TMI Blog1993 (3) TMI 143X X X X Extracts X X X X X X X X Extracts X X X X ..... . According to this ground of appeal of the assessee, the ld. CIT(A) erred in upholding the rejection of the books of account by taking recourse to provisions of section 145(2). After examination of purchase vouchers, etc., the ld. ITO rejected the assessee's books of account and applied proviso to sub-section (2) of section 145, with the following observations: "3. Examination of the purchase vouchers in regard to material earth work, steel binding and bending, shuttering and concrete etc. revealed that the payments are on basis of internal pay slips on which signatures of the payees have been obtained on revenue stamps. The addresses of the payees, their bills etc. are not maintained. This was found to be the case in respect of purchases of sand and bajri and other material also. Even the payments of labour for completing the work are on the basis of internal pay slips. In these circumstances, the genuineness of the payees or the job for which the payments were made or the material for the purchase of which the expenses were incurred, are not verifiable. 4. In the trading account, work in progress has been valued at Rs.84,000. The basis of this amount is only estimated and no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s.9,63,000. Thus finally net profit from the contract was determined at Rs.3,91,340. The ld. ITO determined and adopted this income by applying a net profit rate at 10 per cent. No doubt, there is no specific discussion in the assessment order about depreciation but it was subsequently explained on behalf of the revenue by the ld. ITO, before the ld. CIT (A) that depreciation on machinery was not allowed because net profit rate had been applied. 7. This issue was also contested by the assessee and the ld. CIT(A), after detailed discussion and in fact relying upon the ratio in the case of Saraya Engg. Works v. CIT [1987] 168 ITR 455 (All.) and further making mention of the order of the Chandigarh Bench of the Tribunal in the case of Mangal Dass Ashok Kumar [IT Appeal No. 798 (Chd.) of 1984, dated 27-2-1986] for assessment year 1982-83, held that the net profit rate applied by the Id. ITO for determining the income from contract business should be considered to cover all expenses and allowances including depreciation, interest on capital and expenses on hiring of machinery. The ld. CIT (A) thus confirmed the ld.ITO's action on the point. The application of net profit rate at 10 pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6 of the Tribunal. The assessee's grievance before us is against that finding of the ld.CIT(A). We have gone through the order dated 27-2-1985 of the local Bench of the Tribunal, wherein in the like situation, application of net profit rate at 10 per cent was considered fair and reasonable and thereafter disallowance of depreciation was also confirmed. The finding of the revenue authorities on the issue is thus in conformity with the Tribunal's order. Such action finds full support in the case supra decided by the Honble Allahabad High Court. On behalf of the assessee. nothing was shown to enable us to record a finding at variance from the finding under challenge. Mention of two assessment orders in the cases supra of M/s Lamba Builders and M/s Premier Construction Co. is seen to be irrelevant. in view of the detailed order of the Tribunal, followed by the ld. CIT(A). In view of the said order of the Tribunal and the ratio laid down by the Hon'ble Allahabad High Court on the issue at hand in similar circumstances, any reference to the assessment orders in the cases of other assessees would appear to be misconceived and irrelevant. Moreover, the finding may be correct in the circums ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... given in this regard, if any relief was allowed in respect of other grounds of appeal. Adopting the ld. CIT(A)'s reasoning, we reject this ground also. 16. No other ground was either raised or pressed before us. Pages of the paperbooks mentioned before us have been gone into. 17. In the result, the appeal is dismissed. Per Shri S.K. Chander - I have gone carefully through the proposed order of the learned Judicial Member. However, I do not find it possible to bring myself in agreement with the various observations made by him and the conclusions arrived at. It is very, important first to bear in mind that when the apex body of the Income-tax Department (CBDT) finds it necessary to issue instructions to the Field Officers the issues involved have considerable importance and affect the public at large. The Hon'ble Supreme Court has held in the case of Navnit Lal C. Javeri v. K.K. Sen, AAC [1965] 56 ITR 198 that a circular issued by the Board would be binding on all persons and officers employed in the execution of the Act. Subsequently this view was re-affirmed by the Hon'ble Supreme Court in the case of Ellerman Lines Ltd. v. CIT [1971] 82 ITR 913. However, what is bindi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Numerous instances have come to the notice of the Board where 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 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 written down value of the asset. 2. The Board considered that where it is proposed to estimate the profit and the prescribed particulars have been furnished by the assessee, the depreciation allowance should be separately worked out. In all such cases, the gross profit should be estimated and the deductions and allowances including the dep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 3,91,340 ------------------------------------------------------------ The Income-tax Officer has nowhere mentioned the factum that the assessee has claimed depreciation in the return and that in arriving at the net profit he has considered such a claim of the assessee or that the net profit worked out by him at 10 per cent is after consideration of allowance of depreciation. Therefore, to read into his order that which he has done what he was required to do, by making a non-speaking order, to my mind is putting a stamp of approval and putting a premium on inaction by a statutory authority in the execution of duties. We have, therefore, to see whether on the facts and in the circumstances of the case, the assessee is entitled to depreciation which was claimed in the return. 5. There is nothing sacrosanct about net profits from contract work being estimated at 10 per cent because profit emanating from a contract depends upon multifarious factors such as escalation of cost of raw material, type of machinery employed, nature of work, type of labour available, time of the execution of contract and escalation in other prices and much more important is the relation that the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... depreciation independently even when income is estimated after rejection of the books of account, clearly apply. Therefore, those cases do not really apply to the facts of this case. 8. It is further important to note that if the action of the Income-tax Officer is confirmed as it is and as is proposed by my learned Brother, the net profit will be something like 16.5 per cent in the case of the assessee. This is preposterous even considering the estimate made by the Income-tax Officer which according to him should not have been more than 10 per cent after depreciation. This was the first year of the contract and the assessee had furnished all necessary details before the Income-tax Officer. The entirety of the facts and circumstances of the case show that the claim of depreciation on the machinery used in the execution of contract work which was owned by the assessee, was admissible. By not making a speaking order, the Income-tax Officer cannot be said to have done his duty in a manner that it must be upheld. Therefore, I am of the opinion that the assessee is entitled to depreciation as admissible under the rules on the assets used in the business as claimed in the return. I, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to be a major defect in the accounts and for that reason the Assessing Officer concluded that the book results disclosed were not verifiable. The work-in-progress shown was also considered as unverifiable because it was arrived at on estimate basis without any supporting material. For these reasons the book results were rejected as mentioned above and a net profit rate of 10 per cent was adopted and an income of Rs.3,92,254 was arrived at. To this income was added the profit derived from sub-contracts with which I am not considered in this appeal as that was not a matter in dispute. By making certain additions and substractions, the total income was arrived at Rs.3,91,340. The assessee was not satisfied with this kind of assessment. Objecting to the computation of income at Rs.3,91,340 as against the income of Rs.48,810 returned, the assessee appealed to the Commissioner (Appeals) contending among other things that the Assessing Officer had erroneously rejected the book version and took recourse to the provisions of section 145(2) of the Income-tax Act. Objection was also taken to the estimate of net profit at 10 per cent submitting that it was a flat rate imaginary in character ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fied. Objection was also taken to the rejection of the book version and to the application of the provisions of section 145(2) of the Income-tax Act. This matter was heard by the Tribunal, Chandigarh Bench. The learned Judicial Member, who wrote the leading order in this case, pointed out that although objection was taken to the application of the provisions of section 145(2), it was specifically withdrawn before the Commissioner (Appeals) and therefore this ground did not survive for consideration before the Tribunal. As regards the allowance of depreciation from the net profit rate, he was of the opinion that depreciation must be deemed to have been allowed since a net profit rate was applied meaning that when the profit estimated was net, it must cover all allowances allowable under the Income-tax Act including depreciation. Placing strong reliance upon the decision of the Chandigarh Bench of the Tribunal, the learned Judicial Member justified the action of the Income-tax authorities in declining to allow depreciation from the net profit rate estimated. He did not see any particular relevance of the Board's circular relied upon in this context. But the learned Accountant Member ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uggested that it could be a deliberate or innocent mistake committed by the Income-tax Officer. He also noted that this was the first year of contract of the assessee and that the assessee furnished all necessary details before the Income-tax Officer and there was no reason to disallow depreciation at all and if depreciation was deemed to have been allowed, the net profit rate before depreciation would be as high as unattainable rate of 16.5 per cent. Hence the above difference of opinion, which was referred to me as above, centres round whether the depreciation should be allowed or not. Even though the difference of opinion as framed in the above manner, ultimately it leads to the question whether the rate of net profit applied by the Income-tax Officer is reasonable or not or whether it could be subject to depreciation or not. 4. After hearing the parties at great length, great length because the matter was hotly contested, I did not feel any difficulty in agreeing with the opinion expressed by the learned Accountant Member. All the reasons that were adduced by him are very very significant, relevant and in a manner of saying clinch the issue in favour of the assessee. The fir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut the need to issue such circular arose because determination of income by estimating the net profit without mentioning anything about the allowance of depreciation led to several legal difficulties in assessing the profits arising on the sale of assets by applying the provisions of section 10(2)(vii) of the Income-tax Act, 1922. The Board therefore considered that where it was proposed to estimate the profit and where the prescribed particulars were furnished by the assessee, the depreciation allowance should be separately worked out. In all such cases the gross profit should be estimated and the deductions and allowances including depreciation allowance should be separately deducted from the profit so that the net profit can be arrived at. If it is considered that the net profit should be estimated, it should be estimated subject to allowance of depreciation and the depreciation allowance should be deducted therefrom. This was what was contained in paragraph 2 of the circular. The circular is therefore very categorical and unambiguous and direct the Assessing Officer to work out the depreciation separately even in cases where the net profit is to be estimated. I do not therefore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facts and having regard to the manner in which the Income-tax Officer proceeded to make the assessment and having regard to the fact that It was impossible to presume that depreciation must be considered to have been allowed in arriving at the net profit, unless at the expense of justice, I think the view expressed by the learned Accountant Member should be accepted as proper, reasonable and justified. 7. It is true as pointed out by the Commissioner (Appeals) in his order, which was also emphasised by the learned counsel for the assessee before me that the Income-tax Officer after applying the net profit of 10 per cent allowed interest of Rs.19,620. When that could be so, there is no reason why depreciation also should not be allowed. There is considerable force in this submission. The ITO further made a special mention that he would not allow investment allowance under section 32A on a different ground. He could not therefore be unconscious of the fact that there was a claim made by the assessee for allowance of depreciation and that he has to deal with it in computing the income. which he failed to do. That failure cannot be justified by placing reliance upon judicial author ..... X X X X Extracts X X X X X X X X Extracts X X X X
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