at 10 percent from the running bill and was a matter of convenience of depositing. If the amount was deposited independent of deduction by the assessee he would not have any right to claim the benefit in respect of such amount of security deposit. The bill amount gets transformed into security deposit, by the process of deduction. It was considered that the assessee has received the entire amount of the bill and deductions therefrom are only appropriations of the bill amount. The security deposits are payable after six months of the expiry of contract and the corporation has the absolute right to adjust the said security deposit against its claim on the contractor. As and when such adjustment is made an independent trading loss would arise to the contractor which may give rise to the liability and one of the modes of satisfying this liability is adjustment out of the security deposit.
We have considered the matter. The nature of the security deposit has to .be seen on the basis of contract entered into. It is after the work is performed in part or full, that the amount of 10 percent is deducted from the running bills. The total amount of security has to be 10 per cent of the work done. This amount is for due and satisfactory performance of the contract. The amount which has income due and payable and for which the bill is prepared is the amount, which has been considered as receipt by the assessee. The nature of the security deposit is like an amount, which is kept in trust with the corporation on behalf of the assessee and the corporation is bound to refund the said amount on faithful completion of work. Even in some defect is found the assessee may rectify the same or may prefer to pay cite damages or costs thereof. That eventuality comes at a later stage and till then the amount of security deposit remains in trust with the corporation on behalf of the assessee. If it is not appropriated towards any liability it is refunded. At the time when the amount is refunded it is not the income but return of the amount which was lying with the corporation and the corporation acted as a trustee. The finding which was recorded by the Appellate Assistant Commissioner was not found correct on the facts as the assessee was riot maintaining any books of account and the provisions of subsection (2) of section 145, were applied while framing the assessment and, therefore, to say that the cash system was followed in respect of receipt of security deposit was not in accordance with law. The deduction of security deposit is appropriation in accordance with the contract entered into. To illustrate it further, suppose the assessee has to snake the payment of Rs.7ne lakh to the corporation, of other dues and after the work is executed, bills are prepared, the said amount which was due and payable by the corporation is deducted from the bill, can in such situation it be said that the amount of Rs one lakh has not been received and, therefore, would riot be a receipt of the assessee. In our opinion, the total amount for which the bills were prepared is the receipt and deduction therefrom. On security deposit is only appropriation of the amount to the extent to which the assessee could have otherwise been paid and, therefore, the assessee was not justified in reducing the amount of security deposit from the corporation receipt to arrive at its true income. In view of the position of law, we are of the opinion that the Tribunal was not right in including the value of the material supplied by Hindustan Copper Ltd. and Instrumentation Ltd., to the assessee for calculating the grass profit rate. Question No. 1 is answered in favour of the assessee and against the Revenue.
So far as the question No.2 is concerned, the Tribunal was right in holding that in estimating the income of the assessee no allowance need be given for security deposit deducted from the running bills of the assessee. According question No.2 is answered in favour of the Revenue and against the assessee: No order as to costs.
M. B.A./3157/FCOrder according