I am an MES contractor and the department supplies me cement and steel at fixed rates. The Income-tax Officer added the value of that material to my cash receipts before applying a flat rate. Can he?
No. The Supreme Court held that where the department supplies stores and materials to a works contractor at fixed rates solely for being used, fixed or incorporated in the works, and the surplus must be returned, there is not even a theoretical possibility of profit in the turnover those stores represent. So on a best judgment assessment the flat rate is to be applied only to the cash payments received from the department, exclusive of the cost of such stores. The Punjab and Haryana High Court's contrary view in Brij Bhushan Lal v CIT (Delhi) was held erroneous.
Decided by the Supreme Court (Supreme Court of India - V.D. Tulzapurkar and P.N. Bhagwati, JJ (judgment delivered by Tulzapurkar, J)) on 1978-10-06, reported as 1979 AIR 209; 1979 SCR (2) 16; (1979) 3 SCC 14; 115 ITR 524; 1979 SCC (Tax) 197. It bears on section 144, section 145 of the Income Tax Act 1961, in Assessment & Scrutiny matters.
This is the leading authority on what goes into the turnover of a government works contractor whose books are rejected. It overruled (1971) 81 ITR 497 (Punjab and Haryana) and approved the Kerala, Madras, Gujarat and Andhra Pradesh view, settling a conflict that affected the whole class of contractors working for the Government. It also states the discipline of a best judgment assessment in the Supreme Court's own words: an honest and fair estimate, arbitrary to a degree but never capricious, with a reasonable nexus to the available material. The distinction it draws is between materials the contractor buys in the open market and supplies (where a profit element can be embedded) and departmental stores that never leave the Government's ownership.
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Both assessee firms were Military Engineering Services contractors executing lump sum contracts. Under those contracts the department supplied specified stores - cement, coal, steel and the like - at fixed rates set out in Schedule 'B', solely for being used, fixed or incorporated in the works. The stores stayed the property of the Government while in the contractor's custody, and any surplus at completion had to be returned, credit being given at the issue rate subject to wear and tear. The books of both firms were rejected and best judgment assessments were made. In one case the assessee had declared ten per cent of cash payments of Rs 4,44,622; the Income-tax Officer estimated the cost of departmental stores at fifty per cent of the cash payments, added it, and applied ten per cent to the enlarged figure. The Appellate Assistant Commissioner reduced the estimate to twenty-five per cent but upheld the addition in principle. The Tribunal deleted it, following the Kerala High Court in M.P. Alexander. The Punjab and Haryana High Court, on references at the Revenue's instance, restored the departmental view, following its own earlier decision in Brij Bhushan Lal v CIT (Delhi).
The appeals were allowed, the High Court's orders set aside and the Tribunal's orders restored, with costs to the assessees. The Court held that the cost of stores and materials supplied by the MES Department at fixed rates for incorporation in the works could not be added to the cash payments when estimating a contractor's profits. Ordinarily a works contractor's profit is worked out on the value of the contract as a whole and not item by item; but where stores are supplied on these terms the real total value of the contract is the value minus the cost of those stores. Income was therefore to be determined on the cash payments received from the department alone. The Punjab and Haryana decision in Brij Bhushan Lal (1971) 81 ITR 497 was erroneous; the Kerala, Madras, Gujarat and Andhra Pradesh (Full Bench) decisions to the contrary effect were approved.
The Court began with the limits of a best judgment assessment. Following the Privy Council in Laxminarain Badridas and its own decisions in Raghubar Mandal Harihar Mandal and State of Kerala v C. Velukutty, it held the officer must make an honest and fair estimate; guesswork is unavoidable but must not be capricious and must bear a reasonable nexus to the available material. Applied to these facts, the real question became whether the turnover represented by the cost of departmental stores contained any element of profit at all. The Court read General Conditions 10 and 33 of the MES contract. Three things followed. The contractor tenders knowing those stores will come to him free of any payment from his own pocket, so his quoted figure is fixed on that footing. The stores must be incorporated in the works and any surplus returned. The initial supply is debited to him and the return credited at the same rates, so nothing is accounted for against the contract payment in respect of what is actually used. In substance the stores remain the department's property throughout and the contractor merely has custody. On those terms there is not even a theoretical possibility of profit in that turnover. Materials a contractor buys in the market are different: a profit element can be embedded there.
though arbitrariness cannot be avoided in such estimate the same must not be capricious but should have a reasonable nexus to the available material and the circumstances of the case
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Handle my notice → Ask a CA on WhatsAppNo. The Supreme Court held that where the department supplies stores and materials to a works contractor at fixed rates solely for being used, fixed or incorporated in the works, and the surplus must be returned, there is not even a theoretical possibility of profit in the turnover those stores represent. So on a best judgment assessment the flat rate is to be applied only to the cash payments received from the department, exclusive of the cost of such stores. The Punjab and Haryana High Court's contrary view in Brij Bhushan Lal v CIT (Delhi) was held erroneous. This was decided by the Supreme Court (Supreme Court of India - V.D. Tulzapurkar and P.N. Bhagwati, JJ (judgment delivered by Tulzapurkar, J)) and bears on section 144, section 145 of the Income Tax Act 1961. It is reported as 1979 AIR 209; 1979 SCR (2) 16; (1979) 3 SCC 14; 115 ITR 524; 1979 SCC (Tax) 197. This is the leading authority on what goes into the turnover of a government works contractor whose books are rejected. It overruled (1971) 81 ITR 497 (Punjab and Haryana) and approved the Kerala, Madras, Gujarat and Andhra Pradesh view, settling a conflict that affected the whole class of contractors working for the Government. It also states the discipline of a best judgment assessment in the Supreme Court's own words: an honest and fair estimate, arbitrary to a degree but never capricious, with a reasonable nexus to the available material. The distinction it draws is between materials the contractor buys in the open market and supplies (where a profit element can be embedded) and departmental stores that never leave the Government's ownership. If it applies to you, the first step is this: Produce the contract itself - the Schedule 'B' list, the fixed rates and the general conditions on stores - because the whole point turns on those terms, not on how the accounts were kept.
Both assessee firms were Military Engineering Services contractors executing lump sum contracts. Under those contracts the department supplied specified stores - cement, coal, steel and the like - at fixed rates set out in Schedule 'B', solely for being used, fixed or incorporated in the works. The stores stayed the property of the Government while in the contractor's custody, and any surplus at completion had to be returned, credit being given at the issue rate subject to wear and tear. The books of both firms were rejected and best judgment assessments were made. In one case the assessee had declared ten per cent of cash payments of Rs 4,44,622; the Income-tax Officer estimated the cost of departmental stores at fifty per cent of the cash payments, added it, and applied ten per cent to the enlarged figure. The Appellate Assistant Commissioner reduced the estimate to twenty-five per cent but upheld the addition in principle. The Tribunal deleted it, following the Kerala High Court in M.P. Alexander. The Punjab and Haryana High Court, on references at the Revenue's instance, restored the departmental view, following its own earlier decision in Brij Bhushan Lal v CIT (Delhi). The matter was decided on 1978-10-06 by the Supreme Court (Supreme Court of India - V.D. Tulzapurkar and P.N. Bhagwati, JJ (judgment delivered by Tulzapurkar, J)). On those facts the Supreme Court held as follows. The appeals were allowed, the High Court's orders set aside and the Tribunal's orders restored, with costs to the assessees. The Court held that the cost of stores and materials supplied by the MES Department at fixed rates for incorporation in the works could not be added to the cash payments when estimating a contractor's profits. Ordinarily a works contractor's profit is worked out on the value of the contract as a whole and not item by item; but where stores are supplied on these terms the real total value of the contract is the value minus the cost of those stores. Income was therefore to be determined on the cash payments received from the department alone. The Punjab and Haryana decision in Brij Bhushan Lal (1971) 81 ITR 497 was erroneous; the Kerala, Madras, Gujarat and Andhra Pradesh (Full Bench) decisions to the contrary effect were approved.
The Court began with the limits of a best judgment assessment. Following the Privy Council in Laxminarain Badridas and its own decisions in Raghubar Mandal Harihar Mandal and State of Kerala v C. Velukutty, it held the officer must make an honest and fair estimate; guesswork is unavoidable but must not be capricious and must bear a reasonable nexus to the available material. Applied to these facts, the real question became whether the turnover represented by the cost of departmental stores contained any element of profit at all. The Court read General Conditions 10 and 33 of the MES contract. Three things followed. The contractor tenders knowing those stores will come to him free of any payment from his own pocket, so his quoted figure is fixed on that footing. The stores must be incorporated in the works and any surplus returned. The initial supply is debited to him and the return credited at the same rates, so nothing is accounted for against the contract payment in respect of what is actually used. In substance the stores remain the department's property throughout and the contractor merely has custody. On those terms there is not even a theoretical possibility of profit in that turnover. Materials a contractor buys in the market are different: a profit element can be embedded there. In the words reproduced by the source cited on this page: "though arbitrariness cannot be avoided in such estimate the same must not be capricious but should have a reasonable nexus to the available material and the circumstances of the case"
It was decided by the Supreme Court on 1978-10-06 and is reported as 1979 AIR 209; 1979 SCR (2) 16; (1979) 3 SCC 14; 115 ITR 524; 1979 SCC (Tax) 197. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 144, section 145, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The appeals were allowed, the High Court's orders set aside and the Tribunal's orders restored, with costs to the assessees. The Court held that the cost of stores and materials supplied by the MES Department at fixed rates for incorporation in the works could not be added to the cash payments when estimating a contractor's profits. Ordinarily a works contractor's profit is worked out on the value of the contract as a whole and not item by item; but where stores are supplied on these terms the real total value of the contract is the value minus the cost of those stores. Income was therefore to be determined on the cash payments received from the department alone. The Punjab and Haryana decision in Brij Bhushan Lal (1971) 81 ITR 497 was erroneous; the Kerala, Madras, Gujarat and Andhra Pradesh (Full Bench) decisions to the contrary effect were approved. It arises in Assessment & Scrutiny matters, on section 144, section 145 of the Income Tax Act 1961, and was decided by Supreme Court of India - V.D. Tulzapurkar and P.N. Bhagwati, JJ (judgment delivered by Tulzapurkar, J). Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Show that surplus stores go back to the department and are credited at the issue rate, so no sale to the contractor ever took place. Argue for a flat rate on cash receipts alone; do not argue that the flat rate itself is wrong if the books were rightly rejected, argue about what the rate is applied to. Separate materials you bought yourself and incorporated in the works - the judgment accepts that a profit element can sit in those, and they stay in the turnover.
Still good law. The judgment overrules the Punjab and Haryana view and approves four other High Courts; the harvested page records it as referred to in a later Supreme Court decision of 1989. No later decision doubting it was read as part of this exercise. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The judgment nowhere cites section numbers - it speaks of 'best judgment assessment' and rejection of book results without naming sections 144 or 145, and those sections are recorded here from the subject matter, not from the text. The assessment years are 1965-66 and 1966-67, so the 1961 Act applies, but the Court's reasoning on best judgment is drawn from decisions under the 1922 Act and under sales tax statutes. The harvested page carries a reporter's headnote before the judgment; it has been ignored. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeals were allowed, the High Court's orders set aside and the Tribunal's orders restored, with costs to the assessees. The Court held that the cost of stores and materials supplied by the MES Department at fixed rates for incorporation in the works could not be added to the cash payments when estimating a contractor's profits. Ordinarily a works contractor's profit is worked out on the value of the contract as a whole and not item by item; but where stores are supplied on these terms the real total value of the contract is the value minus the cost of those stores. Income was therefore to be determined on the cash payments received from the department alone. The Punjab and Haryana decision in Brij Bhushan Lal (1971) 81 ITR 497 was erroneous; the Kerala, Madras, Gujarat and Andhra Pradesh (Full Bench) decisions to the contrary effect were approved.
TaxSphere, “Brij Bhushan Lal Parduman Kumar v CIT”, https://taxnotice.vittsphere.com/caselaw/case/brij-bhushan-lal-parduman-kumar-v-cit/ (validity last checked 2026-08-29)
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