1996 (8) TMI 153 - AT - Income Tax

Summary

Issues:
1. Application of net profit rate for assessment years 1991-92 and 1992-93.
2. Disallowance of depreciation and interest paid to third parties.
3. Reasonableness of the net profit rate applied by the Assessing Officer.
4. Compliance with the provisions of section 145 of the Income Tax Act.
5. Allowability of depreciation and interest paid to third parties after applying the net profit rate.

Analysis:

Issue 1: Application of net profit rate for assessment years 1991-92 and 1992-93
In the assessment year 1991-92, the Assessing Officer (AO) applied a net profit rate of 10.5% on total receipts, not allowing depreciation and interest paid to third parties. The assessee declared a lower Gross Profit (G.P.) rate of 8.31%. The CIT(A) upheld the AO's decision, considering the rise in price index but allowed a lump sum relief. In the assessment year 1992-93, the AO applied a net profit rate of 10% without considering depreciation and interest. The CIT(A) agreed with the AO but allowed relief due to the rise in the price index.

Issue 2: Disallowance of depreciation and interest paid to third parties
The assessee contended that the AO did not allow 100% depreciation on hutments in 1991-92 and did not consider depreciation on trucks and machinery in 1992-93. The Tribunal observed that in similar cases, depreciation and interest were allowed separately even after applying the net profit rate.

Issue 3: Reasonableness of the net profit rate applied
The counsel for the assessee argued that the net profit rate applied by the AO was high compared to similar cases where lower rates were considered reasonable. The Tribunal agreed, stating that the AO's reasoning based on low withdrawals by partners was not sufficient to justify the higher rate.

Issue 4: Compliance with section 145 of the Income Tax Act
The AO invoked section 145 to estimate profits at a net rate of 10% in 1992-93 due to inadequate maintenance of books and lack of vouchers for expenses. The Tribunal directed the AO to verify factual details and allow depreciation and interest separately.

Issue 5: Allowability of depreciation and interest paid to third parties after applying the net profit rate
The Tribunal, in line with previous decisions, held that depreciation and interest paid to third parties should be allowed even after applying the net profit rate. The Tribunal directed the AO to allow these claims after verifying the details for the assessment year 1992-93.

In conclusion, the Tribunal partially allowed the appeal, deleting the addition made by the CIT(A) and directing the AO to allow depreciation and interest separately after applying the net profit rate. The Tribunal emphasized the importance of considering past history and reasonable rates while assessing profits for the assessee.