NARINDER JAIN vs CENTRAL BOARD OF DIRECT TAXES.

ASHOK BHAN, J. :

This order shall dispose of Civil Writ Petitions 15278, 15287 and 15411, of 1996, as common questions of law and facts are involved in all these petitions.

Facts, as stated below, are taken from CWP 15278 of 1996 :

Petitioner, a partnership concern, is engaged in the business of civil construction/supply of labour for civil construction. It filed its return for the asst. yr. 1995-96 on 23rd June, 1995. Income was computed as per the provisions of s. 44AD of the IT Act, 1961 (hereinafter referred to as the Act). Petitioner claimed deduction of salary and interest paid to the partners out of the income computed as per s. 44AD of the Act, which was admissible as per cls. 31 and 32.2 of Circular No. 684 dt. 10th June, 1994 [published at (1994) 119 CTR 25, issued by the CBDT. Clauses 31.3 and 32.2 of the said Circular, copy of which has been attached as Annexure P-1 with the writ petition, read as under :

"31.3. The rate of 8 per cent is comprehensive. All deductions under sections 30 to 38 including depreciation, will be deemed to have been already allowed and no further deduction will be allowed under these sections. The written down value will be calculated, where necessary, as if depreciation as applicable has been allowed. In the case of firms, the normal deductions to the extent allowed under cl. (b) of s. 40 will be allowed.

32.2. The estimated income is comprehensive. All deductions under ss. 30 to 38 including depreciation, will be deemed to have been already allowed and no further deduction will be allowed under these sections. The written down value will be calculated, where necessary, as if depreciation as applicable has been allowed. In the case of firms, the normal deductions to the extent allowed under cl. (b) of s. 40 will be allowed."

On 23rd February, 1996, the Board issued another Circular No. 737, [published at (1996) 131 CTR (St.) 9] Annexure P-2, wherein the following lines were deleted from cls. 31.3 and 32.2 of Circular No. 684 dt. 10th June, 1994 :

"In the case of firms, the normal deductions to the extent allowed under cl. (b) of s. 40 will be allowed."

The ITO, respondent No. 2, who was the AO, issued notices to the petitioner under ss. 143(2) and 142(1) of the Act, on 22nd April, 1996, 20th May, 1996 and 4th July, 1996. In the notice dt. 4th July, 1996, the AO directed the petitioner to produce the complete set of account books, i.e. Cash Book, all Vouchers, Bank Pass Books and Post Office Pass Books. Petitioner produced the relevant material asked for. The AO, thereafter, passed the assessment order, Annexure P. 4, and raised a demand of Rs. 62,766. The demand was created primarily on account of disallowance of deduction of salary and interest under s. 40(b) of the Act from the profits worked out under s. 44AD of the Act. This was done in view of Board Circular No. 737 dt. 23rd February, 1996 (supra), Annexure P. 2.

Petitioner, apart from filing an appeal against the assessment order, has simultaneously filed this writ petition challenging the legality of Circular No. 737 dt. 23rd February, 1996, (supra), Annexure P. 2.

In the written statement filed, respondents have taken a preliminary objection that against the assessment order, Annexure P. 4, petitioner has already filed an appeal and he cannot be allowed to avail of two remedies simultaneously. As the petitioner has already availed of the alternate remedy of appeal, the present petition is not competent. On merits, it has been contended that the Circular No. 737 issued by the Board is the correct interpretation of statutory provisions and the same is binding on the Department.

Today, when the case was taken up for arguments, counsel for the petitioner brought to our notice that in the Finance Act, 1997, a proviso to s. 44-AD has been added, clarifying the position that the salary and interest by a firm to its partners shall be deducted from income computed under sub-s. (1) subject to the conditions and limits specified in cl. (b) of s. 40, thereby restoring the position of law as stated by Circular No. 684 dt. 10th June, 1994 issued by the Board rendering Circular No. 737 dt. 23rd February, 1996 (supra), Annexure P. 2, as infructuous. The amendment has been given retrospective effect w.e.f. 1st day of April, 1994.

Prima facie, we find force in the submission made by the counsel for the petitioner but refrain to express any opinion on this and relegate the petitioner to raise this point before the concerned authority (whether appellate or AO). We have no doubt that the authority concerned shall take into consideration the amendment brought about in the Act by the Finance Act of 1997 while deciding the plea, which may be raised by the assessee-petitioner.

With these directions, the writ petition stands disposed of.