Tirath Ram Ahuja (P.) Ltd. v. Commissioner Of Income-Tax, Delhi.

T.V.R Tatachari, C.J:— This is an application by the assessee, M/s. Tirath Ram Ahuja (Pvt.) Ltd., under section 256(2) of the Income-tax Act, 1961, praying that the Income-tax Appellate Tribunal, Delhi Bench, may be directed to state the case and refer to this High Court the following questions:

“1. On the facts and circumstances of the case, was the sum of Rs. 11,11,100 received by the assessee in the nature of revenue income?

2. If the answer to the above is against the assessee, was the Tribunal justified in holding that neither profit nor loss of the work was to be taken into account in the assessment of income?”

2. The assessee is a private limited company, and it carries on the business of engineers and contractors. It entered into a contract with the Government of Jammu & Kashmir on September 7, 1964, for the construction of a bridge across a river for an amount of Rs. 33,50,300 as per terms and conditions set out in a letter given by the Chief Engineer, dated June 8, 1964. The contract was to be completed in a period of eighteen months from the date of the placing of the order. As it was rainy season at the time the contract was entered into, much work could not be done in that season. After the rainy reason was over, the assessee started the work in December, 1964, and the same went on till August, 1965, when war broke out between Pakistan and India and the former completely occupied the area of the site of construction. The staff, labour and other personnel of the assessee-company, therefore, evacuated, machinery and materials were pulled out whenever possible and the work was abandoned.

3. Subsequently, on April 19, 1968, the assessee entered into a supplemental agreement with the Government of Jammu and Kashmir, and the work was restarted. During the period of work in the financial year 1964-65, the assessee incurred an expenditure of Rs. 2,33,320 in addition to the expenditure of Rs. 84,829 on over-heads, in all a sum of Rs. 3,18,149. This amount was carried forward to the next year, i.e, financial year 1965-66 (assessment year 1966-67). Further work was done in the latter year upto August, 1965, and the total value of the work done came to Rs. 12,62,941. As already stated, the work had to be abandoned in August, 1965. The value of the machinery that could not be salvaged in the process of evacuation was put by the assessee at Rs. 80,180. Thus, the total expenditure incurred by the assessee up to the date of the abandonment of the work in August, 1965, came to Rs. 13,43,121. As against the said amount, the assessee-company received from the Government a sum of Rs. 11,11,100 by way of advances as well as a sum of Rs. 5,39,200 as secured advance against materials stocked at the site of the work. We are not concerned with the receipt of Rs. 5,39,200 in the present reference.

4. In the assessment proceedings for the financial year 1965-66 (assessment year 1966-67), the assessee claimed the entire expenditure of Rs. 13,43,121 to be a business loss, and the receipt of Rs. 11,11,100 to be repayable advances and not income. The Income-tax Officer held that the sum of Rs. 11,11,100 was the income of the assessee, and that the total expenditure was Rs. 9,45,024 after making certain deductions, and that the difference of Rs. 1,66,076 was profit of the assessee in respect of the contract in the relevant assessment year. Thus, in the place of a business loss of Rs. 13,43,121 claimed by the assessee, the Income-tax Officer determined the income at Rs. 1,66,076. Against the said assessment order, the assessee preferred an appeal to the Appellate Assistant Commissioner who held that the total receipts should have been taken as Rs. 16,30,300, i.e, Rs. 11,11,100 plus Rs. 5,19,200 and the total expenditure should have been taken as Rs. 13,43,224 and that there was thus a profit of Rs. 2,87,076. Permitting some further deductions, with which we are not concerned, the Appellate Assistant Commissioner enhanced the income determined by the Income-tax Officer by Rs. 42,000. As regards the sum of Rs. 11,11,100 the Appellate Assistant Commissioner agreed with the view taken by the Income-tax Officer that it was in the nature of income and not in the nature of repayable advances as claimed by the assessee.

5. The assessee then preferred an appeal, I.T.A No. 366 of 1972-73, to the Income-tax Appellate Tribunal, Delhi Bench B, which agreed with the view taken by the Income-tax Officer regarding the sum of Rs. 11,11,100 as being the income of the assessee and not repayable advances. As regards the sum of Rs. 5,19,200 the Tribunal took the view that the said amount should be excluded from consideration for the purpose of the assessment. Thus, the Tribunal held that as against a total expenditure of Rs. 13,43,224 the receipts were only Rs. 11,11,100 and there would, therefore, be a loss of Rs. 2,31,124. The Tribunal, however, held as under:

“But a question may arise here whether it was in fact the loss and whether the assessee is entitled to carry forward this loss or set it off against the income from other contracts. That it was a loss incurred in the peculiar circumstances in which the assessee is placed, namely, uncertainty of expenditure or loss caused by the enemy action and the uncertainty of the value of the materials to be recovered could not be gainsaid. It is understandable that the assessee-company was not in a position as at the end of the accounting year to arrive at the work-in-progress so as to arrive at the profit or loss reatable to the receipts of Rs. 11,11,100. At the same time it is also not possible to say that the assessee incurred a loss of Rs. 2,31,124 on receipts of Rs. 11,11,100 or it made a profit of Rs. 2,88,076 as computed by the Appellate Assistant Commissioner. Having regard to the peculiar circumstances of the case it would be fair and reasonable to take neither profit nor loss in this contract for this year. This would mean that the addition of Rs. 2,31,124 proposed by the Appellate Assistant Commissioner is deleted.”

6. The assessee thereupon filed an application, R.A No. 205 (DEL) of 1973-74, under section 256(1) seeking reference of the following two questions said to arise out of the order of the Appellate Tribunal:

“1. On the facts and circumstances of the case, was the sum of Rs. 11,11,100 received by the assessee in the nature of revenue income?

2. If the answer to the above is against the assessee, was the Tribunal justified in holding that neither profit nor loss of the work was to be taken into account in the assessment of income?”

7. By its order dated November 14, 1973, the Tribunal held that the conclusions reached by it in its impugned order were purely findings of fact and did not involve consideration or interpretation of any legal proposition. As regards the first question, the Tribunal pointed out that it is well settled that receipts of the nature of the sum of Rs. 11,11,100 are taxable receipts and in the case of contracts, in order to ascertain the income, one need not wait till the contract is completed and it is open to the revenue to estimate the profit on the basis of the receipts in each year of construction although the contract is not complete. As regards the second question, the Tribunal pointed out that the question as to whether any profit or loss has to be taken into account on the basis of facts was a pure finding of fact based on the appraisal of the evidence placed before the Tribunal and could in no circumstance give rise to a question of law, and that it was not the suggestion on behalf of the assessee-company that there was no evidence before the Tribunal to justify its conclusion. In that view, the Tribunal declined to refer the questions mentioned in the application, and dismissed the application.

8. The assessee has, therefore, filed the present petition, I.T.C No. 25 of 1974, under section 256(2) of the Income-tax Act, 1961, praying that the Income-tax Appellate Tribunal may be directed to refer to this court the two questions which have already been set out by us in the beginning of this judgment.

9. So far as the first question is concerned, it is a judicially recognised proposition that in the case of contracts, in order to ascertain the income, one need not wait till the contract is completed, and that it is open to the revenue to estimate the profit on the basis of the receipts in each year of construction, although the contract is not complete. In Sukhdeodas Jalan v. Commissioner of Income-tax [1954] 26 ITR 617 Pat., a military contract extended beyond the accounting period and the accounts were closed only after the completion of the contract. The question arose for determination whether the profits should be assessed only after the completion of the contract or whether the profits accruing during the accounting period could be assessed. A Division Bench of the High Court of Patna, Ramaswami and Ahmed JJ., observed at page 627 that it is fallacious to argue that merely because the military contract was completed after the accounting period, no profits arose or accrued to the assessee in the accounting year, and that in the case of an incomplete contract there is a well-established method of calculating profits accruing in the accounting year which has been pointed out at page 971 of Batliboi's Advance Accounting. Thus, even if the first question can be said to involve a point of law arising out of the order of the Appellate Tribunal, it is a settled proposition which cannot be disputed. In fact, the learned counsel could not cite any authority to the contrary. Consequently, no purpose would be served by directing the Appellate Tribunal to refer the question for the opinion of this court.

10. As regards the second question, it is obvious that the Appellate Tribunal, on the facts and circumstances of the case, drew an inference of fact that the assessee-company was not in a position as at the end of the accounting year to arrive at the work-in-progess so as to arrive at the profit or loss relatable to the receipts amounting to Rs. 11,11,100, that at the same time, it was also not possible to say that the assessee incurred a loss of Rs. 2,31,124 on receipts of Rs. 11,11,100 or it made a profit of Rs. 2,88,076 as computed by the Appellate Assistant Commissioner, and that having regard to the peculiar circumstances of the case it would be fair and reasonable to take neither profit nor loss in the contract for the accounting year in question. It is thus only an inference of fact from basic or primary facts and circumstances in the case and does not involve any point of law. As observed by the Appellate Tribunal, it was not the suggestion on behalf of the assessee-company that there was no evidence before the Tribunal to justify its conclusion.

11. For the foregoing reasons, we hold that the Appellate Tribunal was justified in declining to make a reference to this court under section 256(1) and we also decline to require the Appellate Tribunal under section 256(2) to state the case and refer any of the two questions to this court. I.T.C No. 25 of 1974 is dismissed, but in the circumstances without costs.