1. Issue for consideration :
1.1 During the course of assessment proceedings, it often happens that an Assessing Officer does not accept the business income returned by an assessee, rejects the books of accounts u/s.145 and makes an estimate of the income of an assessee by applying a flat rate of profit to the gross receipts of the assessee.
1.2 In such cases, the question has arisen before the Courts as to whether the assessee should be deemed to have already been allowed depreciation on his assets used for the business in making such estimate, or whether he is further entitled to a deduction of depreciation from such estimated income.
1.3 While the Allahabad High Court has held that no further depreciation is allowable from such estimated income, a contrary view has been taken by the Punjab and Haryana High Court and by another Bench of the Allahabad High Court, which have taken the view that the assessee was entitled to a further deduction from such estimated income.
2. Saraya Engineering Works case :
2.1 The issue first came up before the Allahabad High Court in the case of Saraya Engineering Works, 168 ITR 455.
2.2 In that case, the assessee was a private limited company carrying on contract work of engineering. Against gross receipts of Rs.5,46,805, the assessee showed a profit of Rs.34,527. The assessee claimed that on account of bad condition and hilly areas, abnormally high expenses were incurred for the operation and repairs of its vehicles. The Income-tax Officer did not accept the explanation and the assessee’s accounts, and estimated the net profit at 10% of the assessee’s gross receipts. He did not allow any depreciation on the assessee’s vehicles on the ground that the assessee had not furnished full details.
2.3 In appeal, the Appellate Assistant Commissioner rejected the assessee’s appeal on the ground that since the income had been estimated, the depreciation is deemed to have been considered in determining the total income. The appeal before the Income-tax Appellate Tribunal was also rejected on the ground that the assessee could not show anything which could enable the Tribunal to take a contrary view.
2.4 Before the Allahabad High Court, the assessee claimed that both the Appellate Assistant Commissioner as well as the Tribunal committed an error in not going into the merits of the claim of the assessee for depreciation, and in disposing of it cursorily. It was also argued that the Income Tax Officer should have called for the details of depreciation, and should not have rejected the claim on a mere finding that full details had not been given.
2.5 The Allahabad High Court did not accept these arguments, and held that a possible view was that as the depreciation had been allowed on the contract work, no claim for further amount on this head was entertainable. According to the Court, the claim of the assessee with regard to depreciation was not accepted, as the same had been taken care of while dealing with the profit earned by the assessee in the contract work. In the contract work of the assessee, the income had been estimated, and while estimating income, depreciation was also taken into consideration. The Allahabad High Court therefore held that once depreciation had been taken into consideration, the assessee could not get a double advantage by claiming it separately from the contract work.
3. Chopra Bros. case :
3.1 The issue again recently came up before the Punjab and Haryana High Court in the case of Commissioner of Income-tax v. Chopra Bros. India (P) Ltd., 252 ITR 412.
3.2 In this case, the assessee was a construction contractor. The Assessing Officer noticed defects in the maintenance of accounts and invoked the provisions of S. 145, rejecting the book results. He applied a net profit rate of 10% to the gross receipts to compute the taxable income.
3.3 Before the Commissioner (Appeals), the assessee claimed that the Assessing Officer ought to have allowed depreciation on the machinery used in the execution of works as claimed by it in its return of income. It relied on the Circular of the CBDT No. 29D (XIX-14) dated 31st August 1965, where the CBDT had instructed the authorities that the depreciation allowance should be separately worked out where prescribed particulars had been furnished and profits were estimated. The Commissioner (Appeals) held that when net profit was estimated, it must be presumed that all permissible allowances were made, and income so determined should be deemed to have covered all the expenses including depreciation. The Tribunal however allowed the claim of the assessee.
3.4 Before the Punjab and Haryana High Court, on behalf of the Revenue, it was contended that the taxable income having been determined by applying the principle of net profit, all admissible allowances should be deemed to have been taken into consideration.
3.5 The Punjab and Haryana High Court observed that while making a best judgement assessment, the AO was bound to take into account all relevant material on record. The consideration by the AO could not be assumed, but must be apparent from the order. The assessee had claimed depreciation and had furnished all the relevant particulars, yet the AO had not said a word about the claim. The Court noted that the AO had not even suggested that he had estimated net profit rate at 10% after allowing claim for depreciation, and in this situation, it could not be said that he had taken all the material into consideration as required u/s.144 of the Income-tax Act.
3.6 The Court further observed that the CBDT circular, not being contrary to any statutory provision, was binding on the authorities, and had to be followed. The Court held that there was no room for assumption that the income had been determined by the AO after taking into consideration the depreciation. The Punjab and Haryana High Court therefore held that the assessee was entitled to a deduction for depreciation from the income estimated by the AO.
3.7 In so doing, the Punjab and Haryana High Court also noted with approval the subsequent decision of the Allahabad High Court in case of CIT v. Bishambhar Dayal & Co., 210 ITR 118, where a similar view was taken by the Allahabad High Court and specifically dissented from the decision in the case of Saraya Engineering.
4. Observations :
4.1 In Saraya Engineering’s case, the Allahabad High Court did not take into consideration the CBDT Circular of 1965, which clearly stated that in such cases, where details were available, the assessee was separately entitled to a further deduction. Had the Circular been taken into consideration, the view taken by the Allahabad High Court might have been different.
4.2 As rightly observed by the Punjab and Haryana High Court, no presumption can be made that an AO has taken into consideration certain deductions in computing the net profit on an estimated basis, in the absence of specific observations to that effect. Where details are available, the AO is bound to allow the deduction for depreciation.
4.3 The view that depreciation is allowable separately from estimated income is further supported by the express provisions of S. 44AD, S. 44AE and S. 44AF, which expressly provide that in computing the deemed income of a construction contractor, transporter or retail trader, all deductions u/s.30 to u/s.38 shall be deemed to have been allowed, and that no further deduction under those Sections would be allowable. There was no need for such express provisions, unless such deductions were otherwise allowable from incomes estimated by applying a flat rate to the gross receipts or on some other presumptive basis. The absence of similar provisions in other cases supports the view that such deductions are otherwise allowable from the income estimated by the AO, unless the AO has expressly taken such deduction into account while adopting a particular rate of profit.
4.4 The better view therefore seems to be that of the Punjab and Haryana High Court, that deduction for depreciation is allowable from the income estimated by the Assessing Officer.
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