High Court upholds Tribunal's decision on depreciation calculation under Income-tax Act with cost order

The High Court rejected the applications under section 256(2) of the Income-tax Act, 1961, holding that the Income-tax Appellate Tribunal's decision to allow depreciation separately when income is computed using a net rate was justified. The Court emphasized that there is no provision in the Act disallowing depreciation when a flat rate is applied. The Tribunal's decision to reduce the net profit rate to nine per cent. was deemed reasonable, considering the assessee's history and consistent application of the rate. The Court dismissed the applications, with costs imposed on the applicants.

---

---

Issues involved: Application u/s 256(2) of the Income-tax Act, 1961 regarding the allowance of depreciation when income is computed by applying a flat rate.

Summary:
The judgment pertains to two applications u/s 256(2) of the Income-tax Act, 1961, arising from a common order by the Income-tax Appellate Tribunal for the assessment years 1987-88 and 1988-89. The main question raised was whether the Tribunal was justified in allowing depreciation when the Income-tax Officer had already estimated income after allowing admissible depreciation. The assessee, a contractor, had claimed depreciation which the Income-tax Officer disallowed when applying a net rate of ten per cent. for the assessment year 1987-88. However, for the year 1988-89, a similar net rate was applied without specific observations. The Commissioner of Income-tax (Appeals) upheld the ten per cent. rate but allowed the depreciation claimed by the assessee. Both parties filed cross-appeals before the Income-tax Appellate Tribunal, which partially allowed the assessee's appeal by reducing the net profit rate to nine per cent. The Revenue sought a reference u/s 256(1) of the Act, which was dismissed, leading to the current applications.

The High Court rejected the applications, stating that the Income-tax Appellate Tribunal's decision was in line with a circular issued by the Central Board of Direct Taxes, allowing depreciation separately when income is computed using a net rate. The Court found no provision in the Income-tax Act disallowing depreciation when a flat rate is applied. It was noted that the Tribunal's decision did not raise any legal question, as the Income-tax Officer's assessment order did not support the disallowance of depreciation. The Court also highlighted that the Tribunal had considered the assessee's past history and determined a reasonable flat rate of nine per cent., which had been consistently applied without factoring in depreciation claims. A previous court decision cited by the Revenue was deemed irrelevant to the current case. Ultimately, both applications were dismissed as lacking merit, with costs imposed on the applicants.

---