MESSRS MIAN CONTRACTORS, LAHORE VS COMMISSIONER OF INCOME-TAX, ZONE-A, LAHORE
2002 P T D 529
[Lahore High Court]
Before, Naseem Sikandar acid Mansnor Ahmad, JJ
Messrs MIAN CONTRACTORS, LAHORE
versus
COMMISSIONER OF INCOME-TAX, ZONE-A, LAHORE
C.T.R. No.50 of 1992, decided on 22/06/2001.
Income Tax Ordinance (XXXI of 1979)---
----S.136(1) & (2)---Reference to High Court---Question of law-- Amount deducted by the Highway Department out of total contract receipts on account of supply of material to its contractor could not be included in the gross receipts of the contractor/assessee for determining his total income chargeable to tax---Amount being price of supply made by the Department was an expense and could not form part of the gross receipts---Said amount having never reached the hands of the assessee, he had all the justifications to reduce his receipts by that sum.
Re: Commissioner of Income-tax v. J.S. Serwarey (1978) 38 Tax 57 rel.
Latif Ahmad Qureshi for Petitioner.
Muhammad Ilyas Khan for Respondent.
Date of hearing: 22nd May, 2001.
ORDER
NASEEM SIKANDAR, J.---The Lahore Bench of the Income tax Appellate Tribunal, at the instance of the assessee. Messrs Mian Contractors, Lahore has referred following question of law under section 136(1) of the Income Tax Ordinance, 1979 which is said to have arisen out of their order, dated 27-9-1990:---
"Whether on the facts and in the circumstances of the case, when the assessee has declared net receipts following the instructions contained in C.B.R.'s Circular No.1 of 1950, dated 10-11-1950 followed by Circular No.11 of 1961 and after holding that it was not a case of concealment to hold that the re opening of the case was justified and correct?"
2. Earlier before the Tribunal assessee had proposed following three questions under section 136(1) of the Income Tax Ordinance, 1979:---
"(1) Whether on the facts and in the circumstances of the case the Tribunal was right in holding that the income of the assessee chargeable to tax could be determined in a manner violative of the Circular of the C.B.R. for the determination of that income, and whether the sum of Rs.2,75,241 for cost of material was rightly included in the gross receipts of the assessee chargeable to tax?
(2)Whether in the facts and circumstances of the case the I.T.A.T. Tribunal was right in holding that the Tribunal was not obliged to see whether C.B.R.'s instructions which are binding on the I.T.O. as provided in section 8 of the Income Tax Ordinance. 1979, are followed by the I.T.O. or not?
(3)Whether in the facts and circumstances of the case, after holding that C.B.R.'s circular instructions were binding on the I.T.O. the Tribunal was right in justifying the non-following of the instructions by the Income-tax Officer.?"
3. However, since the Tribunal referred only the aforesaid question, the assessee directly approached this Court under section 136(2) of the Ordinance proposing the three questions. It is claimed that the question as framed by the Revenue did not bring out the real controversy.
4. According to the statement of the case, the assessee, an individual engaged in execution of road building contracts returned receipts at Rs.7,98,182: This amount did not include the sum of Rs.2,75,241 which represented payments deducted by the Department for supply of bitumen. Before the Revenue, it was the case of the assessee that bitumen of the said value having been supplied by the contracting agency, the Punjab Highway Department, no profit had accrued to him on it and, therefore, that amount had to be excluded from the total payments made by the Department and evidenced by a payment certificate at Rs.10,73,423. The Assessing Officer, however, did not agree. In his view the total payments evidenced by the said certificate had to be taken as gross receipts for the purpose of subjecting them to a rate irrespective of the fact that the said amount of Rs.2,75,241 had earlier been deducted by the Department on account of supply of bitumen.
5. The learned First Appellate Authority advanced quite novel reasons to reject the appeal. It was held that supply of material by a Department to a contractor relieved him of the hassle to approach the market and to purchase substandard material on high price. Also that the supply of material at site by the Department was otherwise beneficial to a contractor who could complete the project within the stipulated period. For these and other so-called gains, the learned Commissioner (Appeals) refused to allow the plea raised before her. On further appeal, a Division Bench of the Tribunal by referring to their earlier order, statedly recorded on the same subject proceeded to maintain the view adopted by the Assessing Officer as well as the Commissioner of Appeals.
6. After hearing the learned counsel for the parties, we are of the view that only second half of the first question proposed by the assessee in his application under section 136(2) of the Ordinance, arises out of the order of the Tribunal, we proceed to re-frame the question for our consideration and reply:---
Question of law:
"Whether on the facts and in the circumstances of the case the Tribunal was right in holding that a sum of Rs.2,75,241 being cost of material was rightly included in the gross receipts of the assessee chargeable to tax?"
7. Having heard the learned counsel .for the parties, we are absolutely certain in our minds that the approach of the Revenue was not only against the basic principles of accountancy but also those of the Income-tax Law, equity and justice. From whatever angle seen, the inclusion of the value of the material supplied by the Department in total receipts of the assessee appears absolutely illegal and unlawful. The arguments of the assessee that on the aforesaid amount which was deducted by the Department out of total contract receipts, he did not earn any profit and, therefore, the same was not includible in his gross receipts was absolutely correct. Even otherwise, the amount being price of the supply made by the Department was an expense and, therefore, could not form part of the gross receipts. If the Department had not supplied the aforesaid material to the assessee, obviously he would have gone for its purchase from the market and obtained it on payment of its price. The question, thus arises if that had happened could the Assessing Officer take the expense so made as part of the gross receipts. The answer is "No" in capital words. Since the Tribunal decided the issue with reference to another decision we are not in a position to judge the soundness of the reasons assigned by them in that decision.
8. The Gauhati High Court in a case reported as (1978) 38 Tax 57 re: Commissioner of Income-tax v. J. S. Serwarey in an identical situation concluded "that there was no element of profit so far s the value of the materials supplied by the M.E.S. Department to the assessee in performing the construction works were concerned...". Therefore, the Tribunal was found justified in holding that the cost of material supplied by the M.E.S. Department was not liable to be included in the total receipts of the assessee for estimating its net profit. We are in respectable agreement with this view adopted by the learned Division Bench.
9. As far First Appellate Authority is concerned its reasons are absolutely incorrect and have no relevancy whatsoever to the issue. The concept of gross receipts which are to be made subject to a certain pre determined rate of profit cannot include a deduction made by the, payer as price of a supply already made. That amount having never reached the hands of the assessee, he had all the justification in the world to reduce his receipts by that sum.
10. That being so, our answer to the aforesaid question is in the negative.
C.M.A./M.A.K./M-944/L Question answered in negative.