Andhra Pradesh High Court - Amravati

The Pr Commissioner Of Income Tax vs M/S Engineers Works on 23 September, 2021

Bench: Joymalya Bagchi, Kongara Vijaya Lakshmi

                 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 01.12.2020, 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.

(ITA No.9/HYD/2007)

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.

(1998) 232 ITR 0776

(2015) 372 ITR 077

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

(1971) 2 SCC 526

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

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