Facts of the Case

The assessee, engaged in contractual business, filed the return of income declaring income based on books of account and profit and loss account. Depreciation on business assets was claimed in the return.

During scrutiny assessment, the Assessing Officer treated the case as covered under Section 44AD (presumptive taxation) and disallowed the depreciation claim on the assumption that depreciation is deemed to have been allowed under the presumptive scheme.

The assessee contended that the return was not filed under Section 44AD and that proper books of account were maintained. The Assessing Officer nevertheless rejected the claim. The CIT(A) upheld the disallowance. The matter reached the ITAT.

 Issues Involved

  1. Whether depreciation under Section 32 can be denied on the assumption that income is computed under Section 44AD.
  2. Whether the assessee was actually governed by presumptive taxation despite maintaining books of account.
  3. Interaction between Sections 32, 44AD, and 44AB in computation of business income.

Petitioner’s Arguments (Assessee)

  • The return was filed on the basis of books of account and not under Section 44AD.
  • Depreciation was specifically claimed in the return of income.
  • All relevant details, including opening and closing WDV of assets, were furnished.
  • The Assessing Officer himself had earlier acknowledged that Section 44AD was not applicable.
  • Disallowance of depreciation was based on incorrect factual assumptions.
  • The claim should be allowed in accordance with applicable CBDT circulars and law.

Court Order / Findings (ITAT Allahabad)

  • The assessee had filed the return on the basis of books of account and not under Section 44AD.
  • Depreciation had been duly claimed in the return.
  • Relevant details of assets, including written down value, were available before the Assessing Officer.
  • Disallowance was made on an incorrect presumption that the case fell under presumptive taxation.

It concluded that rejection of depreciation was not justified where:

  • Income was not computed under Section 44AD, and
  • Necessary details supporting the claim were available on record.

 Important Clarification

  • Depreciation under Section 32 cannot be denied merely on presumptive assumptions.
  • Applicability of Section 44AD must be based on actual facts and manner of filing return.
  • Where books of account are maintained and income is computed under normal provisions, depreciation must be considered separately.
  • CBDT circulars relating to estimation of income cannot override factual findings regarding the method of computation.

Link to download the order -  

https://itat.gov.in/public/files/upload/1640156315-ita%20no.%207%20alld%202021%20shree%20sudhakar%20pandey.pdf

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