Income Tax Appellate Tribunal - Chandigarh
Chopra Bros. (India) Pvt. Ltd. vs Income-Tax Officer on 31 March, 1993
Equivalent citations: [1993]45ITD85(CHD)
ORDER
S.S. Mehra, Judicial Member
1. The appellant-assessee, by the present appeal, challenges order dated August 4, 1989, of the learned Commissioner of Income-tax (Appeals), for the assessment year 1988-89, on various grounds mentioned in the memorandum of appeal.
2. The assessee in this case, by status, is a private limited company, deriving income from executing contract work of construction of Mansoli Super-passage-cum-VR Bridge at RD 20.100 of SYL Canal Project (Pb). The method of accounting was mercantile and its accounting period was the year ending March 31, 1988. The return was filed on November 30, 1988, showing income of Rs. 48,810. Assessment was completed on March 31, 1989, of a total income of Rs. 3,91,340, under Section 143(3). First appeal against the said assessment order was heard and decided by the learned Commissioner of Income-tax (Appeals) and the present appeal before us is in respect of the first appellate order.
3. To start with, we take up ground No. 2 of the appeal. According to this ground of appeal of the assessee, the learned Commissioner of Income-tax (Appeals) erred in upholding the rejection of the books of account by taking recourse to the provisions of Section 145(2). After examination of purchase vouchers, etc., the learned Income-tax Officer rejected the assessee's books of account and applied the provisions of 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 the 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 materials also. Even the payments for 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 materials 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 basis of this amount is only estimated and no check book regarding the materials lying at the site or used in the work-in-progress, the wages paid and other expenses in connection with the work-in-progress, are not ascertainable. As such, the provisions of Section 145(2) are applicable in this case."
4. A ground was taken before the learned Commissioner of Income-tax (Appeals) during the hearing of the first appeal that the assessee had maintained regular books of account and that the learned Income-tax Officer erroneously rejected the book version and took recourse to the provisions of Section 145(2). The learned Commissioner of Income-tax (Appeals ) confirmed the application of the proviso by the learned Income-tax Officer as it was contended before him that the objection about the application of the proviso was withdrawn. Thus, the ground on this aspect before the learned Commissioner of Income-tax (Appeals ) was withdrawn and thereafter the action of the learned Income-tax Officer on the issue was confirmed by the learned Commissioner of Income-tax (Appeals ). The assessee's present ground before us is against that part of the first appellate order.
5. We are surprised that ground No. 2 is misconceived and without any merit. In view of the detailed reasons mentioned in paragraph 2 of the order under challenge, we reject this ground.
6. Next we take up ground No. 3 of the appeal. According to this ground, the learned Commissioner of Income-tax (Appeals) is said to have erred in upholding the application of the net rate of profit at ten per cent, on total contract receipts without allowing depreciation said to have been claimed on the machinery used for the contract works. Total receipts from the contract works were reflected at Rs. 48,39,648. Out of this receipt, the assessee had paid job work charges to Messrs. R.S. Lamba and Co. amounting to Rs. 5,90,066 and Messrs. Yash Pal Chopra and Co. amounting to Rs. 3,37,038. These payments were made for getting the earthwork and sinking on sub-contract basis. As discussed earlier, the assessee's books of account were not found to be in order and after noticing certain specific discrepancies, the same were rejected by applying the provisions of Sub-section (2) of Section 145. The learned Income-tax Officer, in those circumstances, applied a net profit rate of ten per cent, on the balance receipt, after deducting payments made to sub-contractors. On the above basis, the net profit rate of ten per cent. was worked out at Rs. 3,92,254. In that, another profit of Rs. 18,342 was added on account of profit at two per cent, on the payments made to sub-contractors. That gave a figure of Rs. 4,10,596. Out of the said figure, an amount of Rs. 19,260 was deducted on account 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 learned Income-tax Officer determined and adopted this income by applying a net profit rate at ten 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 learned Income-tax Officer, before the learned Commissioner of Income-tax (Appeals ) that depreciation on machinery was not allowed because the net profit rate had been applied.
7. This issue was also contested by the assessee and the learned Commissioner of, Income-tax (Appeals), after a detailed discussion and in fact relying upon the ratio in the case of Sarayo Engineering Works v. CIT [1987] 168 ITR 455 (All) and further making mention of the order dated February 27, 1986, of the Chandigarh Bench of the Tribunal in I. T. A. No. 798/Chandigarh of 1984, for the assessment year 1982-83, in the case of Messrs. Mangal Dass Ashok Kumar, held that the net profit rate applied by the learned Income-tax Officer 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 learned Commissioner of Income-tax (Appeals) thus confirmed the learned Income-tax Officer's action on the point. The application of the net profit rate at ten per cent, on total receipts was confirmed and nothing more was found allowable by way of depreciation.
8. The assessee's present ground before us is against the above action. Learned counsel, Shri D. K. Gupta, repeated the submissions seem to have been recorded in the orders of the Revenue authorities and also made mention of the Board's circular dated May 31, 1965, and the ratio in the case of Beco Engineering Co. Ltd. v. CIT [1984] 148 ITR 478 (P & H). He also made mention of pages 5 to 15 of the paperbook, being a copy of the assessment order dated January 16, 1989, in the case of Messrs. Lamba Builders, for the assessment year 1988-89. He further made mention of page 17 of the paperbook, being a statement of income in the case of Messrs. Premier Construction Co., for the assessment year 1988-89. He also mentioned pages 18 to 21 of the paperbook, being a copy of the assessment order dated July 6, 1989, in the case of Messrs. Premier Construction Co., for the assessment year 1988-89. He also invited our attention to page 4 of the paperbook, showing details of the trading results of the two companies, made mention of hereinabove. According to learned counsel, the assessee's claim for depreciation was allowable under law. It was also pointed out by learned counsel that the Tribunal's order supra dated February 27, 1986, was inapplicable to the assessee's case and that the ratio in the case of Saraya Engineering Works [1987] 168 ITR 455 (All) was also not relevant. He also pointed out that keeping in view page 4 of the paperbook, the gross profit shown by the assessee being reasonable, should have been accepted.
9. On behalf of the Revenue, the learned Senior Departmental Representative, Shri D. Chatterjee, supported the orders of the Revenue authorities and contended further that no interference was called for.
10. Rival submissions have been heard and the record carefully perused. In the present case, as mentioned earlier, the assessee derived income from executing contract works. Depreciation on machinery is said to have been claimed in the return, the absence of any discussion on the point in the assessment order notwithstanding. The learned Income-tax Officer, after detailed discussion, rejected the assessee's book version by applying the provisions of Sub-section (2) of Section 145 and thereafter determined the income after applying a net profit rate of ten per cent. Such action was subsequently confirmed by the learned Commissioner of Income-tax (Appeals), following the ratio in the case of Saraya Engineering Works [1987] 168 ITR 455 (All) and the finding dated February 27, 1986, of the Tribunal. The assessee's grievance before us is against that finding of the learned Commissioner of Income-tax (Appeals ). We have gone through the order dated February 27, 1985, of the local Bench of the Tribunal, wherein, in like situation, the application of a net profit rate of ten 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 decided by the Allahabad High Court. On behalf of the assessee, nothing was shown to enable us to record a finding at variance with the finding under challenge. The mention of the two assessment orders in the cases of Messrs. Lamba Builders and Messrs. Premier Construction Co. is seen to be irrelevant in view of the detailed order of the Tribunal, followed by the learned Commissioner of Income-tax (Appeals). In view of the said order of the Tribunal and the ratio laid down by the 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, the finding may be correct in the circumstances existing in those cases, whereas the finding under challenge in the present case, in our view, is fully justified. Mention of the Board's circular dated August 31, 1965, also is of no relevance or consequence because the issue in the case of Beco Engg. Co. Ltd. [1984] 148 ITR 478 (P & H), wherein the circular is seen to have been mentioned was different. The assessee, in our view, gets support neither from the ratio in that case nor the Board's circular. In the light of the above discussion, we are satisfied that the learned Commissioner of Income-tax (Appeals) rightly confirmed the application of the net profit rate of ten per cent, and also correctly held that the assessee's claim for depreciation was not separately allowable after application of the net profit rate. We thus see no merit in this ground of the appeal also.
11. Another ground, i.e., No. 4, is to the effect that the learned Commissioner of Income-tax (Appeals) failed to appreciate the facts and circumstances in their correct perspective in utter violation of the Board's circular and the judgment of the Punjab and Haryana High Court in the case of Beco Engg. Co. Ltd. [1984] 148 ITR 478 and the Tribunal's decision dated August 23, 1977, in the case of Messrs. V. K. Aggarwal and Co., for the assessment year 1972-73.
12. After hearing the rival submissions and perusing the record and in fact keeping in view our observations on ground No. 3 of the assessee's appeal, we see no necessity to record any separate and independent discussion on this issue. This ground also is, therefore, rejected.
13. Ground No. 5 is that the net rate of profit of ten per cent, applied and confirmed, is highly excessive and unjustified. The assessee's books of account have been rejected and the net profit rate was applied thereafter. Nothing specific is seen in the assessee's case to interfere with the net profit rate of ten per cent, which was neither excessive nor unjustified. On account of that, we reject this ground also.
14. The first ground raised before us is that the returned income of Rs. 46,810 should have been accepted instead of the estimated income of Rs. 3,91,340. Keeping in view the entire discussion on grounds Nos. 3 to 5, no separate discussion is necessary on the issue as the income was correctly determined in the circumstances of the case.
15. Ground No. 6 before us is against charging interest under sections 217 and 139(8). In paragraph 5 of the order under challenge, the learned Commissioner of Income-tax (Appeals) has observed that the assessee only wanted consequential relief to be given in this regard, if any relief was allowed in respect of other grounds of appeal. Adopting the learned Commissioner of Income-tax (Appeal )'s reasoning, we reject this ground also.
16. No other ground was either raised or pressed before us. Pages of the paperbook mentioned before us have been gone into.
17. In the result, the appeal is dismissed.
S. K. Chander, Accountant Member
18. 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 ( Central Board of Direct Taxes) finds it necessary to issue instructions to the field officers, the issues involved have considerable importance and affect the public at large. The Supreme Court has held in the case of Navnit Lal C. Javeri v. K. K. Sen [1965] 56 ITR 198, that a circular issued by the Board would be binding on all officers and persons employed in the execution of the Act. Subsequently, this view was reaffirmed by the Supreme Court in the case of EUerman Lines Ltd. v. CIT [1971] 82 ITR 913. However, what is binding on administrative authorities is not necessarily binding on the courts. Benevolent circulars issued by the Board, however, " even if they deviate from the legal position, are required to be followed by the Department since such circulars would go to the assistance of the assessees ". On this there are a large number of judgments such as Laxmichand Hirjibhai v. CIT [1981] 128 ITR 747 (Guj); CIT v. Mothooram Premchand [1980] 121 ITR 59 (P & H) ; CIT v. T.S. Venhiteswaran [1979] 120 ITR 675 (Ker); CWT v. Suresh Chandra Badri [1983] 142 ITR 89 (MP). It is interesting to note that the Madras High Court in the case of CIT v. K.T.M.S. Mohamed [1981] 128 ITR 580 held that a benevolent circular issued by the Central Board of Direct Taxes would have to be applied in a sympathetic as well as in a broad and liberal manner.
19. With the above position of law, we have to appreciate the judgments cited before us and the obiter of the court with regard to the circular No. 29D(XIX-14), dated August 31, 1965. The observations of the Punjab and Haryana High Court in the case of Beco Engg. Co. Ltd. [1984] 148 ITR 478 are. confined to the facts of that case in this regard. Similarly, the observations of the Allahabad High Court in the case of Saraya Engineering Works [1987] 168 ITR 455 are on the peculiar facts of that case. But one thing that clearly emerges from these observations and from the contents of the circular of the Board which we think it proper to bodily incorporate in this order, is that if a claim for depreciation is made by the assessee in the return and the Income-tax Officer proposes to estimate the profits, the depreciation allowance should be separately worked out. The Board is very clear in pointing out this aspect of the matter in paragraph 2 of the circular where it specifically directs that 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. The Board has further pointed out that 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. The circular of the Board is as under :
" Profit estimated invoking proviso to Section 13 of the 1922 Act (corresponding to Section 145 of the 1961 Act) --Depreciation allowance how to be computed by the Income-tax Officer.
1. .Numerous instances have come to the notice of the Board where the assessee's claim for depreciation duly shown in the return was not considered by the Income-tax Officer because the books of account produced were not properly maintained and it was necessary to estimate the 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."
20. However, my learned brother has dismissed this circular with the observations that, f at page 46) " mention of the Board's circular dated August 31, 1965, also is of no relevance or consequence because the issue in the case of Beco Engineering Co. Ltd. [1984] 148 ITR 478 (P & H), wherein the circular is seen to have been mentioned was different".
21. A perusal of the impugned assessment order made on March 31, 1989, under Section 143(3) shows that the Income-tax Officer has clearly not followed the directions issued by the Central Board of Direct Taxes in computing the total income of the assessee. It is as under :
Rs.
Rs.
Gross receipts 48,39,648 Less : Payments to sub-contractors considered separately (5,80,066 + 3,37,038) 9,17,104 Balance 39,22,544 Net profit at ten per cent.
3,92,254 Add : Profit at two per cent. on Rs. 9,17,104 18,342 Total 4,10,596 Less : Two per cent. of secured advance of Rs. 9,63,000 19,260 Net income 3,91,336 or say Rs. 3,91,340
22. The Income-tax Officer has nowhere mentioned the fact that the assessee has claimed depreciation in the return and that in arriving at the net profit he has considered such a claim of the assessee or that the net profit worked out by him at ten per cent, is after consideration of allowance of depreciation. Therefore, to read into his order that which he has done what he was required to do, by making a non-speaking order, to my mind is putting a stamp of approval and putting a premium on inaction by a statutory authority in the execution of his duties. We have, therefore, to see whether, on the facts and in the circumstances of the case, the assessee is entitled to the depreciation which was claimed in the return.
23. There is nothing sacrosanct about net profits from contract work being estimated at ten per cent, because the profit emanating from a contract depends upon multifarious factors such as escalation of cost of raw material, type of machinery employed, nature of work, type of labour available, time of the execution of contract and escalation in other prices and much more important is the relations that the contractor is in a position to develop with the concerned authorities. It is in this background that one should appreciate the submissions made before us. Now once that attitude is adopted, the things become clearer from the orders of the Revenue authorities made in the case of the assessee and in some other cases. In the case of Lamba Builders, Yamunanagar, for the assessment year 1988-89, which is under appeal before us in the case of the assessee, the percentage of profit before depreciation was taken at 9.35 per cent. After allowance of depreciation of Rs. 5,36,160, the percentage of net profit came to 5.45 per cent. Similarly, in the case of Premier Construction Co., Yamunanagar, similarly worked out the net profit comes to 4.64 per cent. These are the assessments made by the Revenue and the same Revenue is claiming that in this case, the net profit rate from contract must be taken at ten 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.
24. 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 above, the circular of the Board clearly directs the field officers to work out the 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 the claim of depreciation made in the return before the Income-tax Officer as the assessee had maintained the books of account and rejection of the books came at the instance of the Assessing Officer.
25. The two judgments--one from the Punjab and Haryana High Court in Beco Engineering Co. Ltd. v. CIT [1984] 148 ITR 478 and the other from the Allahabad High Court in Saraya Engineering Works v. CIT [1987] 168 ITR 455, when perused very clearly indicate that those decisions turned on the peculiar facts of those cases. The circular of the Board in its entirety was not applied to any of the cases. The case before us is one to which the directions issued by the Board for calculating the depreciation independently even when income is estimated after rejection of the books of -account, clearly apply. Therefore, those cases do not really apply to the facts of this case.
26. It is further important to note that if the action of the Income-tax Officer is confirmed as it is and as is proposed by my learned Brother, the net profit will be something like 16.5 per cent in the case of the assessee. This is preposterous even considering the estimate made by the Income-tax Officer which according to him, should not have been more than ten per cent, after depreciation. This was the first year of the contract and the assessee had furnished all necessary details before the Income-tax Officer. The entirety of the facts and circumstances of the case show that the claim of depreciation on the machinery used in the execution of contract work which was owned by the assessee, was admissible. By not making a speaking order, the Income-tax Officer cannot be said to have done his duty in a manner that it could be upheld. Therefore, I am of the opinion that the assessee is entitled to depreciation as admissible under the rules on the assets used in the business as claimed in the return. I, therefore, cannot agree with my learned brother that the issue should be decided against the assessee and in favour of the Revenue. I direct that depreciation be allowed as deduction from income computed already.
ORDER OF REFERENCE TO THIRD MEMBER
27. We have differed in our opinion on the point stated below. We, therefore, refer the matter to the Hon'ble President, Income-tax Appellate Tribunal, under Section 255(4) of the Income-tax Act, 1961, for necessary action :
" 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 the assessment order for the assessment year 1988-89 made under Section 143(3) on January 16, 1989, as held by the Accountant Member or should not be allowed as a deduction therefrom as held by the Judicial Member ?"
ORDER OF THIRD MEMBER G. Krishnamurthy, President
28. 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 to 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 the assessment order for the assessment year 1988:89 made under Section 143(3) on January 16, 1989, as held by the Accountant Member or should not be allowed as a deduction therefrom as held by the Judicial Member ?"
29. The assessee in this appeal is a private limited company deriving income from execution of contracts of construction of Mansoli Super-passage-cum-VR Bridge at RD 20.11 of SYL Canal Project, Punjab. The return for the year under appeal was filed on November 30, 1988, admitting an income of Rs. 48,810. The total receipts in the accounting year amounted to Rs. 48,39,648. Out of this, a total sum of Rs. 9,17,104 was paid to subcontractors so that the net gross payments were worked out to Rs. 39,22,544. The Income-tax Officer found that the purchase vouchers in regard to materials utilised for earth work, steel binding and bending, shuttering, concrete, etc., were only on internal vouchers. The Assessing Officer considered these vouchers as not supportive of the payments although they bore the signatures of the payees affixed duly on revenue stamp. This was considered to be a major defect in the accounts and, for that reason, the Assessing Officer concluded that the book results disclosed were not verifiable. The work-in-progress shown was also considered as unverifiable because it was arrived at on estimate basis without any supporting material. For these reasons, the book results were rejected as mentioned above and a net profit rate of ten per cent, was adopted and an income of Rs. 3,92,254 was arrived at To this income was added the profit derived from sub-contracts with which I am not concerned in this appeal as that was not a matter in dispute. By making certain additions and subtractions, the total income arrived at was Rs. 3,91,340. The assessee was not satisfied with this kind of assessment. Objecting to the computation of income at Rs. 3,91,340 as against the income of Rs. 48,810 returned, the assessee appealed to the Commissioner (Appeals) contending, among other things, that the Assessing Officer had erroneously rejected the book version and took recourse to the provisions of Section 145(2) of the Income-tax Act, 1961. Objection was also taken to the estimate of net profit at ten per cent, submitting that it was a flat rate imaginary in character and not based upon any material. Finally, it was submitted without prejudice to the estimate of income, that the Assessing Officer should have allowed depreciation on the machinery used as was claimed in the return of income and the non-allowance of depreciation amounted to ignoring or defying the instructions given by the Central Board of Direct Taxes contained in Circular No. 29-D(XIX-14), dated August 31, 1965, and also a decision of the Punjab and Haryana High Court in the case reported in Beco Engineering Co. Ltd. v. CIT [1984] 148 1TR 478. The Commissioner (Appeals) first of all held that the provisions of Section 145(2) were clearly attracted and that an estimate of income was called for rejecting the book version. Addressing himself to the allowance 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 the 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 ten 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 v. CIT [1987] 168 ITR 455, and also an order of the Chandigarh Bench of the Income-tax Appellate Tribunal in the case of Messrs. Mangal Dass Ashok Kumar v. ITO in I.T.A. No. 798/(Chandigarh) of 1984, wherein it was held that the net profit rate of ten per cent, applied in a contractor's case would cover the allowance of depreciation also. Relying upon the order and the judgment, he rejected the assessee's claim.
30. The matter then came before the Tribunal by way of further appeal. The contention raised before the Tribunal among others was that the depreciation should be allowed from the net profit computed even though by applying a net profit rate of ten per cent, to the gross contract receipts and a ground was also taken that the estimate of ten per cent, was highly excessive and unjustified. Objection was also taken to the rejection of the book result and to the application of the provisions of Section 145(2) of the Income-tax Act. This matter was heard by the Tribunal, Chandigarh Bench. The learned Judicial Member who wrote the leading order in this case pointed out that, although objection was taken to the application of the provisions of Section 145(2), it was specifically withdrawn before the Commissioner (Appeals) and, therefore, this ground did not survive for consideration before the Tribunal. As regards the allowance of depreciation from the net profit, he was of the opinion that depreciation must be deemed to have been allowed since a net profit rate was applied meaning thereby that, when the profit estimated was net, it must cover all allowances allowable under the Income-tax Act including depreciation. Placing strong reliance upon the decision of the Chandigarh Bench of the Tribunal, the learned judicial Member justified the action of the income-tax authorities in declining to allow depreciation from the estimated net profit. He did not see any particular relevance of the Board's circular relied upon in this context. But the learned Accountant Member did not agree with this view. He held that when the Board issued a circular on finding it necessary to have uniformity in assessment throughout the country that depreciation should be allowed separately whenever net profit is estimated or when depreciation is not to be allowed, a mention to that effect should have been made in the assessment order and since no such mention was made in the assessment order in the present case, the instructions given by the Board were knowingly or unknowingly violated and defied and that was not proper on the part of departmental officers on whom the circulars issued by the Board were binding. He also found fault with the Commissioner (Appeals) in side-stepping the circular by giving queer and quaint reasons for not following it. He referred to the judgments 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 whole circular was quoted in his order to show how the circular was very significant and relevant and how deviation from following the circular had affected the assessee and deprived him of its right to claim 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 had considered the claim of depreciation and since if depreciation is deemed to have been allowed in arriving at the net profit rate of ten 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 comparable case to show that the rate of net profit would be 16.5 per cent, before depreciation, he referred to cases where a net profit rate of 4.64 per cent, and 5.45 per cent, were accepted by the Department after allowing depreciation. He, therefore, held that the estimate of net profit at ten per cent, was too high and uncalled for and from that net profit rate of ten per cent., depreciation claimed must be allowed. According to him, non-allowance of depreciation was totally incorrect and even suggested that it could be a deliberate or innocent mistake committed by the Income-tax Officer. He also noted that this was the first year of contract of the assessee and that the assessee furnished all necessary details before the. Income-tax Officer and there was no reason to disallow depreciation at all and if depreciation was deemed to have been allowed, the net profit rate before depreciation would be a high unattainable rate of 16.5 per cent. Hence the above difference of opinion which was referred to me as above centres round whether the depreciation should be allowed or not. Even though the difference of opinion is framed in the above manner, ultimately it leads to the question whether the rate of net profit applied by the Income-tax Officer is reasonable or not or whether it could be subject to depreciation or not.
31. After hearing the parties at great length, great length because the matter was hotly contested, I did not feel any difficulty in agreeing with the opinion expressed by the learned Accountant Member. All the reasons that were adduced by him are very very significant, relevant and in a manner of saying, clinch the issue in favour of the assessee. The first and foremost reason that is very significant and relevant is in working out of the net profit before depreciation at 16.5 per cent. The Departmental Representative is unable to point out any comparable case in the entire circle where in the case of a contractor a net profit rate of 16.5 per cent, was estimated or shown before depreciation. The Income-tax Officer was aware of the fact that the assessee claimed depreciation and furnished all the particulars relevant thereto. He did not mention even one single wprd in the assessment order as to whether he was allowing depreciation or disallowing depreciation or that the net profit rate of ten per cent, estimated by him was after depreciation. We have to, therefore, 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 ten per cent, except abruptly stating that, on the gross receipts, he would estimate the net profit at ten per cent. In the case of sub-contracts, he accepted a profit of two per cent, but, in the case of the assessee, he estimated the net profit at ten 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 16.5 per cent., which was totally unacceptable, unattainable, unreasonable too. One would not expect the Income-tax Officer to estimate the net profit at 16.5 per cent, before depreciation without first making out a case in support thereof, if it is to be presumed that the net profit rate of ten per cent, estimated by him was after depreciation. In the order of the learned Accountant Member, the entire circular of the Board was reproduced. I do not wish to reproduce the circular again, but the need to issue such circular arose because determination of income by estimating the net profit without mentioning anything about the allowance of depreciation led to several legal difficulties in assessing the profits arising on the sale of assets by applying the provisions of Section 10(2)(vii) of the Indian Income-tax Act, 1922. The Board, therefore, considered that, where it was proposed to estimate the profit and where the prescribed particulars were 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 depreciation allowance should be separately deducted from the profit so that the net profit can be arrived at. If it is considered that the net profit should be estimated, it should be estimated subject to allowance of depreciation and the depreciation allowance should be deducted therefrom (underlining by me). This was what was contained in paragraph 2 of the circular. The circular is, therefore, very categorical and unambiguous and directs the Assessing Officers to work out the depreciation separately even in cases where the net profit is to be estimated. I do not, therefore, see how the learned Commissioner (Appeals) could bring himself to say that the circular is inapplicable. The reasoning given by him is rather strange. In paragraph 3 of the circular, the Board has gone a step further and said that even when a best judgment assessment was made, the procedure mentioned above should be scrupulously followed. This is another reason why I am astonished at the way in which the circular of the Central Board of Direct Taxes was, if I may use the expression, deliberately and with a conscious design sidetracked. Beneficial circulars and benevolent circulars should receive the highest respect and consideration at the hands of the Assessing Officers, particularly, at the level of the Commissioner (Appeals) because that was the policy of the Central Board of Direct Taxes, 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 predilections in implementing the fiscal laws. The spirit more than the letter should receive the 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.
32. 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 all cases of contractors irrespective of the facts and situations. On the 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 the reasons shown by the Income-tax Officer were such as would throw only a doubt on the vouching of the payments but there was nothing positive to show that the payments covered by those vouchers were inflated. Mere possibility to inflate expenses is only theoretical. That does not by itself mean that the payments claimed were all bogus or inflated. Therefore, the Income-tax Officer could not have estimated the net profit at 16.5 per cent, before depreciation.
33. Having regard to these facts and having regard to the manner in which the Income-tax Officer proceeded to make the assessment having regard to the fact that it was impossible to presume that depreciation must be considered to have been allowed in arriving at the net profit, unless at the expense of justice, I think the view expressed by the learned Accountant Member should be accepted as proper, reasonable and justified.
34. It is true as pointed out by the Commissioner (Appeals ) in his order which was also emphasised by learned counsel for the assessee before me that the Income-tax Officer, after applying the net profit rate of ten per cent, allowed interest of Rs. 19,620. When that could be so, there is no reason why depreciation also should not have been allowed. There is considerable force in this submission. The Income-tax Officer further made a special mention that he would not allow investment allowance under Section 32A on a different ground. He could not, therefore, be unconscious of the fact that there was a claim made by the assessee for allowance of depreciation and that he has to deal with it in computing the income, which he failed to do. That failure cannot be justified by placing reliance upon judicial authorities which turn upon the facts peculiar to those cases ignoring at the same time the all-pervasive circulars issued by the Central Board of Direct Taxes applicable to all assessments made by Income-tax Officers in the country wherever income was to be arrived at by estimating the net profit. The net profit shown by the assessee after depreciation as per books worked out to 1.2 per cent. If ten per cent, net profit was applied and depreciation was allowed thereafter, the rate of profit would work out to a reasonable percentage which would conform to the net profit rates arrived at after depreciation in the case of other contractors.
35. For these reasons, I would agree with the opinion expressed by the learned Accountant Member. The matter will now go before the regular Bench for disposal of the appeal in accordance with the opinion of the majority.