M.N. Mathur, J.
All these applications under section 256(2) of the Income Tax Act, 1961, (hereinafter referred to as 'the Act of 1961'), which pertain to the assessment year 1993-94, have been filed at the instance of the revenue seeking mandamus to the Tribunal for drawing up statement of case and to refer the different questions formulated in each reference application. Though the questions have been differently worded in each reference application but it is agreed by the learned counsel for the revenue as well as for the respondent-assessee that following common questions are involved in this group of applications :
'(i) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in its interpretation of section 40(b) of the Income Tax Act and then holding that the claim of the assessee for interest on capital contribution by the partners and salary to the working partners is covered by the said provisions ?
(ii) Whether, in the facts and circumstances of the case, the Tribunal was justified in allowing the claim of depreciation, interest and salary to partners, etc. despite the income being determined by applying net profit rate after rejecting the books of accounts despite that when the income is determined by applying net profit rate, all the deductions allowable are treated to be allowed?'
2. In order to better appreciate the controversy, the facts of one of the reference applications i.e., D.B. IT Ref. AppIn. No. 12/1998 'CIT, Jodhpur v. M/s Jain Constructions Co., Barmer' are stated in brief.
3. The assessee, a registered partnership firm, filed return for the assessment year 1993-94 in respect of accounting period of 1992-93 declaring income of Rs. 17,980. On account of certain discrepancies noticed in the books of accounts, the assessing authority viz; the Income Tax Officer, Barmer, invoking the provisions of section 145 of the Act of 1961, applied a net profit rate of 12.5 per cent on receipts of Rs. 76,12,688. He further allowed deduction by way of depreciation, interest and salary to partners to the extent of Rs. 8,67,691. As a result of this deduction, the assessable income was calculated as Rs. 83,895. The Commissioner, Jodhpur, on perusal of the assessment record, found that the order of the assessing authority is erroneous as it is prejudicial to the interest of the revenue inasmuch as a result of deduction by way of depreciation, interest and salary to the partners, the net profit in assessee's case came down to the rate of 1.10 per cent. In his opinion, the said net rate was extremely low. He, therefore, invoked the provisions of section 263 of the Act of 1961 and issued a notice to the assessee. The Commissioner held that while taking the net profit rate of 12.5 per cent, the assessing authority had already allowed expenses to the extent of 87.5 per cent in the case of the assessee against the net receipts. In his opinion, the provisions of section 40(b) of the Act of 1961 were only enabling provisions and they did not provide for separate deductions of such expenses even when the income was being computed after adopting the net profit rate by rejecting the books of accounts. He also held that looking to the normal net profit rate, which is applicable in the case of contractors, the income determined by the assessing authority by applying effective rate of 1.1 per cent is very much low as compared to the income properly assessable in the case. In view of the finding, the Commissioner directed the assessing authority to recompute the income from the contract business without allowing any separate deduction in respect of interest claimed by the assessee including the interest and salary to partners. The Commissioner also found that there is nothing on record to indicate any inquiries regarding the fulfilment of the conditions relating to allowance of depreciation in terms of ownership of the assets by the assessee and the extent of their use for business purposes. Thus, the Commissioner restored the matter back to the assessing authority for giving a fresh finding in the light of the directions given in his order allowing an opportunity of being heard to the assessee.
4. Aggrieved by the order of Commissioner dated 27-3-1996. The assessee filed an appeal before the Tribunal, Jaipur Bench. The Tribunal persuaded by the circular of the Central Board of revenue held that the depreciation should be worked out separately with reference to the claim of the assessee for salary and interest payable to the partners. Keeping in view the amended provisions of section 40(b) of the Act of 1961, the Tribunal examined the partnership deed and found that the claim of the assessee for interest on capital contribution by partners and salary to working partners is squarely covered by the said provision. In view of the finding by judgment dated 30-8-1996, the Tribunal set aside the order of the Commissioner made under section 263 of the Act of 1961. The revenue made an application before the Tribunal seeking reference of the questions formulated for the opinion of this court. The Tribunal declined to refer the questions for the opinion of this court as in its opinion, no referable question of law arose. The application was accordingly rejected by order dated 24-6-1997.
5. It is contended by Mr. Sandeep Bhandawat, learned counsel appearing for the revenue, that the Tribunal has erred in law in not appreciating the fact that when the income from the contract is determined by applying net profit rate, all such deductions are treated to be allowed. Giving effect to the directions of the Tribunal would tantamount to allowing the same deduction twice and as a result thereof, the income would be reduced to substantially low figure. It is also submitted that the circular of the Board relied upon by the Tribunal is only for the guidance of the assessing authority and is not binding on the courts. On the other hand, Mr. Anjay Kothari has supported the decision of the Tribunal.
6. We have considered the rival contentions. Section 40(b) is the substitute of the original section 10(4)(b) of the Income Tax Act, 1922. As the provision existed in each case, it was required to be determined whether payment made by way of interest, salary, commission or remuneration by a firm to a partner was real and bona fide or only intended to serve as a device to escape taxation. For this, it was also required to be seen whether the payment was to a partner as a partner or in a different character. In order to procure more certainty in the nature of payments, section 40(b) was introduced by the Amendment Act of 1989. Section 40(b) under the Amendment Act, 1989, was as follows :
'Sec. 40. -Notwithstanding anything contrary to sections 30 to 38, the following amount shall not be deducted in computing the income chargeable under the head Profit and gain of business or profession:
(a) xxxxxxx
(b) in the case of any firm, any payment of interest, salary, bonus, commission or remuneration made by the firm to any partner of the firm.
Explanation 1 : Where interest is paid by a firm to any partner of the firm who has also paid interest to the firm, the amount of interest to be disallowed under this clause shall be limited to the amount by which the payment of interest by the firm to the partner exceeds the payment of interest by the partner to the firm.
Explanation 2 : Where an individual is a partner in a firm on behalf, or for the benefit, of any other person, such partner and the other person being hereinafter referred to as 'partner in a representative capacity' and 'person so represented' respectively.
(i) interest paid by the firm to such individual or by such individual to the firm otherwise than as partner in a representative capacity, shall not be taken into account for the purposes of this clause;
(ii) interest paid by the firm to such individual or by such individual to the firm as partner in a representative capacity and interest paid by the firm to the person so represented or by the person so represented to the firm, shall be taken into account for the purposes of this clause.
Explanation 3 : Where an individual is a partner in a firm otherwise than as partner in a representative capacity, interest paid by the firm to such individual shall not be taken into account for the purposes of this clause, if such interest is received by him on behalf, or for the benefit, of any other person.'
7. It seems that it imposed an absolute embargo against deductions in respect of any of the payments made by the firm, of the nature enumerated, to any partner of the firm. Explanation 2 clarified that the interest paid by the firm to an individual, who is a partner in a firm in a representative capacity, shall not be taken into account for the purposes of the said clause. It indicated that it covered all the payments of the nature described to a partner of the firm by the firm and did not cover other payments made to such partners. The provision also did not provide for any category of salary, remuneration, etc., though paid by a firm to a person who is a partner, falling outside the scope of the said provision. There was nothing to indicate splitting of capacities of a partner making distinction between a partner obliged to work and the one not obliged to work under the terms of a contract or the provision of law. It appears that state of law on the subject was still not satisfactory, thus section 40(b) has again been substituted by the Finance Act of 1992, which reads as follows :
'Section 40 : Notwithstanding anything contrary to section 30 to 38, the following amount shall not be deducted in computing the income chargeable under the head 'Profit and gains of business or profession'
(a)xxxxxxx
(b) in the case of any firm assessable as such
(i) any payment of salary, bonus, commission or remuneration by whatever name called (hereinafter referred to as 'remuneration') to any partner who is not a working partners: or
(ii) any payment of remuneration to any partner who is a working partner, or of interest to any partner, which, in either case, is not authorised by, or is not in accordance with, the terms of the partnership deed; or
(iii) any payment of remuneration to any partner who is a working partner, or of interest to any partner, which, in either case, is authorised by, and is in accordance with, the terms of the partnership deed, but which relates to any period (falling prior to the date of such partnership deed) for which such payment was not authorised by, or is not in accordance with, any earlier partnership deed, so, however, that the period of authorisation for such payment by any earlier partnership deed does not cover any period prior to the date of such earlier partnership deed, or
(iv) any payment of interest to any partner which is authorised by, and is in accordance with, the terms of the partnership deed and relates to any period falling after the date of such partnership deed insofar as such amount exceeds the amount calculated at the rate of eighteen percent simple interest per annum; or
(v) any payment of remuneration to any partner who is a working partner, which is authorised by, and is in accordance with, the terms of the partnership deed and relates to any period falling after the date of such partnership deed in so far as the amount of such payment to all the partners during the previous year exceeds the aggregate amount computed as hereunder :
(1) in case of a firm carrying on a profession referred to in section 44AA or which is notified for the purpose of that section :
(a) on the first Rs. 1,00,000 of the above profit or in case of a loss
Rs. 50,000 or at the rate of 90% of the book-profit, whichever is more;
(b) on the next Rs. 1,00,000 of the book-profit
at the rate of 60%
(c) on the balance of the book profit
at the rate of 40%;
(2) in the case of any other firm-
(a) on the first Rs. 75,000 of the book profit, or in case of a loss
Rs. 50,000 or at the rate of 90% of the book-profit, whichever is more;
(b) on the next Rs. 75,000 of the book profit
at the rate of 60%
(c) on the balance of the book profit
at the rate 40%
Provided that in relation to any payment under this clause to the partner during the previous year relevant to the assessment year commencing on the 1st day of April, 1993, the terms of the partnership deed may, at any time during the said previous year, provide for such payment.
Explanation 1 : Where an individual is a partner in a firm on behalf, or for the benefit, of any other person, such partner and the other person being hereinafter referred to as 'partner in a representative capacity' and 'person so represented', respectively.'
Thus, now in case of working partners, payments of salary, bonus, commission or remuneration by whatever name it called in terms of the partnership deed is allowable as deductions to the extent of limit provided under section 40(b). In this group of cases, the Tribunal after examining the partnership deed in all individual cases found that the claim of assessees for interest on capital contribution by the partners and salary to working partners was allowable deductions to the extent of limit provided under section 40(b) of the Act. In our view, the Tribunal was justified in doing so. The finding of fact does not give rise to question of law,
7.1. Mr. Bhandawat has made a faint attempt to suggest that the amended provision of section 40(b) is not applicable in the instant case for the reason that it relates to the financial year 1993-94. In our view, there is no substance in the contention. It is clearly provided that the amendment will take effect from 1st April, 1993, and will, accordingly, apply in relation to assessment year 1993-94 and the subsequent years thereto. It is also provided that it pertains to the payment to the partner during the previous year, relevant to the assessment year commencing on 1-4-1993. Obviously, the previous year is 1992-93 and the assessment year 1993-94.
8. Dealing with the question of claim of depreciation on account of interest and salary to the partner in a case of determination of income applying the net profit rate. It would be pertinent to refer the Circular dated 31-8-1965, issued by the Central Board of revenue, which provides 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 alone should be separately worked out. The Board clearly pointed out this aspect of the matter in para 2 of the circular, where it particularly directs that in all such cases, the gross profit shall be estimated and the deduction and allowance 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 reads as under
'171. 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. '
(Emphasis, italicised in print, supplied)
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) of the Act of 1922. 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.
9. It is contended by Mr. Bhandawat learned counsel for the department that the circular of the Board is not binding on the Courts as it is only for the guidance of the assessing authority. The controversy has been settled by a recent decision of the Apex Court in UCO Bank v. CIT : [1999]237ITR889(SC) . It is held therein that the Central Board of Direct Tax under section 119 of the Income Tax Act, 1961, has power, inter alia, to tone down the rigour of the law and ensure a fair enforcement of its provisions by issuing circulars in exercise of its statutory powers under section 119 of the Act which are binding on the authorities in the administration of the Act. The court further held that the power is given for the purpose of just, proper and efficient management of the work of assessment and in public interest. It is a beneficial power given to the Board for proper administration of fiscal law so that undue hardship may not be caused to the assessee and the fiscal laws may be correctly applied. The same view has been taken by the Apex Court in Mathew M. Thomas & Ors. v. CIT : [1999]236ITR691(SC) . It is held therein that the circular is a beneficial measure in order to bring an end to the uncertainty of litigious proceedings with reference to properties. In view of the binding decisions of the Apex Court, the contention raised by Mr. Bhandawat is not sustainable and the same is accordingly rejected. There is no merit in the another contention of Mr. Bhandawat that giving effect to the order of the Tribunal will tantamount to same deductions twice. The premises of the contention appears to be the presumption that depreciation must have been considered to have been allowed in arriving at the net profit. In our view, it is not permissible to draw such presumption. An assessing officer is expected to be conscious of the claim of the assessee for allowance of depreciation and that he has to deal with it in computing the income, by applying net profit. Thus in our view, the assessee is entitled to depreciation as admissible under the rules on the assets used in the business as claimed in the return. In a case of rejection of account and estimate of net profit, depreciation is required to be worked out separately.
10. It will also be relevant to consider section 44AD, which is a special provision for computing profits and gains of business of civil construction, etc. This provision has been inserted by the Finance Act of 1994 with effect from 1-4-1994. The provision does not have a direct bearing on the controversy involved in the instant case as it pertains to assessment year 1993-94 but it required to be dealt with as it has been referred by the learned counsel for the revenue. Now in case of assessee engaged in business of civil construction or supply of labour for civil construction fixed rate of net profit of 8 per cent has been provided. Proviso to sub-section (2) permits salary and interest paid to the partners deducted from the fixed net profit of 8 per cent subject to the conditions and limits specified in clause (b) of section 40. Thus, there is further simplication and certainty in computation of income. Instructions contained in para 2 of the circular of the year 1965 have been brought in the statute, thereby the doubts, if any, with respect to subject circular have been settled.
11. The Division Bench of this court in CIT v. S.M. Bhatia Associates (1998) 226 ITR 675 has held that finding recorded by the Tribunal on appreciation of evidence available on record, is a finding of fact and does not give rise to the question of law for reference under section 256(2) of the Act, and thereby rejected the applications seeking reference of similar questions.
In the instant cases, the Tribunal while allowing the appeal has directed the assessing authority to recompute the total income as estimated by him and allow relief on account of payment of interest and claim of depreciation. The finding recorded by the Tribunal is purely a finding of fact, based on proper appreciation of material on record and the evidence produced by the assessee. As no question of law arises out of the order passed by the Tribunal, we find no fault with the order of the Tribunal declining to refer the question for our opinion.
12. Consequently, all the applications filed under section 256(2) of the Act filed by the revenue are hereby rejected.