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Issues: Application under section 256(2) for reference of questions of law arising from the Tribunal's order in an income tax case regarding deductions for depreciation and interest on borrowed capital.
Analysis: The case involved an application by the Commissioner of Income-tax under section 256(2) to require the Tribunal to state the case and refer questions of law arising from the Tribunal's order. The primary issues revolved around the justification of the Income-tax Appellate Tribunal in allowing further deductions for depreciation and interest paid to creditors. The Assessing Officer had rejected the books of account of the building contractor and applied a net profit rate on contract receipts, resulting in an enhanced income assessment. However, no allowance for depreciation or interest paid to creditors was made in the income computation. The Commissioner of Income-tax (Appeals) reduced the assessment by disallowing the claim for interest and depreciation, stating that the initial deduction included all necessary allowances. The Tribunal, based on a previous decision, allowed the deductions for depreciation and interest. The Tribunal rejected the application for reference of questions of law, asserting that the correct decision was made considering precedents from other High Courts. The High Court found that the Tribunal erred in not appreciating the scope of section 256, emphasizing that a question of law remains such even if the Tribunal believes it made the correct decision. The High Court noted that the application of a net profit rate and subsequent lump sum deduction raised a legal question regarding the right to claim specific deductions. Therefore, the High Court allowed the application, directing the Tribunal to refer the question of law on whether the Tribunal was justified in allowing further deductions for depreciation and interest, especially in light of the Commissioner of Income-tax (Appeals) findings on the inclusion of these deductions in the reduced income assessment. The High Court concluded the judgment without awarding any costs.
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