2021 (12) TMI 561 - AT - Income Tax

Rectification of mistake u/s 154 - deduction on account of depreciation separately while computing its income by applying the net profit rate - HELD THAT - We find merit in the contention of assessee that there was a mistake in the order passed by the Assessing Officer under section 143(3) of the Act on 04.03.2015 in not allowing depreciation allowance separately when the income of the assessee from the business of contracting was computed by the AO by applying the net profit rate. Since the said mistake was apparent from record, it was correctly rectified by the AO in the first order passed under section 154 of the Act since the said order passed by the Assessing Officer under section 154 in allowing deduction on account of depreciation allowance separately when the income of the assessee was computed by applying the net profit rate was duly supported by the decision of Shyam Bihari 2012 (8) TMI 420 - PATNA HIGH COURT as well as the CBDT Circular dated August 31, 1965 - We also find merit in the contention raised by the ld. Counsel for the assessee that there was no mistake in the said order much less the mistake apparent from record, which could be rectified under section 154 as done by the Assessing Officer vide his second order dated 26.11.2015 passed under section 154. The ld. CIT(Appeals), in our opinion, therefore, was not justified in upholding the order of the Assessing Officer passed under section 154 dated 26.11.2015 on the issue of disallowance of depreciation. Addition made on account of interest on FDR - We are of the view that there being nothing on record to establish that the investment in the FDR made by the assessee was for the purpose of its business, the interest earned on the said FDR was liable to be added separately while computing the total income of the assessee by applying the net profit rate. We, therefore, find no infirmity in the impugned order of the ld. CIT(Appeals) confirming the addition made by the Assessing Officer on this issue vide his order dated 26.11.2015 passed under section 154 of the Act. Rate of net profit to be adopted for estimating the income of the assessee - As observed that the net profit rate of 6% adopted in the assessment originally completed under section 143(3) of the Act was increased by the Assessing Officer vide the first order dated 27.04.2015 passed under section 154 of the Act while allowing the depreciation allowance separately and since the said order was accepted by the Assessing Officer and no appeal against the same was filed by the assessee before the ld. CIT(Appeals), we are of the view that the net profit rate of 6.5% applied by the Assessing Officer had become final and the same having been not disturbed by the Assessing Officer even in the second order dated 26.11.2015 passed under section 154, we are of the view that this issue was not arising from the second order passed by the Assessing Officer under section 154 and the ld. CIT(Appeals) was not justified in disturbing the same while disposing of the appeal of the assessee against the second order passed by the Assessing Officer under section 154. We accordingly modify the impugned order of the ld. CIT(Appeals) and allow this appeal of the assessee partly.

Summary

Issues:
1. Disallowance on account of depreciation.
2. Addition of interest income on FDR.
3. Adoption of net profit rate for estimating income.

Disallowance on account of depreciation:
The appeal was against the order upholding the disallowance of depreciation by the Assessing Officer under section 154. The Assessing Officer initially rejected the books of account and computed income at 6% of gross receipts. The assessee claimed depreciation should have been allowed separately. The Assessing Officer rectified the mistake under section 154, but later disallowed depreciation again. The CIT(A) upheld the disallowance. The Tribunal referred to the CBDT Circular and a High Court decision stating depreciation should be allowed separately. The Tribunal found the first rectification order allowing depreciation was correct, and the second order disallowing it was unjustified.

Addition of interest income on FDR:
The Assessing Officer added interest income on FDR separately, despite the assessee arguing it was for business purposes and part of the net profit estimation. The CIT(A) confirmed the addition. The Tribunal agreed with the CIT(A) that the interest income should be added separately while computing total income. The Tribunal found no error in confirming the addition of interest income on FDR.

Adoption of net profit rate for estimating income:
The Assessing Officer increased the net profit rate from 6% to 6.5% in the first rectification order. The CIT(A) reduced it back to 6%. The Tribunal noted that since the Assessing Officer did not disturb the 6.5% rate in the second rectification order, it became final. The Tribunal held that the CIT(A) was not justified in changing the net profit rate in the appeal against the second rectification order. Consequently, the Tribunal partially allowed the appeal, modifying the CIT(A)'s order on the net profit rate issue.

In conclusion, the Tribunal partially allowed the appeal, finding in favor of the assessee on the disallowance of depreciation issue based on legal precedents and the CBDT Circular. The addition of interest income on FDR was upheld. The Tribunal maintained the 6.5% net profit rate adopted by the Assessing Officer, stating it had become final.