The Commissioner Of Income Tax, Andhra Pradesh – I, Hyderabad v. $ Y. Ramachandra Reddy,843, Banjara Avenue,Banjara Hillshyderabad …

*THE HONOURABLE SRI JUSTICE L. NARASIMHA REDDYand *THE HON’BLE SRI JUSTICE CHALLA KODANDA RAM + I.T.T.A.No.48 of 2002 %30.07.2014 The Commissioner of Income Tax, Andhra Pradesh – I, Hyderabad. …. Appellant Vs. $ Y. Ramachandra Reddy,843, Banjara Avenue,Banjara HillsHyderabad …. Respondent ! Counsel for the Appellant: SRI J.V. PRASAD, SC FOR INCOME TAX Counsel for Respondent: SRI A.V.KRISHNA KAUNDINYA <Gist : >Head Note: ? Cases referred:1. 1998 ITR 232 THE HON’BLE SRI JUSTICE L.NARASIMHA REDDYANDTHE HON’BLE SRI JUSTICE CHALLA KODANDA RAMI.T.T.A.No.48 of 2002 ORDER:(per the Hon’ble Sri Justice L.Narasimha Reddy) This appeal under Section 260-A of the Income Tax Act, 1961(for short ‘the Act’) is preferred by the Revenue feeling aggrieved bythe order dated 10.08.1999 passed by the Hyderabad Bench ‘A’ of theIncome Tax Appellate Tribunal (for short ‘Tribunal’) inI.T.A.No.1336/H/1997, by raising the following questions of law: 1.Whether on the facts and in the circumstances of thecase the Tribunal is correct in law in directing theAssessing Officer to allow depreciation and interestpayments from the estimate of profit made at 12%? 2.Whether on the facts and in the circumstances of thecase the Tribunal is correct in law in directing theAssessing Officer to grant reliefs on those items whichare not claimed by the assessee? 3. Whether on the facts and in the circumstances of thecase the Tribunal is correct in granting depreciationthough it was already granted by the Assessing Officer? The respondent is a civil contractor, and is an assessee underthe Act. He submitted returns for the Assessment Year 1994-95declaring loss of Rs.15,24,198/-. Thereafter, revised returns were filedshowing enhanced figures of loss, being Rs.93,11,879/-. TheAssessing Officer issued notice to the respondent. The books ofaccount were not believed and obviously, by taking recourse toSection 144 of the Act, the Assessing Officer passed an order to theeffect that the total receipts are to the tune of Rs.9,52,52,636/- and netprofit at 9%, works out to Rs.85,72,737/-. A sum of Rs.1,49,294/- wasadded towards miscellaneous receipts. He took the view that since the profit is determined on estimation basis, deduction of depreciation orinterest would not be allowed. However, unabsorbed depreciation ofRs.14,77,938/- for the Assessment Years 1990-91 and 1991-92, wasdeducted and taxable income was arrived at Rs.72,71,820/-. Feeling aggrieved by the order passed by the Assessing Officer,the respondent filed an appeal before the Commissioner of IncomeTax (Appeals) (for short ‘Commissioner’). Through his order dated30.06.1997, the Commissioner took the view that the net profits oughtto have been worked out at 12% of the total receipts and deduction ofdepreciation and interest ought to have been allowed, as usual. The appellant on the one hand and the respondent on the otherfiled appeals before the Tribunal assailing the order of theCommissioner. The Tribunal dismissed both the appeals andconfirmed the order passed by the Commissioner. The Revenueapproached this Court through this appeal. Sri J.V. Prasad, learned counsel for the appellant submits thatthough the Commissioner was justified in taking the net profits at 12%,having regard to the nature of business undertaken by the respondent,he was not correct in permitting deduction of depreciation and interest.He submits that the exercise undertaken by the Commissioner, or forthat the Assessing Officer is akin to the one provided for under Section44AD of the Act, which provides for comprehensive exercise of arrivingthe net profits at a fixed percentage and that would be inclusive of theallowance of depreciation and interest. He submits that the exercisebeing comprehensive in nature, the two components cannot be dealtwith, separately. Sri J.V. Prasad, learned counsel for the appellant submits thatthough the Commissioner was justified in taking the net profits at 12%,having regard to the nature of business undertaken by the respondent,he was not correct in permitting deduction of depreciation and interest.He submits that the exercise undertaken by the Commissioner, or forthat the Assessing Officer is akin to the one provided for under Section44AD of the Act, which provides for comprehensive exercise of arrivingthe net profits at a fixed percentage and that would be inclusive of theallowance of depreciation and interest. He submits that the exercisebeing comprehensive in nature, the two components cannot be dealtwith, separately. Sri A.V. Krishna Koundinya, learned Senior Counsel for therespondent, on the other hand, submits that the determination of thetaxable income by taking recourse to Section 144 of the Act, namely, best judgment assessment has nothing to do with the allowance ofdepreciation under Section 32 of the Act. He contends that these twooperate on totally different planes and there is hardly any meetingpoint between them, particularly, at the time when the assessment inquestion was made. The respondent himself was not sure as to the exact losssustained by him in the Assessment Year 1994-95. Initially, hedeclared the loss of Rs.15,24,198/- and he came forward with arevised return indicating the loss of Rs.93,11,879/-. That itself wassufficient for the Assessing Officer to disbelieve the books of accountand he has chosen to adopt the procedure prescribed under Section144 of the Act, namely, the best judgment assessment. In matters ofthis nature, the amount of turnover on the one hand, and the nature ofbusiness undertaken by the assessee, on the other, become relevant. The net profits were taken at 9%. The Assessing Officer had extendedthe benefit of allowance of unabsorbed depreciation for theAssessment Years 1990-91 and 1991-92. However, he refused toallow deduction of depreciation and interest for the concernedAssessment Year. The grievance of the respondent was not much about thepercentage, at which the net profit was determined. Rather, it wasabout the non-allowance of the current depreciation and interest. Thematter landed before the Commissioner by way of appeal preferred bythe respondent. The Commissioner took into account, the nature ofbusiness as well as the non-dependability of the books of account, andtook the view that the net profits must be arrived at on total/grossreceipts. As regards the allowance of current depreciation and interest,he took the view that there is nothing in law which disentitles therespondent to claim it. He left the matter to the Assessing Officer toworkout the details. The appellant as well as the respondent filedappeals before the Tribunal. Through the order under appeal, the Tribunal upheld the order of the Commissioner, in all respects. Though the respondent filed an appeal feeling aggrieved by theenhancement of the percentage of net profit, and it was dismissed, hedid not pursue the matter, further. The Department filed this appeal,pleading that current depreciation ought not to have been permitted tobe deducted. In the comprehensive, if not complicated exercise to beundertaken with reference to a return, handling the depreciation andinterest is an important step, as is the determination the income itself. Wherever the Parliament wanted to deviate from the ordinaryprocedure for determination of income or for that matter, thedepreciation in the process of reckoning the taxable income, specificprovisions to that effect are made. While in some cases, such stepsare reflected directly in the very provisions of the Act or in other casesthey are in the form of the cross reference from other provisions. Section 44AD of the Act reads as under: “44AD. Special provision for computing profits and gainsof business on presumptive basis - In the comprehensive, if not complicated exercise to beundertaken with reference to a return, handling the depreciation andinterest is an important step, as is the determination the income itself. Wherever the Parliament wanted to deviate from the ordinaryprocedure for determination of income or for that matter, thedepreciation in the process of reckoning the taxable income, specificprovisions to that effect are made. While in some cases, such stepsare reflected directly in the very provisions of the Act or in other casesthey are in the form of the cross reference from other provisions. Section 44AD of the Act reads as under: “44AD. Special provision for computing profits and gainsof business on presumptive basis - (1)Notwithstanding anything to the contrary containedin sections 28 to 43C, in the case of an eligibleassessee engaged in an eligible business, a sumequal to eight per cent of the total turnover or grossreceipts of the assessee in the previous year onaccount of such business or, as the case may be, asum higher than the aforesaid sum claimed to havebeen earned by the eligible assessee, shall bedeemed to be the profits and gains of suchbusiness chargeable to tax under the head “Profitsand gains of business or profession”.in sections 28 to 43C, in the case of an eligibleassessee engaged in an eligible business, a sumequal to eight per cent of the total turnover or grossreceipts of the assessee in the previous year onaccount of such business or, as the case may be, asum higher than the aforesaid sum claimed to havebeen earned by the eligible assessee, shall bedeemed to be the profits and gains of suchbusiness chargeable to tax under the head “Profitsand gains of business or profession”. (2)Any deduction allowable under the provisions ofsections 30 to 38 shall, for the purposes of sub-section (1), be deemed to have been already givenfull effect to and no further deduction under thosesections shall be allowed:Providedthat where the eligible assessee is a firm,the salary and interest paid to its partners shall besections 30 to 38 shall, for the purposes of sub-section (1), be deemed to have been already givenfull effect to and no further deduction under thosesections shall be allowed:Providedthat where the eligible assessee is a firm,the salary and interest paid to its partners shall be deducted from the income computed under sub-section (1) subject to the conditions and limitsspecified in clause (b) of section 40. (3)The written down value of any asset of an eligiblebusiness shall be deemed to have been calculatedas if the eligible assessee had claimed and hadbeen actually allowed the deduction in respect of thedepreciation for each of the relevant assessmentyears. (4)The provisions of Chapter XVIIC shall not apply toan eligible assessee in so far as they relate to theeligible business. (5)Notwithstanding anything contained in the foregoingprovisions of this section, an eligible assessee whoclaims that his profits and gains from the eligiblebusiness are lower than the profits and gainsspecified in sub-section (1) and whose total incomeexceeds the maximum amount which is notchargeable to income-tax, shall be required to keepand maintain such books of account and otherdocuments as required under sub-section (2) ofSection 44A and get them audited and furnish areport of such audit as required under section 44AB. (6)The provisions of this section, notwithstandinganything contained in the foregoing provisions, shallnot apply to - i.a person carrying on profession as referred to in sub-section (1)of section 44AA;of section 44AA; ii.a person earning income inthe nature of commission or brokerage; oriii.a person carrying on any agencyiii.a person carrying on any agencybusiness. Explanation – For the purposes of this section, - (a) ‘eligible assessee’ means – (6)The provisions of this section, notwithstandinganything contained in the foregoing provisions, shallnot apply to - i.a person carrying on profession as referred to in sub-section (1)of section 44AA;of section 44AA; ii.a person earning income inthe nature of commission or brokerage; oriii.a person carrying on any agencyiii.a person carrying on any agencybusiness. Explanation – For the purposes of this section, - (a) ‘eligible assessee’ means – (i)an individual, Hindu undivided family ora partnership firm, who is a resident,but not a limited liability partnership firmas defined under clause (n) of sub-section (1) of section 2 of the LimitedLiability Partnership Act, 2008 (6 of2009); anda partnership firm, who is a resident,but not a limited liability partnership firmas defined under clause (n) of sub-section (1) of section 2 of the LimitedLiability Partnership Act, 2008 (6 of2009); and (ii)who has not claimed deduction underany of the sections 10A, 10 AA, 10B,10BA or deduction under anyprovisions of Chapter VIA under theheading “C – Deductions in respect ofcertain incomes” in the relevantassessment year;any of the sections 10A, 10 AA, 10B,10BA or deduction under anyprovisions of Chapter VIA under theheading “C – Deductions in respect ofcertain incomes” in the relevantassessment year; (b) “eligible business” means – (i) any business except the business of plying, hiring or leasing goods carriagesreferred to in section 44AE; and (ii) Whose total turnover or gross receiptsin the previous year does not exceed anamount of one crore rupees.” For example, Section 44AD of the Act provides for determinationof the income of an assessee from the business at 8% of the totalturnover or the gross receipts of the previous year under certaincircumstances. Sub-Section (2) is to the effect that if any deductionallowable under Sections 30 to 38, which takes in its fold thededuction such as depreciation and interest, shall be deemed to havebeen effected. The procedure under that section, however, appliesonly when the turnover is below a particular figure which at therelevant point of time was Rs.40,00,000/-. As of now, it is Rs.1 Crore.In the instant case, Section 44AD of the Act does not apply becausethe turnover was above the stipulated amount. Therefore, the feasibilityof deduction of turnover and interest cannot be said to have beentaken away. The learned counsel for the appellant is not able to point out anyprovision of law in the Act or Rules made thereunder, which restrictsthe allowance of the depreciation and interest. On the other hand, thefacility created under the Act is so firm and strong that if for any reasonit becomes impermissible or unnecessary for an assessee to seek theallowance of depreciation for a particular Assessment Year, he isentitled to carry it forward, for the subsequent years. In such an event, itassumes the character of unabsorbed depreciation. In this very case,the Assessing Officer permitted the allowance of unabsorbeddepreciation to the respondent. However, he denied the benefit of theallowance of current depreciation and interest. No reference is madeto any provision of law to make such distinction. His understanding ofthe matter is that Section 44AD of the Act, that provides for acomprehensive formula of determining net profit derived by a civil contract or at 8%, takes in its fold, allowance of depreciation, interestand other benefits. The fact, however, remains that such a provisionwas not in existence in the Assessment Year 1994-95. contract or at 8%, takes in its fold, allowance of depreciation, interestand other benefits. The fact, however, remains that such a provisionwas not in existence in the Assessment Year 1994-95. If an assessee is entitled to claim deduction of interest, be itunder Section 36(1)(iii) of the Act or any other relevant provision and ofdepreciation under Section 37 of the Act, in the ordinary course ofassessment, there is no reason why the same facilities be notextended to him, merely because the profit is determined on the basisof estimation as was done in the instant case. We are of the view thatdepreciation and interest, which are otherwise deductable in theordinary course of assessment, retain the same legal character, evenwhere the profit of assessee is determined on percentage basis. The conclusions arrived at by us, get support from the Circulardated 31.08.1965 issued by the Central Board of Direct Taxes. Though the Circular was with reference to the 1922 Act, it holds goodfor the analogous provisions under the 1961 Act. The learned counsel for the appellant relied on a judgment of thisCourt in Indwell Constructions v. Commissioner of Income Tax[[1]].That was a case in which this Court took the view that once the booksof account are disbelieved for a particular purpose, they cannot berelied upon in the context of interest. In the instant case, we areconcerned with the depreciation. The occasion to deny the deductionof depreciation or interest would arise if only the material placed beforethe Assessing Authority in proof of purchase of machinery and otheritems and payment of interest is disbelieved. No finding of that naturewas recorded by the Assessing Officer. The appeal is accordingly dismissed. There shall be no orderas to costs. The miscellaneous petitions filed in this appeal shall also standdisposed of. L.NARASIMHA REDDY, J CHALLA KODANDA RAM, J Date: 30.07.2014Note: L.R Copy to be markedB/ova [1]1998 ITR 232