1993 (3) TMI 143 - AT - Income Tax

Issues Involved:
1. Rejection of books of account under Section 145(2).
2. Application of net profit rate at 10% on total contract receipts.
3. Denial of depreciation on machinery used for contract works.
4. Excessiveness of the net profit rate applied.
5. Charging of interest under Sections 217 and 139(8).

Issue-wise Detailed Analysis:

1. Rejection of Books of Account under Section 145(2):
The appellant-assessee, a private limited company, challenged the rejection of its books of account by the Income Tax Officer (ITO) under Section 145(2). The ITO found discrepancies in the purchase vouchers and payments, which were made on the basis of internal pay slips without proper verification. The work in progress was also valued on an estimated basis without supporting documentation. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the ITO's decision, and the Tribunal found no merit in the appellant's ground, confirming the rejection of the books of account.

2. Application of Net Profit Rate at 10% on Total Contract Receipts:
The ITO applied a net profit rate of 10% on the total contract receipts after rejecting the books of account. The CIT(A) confirmed this application, relying on precedents such as Saraya Engg. Works v. CIT and an earlier Tribunal decision. The appellant contended that the net profit rate should not cover depreciation, but the CIT(A) held that the net profit rate included all expenses and allowances, including depreciation. The Tribunal agreed with the CIT(A), finding the application of the 10% net profit rate justified.

3. Denial of Depreciation on Machinery Used for Contract Works:
The appellant argued that depreciation on machinery should be allowed separately from the net profit rate. The CIT(A) and the ITO did not allow separate depreciation, stating that the net profit rate covered all expenses. The Tribunal initially upheld this view, but the Accountant Member dissented, emphasizing the importance of following the Central Board of Direct Taxes (CBDT) circular, which mandates separate allowance of depreciation even when net profit is estimated. The Third Member agreed with the Accountant Member, highlighting that the ITO's failure to mention depreciation in the assessment order was a significant oversight, and depreciation should be allowed separately.

4. Excessiveness of the Net Profit Rate Applied:
The appellant claimed that the 10% net profit rate was excessive and unjustified. The Tribunal found no specific grounds to interfere with the applied rate, considering it neither excessive nor unjustified. The Third Member noted that if depreciation was considered, the effective net profit rate would be unreasonably high at 16.5%, supporting the need for separate depreciation allowance to arrive at a reasonable profit rate.

5. Charging of Interest under Sections 217 and 139(8):
The appellant sought consequential relief from interest charged under Sections 217 and 139(8). The CIT(A) observed that such relief would depend on the outcome of other grounds of appeal. The Tribunal, adopting the CIT(A)'s reasoning, rejected this ground, as no relief was granted on other grounds.

Separate Judgments Delivered:
The Tribunal's decision included a dissenting opinion by the Accountant Member, who argued for the separate allowance of depreciation based on the CBDT circular and relevant case law. The Third Member, agreeing with the Accountant Member, directed that depreciation be allowed as a deduction from the net profit computed, leading to a majority decision in favor of the appellant on this specific issue.

Conclusion:
The Tribunal, by majority decision, allowed the appeal in part, directing the allowance of depreciation separately from the net profit rate, while upholding the rejection of books of account, the application of the 10% net profit rate, and the charging of interest under Sections 217 and 139(8). The appeal was dismissed on other grounds.

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