THE PR COMMISSIONER OF INCOME TAX V. M/S ENGINEERS WORKS

ITTA/4/2021

AI Insights

The case revolves around the appeal by the Department against the order of the ITAT, which upheld the CIT (Appeals)'s decision that the Assessing Officer's rectification under Section 154 of the Income Tax Act was beyond his powers. The dispute originated from the Assessing Officer's estimation of the assessee's income at 12.5% on contractual receipts and subsequent allowance of depreciation, which was later added back to the income under a rectification order. The CIT (Appeals) and ITAT found the rectification to be improper, leading to the Department's appeal to the High Court. The court examined whether the issue of allowing depreciation on estimated income was a mistake apparent on the record, referencing decisions in KNR Constructions and Indwell Constructions, and ultimately found it to be a debatable issue, not warranting rectification under Section 154.

• Counselvise Citation: [2021] 140 COUNSELVISE.COM (IT) 741060 (HC-MISC)
• Appeal Type: Others
• Pronouncement Date: 23-09-2021
• Assessment Year: misc
• Other Referred Cases: KNR Constructions Vs. DCIT, Indwell Constructions vs. Commissioner of Income Tax, CIT Vs. Y.Ramachandra Reddy
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Respondent
• Court: HIGH COURT
• Keywords: Depreciation; Income estimation; Mistake apparent on record; Rectification
• Section: 154; 32; 260A

Judgement Text

"HON’BLE SRI JUSTICE JOYMALYA BAGCHI & HON’BLE SMT. JUSTICE KONGARA VIJAYA LAKSHMI I.T.T.A.No.4 of 2021 (Taken up through video conferencing) JUDGMENT: (Per Hon’ble Sri Justice Joymalya Bagchi) The department has sought admission of the appeal under Section 260A of the Income Tax, 1961 (for short ‘the Act’) on the following substantial questions of law. 1. Whether, on the facts and in the circumstances of the case, the order of the Tribunal is perverse and liable to be set aside? 2. Whether, on the facts and in the circumstances of the case, the Tribunal is correct in law in directing the assessing officer to estimate the income tax 12.5% of the gross receipts and to grant depreciation? By assessment order dated 01.12.2010, the Assessing Officer estimated the income of the assessee for the accounting year 2008-09 at the rate of 12.5% on contractual receipts in view of the ratio laid down in the case of ‘KNR Constructions Vs. DCIT1’. Upon making such estimation, the Assessing Officer allowed depreciation under Section 32 of the Act from income so estimated. Subsequently, by invoking the powers under Section 154 of the Act, the Assessing Officer added the depreciation to the income of the assessee. Aggrieved by the order of the Assessing Officer, the assessee went in appeal before the CIT (Appeals) and the latter allowed the appeal holding that rectification by the Assessing Officer was beyond the powers vested in Section 154 of the Act. ITAT affirmed the impugned order. Hence, by the Department is before this Court. 1 (ITA No.9/HYD/2007) 2 JB, J & KVL, J ITTA No.4 of 2021 Mrs. M.Kiranmayee, learned senior standing counsel appearing on behalf of the Department, argued that the Assessing Officer had incorrectly misapplied the ratio in KNR Constructions (supra) to the facts of the case and allowed depreciation after calculating gross income on the basis of estimation. In KNR Constructions (supra), it was inter- alia held once profits are estimated as a percentage of turnover of contractual receipts, no disallowance of any expenditure may be entertained on the basis of the profit and loss account on the ground no reliance can be placed on the financial statements prepared on the basis of books of account which have already been rejected. Hence, there was a mistake apparent on the face of record which required rectification. She submits once books of accounts are rejected, they cannot be utilized for adding or deleting any income on the basis of such books of accounts. In support of her contention, she relies upon the decision in ‘Indwell constructions vs. Commissioner of Income Tax2.’ Sri E.V.V.V.S. Ravi Kumar, learned counsel appearing on behalf of the assessee, argues that a debatable question of law cannot fall within the ambit of mistake apparent on the face of record, which is a condition precedent for invoking powers of rectification under Section 154 of the Act. He submits that the issue whether deduction on accounts on depreciation is permissible on estimated income is no longer res integra in view of the decision of this Court in ‘CIT Vs. Y.Ramachandra Reddy3’. He further submits that the ratio in Indwell Constructions (supra) does not deal with deduction on account of depreciation and is distinguishable from the facts of this case. 2 (1998) 232 ITR 0776 3 (2015) 372 ITR 077 3 JB, J & KVL, J ITTA No.4 of 2021 Section 154 of the Act empowers an Assessing Officer to rectify a mistake which is apparent from the record. A mistake can be said to be apparent on the record when it is a palpable and glaring one and not something which can be established by a long drawn process of reasoning on which may conceivably yield two opinions. A debatable point of law is not a mistake apparent on the face of the record. Only when such patent and obvious mistake is apparent from the record, the Assessing Officer is permitted to rectify or amend the Assessment Order, vide T.S.Balaram, Income Tax Officer, Company Circle IV, Bombay v. M/s. Volkart Brothers, Bombay4. Mrs. M. Kiranmayee, learned standing counsel contends that the Assessing Officer in palpable contradiction to the ratio in KNR Constructions (supra), allowed deduction on the ground of depreciation after gross income was estimated at 12.5% on the main contractual receipts upon rejection of the books of accounts. Reliance is also placed on Indwell Constructions (supra) and it is argued in the event books of accounts are rejected, the same cannot be used to allow deduction on gross income. On the other hand, on behalf of the assessee, referring to the decision in Y. Ramachandra Reddy (supra) it is contended that depreciation is permissible even if the income is based on the estimation. Relevant portion of the said report reads as follows: “If an assessee is entitled to claim deduction of interest, be it under Section 36(1)(iii) of the Act or any other relevant provision and of depreciation under Section 37 of the Act, in the ordinary course of assessment, there is no reason why the same facilities be not extended to him, merely because of the profit is determined on the basis of estimation as was done in the instant case. We are of the view that depreciation and interest, which are 4 (1971) 2 SCC 526 4 JB, J & KVL, J ITTA No.4 of 2021 otherwise deductable in the ordinary course of assessment, remain the same legal character, even where the profit of assessee is determined on percentage basis.” The legal position enunciated in Ramachandra Reddy (supra) is that an assessee is not automatically disentitled to depreciation where the profit is determined on percentage basis. Hence, the issue of deduction on the score of depreciation from gross income which is computed on the basis of estimation is a debatable one and cannot be a palpable error on the face of the record. We also find much substance in the argument on behalf of the assessee that in Indwell Constructions (supra), the Bench was not dealing with the issue of depreciation. In this regard it may be profitable to refer to the observations of this Court in Y.Ramachandra Reddy (supra) where the Bench distinguished Indwell Constructions (supra) in the following manner:- “The learned counsel for the appellant relied on a judgment of this Court in Indwell Constructions v Commissioner of Income Tax. That was a case in which this Court took the view that once the books of account are disbelieved for a particular purpose, they cannot be relied upon in the context of interest. In the instant case, we are concerned with the depreciation. The occasion to deny the deduction of depreciation or interest would arise if only the material placed before the Assessing Authority in proof of purchase of machinery and other items and payment of interest is disbelieved. No finding of that nature was recorded by the Assessing Officer.” In view of the ratio laid down in Y.Ramachandra Reddy (supra), we are of the opinion deduction of depreciation from gross receipts of income estimated at the rate of 12.5% on main contractual receipts is a debatable question of law and fact. Since the issue is not a palpable 5 JB, J & KVL, J ITTA No.4 of 2021 mistake on record but involves interpretation of the ratio laid down in KNR Constructions in the light of the law declared in Y.Ramachandra Reddy (supra), we are of the opinion that the invocation of jurisdiction under Section 154 of the Act was not justified. Hence, no case to admit the appeal on the proposed questions of law or otherwise is made out. The appeal is, accordingly, dismissed. No order as to costs. Miscellaneous petitions, if any pending in this appeal, shall stand closed. ___________________ JOYMALYA BAGCHI, J __________________________ KONGARA VIJAYA LAKSHMI, J Date: 23.09.2021 BSS 6 JB, J & KVL, J ITTA No.4 of 2021 HON’BLE SRI JUSTICE JOYMALYA BAGCHI & HON’BLE SMT. JUSTICE KONGARA VIJAYA LAKSHMI (Per Hon’ble Sri Justice Joymalya Bagchi) I.T.T.A.No.4 of 2021 31 Date: 23.09.2021 BSS "