TMI Blog1999 (9) TMI 26X X X X Extracts X X X X X X X X Extracts X X X X ..... aim of the assessee for interest on capital contribution by the partners and salary to the working partners is covered by the said provisions ? (ii) Whether, in the facts and circumstances of the case, the Income-tax Appellate Tribunal was justified in allowing the claim of depreciation, interest and salary to the partners, etc., despite the income being determined by applying net profit rate after rejecting the books of account despite that when the income is determined by applying net profit rate, all the deductions allowable are treated to be allowed ?" In order to better appreciate the controversy, the facts of one of the reference applications, i.e., D. B. Income-tax Reference Application No. 12 of 1998 CIT v. Jain Construction Co.) are stated in brief. The assessee, a registered partnership firm, filed its return for the assessment year 1993-94 in respect of the accounting period of 1992-93 declaring an income of Rs. 17,980. On account of certain discrepancies noticed in the books of account, the assessing authority, viz., the Income-tax Officer, Barmer, invoking the provisions of section 145 of the Act of 1961, applied a net profit rate of 12.5 per cent. on receipts of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee filed an appeal before the Income-tax Appellate Tribunal, Jaipur Bench. The Tribunal, persuaded by the circular of the Central Board of Revenue, held that the depreciation should be worked out separately with reference to the claim of the assessee for salary and interest payable to the partners. Keeping in view, the amended provisions of section 40(b) of the Act of 1961, the Tribunal examined the partnership deed and found that the claim of the assessee for interest on capital contribution by the partners and salary to working partners is squarely covered by the said provision. In view of the finding by a judgment dated August 30, 1996, the Tribunal set aside the order of the Commissioner of Income-tax made under section 263 of the Act of 1961. The Revenue made an application before the Tribunal seeking reference of the questions formulated for the opinion of this court. The Tribunal declined to refer the questions for the opinion of this court as in its opinion, no referable question of law arose. The application was accordingly rejected by order dated June 24, 1997. It is contended by Mr. Sandeep Bhandawat, learned counsel appearing for the Revenue, that the Tribunal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shall not be taken into account for the purposes of this clause ; (ii) interest paid by the firm to such individual or by such individual to the firm as partner in a representative capacity and interest paid by the firm to the person so represented or by the person so represented to the firm, shall be taken into account for the purposes of this clause. Explanation .3.---Where an individual is a partner in a firm otherwise than as partner in a representative capacity, interest paid by the firm to such individual shall not be taken into account for the purposes of this clause, if such interest is received by him on behalf, or for the benefit, of any other person." It seems that it imposed an absolute embargo against deductions in respect of any of the payments made by the firm, of the nature enumerated, to any partner of the firm. Explanation 2 clarified that the interest paid by the firm to an individual, who is a partner in a firm in a representative capacity, shall not be taken into account for the purposes of the said clause. It indicated that it covered all the payments of the nature described to a partner of the firm by the firm and did not cover other payments made to s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of such payment to all the partners during the previous year exceeds the aggregate amount computed as hereunder: (1) in the case of a firm carrying on a profession referred to in section 44AA or which is notified for the purpose of that section--- (a) on the first Rs. 1,00,000 Rs. 50,000 or at the rate of 90 per of the book-profit or in case of a cent. of the book profit, whichever is loss more; (b) on the next Rs. 1,00,000 at the rate of 60 per cent. ; of the book-profit (c) on the balance of the at the rate of 40 per cent. : book-profit (2) in the case of any other firm --- (a) on the first Rs. 75,000 Rs. 50,000 or at the rate of 90 per of the book profit, or in case of a cent. of the book-profit, whichever is loss more ; (b) on the next Rs. 75,000 at the rate of 60 per cent. ; of the book profit (c) on the balance of the at the rate of 40 per cent.; book-profit Provided that in relation to any payment under this clause to the partner during the previous year relevant to the assessment year commencing on the 1st day of April, 1993, the terms of the partnership deed may, at any time during the said previous year, provide for such payment. Expl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d out that if it is considered that the net profit should be estimated, it should be estimated subject to the allowance for depreciation and the depreciation allowance should be deducted therefrom. The circular of the Board reads as under : "171. Claim for depreciation.---Where required particulars have not been furnished. 1. Numerous instances have come to the notice of the Board where the assessee's claim for depreciation duly shown in the return was not considered by the Income-tax Officer because books of account produced were not properly maintained and it was necessary to estimate profits by invoking the proviso to section 13 of the 1922 Act. The course generally followed in such cases was to estimate the net income. The decision of the appellate authorities in such cases that the mere fact that net profits had been estimated could not be a ground for saying that depreciation claimed in the returns had been duly 'allowed' as provided under the Act. On the contrary, they held, that since no depreciation was actually allowed in the past years, the profit or loss under section 10(2)(vii) would be computed without making any deduction for depreciation for arriving at the writ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l for the Department, that the circular of the Board is not binding on the courts as it is only for the guidance of the assessing authority. The controversy has been settled by a recent decision of the apex court in UCO Bank v. CIT [1999] 237 ITR 889. It is held therein that the Central Board of Direct Taxes under section 119 of the Income-tax Act, 1961, has power, inter alia, to tone down the rigour of the law and ensure a fair enforcement of its provisions by issuing circulars in exercise of its statutory powers under section 119 of the Act which are binding on the authorities in the administration of the Act. The court further held that the power is given for the purpose of just, proper and efficient management of the work of assessment and in public interest. It is a beneficial power given to the Board for proper administration of fiscal law so that undue hardship may not be caused to the assessee and the fiscal laws may be correctly applied. The same view has been taken by the apex court in Mathew M. Thomas v. CIT [1999] 236 ITR 691. It is held therein that the circular is a beneficial measure in order to bring to an end the uncertainty of litigous proceedings with reference t ..... 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