TaxTMI 
TaxTMI 
1993 (3) TMI 143
X X X X Extracts X X X X
X X X X Extracts X X X X
...., we take up ground No. 2 of the appeal. According to this ground of appeal of the assessee, the ld. CIT(A) erred in upholding the rejection of the books of account by taking recourse to provisions of section 145(2). After examination of purchase vouchers, etc., the ld. ITO rejected the assessee's books of account and applied proviso to sub-section (2) of section 145, with the following observations: "3. Examination of the purchase vouchers in regard to material earth work, steel binding and bending, shuttering and concrete etc. revealed that the payments are on basis of internal pay slips on which signatures of the payees have been obtained on revenue stamps. The addresses of the payees, their bills etc. are not maintained. This was found to be the case in respect of purchases of sand and bajri and other material also. Even the payments of labour for completing the work are on the basis of internal pay slips. In these circumstances, the genuineness of the payees or the job for which the payments were made or the material for the purchase of which the expenses were incurred, are not verifiable. 4. In the trading account, work in progress has been valued at Rs.84,000. The basi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t of payment made on secured advance of Rs.9,63,000. Thus finally net profit from the contract was determined at Rs.3,91,340. The ld. ITO determined and adopted this income by applying a net profit rate at 10 per cent. No doubt, there is no specific discussion in the assessment order about depreciation but it was subsequently explained on behalf of the revenue by the ld. ITO, before the ld. CIT (A) that depreciation on machinery was not allowed because net profit rate had been applied. 7. This issue was also contested by the assessee and the ld. CIT(A), after detailed discussion and in fact relying upon the ratio in the case of Saraya Engg. Works v. CIT [1987] 168 ITR 455 (All.) and further making mention of the order of the Chandigarh Bench of the Tribunal in the case of Mangal Dass Ashok Kumar [IT Appeal No. 798 (Chd.) of 1984, dated 27-2-1986] for assessment year 1982-83, held that the net profit rate applied by the Id. ITO for determining the income from contract business should be considered to cover all expenses and allowances including depreciation, interest on capital and expenses on hiring of machinery. The ld. CIT (A) thus confirmed the ld.ITO's action on the point. Th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....orks and the finding supra dated 27-2-1986 of the Tribunal. The assessee's grievance before us is against that finding of the ld.CIT(A). We have gone through the order dated 27-2-1985 of the local Bench of the Tribunal, wherein in the like situation, application of net profit rate at 10 per cent was considered fair and reasonable and thereafter disallowance of depreciation was also confirmed. The finding of the revenue authorities on the issue is thus in conformity with the Tribunal's order. Such action finds full support in the case supra decided by the Honble Allahabad High Court. On behalf of the assessee. nothing was shown to enable us to record a finding at variance from the finding under challenge. Mention of two assessment orders in the cases supra of M/s Lamba Builders and M/s Premier Construction Co. is seen to be irrelevant. in view of the detailed order of the Tribunal, followed by the ld. CIT(A). In view of the said order of the Tribunal and the ratio laid down by the Hon'ble Allahabad High Court on the issue at hand in similar circumstances, any reference to the assessment orders in the cases of other assessees would appear to be misconceived and irrelevant. Moreover, ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ee only wanted consequential relief to be given in this regard, if any relief was allowed in respect of other grounds of appeal. Adopting the ld. CIT(A)'s reasoning, we reject this ground also. 16. No other ground was either raised or pressed before us. Pages of the paperbooks mentioned before us have been gone into. 17. In the result, the appeal is dismissed. Per Shri S.K. Chander - I have gone carefully through the proposed order of the learned Judicial Member. However, I do not find it possible to bring myself in agreement with the various observations made by him and the conclusions arrived at. It is very, important first to bear in mind that when the apex body of the Income-tax Department (CBDT) finds it necessary to issue instructions to the Field Officers the issues involved have considerable importance and affect the public at large. The Hon'ble Supreme Court has held in the case of Navnit Lal C. Javeri v. K.K. Sen, AAC [1965] 56 ITR 198 that a circular issued by the Board would be binding on all persons and officers employed in the execution of the Act. Subsequently this view was re-affirmed by the Hon'ble Supreme Court in the case of Ellerman Lines Ltd. v. CIT [1....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ance how to be computed by the ITO 1. Numerous instances have come to the notice of the Board where assessee's claim for depreciation duly shown in the return was not considered by the Income-tax Officer because books of account produced were not properly maintained and it was necessary to estimate profits by invoking the proviso to section 13 of the 1922 Act. The course generally followed in such cases was to estimate the net income. The decision of the appellate authorities in such cases that mere fact that net profits had been estimated could not be a ground for saying that depreciation claimed in the returns had been duly 'allowed' as provided under the Act. On the contrary, they held, that since no depreciation was actually allowed in the past years. the profit or loss under section 10(2)(vii) would be computed without making any deduction for depreciation for arriving at the written down value of the asset. 2. The Board considered that where it is proposed to estimate the profit and the prescribed particulars have been furnished by the assessee, the depreciation allowance should be separately worked out. In all such cases, the gross profit should be estimated and the de....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... ---------------- Balance Rs. 39,22,544 Net profit @ 10 per cent Rs. 3,92,254 Add: Profit % @ 2 per cent on Rs. 917104 Rs. 18,342 ---------------- Total Rs. 4,10,596 Less: 2 per cent of secured ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 4.64 per cent. These are the assessments made by the Revenue and the same Revenue is claiming that in this case, net profit rate from contract must be taken at 10 per cent and even if nothing is mentioned in the assessment order, it must be presumed that depreciation has been allowed therefrom. There is no support or evidence for such a proposition to be upheld as done by my learned brother. 6. It is further important to note that if the assessment is made in violation of the circular of the Board, the least that the appellate authority can do is that it should be brought in accordance with the contents and spirit of that circular if it benefits the public. As pointed out supra, the circular of the Board clearly directs the Field Officers to work out income in such a manner that allowance or disallowance of depreciation is apparent from the record. There is no such effort made by the Income-tax Officer and the first appellate authority has supported him without appreciating the position of law and the contents of the circular which go in favour of the assessee because of a claim of depreciation made in the return before the Income-tax Officer as the assessee had maintained the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on 143(3) on 16-1-1989 as held by the Accountant Member or should not be allowed as a deduction therefrom as held by the Judicial Member?" THIRD MEMBER ORDER UNDER SECTION 255(4) 1. This is a case referred to me under section 255(4) of the Income-tax Act, 1961 for my opinion as the learned Members of the Chandigarh Bench, who heard this appeal, could not agree on the conclusion and they referred the following point of difference of opinion for me: "Whether, on the facts and in the circumstances of the case, depreciation should be allowed from the total income as computed by the Income-tax Officer in assessment order for the assessment year 1988-89 made under section 143(3) on 16-1-1989 as held by the Accountant Member or should not be allowed as a deduction therefrom as held by the Judicial Member?" 2. The assessee in this appeal is a private limited company deriving income from execution of contracts of construction of Mansoli Superpassage-cum-VR Bridge at RD 20.11 of SYL Canal Project, Punjab. The return for the year under appeal was filed on 30-11-1988 admitting an income of Rs.48,81O.The total receipts in the accounting year amounted to Rs.48,39,648. Out of this a t....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of depreciation from the net profit computed, the learned Commissioner (Appeals) held that when net profit was estimated, it must be presumed that all permissible allowances were made and income so determined should be deemed to have covered all the expenses including depreciation, interest on capital etc. and therefore no further allowance would be admissible. The Commissioner (Appeals) noticed that though the Income-tax Officer applied a net profit rate of 10 per cent on the gross receipts, denying the allowance of depreciation, yet he allowed deduction for interest of Rs.19,260. This according to the Commissioner (Appeals) was wrong although he did not enhance the assessment. Though he referred to the decision of the Punjab and Haryana High Court and the circular of the Board, he distinguished them pointing out that to the facts of this case they were inapplicable. He placed reliance upon a decision of the Allahabad High Court in the case of Saraya Engg. Works and also an order of the Chandigarh Bench of the Income-tax Appellate Tribunal in the case of Mangal Dass Ashok Kumar wherein it was held that the net profit rate of 10 per cent applied in a contractor's case would cover ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... by giving queer and quaint reasons for not following it. He referred to the judgment of the Supreme Court where the Supreme Court had repeatedly said that the instructions given by the Central Board of Direct Taxes were binding upon the Officers and the benevolent circulars issued are required to be followed by the departmental officers even though they deviate from the legal position, inasmuch as, they would go to the assistance of the assessees. The circular in full was quoted in his order to show how the circular was very significant and relevant and how the deviation from the following of the circular had affected the assessee and deprived him of its right to claim the depreciation. Since the Income-tax Officer has nowhere mentioned the fact that the assessee had claimed depreciation in the return and also failed to note that in arriving at the net profit, he considered the claim of depreciation of the assessee and since if depreciation is deemed to have been allowed in arriving at the net profit rate of 10 per cent. the rate of net profit before depreciation would come to about 16.5 per cent and that was unimaginary and unattainable in this case. Apart from there being no com....
X X X X Extracts X X X X
X X X X Extracts X X X X
....erefore interpret from the tenor of the order of the Income-tax Officer as to what could have passed in his mind regarding the claim of the assessee for depreciation allowance. The order of the Income-tax Officer shows that because of the defective nature of the vouchers, the provisions of section 145(2) were attracted. I have searched the order of the Income-tax Officer in vain to find out whether he had said anywhere that the profit rate shown by the assessee was unreasonable. He did not give any reasons as to why he was estimating the profit at 10 per cent except abruptly stating that on the gross receipts, he would estimate the net profit at 10 per cent. In the case of sub-contracts, he accepted a profit of 2 per cent but in the case of the assessee he estimated the net profit at 10 per cent. As I mentioned earlier, the tenor of the order of the Income-tax Officer shows, according to me, that he never wanted to disallow depreciation. The non-allowance of depreciation therefore appears to be an innocent mistake. If it is otherwise, there should have been a mention in the assessment order. Secondly as I have said above, the rate of net profit before depreciation would work out to....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... because that was the policy of the CBDT, which means the Government. They are not supposed to go against the intention of the Government in implementing laws. They must advance the course of justice by extending the benefits. There is no room for personal predilictions in implementing fiscal laws. The spirit more than the letter should receive highest consideration. I am therefore of the opinion that both the Income-tax Officer and the Commissioner (Appeals) have erred in appreciating the circular and in not applying it. 5. The decision of the Chandigarh Bench of the Tribunal on which reliance was placed by the learned Judicial Member to support his view cannot be said to be a decision of universal application given to cover an cases of contractors irrespective of the facts and situations. On facts of that case the Bench felt that what was done there was proper. That does not mean that that was the law to be applied to all cases of contractors without having regard to the facts of each individual case. The facts of this particular case are that the rate of net profit would have been 16.5 per cent before depreciation, which is unthinkable in the case of contractors and moreover ....