JUDGMENT
1. The Income-tax Appellate Tribunal, Allahabad, has under Section 256(1) of the Income-tax Act, 1961, referred for the opinion of this court the following questions stated to be of law and to arise out of the order dated February 27, 1981, passed in ITA No. 1531(Alld) of 1979 for assessment year 1975-76 :
"1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that there was an element of profit on the value of materials supplied by the Government in the contract work and in that view confirming the estimate of income on the value of materials as determined by the Commissioner of Income-tax (Appeals) ?
2. Whether, on the facts and in the circumstances of the case and on a proper construction of Section 58 of the Income-tax Act, 1961, and Rule 5 of the Income-tax Rules, 1962, the Appellate Tribunal was justified in disallowing 25 per cent. of the depreciation on the car on the ground of the use of the car by the partners and members of their families for their personal work ?"
2. We have heard Sri Rajesh Kumar, learned counsel for the assessee, and Sri Shambu Chopra, learned standing counsel for the Commissioner.
3. As regards question No. 1, the relevant facts are that the assessee is a civil contractor and executed certain works for the Public Works Department which supplied certain building materials to the assessee for use in the execution of the contract. The Assessing Officer did not accept the profit as returned by the assessee from this activity and undertook an independent exercise for determining the profit from the said business by recasting the trading account and the profit and loss account, etc., and computed the net profit at Rs. 77,575. Further, he included in the total income of the assessee a sum of Rs. 17,266 describing the same to be "profit on materials supplied by the Government". This was ten per cent. of Rs. 1,72,660 representing the value of materials supplied by the con-tractee. The assessee challenged the addition which has been reduced to five per cent. by the Commissioner of Income-tax (Appeals) and has been upheld by the Tribunal. The assessee's case was that there was no element of profit in the supply of materials by the contractee or the execution of the works. Reliance was placed on Brij Bhushan Lal Parduman Kumar v. CIT [1978] 115 ITR 524 (SC) in which a similar action by the Revenue was disapproved. The Supreme Court held that there was no element of profit in the turnover represented by the cost of the materials supplied by the Government to the appellant. The income or profits derived by the appellant from such contracts had to be determined on the basis of the value of the contracts represented by the cash payments received by the appellant from the Government exclusive of the cost of the materials received for being used, fixed or incorporated in the works. The Tribunal has said that the facts of that case were different inasmuch as in the case of the present assessee the property in the materials so supplied had vested in the asses-see-contractor. This, in our view, could not change the legal principle. Whether the property in the books remained with the contractee or passed on to the contractor cannot result in any profit to the contractor.
4. What is apparent in the present case is that the Assessing Officer did not accept the profit declared by the assessee from this activity, i.e., executing a contract for the Public Works Department. He, therefore, proceeded to determine the income on his own and as stated above, computed the net profit from this business at Rs. 77,575. This having been done there was no occasion for him to assume additional income from the mere supply of materials by the contractee to the contractor. There is no finding that the materials so supplied were sold for extra consideration and resulted in an additional profit that has not gone into the computation of the income at Rs. 77,575. The cost of the materials whether supplied by the Government or independently procured by the contractor would go to the debit of the trading account and all receipts from the contractee or otherwise by the sale of remaining materials, etc., would go to the credit of the trading account and the difference of the two sides of the trading account would be the profit or the loss of the business. The Assessing Officer did this exercise and determined a profit of Rs. 77,575. The assessment order does not show any justification for adding or treating the aforesaid sum of Rs. 17,266 as item of income. If the cost of the materials supplied by the contractee is less than the market value of those goods which the contractor would otherwise have to procure from the market, the debit of the lesser amount to the trading account would automatically increase the profit or reduce the loss of the contractor and an independent addition was untenable. We have not been able to discern any rationale for holding that there was an income of Rs. 17,266 arising merely from the supply of building materials by the Government. We, therefore, answer question No. 1 in the negative, i.e., in favour of the assessee and against the Revenue.
5. As regards question No. 2 the same proceeds on the assumption that the car was used by the partners and members of their families for their personal work to the extent of 25 per cent. A finding to that effect is a finding of fact and that finding of fact having not been challenged, the answer to this question is self-evident because of the specific provision of Section 38(2) of the Act which is as under :
"(2) Where any building, machinery, plant or furniture is not exclusively used for the purposes of the business or profession the deductions under Sub-clause (ii) of Clause (a) and Clause (c) of Section 30 Clauses (i) and (ii), of Section 31 and Clause (ii) of Sub-section (1) of Section 32 shall be restricted to a fair proportionate part thereof which the Assessing Officer may determine, having regard to the user of such building, machinery, plant or furniture for the purposes of the business or profession."
6. We, therefore, answer the aforesaid question in the affirmative, i.e., in favour of the Commissioner and against the assessee. The parties will bear their own costs.