233. Claim for depreciation - Where required particulars have not been furnished
Circular No. 2 was issued by the Central Board of Direct Taxes on 9 February 2001. Its subject is 233. Claim for depreciation - Where required particulars have not been furnished.
Lays down how depreciation is to be handled when the Income-tax Officer estimates profits. Where books were not properly maintained and profits had to be estimated, officers were treating depreciation claimed in the return as swallowed by the estimate, and appellate authorities held that a mere estimate of net profit does not amount to depreciation having been 'allowed', so that on a sale the written down value had to be worked without deducting depreciation for those years. The Board directs that where the prescribed particulars have been furnished, the depreciation allowance must be worked out separately: the gross profit is estimated and the deductions and allowances, depreciation among them, are then taken off; and if a net profit is estimated, it is to be estimated subject to depreciation, which is then deducted from it. The same course is to be followed in a best judgment assessment where the particulars have been furnished. Where the particulars are not furnished and no depreciation is claimed in the return, the officer estimates the income without any depreciation, the estimate being naturally higher on that account, records that fact clearly in the assessment order, and the written down value of the assets carries forward unchanged since no depreciation is actually allowed.
Numerous instances had come to the Board's notice of depreciation duly claimed in the return being ignored because profits had to be estimated, and the appellate authorities were consistently holding that such an estimate does not allow depreciation.
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.
In a best judgment or estimated assessment where depreciation is not separately allowed, and later when the written down value of the same block is disputed.
Source: the Income Tax Department’s own published text — its page for this instrument.
