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Cases Referred Nos. 52 of 1962 and 35 of 1966, decided on 21st December 1966.
Contract work‑Completion of work in 2 years and 8 months‑Accounts closed only at the expiry of 2 years and 8 months‑Option of assessee under S. 2(11)(i)(a) as to "previous year" whether, available‑Indian Income‑tax Act, 1922, S. 2 (I1)(i)(a).
The assessee, a contractor, started a contract on 1st January 1957, and completed it on 30th August 1959. Accounts maintain ed for this business were not closed every year but cilly when the contract was completed, that is, nearly after a period of 2 years and 8 months from the date on which the business was started.
He had other sources of income, for which the accounting year was the year ending on 30th September. This accounting year was adopted as the previous year by the assessee and approved by the Income‑tax Officer in respect of contract business also for the first assessment year 1958‑59. For the next assessment year 1959‑60, the next Income‑tax 'Officer relying on section 2(11)(i) took the previous year as the year ending on 31st March, and apportioned the profits between the two assessment years 1958‑59 and 1959‑60. Further, in computing the profits, the Income‑tax Officer made an estimate on the entire value of the contract including the cost of materials supplied by the Government. The assessee contended: (i) that the Income‑tax Officer was wrong in changing the previous year, and also (ii) that the estimate of profits on a percentage basis ought to have been computed on the net value of the contract excluding cost of materials and not on the gross value. On a reference:
Held, (i) that the previous Income‑tax Officer erred in adopting as the previous year the year ending on 30th September, since the option given to the assessee under section 2(11)(i)(a) of the Income‑tax Act to adopt any period (other than the period ending on 31st March) as previous year is available only if the assessee had made up his accounts at the close of such period. Since the assessee had not made up his accounts relating to the contract business for over a period of 2 years and 8 months the succeeding Income‑tax Officer was justified in adopting the year ending 31st March as the previous year under the provisions of section 2(11)(i)(a).
[The second question whether the department was right in estimating the profits on gross value of the contract including the cost of materials supplied by Government, was left open by the Court, as it was not raised at the earlier stages. However, it was observed that the basis adopted by the Income‑tax Officer was right on the facts of this case.]
K. Ramchandra Rao and A. Vengatrama Reddi for the Assessee.
C. Kondaiah for the Commissioner.
‑These two references arise from the same transactions entered into by the assessee, namely, renovation and repairs to what is known as "Rashtrapathi Nilayam" at Bolarum, and the period of assessment is in respect of the "previous year" 1959‑60. Two questions are before us, the one referred by the Tribunal under section 66(t) of the Income‑tax Act, 1922, viz.
"Whether, on the facts and in the circumstances of the case, the 'previous year' for the assessment year 1959.60 in respect of the contract business was correctly taken as the year ending on the 31st day of March 1959 "
and the second question referred by the Tribunal as required by us, under section 66(2) in R. C. No. 36 of 1966, namely:
"Whether on the facts and in the circumstances of the case estimation of profit on the gross amount instead of estimating, on the' net amount received by the assessee after deduction of costs of material supplied by the Government is justified in law."
The assessee is an individual contractor and has several sources of income, such as interest on securities, income from house property and income from business. In the previous year, relating to the assessment year 1959‑60, he had undertaken to complete the building contract work. In fact, this building contract was undertaken by him even earlier to the previous year. But the question that has been referred is only confined .to the previous year relating to the assessment year 1959‑60. It is, however, stated in the statement of the case that the contract actually started on 1st January 1957, and was completed on 30th August 1959. Accounts maintained for this business were, however, closed only once, i.e. when the contracts were completed; so much so, the profit from the contracts was ascertained for the entire period from 1st January 1957, to 30th August 1959, when the accounts were so closed and not periodically with reference to any previous year. For the assessment year 1st January 1957, to 30th August 1959, the Income‑tax Officer bad adopted the previous year as the year ending with 30th September, because the assessee was maintaining accounts from October to September in respect of his other businesses, such as film exhibition business, medical stores, etc., and this was also the accounting period which he preferred for the earlier assessment year in respect of the contract business. But when it came to 1959‑60, it was found by the next Income‑tax Officer that the assessee could not so adopt and therefore, he apportioned the entire profits as between the two assessment years 1958‑59, and 1959‑60 for which the previous years are 1957‑58 and 1958‑59 in the proportion of 3: 1. The basis for doing so as appears from the Income‑tax Officer's report is the receipts in each of the above assessment years, which according to him justify the fixing of that proportion.
Mr. Ramchandra Rao contends that once a year of assess ment has been adopted by the Income‑tax Officer, he cannot give a go‑by to that period and adopt another. As a proposition of law it is unexceptionable. But in this case the adoption by the Income‑tax Officer of the previous year, October to September, for the assessment year 1958‑59, was wrongly adopted, because it does not satisfy the requirements of section 2(11)(i)(a) of the Income‑tax Act. It is only in cases where the assessee could adopt a different period to the financial year, 1st April to 31st March, that any other period could be adopted, which would invariably mean a period of twelve months. This is also subject to the requirement of the section. Section 2(11(i)(a) is as follows:
"2. (11) 'previous year' means‑
(i) in respect of any separate source of income, profits and gains‑
(a) the twelve months ending on the 31st day of March next preceding the year for which the assessment is to be made, or,
if the accounts of the assessee have been made up to a date within the said twelve months in respect of a year ending on any date other than the said 31st day of March, then, at the option of the assessee, the year ending on the date to which his accounts have been so made up."
The crucial point to note about this section is the making up of accounts. "Previous year" ordinarily means a period from 1st April to 31st March. But if the assessee wants to adopt any other period, then his accounts must be made up for that period. If, however, those accounts are not made up for that period, he cannot ask for that period. In this case, admittedly the accounts had not been made up for over a period of 2 years and 8 months, so that the assessee could not adopt any other period than 1st April to 31st March. In these circumstances, the adoption by the Income‑tax Officer of the accounting, period from October to September for year of assessment 1958‑59, cannot be conclusive, nor can the next Income‑tax Officer be barred from adopting the correct accounting period in terms of sec tion 2(11)(i)(a).
The next question that has been urged before us is that the apportionment ought to have been made over a period of 4 years instead of 2 years, because the receipts were spread over those 4 years. We would have considered this question but for the fact that it was not urged at any stage of the assessment proceedings, nor is it the subject‑matter of the assessment. Nor for the same reason can we assist the assessee in respect of his further argument that the whole of the amount was not received in those two assessment years and, therefore, the proportion of the 3/4ths and 1/4ths was not a correct proportion to be adopted as a basis for assessment of the tax. In this view, our answer to the first question is in the affirmative and in favour of the department.
In respect of the second question also, the answer must be in favour of the department, inasmuch as the contentions now urged have not been raised before the Tribunal nor has the assessee adduced any evidence in respect of this contention, nor does the statement of case refer to this contention. We cannot, therefore, go into that question. The contention of Mr. Ramachandra Rao is that the contract which the assessee has entered into with the Central Government was only to build and repair "Rashtrapathi Nilayam" and that the value of the contract does not include the materials which the Government supplied. Notwithstanding this, he says the cost of the materials supplied was also included for the purposes of ascertaining the net profits on percentage basis. We do not know whether the contract was for the whole of the work including the materials and the Government gave a rebate of the cost of materials. There is, however, an indication in the finding of the Appellate Assistant Commissioner that the latter is the case. In the statement of the case, the following observations of the Appellate Assistant Commissioner were extracted, which we may also usefully give below:
"The contention that profit rate should be adopted only in respect of the net receipts cannot be, accepted because admittedly the appellant had received the gross amount and had to furnish the materials himself. A profit ratio has been adopted. The material supplied by the departmental authorities were of such a nature that they could not be obtained by the appellant in the open market at the rates at which the Government supplied them, even if he could obtain them in the open market. It is not also the case of the appellant that he had enough funds that he could .stock those materials when the prices were low and utilise them when prices where high. The percentage of net profit of 12'5 per cent. adopted by the Income‑tax Officer also is quite reason able. In fact, in respect of the contract relating to Rashtrapathi Nilayam, the Income‑tax Officer himself adopted the net profit at 10 per cent., accepting the appellant's plea that the appellant had been allotted only a part of the work and that more profitable items of the contract were given to other contractors."
This above extract gives an indication that the assessee was to receive the gross amount and had to furnish the materials himself but since the Government furnished the materials, an inference would arise that they must have deducted those amounts from the payments, in which case the basis cannot be challenged.
Our answers to both the questions are, therefore, in the affirmative and in favour of the department, with costs in R. C. No. 52 of 1962. Advocate's fee Rs. 250.
Questions answered in the affirmative.
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