The officer made a best judgment assessment and fixed my profit at a percentage of receipts. Does that wipe out my claim to depreciation and to interest?
No. The High Court held that depreciation and interest, which are otherwise deductible in the ordinary course of assessment, keep the same legal character even where the profit is determined on a percentage basis. There was no reason to withhold from the assessee, merely because his profit had been estimated, a facility he would have had on a regular computation. The Revenue's appeal was dismissed. Note the boundary of this: the assessee's receipts were far above the s.44AD threshold, so s.44AD did not apply to him at all. Where income is actually returned under s.44AD, s.44AD(2) provides that deductions under ss.30 to 38 are deemed to have been given full effect, and depreciation under s.32 falls inside that range.
Decided by the High Court (Andhra Pradesh High Court; L. Narasimha Reddy J and Challa Kodanda Ram J) on 2014-07-30, reported as I.T.T.A. No. 48 of 2002. It bears on section 144, section 32, section 36(1)(iii), section 44AD of the Income Tax Act 1961, in Presumptive Taxation & Audit, Assessment & Scrutiny and Deductions & Disallowances matters.
Best judgment assessments on contractors are common and the officer's usual position is that a percentage estimate is the end of the matter and nothing further is allowed. This is a High Court answer that it is not, at least for depreciation and interest. It is also a useful corrective to Tribunal orders which reason from the s.44AD scheme by analogy and refuse depreciation on that basis; the High Court did not accept that an estimate strips a deduction of its character. The distinction that has to be kept clear is between an estimate made under s.144 or s.145 where s.44AD has no application, which is this case, and a return actually filed under s.44AD, where the statute itself deems ss.30 to 38 to have been allowed.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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The assessee was a civil contractor. For assessment year 1994-95 he returned income against gross receipts of Rs 9,52,52,636. The Assessing Officer disbelieved the books of account, proceeded under s.144, took the net profits at 9 per cent of the total receipts, and refused depreciation and interest for the year, while allowing unabsorbed depreciation of earlier years. The Commissioner (Appeals) held that the net profits ought to have been worked out at 12 per cent of the total receipts and permitted deduction of the current year's depreciation and interest. The Tribunal, by the order under appeal, upheld the order of the Commissioner (Appeals) in all respects. The Revenue appealed to the High Court, its questions being whether the Tribunal was right in directing that depreciation and interest be allowed from the estimated profit, whether it was right in granting relief on items not claimed by the assessee, and whether it was right as regards depreciation already granted by the Assessing Officer. The Court recorded that s.44AD, which provides for profit at 8 per cent, was not applicable because the turnover exceeded the statutory threshold.
The Revenue's appeal was dismissed. Depreciation and interest which are otherwise deductible in the ordinary course of assessment retain the same legal character even where the profit of the assessee is determined on a percentage basis.
The Court's reasoning was short. If an assessee would be entitled in the ordinary course of assessment to claim deduction of interest, whether under s.36(1)(iii) or any other relevant provision, and of depreciation, there was no reason why the same facilities should not be extended to him merely because the profit had been determined on the basis of estimation. Since s.44AD, with its comprehensive formula, did not apply on these figures, the feasibility of the deductions could not be said to have been taken away.
We are of the view that depreciation and interest, which are otherwise deductable in the ordinary course of assessment, remain the same legal character, even where the profit of assessee is determined on percentage basis.
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Handle my notice → Ask a CA on WhatsAppNo. The High Court held that depreciation and interest, which are otherwise deductible in the ordinary course of assessment, keep the same legal character even where the profit is determined on a percentage basis. There was no reason to withhold from the assessee, merely because his profit had been estimated, a facility he would have had on a regular computation. The Revenue's appeal was dismissed. Note the boundary of this: the assessee's receipts were far above the s.44AD threshold, so s.44AD did not apply to him at all. Where income is actually returned under s.44AD, s.44AD(2) provides that deductions under ss.30 to 38 are deemed to have been given full effect, and depreciation under s.32 falls inside that range. This was decided by the High Court (Andhra Pradesh High Court; L. Narasimha Reddy J and Challa Kodanda Ram J) and bears on section 144, section 32, section 36(1)(iii), section 44AD of the Income Tax Act 1961. It is reported as I.T.T.A. No. 48 of 2002. Best judgment assessments on contractors are common and the officer's usual position is that a percentage estimate is the end of the matter and nothing further is allowed. This is a High Court answer that it is not, at least for depreciation and interest. It is also a useful corrective to Tribunal orders which reason from the s.44AD scheme by analogy and refuse depreciation on that basis; the High Court did not accept that an estimate strips a deduction of its character. The distinction that has to be kept clear is between an estimate made under s.144 or s.145 where s.44AD has no application, which is this case, and a return actually filed under s.44AD, where the statute itself deems ss.30 to 38 to have been allowed. If it applies to you, the first step is this: Check first whether s.44AD applied at all. If your turnover was above the ceiling for the year, the profit was estimated under s.144 or s.145 and this decision is directly in point.
The assessee was a civil contractor. For assessment year 1994-95 he returned income against gross receipts of Rs 9,52,52,636. The Assessing Officer disbelieved the books of account, proceeded under s.144, took the net profits at 9 per cent of the total receipts, and refused depreciation and interest for the year, while allowing unabsorbed depreciation of earlier years. The Commissioner (Appeals) held that the net profits ought to have been worked out at 12 per cent of the total receipts and permitted deduction of the current year's depreciation and interest. The Tribunal, by the order under appeal, upheld the order of the Commissioner (Appeals) in all respects. The Revenue appealed to the High Court, its questions being whether the Tribunal was right in directing that depreciation and interest be allowed from the estimated profit, whether it was right in granting relief on items not claimed by the assessee, and whether it was right as regards depreciation already granted by the Assessing Officer. The Court recorded that s.44AD, which provides for profit at 8 per cent, was not applicable because the turnover exceeded the statutory threshold. The matter was decided on 2014-07-30 by the High Court (Andhra Pradesh High Court; L. Narasimha Reddy J and Challa Kodanda Ram J). On those facts the High Court held as follows. The Revenue's appeal was dismissed. Depreciation and interest which are otherwise deductible in the ordinary course of assessment retain the same legal character even where the profit of the assessee is determined on a percentage basis.
The Court's reasoning was short. If an assessee would be entitled in the ordinary course of assessment to claim deduction of interest, whether under s.36(1)(iii) or any other relevant provision, and of depreciation, there was no reason why the same facilities should not be extended to him merely because the profit had been determined on the basis of estimation. Since s.44AD, with its comprehensive formula, did not apply on these figures, the feasibility of the deductions could not be said to have been taken away. In the words reproduced by the source cited on this page: "We are of the view that depreciation and interest, which are otherwise deductable in the ordinary course of assessment, remain the same legal character, even where the profit of assessee is determined on percentage basis."
It was decided by the High Court on 2014-07-30 and is reported as I.T.T.A. No. 48 of 2002. Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 144, section 32, section 36(1)(iii), section 44AD, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The Revenue's appeal was dismissed. Depreciation and interest which are otherwise deductible in the ordinary course of assessment retain the same legal character even where the profit of the assessee is determined on a percentage basis. It arises in Presumptive Taxation & Audit, Assessment & Scrutiny and Deductions & Disallowances matters, on section 144, section 32, section 36(1)(iii), section 44AD of the Income Tax Act 1961, and was decided by Andhra Pradesh High Court; L. Narasimha Reddy J and Challa Kodanda Ram J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. If your income was returned under s.44AD, do not claim depreciation on top of the presumptive figure. Section 44AD(2) deems the deductions under ss.30 to 38, which include s.32 depreciation, to have been given full effect. Where the estimate was made under s.144, put the depreciation and interest claims to the officer in writing with the working, so that the refusal appears on the face of the order and can be appealed. Keep the written down value schedule current even in a year of estimated assessment; the claim is worth nothing if the figure cannot be supported. Read this with Indwell Constructions. Indwell says the estimate absorbs the deductions and the s.40 embargo alike; this decision says depreciation and interest survive it. If the officer cites Indwell against your claim, this is the answer from the same High Court.
Still good law. No decision doubting or overruling it was located. Its reach is limited by its own facts: the Court proceeded on the footing that s.44AD did not apply because the turnover exceeded the threshold. It is not authority for claiming depreciation on top of income returned under s.44AD, where s.44AD(2) deems the deductions under ss.30 to 38 to have been given full effect. The s.44AD turnover ceiling has been raised repeatedly since assessment year 1994-95 and must be checked for the year in issue. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Two points to flag. First, the judgment as printed refers to depreciation as allowable 'under Section 37', which is a slip for s.32; the words are quoted as printed and not corrected. Second, the report shows the Assessing Officer taking net profit at 9 per cent and the Commissioner (Appeals) holding that it ought to be worked out at 12 per cent while allowing depreciation and interest, which is an unusual direction of travel on appeal; the percentages are recorded as they appear in the source and were confirmed on a second retrieval. The judgment does not state whether the interest in question was interest on borrowings or interest to partners, and the entry does not assume either. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The Revenue's appeal was dismissed. Depreciation and interest which are otherwise deductible in the ordinary course of assessment retain the same legal character even where the profit of the assessee is determined on a percentage basis.
TaxSphere, “CIT v Y. Ramachandra Reddy”, https://taxnotice.vittsphere.com/caselaw/case/cit-v-y-ramachandra-reddy-depreciation-interest-on-estimate/ (validity last checked 2026-09-07)
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