Depreciation not covered by net profit rate where books are rejected and CBDT circulars were overlooked.

After rejection of the books under section 145 of the Income-tax Act, 1961, the Tribunal applied a net profit rate and stated that it would cover depreciation and interest. The note records that this approach was taken without considering the CBDT circulars relied on by the assessee, and that section 40(b) was not applicable for the relevant assessment year. It further states that depreciation could not be treated as covered by the net profit rate of 7 per cent, and the issue was decided in favour of the assessee.

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Issues: Whether, on the facts and in the circumstances of the case, depreciation could be treated as having been covered by the net profit rate applied by the Tribunal.

Analysis: The assessment was made by applying a net profit rate after rejecting the books under section 145 of the Income-tax Act, 1961. The Tribunal reduced the rate and stated that the rate would cover depreciation and interest, but it did so without considering the Central Board of Direct Taxes circulars relied upon by the assessee. The reference to section 40(b) was held to be inapplicable to the assessment year in question.

Conclusion: The Tribunal was not right in treating the claim of depreciation as covered in the net profit rate of 7 per cent. The issue was answered in favour of the assessee.

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