SHREE SUDHAKAR PANDEY,SONBHEDRA vs. ACIT RANGE-III,, MIRZAPUR

IN THE INCOME TAX APPELLATE TRIBUNAL ALLAHABAD ‘SMC’ BENCH, ALLAHABAD (THROUGH VIRTUAL COURT) BEFORE SHRI.VIJAY PAL RAO, JUDICIAL MEMBER ITA No. 7/ALLD/2021 Assessment Year: 2014-15 Shree Sudhakar Pandey, Civil Line, v ACIT, Robertsganj, Sonebhadra, Uttar Pradesh- . Range-III, Mirzapur, U.P. 231216 PAN-ALDS03711B (Appellant) (Respondent) Appellant by: Sh. Ashish Bansal, Adv Respondent by: Mr. A.K. Singh, Sr. DR Date of hearing: 07/12/2021 Date of pronouncement: 17/12/2021 O R D E R

SHRI VIJAY PAL RAO, JUDICIAL MEMBER: This appeal by the assessee is directed against the order dated 13.04.2019 of CIT(A), (National Faceless Appeal Centre), Delhi for the assessment year 2014-15. The assessee has raised the following grounds:- 1. “On the facts and in the circumstances of the case and in law, the Ld. CIT(A) failed to take care of conclusion of Ld. Assessing Officer marked at point No. 4 of the assessment order dated 13.04.2019 that Audited balance sheet of AY 2014-15 has now been filed and so the W.D.V. of the opening and closing of fixed assets was produced before ld. Assessing Officer. 2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in not allowing the depreciation of Rs. 4,30,265/- over the estimated income as per CBDT Circular No. 2 Dated 9.02.2011 where required particulars have been furnished in the return by the assessee and the opening and closing of fixed assets was produced before the ld. Assessing Officer. 3. That closing of the fixed of the AY 2014-15 of Rs. 24,38,869/- has been brought as opening in AY 2015-16 and so the depreciation of Rs. 4,30,265/- ought to have been allowed over the estimated income subject to declared income in view of CBDT Circular No. 2 Dated 9.02.2011.”

ITA No.7/ALLD/2021 Shree Sudhakar Pandey 2. The solitary issue arises in this appeal of the assessee is regarding disallowing the claim of depreciation after estimating the income @ 8% of Gross receipts. This is second round of litigation as in the first round of appeal, the Tribunal remanded this issue of allowability of depreciation to the record of the Assessing Officer vide order dated 21.12.2018 in ITA No. 265/Alld/2018. 3. The learned AR of the assessee has submitted that the assessee is a Civil Contractor and filed its return of income on 5th February, 2015 declaring total income at Rs. 11,53,190/-. During the scrutiny assessment, the Assessing Officer rejected the books of accounts of the assessee and estimated the income by applying the rate of 8% of total contracts receipts. The matter was carried up to this Tribunal and vide order dated 21.12.2018, the issue of allowability of depreciation was remanded to the record of the Assessing Officer for allowing the same in accordance with the Board Circular No. 2 of 2011. The learned AR has further pointed out that in the remand proceedings, the Assessing Officer instead of allowing the claim of depreciation as per the Circular No. 2 of 2011 has disallowed the claim on the ground that the same is deemed to have been allowed in computing the assessee’s profit as per the proviso of Section 44AD of the Act. The learned AR has pointed out that the assessee has brought to the notice of the Assessing Officer that the assessee has claimed the depreciation in the return of income at Serial No. 44 under the head depreciation and amortization of Part A profit & loss account of income tax return. The assessee has filed return of income on regular basis and not under Section 44AD. He has pointed out that the acknowledgment of ITR-4 suggests that the return was not filed in ITR-45 and income was declared on the basis of profit & loss account and books of accounts of the assessee and not under section 44AD of the Act. He has also referred to the original assessment order passed by the Assessing Officer wherein the Assessing Officer himself has stated that the case of the assessee is not covered under section 44AD. Thus the learned AR has submitted that the claim of depreciation was disallowed by the Assessing Officer on wrong presumption of fact. Similarly the CIT(A) has 2

ITA No.7/ALLD/2021 Shree Sudhakar Pandey dismissed the appeal of the assessee on the basis of the facts contrary to the record. The learned AR pointed that the assessee has given all the details regarding the claim of depreciation in the return of income. He has referred to the balance-sheet as well as the profit & loss account and submitted that all the details including the opening and closing balance W.D.V. of assets which were available before the Assessing Officer. Thus, the learned has submitted that both Assessing Officer and learned CIT(A) has rejected the claim of depreciation which is contrary to the directions of this Tribunal whereby the matter was remanded to the record of the Assessing Officer for allowing the claim in accordance with the CBDT Circular No. 2 of 2011. 4. On the other hand, the learned DR has submitted that the alleged Circular No. 2 of 2011 does not deal with the depreciation allowance in case of estimation of income but the said Circular deals with the depreciation allowance on the assets acquired under the finance lease agreement. He has further submitted that the relevant Circular is No. 29-D (XIX-14) File No. 45/239/65-ITJ dated 31.08.1965 which deals with the depreciation allowance in case of estimation of income.. However, the said Circular has been considered by the Hon'ble jurisdictional High Court in the case of CIT vs. Sahu Construction Private Limited reported in 362 ITR 609 alongwith the omission of Rule 5A w.e.f. 2.4.1987 and held that when the books of accounts are rejected and net profit is estimated then no deduction including depreciation is separately allowable. He has also relied upon the judgment of Hon'ble jurisdictional High Court in the case of Saraya Engg. Works (P) Ltd., vs. Commissioner of Income Tax 168 ITR 455. Thus the learned DR has contended that when the income of the assessee was estimated by the Assessing Officer then after omission of Rule 5AA w.e.f. 02nd April, 1987 the claim of depreciation is not admissible as per the CBDT Circular dated 31st August, 1965. 5. I have considered the rival submissions as well as relevant material on record. In the first round of appeal, this Tribunal vide order dated 21st December,

ITA No.7/ALLD/2021 Shree Sudhakar Pandey 2018 in ITA No. 265/2018 has remanded this issue to the record of the Assessing Officer in para 4 as under:- “4. We have heard the rival parties and have gone through the material placed on record. We find that books of account were not produced by the assessee before the Assessing Officer and therefore, the Assessing Officer calculated the receipts of the assessee by applying 8% net profit to the total contract receipts and thereby made an addition of Rs. 3,24,580/-. Learned AR had claimed before this Tribunal that necessary particulars for claim of depreciation were filed in the return of income and as per CBDT Circular No. 2 dated 09.02.2011, the Assessing Officer was bound to allow the claim of depreciation out of estimated income of the assessee. The fat of claim of depreciation in the return of income is not available on the record which can only be verified at the level of the Assessing Officer who should allow the claim of depreciation, if it is in accordance with the Board’s Circular and in accordance with the provisions of the law. Needless to say, the assessee will be provided reasonable and sufficient opportunity of being heard.”

ITA No.7/ALLD/2021 Shree Sudhakar Pandey (c) As per section 44AB(d), which reads as “Every person,- carrying on the gains of such person under section 44AD and he has claimed such income to be lower than the profits and gains so deemed to be the profits and gains of his business and his income exceeds the maximum amount which is not chargeable to income-tax in any previous year,)” Hence, the claim of depreciation is deemed to have been allowed in computing assessee’s profit as per the proviso of Section 44AD of the Act. Accordingly, the claim of depreciation is not allowed to the assessee.” 7. Thus, the Assessing Officer rejected the claim in view of the proviso of Section 44AD of the Act. The reason given by the Assessing Officer for disallowing the claim is contrary to the facts of the case as the assessee has not filed the return of income under the provisions of presumptive tax prescribed under section 44AD but the return of income was filed by the assessee on regular computation basis and this fact was duly considered by the Assessing Officer in the original assessment order dated 6.12.2016 in para 3 as under:- “The assessee has shown in the return the nature of business is Civil Contractors. The total business receipts/sales shown Rs. 5410294/-, other income of Rs. 11160009/- (which includes interest on security of Rs. 988919 and commercial tax refund of Rs. 127090/-) and income from other source shown of Rs. 28935/-. In the return Part A-BALANCE SHEET, Column 6, the assessee has denied that regular books of account are not maintained. The assessee has also disclosed in the return in Schedule BP Column 4 that his case is not covered u/s 44AD. The assessee was asked to furnish documentary evidence of all receipts shown and their copy of account and also asked to produce complete books of accounts, bills, vouchers, receipts bills etc. The assessee in his reply dated 12.09.2016 stated that his case is covered by section 44AD. The reply of the assessee is contrary to what the assessee has disclosed in his return that his case is not coverd under section 44AD. The assessee in his reply dated 28.11.2016 stated that in the current year the gross receipts under works contract is Rs. 19,62,894/- and receipts of Rs. 34,47,400/- is against job work.”

ITA No.7/ALLD/2021 Shree Sudhakar Pandey proceedings, the assessee did not produce the books of accounts however, at the time of remand proceedings, the Assessing Officer has stated in the order that the assessee produced the books of accounts which were audited on 15.02.2015. Therefore, this reason of rejection of claim as stated by the CIT(A) in the impugned order is contrary to the facts and record. 9. Thus the Assessing Officer as well as CIT(A) have rejected the claim at threshold without even examine the same whether the claim is allowable in terms of the Circular as well as provisions of law or not? So far as the CBDT Circular as relied upon by the assessee is concerned, the same is reproduced for ready reference as under:- Claim for depreciation-Where required particulars have not been furnished 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 the 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 deductions and allowances including the depreciation allowance should be separately deducted from the gross profit. If it is considered that the net profit should be estimated, it should be estimated subject to the allowance for depreciation and the depreciation allowance should be deducted therefrom. 3. Even where best judgment is made, the above procedure should be adopted provided the required particulars have been furnished by the assessee. In cases where required particulars have not been furnished by the assessee and no claim for depreciation has been made in the return, the Income-tax Officer should estimate the income without allowing depreciation allowance. In such cases, the estimate of net profit would be naturally higher than otherwise and the fact that the estimate has been made without considering depreciation allowance may be clearly brought out in the assessment order. In such cases, the written down value of depreciable assets would continue to be the same as at the end of the preceding year as no depreciation would actually be allowed in the assessment year.

ITA No.7/ALLD/2021 Shree Sudhakar Pandey 10. CBDT Circular dated 31st August, 1965 clarifies that in the case of estimation of profit and the prescribed particulars have been furnished by the assessee, the depreciation allowance should be separately worked out. This Circular has been considered by the Hon'ble jurisdictional High Court in the case of CIT vs. Sahu Construction Private Limited (supra) in para 18 and 24 to 26 as under:- “18. Firstly, the circular no.29D dated 31.8.1965 which prescribed to allow depreciation out of the estimated profit, is not applicable, as the Rule 5AA of the income Tax Rules has been omitted with effect from 2nd April, 1987. This aspect was discussed by this High Court and it was observed in the case of CIT vs Bishambhar Dayal & Co. 210 ITR 118 (Alld) that the Income-tax Appellate Tribunal relied upon a circular of the Central Board of Direct Taxes No. 29D(xix) of 1965, F.No.45/239/65-ITC, dated March 31, 1965. Under this circular, the Board had issued instructions that where income is proposed to be computed by applying a net rate and the assessee has furnished the prescribed particulars for the claim in respect of depreciation, the depreciation should be allowed separately and deducted out of the gross profits. The order of the Income-tax Appellate Tribunal is in conformity with the circular issued by the Central Board of Direct taxes. No provision of the Income-tax Act was brought to our notice which makes the claim to depreciation inadmissible where the income is computed by applying the flat rate. ****************************************************************************************** 24. Needless to mention that the estimate is question of fact as per the ratio laid down in the cases of Commissioner (Custom) vs. Stoneman Marble [(2011) 2 SCC 758], Vijay K. Talwar vs. CIT [(2011) 1 SCC 673]; New Plaza Restaurant vs. ITO [309 ITR 259 (HP)]; and Sanjay Oil Cake vs. CIT [316 ITR 274 (Gujarat)]. 26. In the instant cases, when the books of accounts were rejected, then the assessee is not entitled for the depreciation separately on the same set of books of accounts which have no value after its rejection. Hence, we modify the impugned order passed by the Tribunal pertaining to the addition and direct that the depreciation will not be allowed when the books of accounts were rejected and net profit rate was estimated.” 11. Thus, the Hon'ble High Court has held that the Circular No. 29D dated 31st August, 1965 is not applicable after the Rule 5AA of Income Tax Act is omitted w.e.f. 02nd April 1987. The Hon'ble High Court has further held that no separate deduction like depreciation will be allowed when the net profit is made on estimate basis after the rejection of books of accounts. The Hon'ble High Court has interpreted the provisions relating to the estimation of income as well as the allowability of depreciation. There is no doubt that Circulars and instructions issued by the CBDT is binding on the tax authorities but when the Hon'ble Supreme Court or Hon'ble High 7

ITA No.7/ALLD/2021 Shree Sudhakar Pandey Court declares the law on the question arising for consideration the decision of the Hon'ble Supreme Court and the Hon'ble High Court would be the binding authorities and not the Circular. This proposition has been laid down by the Hon'ble Supreme Court in the case of Commissioner of Central Excise, Bolpur vs. Ratan Melting & Wire Industries 2008 taxmann.com 1649 (Supreme Court) as under:- “6. Circulars and instructions issued by the Board are no doubt binding in law on the authorities under the respective statutes, but when the Supreme Court or the High Court declares the law on the question arising for consideration, it would not be appropriate for the Court to direct that the circular should be given effect to and not the view expressed in a decision of this Court or the High Court. So far as the clarifications/circulars issued by the Central Government and of the State Government are concerned they represent merely their understanding of the statutory provisions. They are not binding upon the court. It is for the Court to declare what the particular provision of statute says and it is not for the Executive. Looked at from another angle, a circular which is contrary to the statutory provisions has really no existence in law.”

Sd/- [VIJAY PAL RAO] JUDICIAL MEMBER DATED: 17/12/2021 Allahabad Sh Copy forwarded to: 1. Appellant – 2. Respondent – 3. CIT(A) , Allahabad 4. CIT 5. DR - 8