2 : Circular No. 2, dated 9-2-2001

233. Claim for depreciation - Where required particulars have not been furnished

1. Numerous instances have come to the notice of the Board where assessee’s claim for depreciation duly shown in the return was not considered by the Income-tax Officer because books of account produced were not properly maintained and it was necessary to estimate 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.

Circular : No. 29-D(XIX-14) [F.  No. 45/239/65-ITJ], dated 31-8-1965.

JUDICIAL ANALYSIS

EXPLAINED IN - In Beco Engg.  Co. Ltd. v. CIT  [1984] 148 ITR 478 (Punj. & Har.), the above circular was explained with the following observations :

". . . The Central Board of Revenue, in its Circular No. 29-D(XIX-14) of 1965, F. No. 45/239/65-ITJ, dated August 31, 1965, has provided that where the required particulars have not been furnished by the assessee and no claim for depreciation has been made in the return, the ITO should estimate the income without allowing depreciation allowance.  From the circular, it is evident that in case the assessee has not claimed depreciation allowance, he cannot be granted the same by the ITO.  It has been settled by the Supreme Court in Navnit Lal C. Javeri v. K.K. Sen, AAC [1965] 56 ITR 198, that the circulars issued by the Department would be binding on it.  From the language of the section, read with the circular, it is clear that in case an assessee has not claimed depreciation, the ITO cannot give the allowance of depreciation to him." (pp. 481-482)

EXPLAINED IN - In CIT v. Friends Corporation [1989] 180 ITR 334 (Punj. & Har.), it was observed as under :

"There is no gainsaying that allowance for depreciation is a benefit available to the assessee to claim, but not one that can be thrust upon him against his wishes.  At any rate, in order to claim depreciation, the assessee must furnish the requisite particulars as prescribed by the Income-tax Act and the Rules made thereunder.  In the absence of such particulars, the assessee cannot avail of, nor indeed can he be held entitled to, depreciation.  It would be pertinent in this behalf to advert to the judgment of this court.  In Beco Engineering Co. Ltd v. CIT  [1984] 148 ITR 478, where a reference was made to Circular No. 29-D(XIX-14) of 1965, dated August 31, 1965, issued by the Central Board of Direct Taxes which provides that where the 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.  Further, it was held that from the language of sections 32(1)(ii) and 34(1) read with the circular, it was clear that in case an assessee had not claimed depreciation, the Income-tax Officer could not give him depreciation allowance." (p. 335)

EXPLAINED IN - In CIT v. Arun Textile [1991] 192 ITR 700 (Guj.), it was observed as under :

". . . In this context, we may also refer to the Circular of the Central Board of Revenue,29-D(XIX-14) of 1965 (F.  No. 45/239/65-ITJ, dated August 31, 1965), which directed that, ‘where the 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.’ Thus, as the assessee had not claimed depreciation allowance and had made clear its intention not to claim the same, no necessary particulars were furnished and it is obvious that the Income-tax Officer has no occasion to allow any deductions.  It was not open to the Income-tax Officer to advert to the original returns for the purpose of allowing deductions which claim was expressly withdrawn by filing the revised returns." (p. 706)

EXPLAINED IN - In CIT v. Shri Someshwar Sahakari Sakhar Karkhana Ltd. [1989] 177 ITR 443 (Bom.), the above circular was explained with the following observations :

"Our attention was invited by counsel for the assessees to the judgment of the Gujarat High Court in Chokshi Metal Refinery v. CIT [1977] 107 ITR 63, 70,71. Reference was there made to a circular of the Central Board of Revenue [Circular No. 14(XL-35) of 1955, dated April 11, 1955].  The circular required officers of the Department ‘to assist a taxpayer in every reasonable way, particularly in the matter of claiming and securing reliefs. . . . Although, therefore, the responsibility, for claiming refunds and relief rests with the assessees on whom it is imposed by law, officers should (a ) draw their attention to any refunds or reliefs to which they appear to be clearly entitled but which they have omitted to claim for some reason or other....’ Counsel for the assessees rightly relied upon this judgment as saying that a claim had to be made by the assessee for a relief to which he was entitled and that the Income-tax Officer’s duty was only to advise him of it.

In the instant cases, therefore, the Income-tax Officer could certainly have advised the assessees of their right to claim depreciation but he could not have given them the allowance on his own.

In our view, to sum up on the first issue, the assessee has a choice to claim or not to claim a deduction on account of depreciation.  If he chooses not to claim it, the Income-tax Officer is not entitled to allow a deduction on account of depreciation." (p. 450)

APPROVED IN  - The above circular was referred to and impliedly approved in CIT v. Bishambar Dayal & Co. [1994] 210 ITR 118 (All.), with the following observations :

". . . The Income-tax Appellate Tribunal relied upon a circular of the Central Board of Direct Taxes No. 29D(XIX) of 1965, F. No. 45/239/65-ITC, dated March 31, 1965. Under this circular, the Board had issued instructions that where income is proposed to be computed by applying a net rate and the assessee has furnished the prescribed particulars for the claim in respect of depreciation, the depreciation should be allowed separately and deducted out of the gross profits. The order of the Income-tax Appellate Tribunal is in conformity with the circular issued by the Central Board of Direct Taxes. No provision of the Income-tax Act was brought to our notice which makes the claim to depreciation inadmissible where the income is computed by applying the flat rate. In our opinion, the order of the Income-tax Appellate Tribunal does not give rise to any statable question of law...." (p. 120)

EXPLAINED IN - The above circular was explained in Chopra Bros. (India) (P.) Ltd. v. ITO [1993] 202 ITR 40 (Chd. - Trib.), in the following words :

". . . 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. 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...."  (pp. 56-57) [Emphasis supplied]

EXPLAINED IN - CIT  v. Jain Construction Co. [2000] 110 Taxman 156 (Raj.) in following words :

"It appears that the Board felt it necessary to issue the aforesaid circular for determination of income by estimating the net profit without mentioning anything about the allowance of depreciation, which led to several legal difficulties arising on the sale of assets by applying the provisions of section 10(2)(vii). The Board, therefore, 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 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 the allowance of depreciation and the depreciation allowance should be deducted therefrom." (pp. 163-165)