The Income Tax Appellate Tribunal, Hyderabad, in a recent ruling, held that depreciation under section 32 of the Income Tax Act, 1961 can be allowed even in cases where the assessing officer has estimated the net income by rejecting the books of accounts. While invalidating the order of revision passed by the Commissioner of Income Tax, the Tribunal observed that the CIT cannot exercise his revisionary power under section 263 of the Income Tax Act merely on ground that the assessment order is prejudicial to the interests of the Revenue. It should also fulfill the second condition, i.e, the order is erroneous.According to the bench, both these conditions have to be satisfied to justify an order under section 263 of the Act.
In the instant case, the assessee-firm engaged in execution of labour and mechanical Contracts. The assessee filed its income tax return for the relevant assessment year. during verification, the assessing officer expressed a suspicion over the expenditure debited to the P&L a/c alleging that it is not supported by proper vouchers/bills as the vouchers produced were not amenable for verification and the genuineness and quantum of expenditure could not be substantiated. Accordingly, the books of account of the assessee u/s 145(3) of the Income Tax Act was rejected by the officer and estimated the income of the assessee at 12.5% on the gross contract receipts and thereafter allowed depreciation therefrom. Against the said order, the Commissioner of Income Tax initiated revisionary proceedings by holding that when the net income is estimated, the depreciation is not allowable.
The assessee, relying upon a catena of decisions, maintained that there is no provision in the I.T. Act which makes the claim of depreciation inadmissible where the income is computed by applying a flat rate of profit and that even where the flat rate of profit is adopted in the assessment proceedings, the depreciation claim is to be considered separately and it should be deducted from such income determined.
While upholding the assessment order, the Tribunal held that “the books of the assessee were not found to be reliable and therefore, the AO has rejected the books and proceeded to estimate the net profit at 12.5% on the gross contract receipts. Thereafter, he has allowed the depreciation claimed by the assessee. We find that in the decisions relied upon by the assessee there were views in support of the stand taken by the AO and there are also decisions contrary to the same. The AO has adopted one of the possible views and therefore, the assessment order cannot be said to be erroneous for an order to be revisable u/s 263 of the Income Tax Act, the assessment order should be both erroneous as well as prejudicial to the interests of the Revenue. Since the assessment order is not found to be erroneous, even if the second condition of the order i.e. prejudicial to the interests of the Revenue is satisfied, it will not justify the revision u/s 263 of the order. In view of the same, the revision order is set aside and assessment order is restored.”
Read the full text of the order below.
