COMMISSIONER OF INCOME TAX PATIALA vs. M/S HARBHAJAN SINGH & CO. SANGRUR

Facts

The Revenue is in appeal before the High Court of Punjab & Haryana against an order dated April 15, 2013, passed by the Income Tax Appellate Tribunal (ITAT), Chandigarh Bench 'B'. The ITAT had allowed deduction on account of depreciation to the assessee, Harbhajan Singh and Co. Sangrur, despite its income being calculated at a net profit rate. The Revenue contended that Section 44 AD(2) of the Income Tax Act, 1961, prohibits further deductions when income is calculated at a net profit rate. The Revenue also argued that the ITAT wrongly set aside the net profit rate of 10%. The assessee argued that Section 44 AD is not applicable as their receipts exceeded Rs. 40 lacs, and the net profit rate was rightly reduced to 6%.

Held

The High Court held that the ITAT rightly allowed depreciation to the assessee. The Court referred to a circular issued by the Central Board of Direct Taxes (CBDT) which clarified that Section 44 AD(2) of the Act applies to assessees whose gross receipts do not exceed Rs. 40 lacs. Since the assessee's gross receipts admittedly exceeded Rs. 10 crores, Section 44 AD was not applicable. Therefore, the prohibition on further deductions under Section 44 AD(2) did not apply. Regarding the reduction of the net profit rate from 10% to 6%, the Court found that the Tribunal determined the rate after considering the past net profit rate applied to the assessee and noted no perceptible change in the assessment year under consideration. The Court concluded that these findings of fact were devoid of arbitrary exercise of discretion or perversity, thus not giving rise to a substantial question of law. Consequently, the questions of law were answered against the revenue, and the appeal was dismissed. No issue was expressly left undecided.

Key Issues

1. Whether the Income Tax Appellate Tribunal erred in granting depreciation to the assessee, as the assessee's income was calculated at a net profit rate, in light of Section 44 AD(2) of the Income Tax Act, 1961? 2. Whether the Income Tax Appellate Tribunal erred in reducing the net profit rate from 10% to 6%? Assessee's Contentions: - Section 44 AD of the Act does not apply to the present case because the assessee's receipts admittedly exceed Rs. 10 crores, whereas Section 44 AD applies to assessees whose receipts do not exceed Rs. 40 lacs, as per a CBDT circular. - The net profit rate of 10% was rightly reduced to 6% as there was no reason to apply such a high gross profit percentage. Revenue's Contentions: - As Section 44 AD(2) of the Income Tax Act, 1961, provides that no further deduction shall be allowed when income is calculated at a net profit rate, the Tribunal is not justified in allowing deduction on account of depreciation. - Judgments in CIT Vs. Chopra Brothers and CIT Vs. Bhullar Construction relied upon by the ITAT do not apply as they pertain to assessment years before Section 44 AD was introduced. - The net profit rate of 10% has been wrongly set aside by the ITAT.