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Income Tax Appellate Tribunal, KOLKATA-PATNA ‘E-COURT’, KOLKATA
Before: Shri P.M. Jagtap, Vice- & Shri A.T. Varkey
Per Shri P.M. Jagtap, Vice-President (KZ):- This appeal filed by the assessee is directed against the order of ld. Commissioner of Income Tax (Appeals), Bhagalpur dated 17.09.2018, whereby he upheld the order passed by the Assessing Officer under section 154 on 26.11.2015 making a disallowance on account of depreciation.
The assessee in the present case is a partnership firm, which is engaged in the business of executing contract works. The return of income for the year under consideration was filed by it on 23.03.2013 declaring total income of Rs.45,31,240/-. In the assessment completed under section 143(3) of the Act vide an order dated 04.03.2015, the
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books of account of the assessee were rejected by the Assessing Officer and its income from the business was computed by applying the net profit rate of 6% on the total gross receipts of Rs.8,21,96,185/- at Rs.49,31,770/-. Thereafter the assessee moved an application under section 154 on 20.03.2015 claiming that depreciation should have been allowed by the Assessing Officer separately from the income computed by applying the net profit rate and there was a mistake apparent from record in the order of the Assessing Officer passed under section 143(3) of the Act in not allowing such depreciation. This stand of the assessee was found to be correct by the Assessing Officer and vide an order passed under section 154 on 27.04.2015, the Assessing Officer re-computed the income of the assessee by applying a net profit rate of 6.5% at Rs.53,42,752/-. After allowing depreciation of Rs.7,02,732/- from the profit so worked out, the total income of the assessee was determined by him at Rs.46,40,020/-. Thereafter the Assessing Officer was of the view that there was a mistake in allowing depreciation separately from the income of the assessee computed by applying net profit rate as well as in not adding separately the interest income on FDR amounting to Rs.41,493/- and the same being apparent from record, he issued a notice under section 154 to the assessee. In reply, it was submitted on behalf of the assessee in respect to the issue of interest on FDR that the investment in FDR having been made for business purpose, interest income earned thereon had a direct nexus with the business of the assessee and there was no separate addition required to be made on account of such interest when its income was estimated by applying the net profit rate to the gross receipts. The Assessing Officer, however, did not find merit in the stand of the assessee and made the addition on account of interest on FDR amounting to Rs.41,493/- separately to the business income estimated by applying the net profit rate. He also held that the depreciation of Rs.7,02,732/- having been already debited by the assessee in the profit & loss account, the same was already taken into consideration while computing the business income of the assessee by
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applying the net profit rate and there was a mistake in allowing depreciation separately in the first order passed under section 154 on 27.04.2015. Accordingly the second order under section 154/143(3) was passed by the Assessing Officer on 26.11.2015 making addition of Rs.41,493/- on account of interest on FDR and disallowance of Rs.7,02,732/- on account of depreciation.
Aggrieved by the second order passed by the Assessing Officer under section 154/143(3) of the Act, an appeal was preferred by the assessee before the ld. CIT(Appeals) and after considering the submissions made by the assessee as well as the material available on record, the ld. CIT(Appeals) disposed of the appeal of the assessee vide paragraph nos. 2 & 3 of the impugned order, which read as under:- “(2) An appeal was filed in Form No.35 alongwith grounds of appeal, statement of facts, proof of payment of appeal fee etc. During the appeal proceedings, a letter of authority was filed on the name of Sri Sanjay Kumar, CA who appeared in response to the notices issued. The assessee had taken as many as 8 grounds of which ground nos. 1, 7 & 8 are general in nature hence not separately adjudicated. Ground nos.2 & 4 are that the proposed disallowance of depreciation could not have been done vide the proceedings u/s.154, where two opinions are possible on an issue. This ground of the assessee deserves to be dismissed since the depreciation was wrongly allowed vide the previous 154 proceedings dated 27.04.2015. From a perusal of the order passed u/s. 143(3) dated 04.03.2015, it is seen that in the concluding para, the AO specifically stated as under:- "Therefore, I hereby reject the books of the assessee and compute income @6% of the gross receipts from contract works. It is clarified that since the assessment is being made in the manner prescribed u/s. 144, no further expenses/deemed expenses would be allowable" From the above remarks made in the assessment order, it becomes evident that income from contract works was estimated at 6% and that no further expenses would be allowable. Therefore, vide the order passed u/s.154 of the Act, the AO should not have allowed the notional expenditure of depreciation from the estimated incomes from contract works. To that extent, the order passed u/s.154 of the Act, was incorrect. There is no possibility of any two opinions at this stage because while the order u/s.143(3) clearly stated that no
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further expenditure would be allowable, the AO incorrectly allowed the depreciation vide the 154 proceedings. If the assessee is of the opinion that depreciation should have been separately allowed after estimating the income from contract works, then he should have appealed against the order passed u/s.143(3) of the Act. Thus, no dispute is possible about allowing the depreciation, vide the proceedings u/s.154. Such incorrect allowance of depreciation is proposed to be rectified vide the order under discussion. Thus, rectification of the previous mistake by passing a subsequent order u/s.154 is very much permissible and hence this ground of the assessee is dismissed.
(3) Ground no.3 is against the addition of Rs.41493/- representing the interest income. The AR pleaded that such addition could not have been made within the purview of section 154 of the Act. This ground of the assessee also deserves to be dismissed since the assessee itself disclosed interest income from FDRs in the audited P&L accounts and vide the return filed. An income disclosed vide the return filed, remained to be brought to tax while completing the assessment u/s.143(3) of the Act. This constitutes a mistake apparent from record. Thus, the AO had rightly brought to tax the interest income vide the present rectification proceedings. Ground no.3 of the assessee stands dismissed. Ground no.5 of the assessee is against the adoption of net profit @6.5% on the contract receipts. It was pleaded that in the original assessment order dated 04.03.2015, the estimation was made @6% and hence the profit rate of 6.5% could not have been adopted by the AO while passing the 154 order. It is seen from the records that the submission of the assessee is true. Vide the 143(3) proceedings, the estimation was made @6% of the gross receipts. However, while completing the previous 154 proceedings dated 27.04.2015, the income from business was computed @6.5% of the gross receipts. No reasons were cited by the AO, as to how and why the estimation is made @6.5% on the gross contract receipts. The same income was adopted while completing the subsequent 154 proceedings, resulting in the order under discussion. Admittedly, incorrect estimation was made while completing the previous 154 proceedings. Since the same income was adopted while completing the present 154 proceedings, impliedly the wrong estimation continued to these subsequent 154 proceedings. Thus, the plea of the assessee of restricting the estimation @6% is justified, more so because the AO did not cite any reasons for estimating the income @6.5%, while passing the previous 154 order on 27.04.2015. Accordingly, the AO is directed to estimate the business incomes @6% while giving effect to this appeal order. This ground of the assessee is allowed. In effect, the appeal is partly allowed”.
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The ld. CIT(Appeals) thus confirmed the addition made by the Assessing Officer on account of interest on FDR amounting to Rs.41,493/- as well as disallowance made on account of depreciation amounting to Rs.7,02,732/-. He, however, reduced the net profit of 6.5% adopted by the Assessing Officer in the first order passed under section 154 on 27.04.2015 by estimating the income of the assessee from the business of contracting to 6%. Still aggrieved by the order of ld. CIT(Appeals), the assessee has preferred this appeal before the Tribunal.
We have heard the arguments of both the sides and also perused the relevant material available on record. In support of the assessee’s case for deduction on account of depreciation separately while computing its income by applying the net profit rate, ld. Counsel for the assessee has relied on the decision of the Hon’ble Patna High Court in the case of Shyam Bihari reported in 345 ITR 283, wherein it was held that if the net profit was required to be estimated, it should be estimated subject to the allowance for depreciation and the depreciation allowance should be deducted separately, as clarified by the CBDT Circular No. August 31, 1965, which was binding on the Assessing Officer. Keeping in view the said decision of the Hon’ble jurisdictional High Court as well as the CBDT Circular dated August 31, 1965 relied therein, we find merit in the contention of the ld. Counsel for the assessee that there was a mistake in the order passed by the Assessing Officer under section 143(3) of the Act on 04.03.2015 in not allowing depreciation allowance separately when the income of the assessee from the business of contracting was computed by the Assessing Officer by applying the net profit rate. Since the said mistake was apparent from record, it was correctly rectified by the Assessing Officer in the first order dated 27.04.2015 passed under section 154 of the Act since the said order passed by the Assessing Officer under section 154 in allowing deduction on account of depreciation allowance separately when the income of the assessee was computed by applying the net profit rate was duly supported by the decision of the
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Hon’ble Jurisdictional High Court in the case of Shyam Bihari (supra) as well as the CBDT Circular dated August 31, 1965 (supra). We also find merit in the contention raised by the ld. Counsel for the assessee that there was no mistake in the said order much less the mistake apparent from record, which could be rectified under section 154 as done by the Assessing Officer vide his second order dated 26.11.2015 passed under section 154. The ld. CIT(Appeals), in our opinion, therefore, was not justified in upholding the order of the Assessing Officer passed under section 154 dated 26.11.2015 on the issue of disallowance of depreciation.
As regards the addition made on account of interest on FDR amounting to Rs.41,493/-, we are of the view that there being nothing on record to establish that the investment in the FDR made by the assessee was for the purpose of its business, the interest earned on the said FDR was liable to be added separately while computing the total income of the assessee by applying the net profit rate. We, therefore, find no infirmity in the impugned order of the ld. CIT(Appeals) confirming the addition made by the Assessing Officer on this issue vide his order dated 26.11.2015 passed under section 154 of the Act.
As regards the issue relating to the rate of net profit is concerned, which is to be adopted for estimating the income of the assessee, it is observed that the net profit rate of 6% adopted in the assessment originally completed under section 143(3) of the Act was increased by the Assessing Officer vide the first order dated 27.04.2015 passed under section 154 of the Act while allowing the depreciation allowance separately and since the said order was accepted by the Assessing Officer and no appeal against the same was filed by the assessee before the ld. CIT(Appeals), we are of the view that the net profit rate of 6.5% applied by the Assessing Officer had become final and the same having been not disturbed by the Assessing Officer even in the second order dated
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26.11.2015 passed under section 154, we are of the view that this issue was not arising from the second order passed by the Assessing Officer under section 154 and the ld. CIT(Appeals) was not justified in disturbing the same while disposing of the appeal of the assessee against the second order passed by the Assessing Officer under section 154. We accordingly modify the impugned order of the ld. CIT(Appeals) and allow this appeal of the assessee partly.
In the result, the appeal of the assessee is partly allowed. Order pronounced in the open Court on December 08, 2021. Sd/- Sd/- (A.T. Varkey) (P.M. Jagtap) Judicial Member Vice-President (KZ) Kolkata, the 8th day of December, 2021
Copies to : (1) Divya Construction, 12, Bolunsi Road, Dhaka More, Banka, Bhagalpur-813102, Bihar (2) Assistant Commissioner of Income Tax, Circle-1, Bhagalpur
(3) Commissioner of Income Tax (Appeals), Bhagalpur (4) Commissioner of Income Tax , (5) The Departmental Representative (6) Guard File
By order
Senior Private Secretary/DDO, Income Tax Appellate Tribunal, Kolkata Benches, Kolkata Laha/Sr. P.S.