2015 (10) TMI 2676 - AT - Income Tax

Allowing the depreciation when the income was computed by the A.O. by applying net profit rate of 25% - Held that - AO had not allowed the separate deduction on account of depreciation separately. IN A.Y. 2009-10, the ld Assessing Officer allowed the depreciation separately from the estimated income U/s 43(3) of the Act. The case law relied upon by the assessee i.e. CIT Vs. Jain Construction (1999 (9) TMI 26 - RAJASTHAN High Court) is squarely applicable wherein it has been held that in case of rejection of books of account of the firm and income estimated, the depreciation is allowable separately by considering the CBDT circular No. 29D(XIX) of 1965 dated 31/8/1965 wherein it has been provided that net profit rate is subject to allowance of depreciation and the depreciation allowance should be deducted therefrom. Therefore, we uphold the order of the ld CIT(A). Addition made U/s 40(a)(ia) and 40A(3) - Held that - It is found that the various Hon ble High Courts as well as ITAT has decided this issue against and in favour of the assessee. The Hon ble Supreme Court in the case of CIT Vs. Vegetable Products Ltd. (1973 (1) TMI 1 - SUPREME Court) has held that when two opinions has been formed by the Hon ble High Court, the assessee s favourable opinion is to be applied. Therefore, we uphold the order of the ld CIT(A) as Assessing Officer had rejected the books of accounts and had applied net profit rate for purpose of computing income no disallowance could have been made u/s 40A(3). In view of the above judicial pronouncements, no disallowance could be made U/s 40(a)(ia) and 40A(3) of the Act when assessment is made computing income by application of NP rate

Summary

Issues:
1. Allowance of depreciation when income computed by applying net profit rate.
2. Deletion of additions made under Sections 40(a)(ia) and 40A(3) of the Income Tax Act.

Issue 1: Allowance of Depreciation
The appeal by the revenue challenged the allowance of depreciation when the income was computed using a net profit rate of 25%. The Assessing Officer (A.O.) observed a significant decline in the net profit rate of the assessee compared to the preceding year. The A.O. rejected the books result due to various discrepancies, leading to the application of a net profit rate of 25% for the current year. The A.O. did not allow any deduction for depreciation in the computed net profit. The CIT(A) confirmed the addition but noted the absence of any mention of depreciation by the A.O. The CIT(A) referred to judicial precedents and a CBDT circular emphasizing the separate allowance of depreciation when books are rejected and income is estimated. The Tribunal upheld the CIT(A)'s decision, citing the necessity of allowing depreciation separately even when a net profit rate is applied.

Issue 2: Deletion of Additions under Sections 40(a)(ia) and 40A(3)
The second ground of the revenue's appeal concerned the deletion of additions made under Sections 40(a)(ia) and 40A(3) of the Act. The A.O. had made separate additions for cash payments violating Section 40A(3) and disallowances under Section 40(a)(ia) despite computing income using a net profit rate. The CIT(A) deleted these additions, stating that when income is determined by applying a net profit rate after rejecting the books of account, additional disallowances under these sections were unjustified. The revenue argued that these additions were deeming additions and should be confirmed. The assessee contended that no separate additions under these sections could be made once income was estimated using a net profit rate. Citing various judicial decisions, the Tribunal upheld the CIT(A)'s order, emphasizing that conflicting opinions favored the assessee, leading to the dismissal of the revenue's appeal.

In conclusion, the Tribunal dismissed the revenue's appeal, upholding the CIT(A)'s decisions regarding the allowance of depreciation and the deletion of additions under Sections 40(a)(ia) and 40A(3) of the Income Tax Act. The judgment highlighted the necessity of separately allowing depreciation when income is estimated using a net profit rate and emphasized the legal position that disallowances under specific sections were unwarranted in such circumstances.