2014 (9) TMI 205 - HC - Income Tax

Allowability of depreciation and interest payment from estimated profits @ 12% - Held that - Revenue is not able to point out any provision of law in the Act or Rules made, which restricts the allowance of the depreciation and interest - the facility created under the Act is so firm and strong that if for any reason it becomes impermissible or unnecessary for an assessee to seek the allowance of depreciation for a particular AY, he is entitled to carry it forward, for the subsequent years - it assumes the character of unabsorbed depreciation - the AO permitted the allowance of unabsorbed depreciation - No reference is made to any provision of law to make such distinction - If an assessee is entitled to claim deduction of interest, be it u/s 36(1)(iii) of the Act or any other relevant provision and of depreciation u/s 37 of the Act, in the ordinary course of assessment, there is no reason why the same facilities be not extended to him, merely because the profit is determined on the basis of estimation - depreciation and interest, which are otherwise deductable in the ordinary course of assessment, remain the same legal character, even where the profit of assessee is determined on percentage basis - relying upon Circular dated 31.08.1965 issued by the Central Board of Direct Taxes The order of the Tribunal is upheld Decided against Revenue.

Summary

Issues:
1. Allowance of depreciation and interest payments from the estimate of profit
2. Granting reliefs on items not claimed by the assessee
3. Granting depreciation already granted by the Assessing Officer

Analysis:
Issue 1: Allowance of Depreciation and Interest Payments
The respondent, a civil contractor, declared losses for the Assessment Year 1994-95. The Assessing Officer passed an order estimating profits at 9% of total receipts and disallowing depreciation and interest payments. The Commissioner directed net profits to be calculated at 12% and allowed depreciation and interest. The Tribunal upheld the Commissioner's order. The appellant argued that depreciation and interest should not be allowed separately as per Section 44AD of the Income Tax Act. However, the respondent contended that best judgment assessment under Section 144 is distinct from depreciation allowance under Section 32.

Issue 2: Granting Reliefs on Unclaimed Items
The Commissioner determined net profits based on total receipts and allowed depreciation and interest. The Tribunal upheld this decision, emphasizing that the nature of business and unreliable books of account were considered. The appellant challenged the allowance of current depreciation and interest, claiming it was not permissible under the law. However, no provision was cited to restrict these deductions, and unabsorbed depreciation was allowed by the Assessing Officer. The Tribunal's decision was supported by a Circular from the Central Board of Direct Taxes.

Issue 3: Granting Depreciation Already Granted
The Assessing Officer allowed unabsorbed depreciation but denied current depreciation and interest deductions. The appellant argued that Section 44AD provides a comprehensive formula inclusive of depreciation and interest, but this provision was not applicable for the relevant assessment year. The court held that depreciation and interest deductions should be allowed even when profits are estimated, as long as the usual legal provisions are met.

In conclusion, the appeal was dismissed, emphasizing that depreciation and interest deductions should be allowed in ordinary assessments, regardless of profit estimation methods. The court found no reason to deny these deductions when the legal criteria were satisfied, and the appellant failed to demonstrate any legal basis for restricting depreciation and interest allowances.