2014 (12) TMI 565 - HC - Income Tax

Applicability of section 44AD - Grant of depreciation - Whether the Tribunal has erred in granting depreciation to the assessee, as his income was calculated at a net profit rate Held that - It is clarified that Section 44AD(2) applies to assessees whose gross receipts do not exceed ₹ 40 lacs - assessee s gross receipts exceeded ₹ 10 crores the circular issued by CBDT clarifies the same thus, it applies to an assessee whose gross receipts do not exceed ₹ 40 lacs, the Tribunal has rightly allowed depreciation to the assessee - net profit rate of 10% was rightly reduced to 6% and as there was no reason to apply such a high gross profit percentage - The findings of fact being devoid of an arbitrary exercise of discretion or any perversity in the reasoning does not give rise to a substantial question of law Decided against revenue.

Summary

Issues:
1. Challenge to the order passed by the Income Tax Appellate Tribunal by the revenue.
2. Whether depreciation should be granted to the assessee when income is calculated at a net profit rate.
3. Validity of reducing the net profit rate from 10% to 6%.

Analysis:
The High Court was presented with a challenge by the revenue against the order passed by the Income Tax Appellate Tribunal. The revenue contended that the Tribunal erred in allowing deduction on account of depreciation to the assessee, as Section 44 AD (2) of the Income Tax Act prohibits further deductions when income is calculated at a net profit rate. The revenue argued that the judgments relied upon by the Tribunal were not applicable to the present case as they pertained to assessment years before Section 44 AD was introduced. On the other hand, the respondent argued that Section 44 AD did not apply to the assessee as their receipts exceeded the threshold. The High Court examined the circular issued by the Central Board of Direct Taxes, which clarified that Section 44 AD applies to assessees with gross receipts not exceeding a certain amount. Since the assessee's gross receipts far exceeded this limit, the Court held that the Tribunal was correct in allowing depreciation.

Regarding the reduction of the net profit rate from 10% to 6%, the Court found that the Tribunal had made this adjustment after considering past rates applied to the assessee, and there was no significant change in the current assessment year. The Court determined that there was no arbitrary exercise of discretion or perversity in the reasoning behind the decision. Consequently, the Court held that there was no substantial question of law arising from this issue, and the appeal was dismissed.