Supreme Court sets aside High Court order, rules proviso to Section 44AD is applicable for assessee with income over Rs. 40 lakhs.

Case Name

Awasthi Traders vs Commissioner of Income Tax-I

Civil Appeal No(s).8481 of 2016

Key Takeaways

- Proviso to Section 44AD, which provides for presumptive taxation, applies to assessees with income above Rs. 40 lakhs.

- For such assessees, the bar on claiming depreciation under Section 44A(2) does not apply.

- Depreciation under Section 32 must be allowed for assessees with income exceeding Rs. 40 lakhs.

- The Supreme Court set aside the High Court's order, which had erroneously held that Section 44AD was applicable to the assessee.

Issue

Whether Section 44AD of the Income Tax Act, 1961, which provides for presumptive taxation, is applicable to the assessee (Awasthi Traders), and if so, whether the assessee is entitled to claim depreciation under Section 32 of the Act.

Facts

- Awasthi Traders, the assessee, had an income exceeding Rs. 40 lakhs for the assessment year 2009-2010.

- The proviso to Section 44AD of the Income Tax Act, 1961, is applicable to the assessee due to its income being above Rs. 40 lakhs.

- The High Court had erroneously held that Section 44AD was applicable to the assessee, which would have barred the assessee from claiming depreciation under Section 44A(2).

Arguments

The assessee's argument was that since the proviso to Section 44AD was applicable due to its income exceeding Rs. 40 lakhs, the bar on claiming depreciation under Section 44A(2) would not apply. Therefore, the assessee should be entitled to claim depreciation under Section 32 of the Income Tax Act, 1961.

The revenue authorities likely argued that Section 44AD was applicable to the assessee, which would have barred the assessee from claiming depreciation under Section 44A(2).

Judgement

The Supreme Court set aside the orders of the High Court and the assessment order. The apex court held that since the proviso to Section 44AD was applicable to the assessee due to its income exceeding Rs. 40 lakhs, the bar on claiming depreciation under Section 44A(2) would not apply. Consequently, the assessee was entitled to claim depreciation under Section 32 of the Income Tax Act, 1961.

The Supreme Court directed the revenue authorities to take necessary steps in accordance with the law for the assessment year 2009-2010, considering the applicability of Section 44AD and the assessee's entitlement to claim depreciation under Section 32.

FAQs

Q1. What is the significance of the Supreme Court's decision?

A1.The Supreme Court's decision clarifies the applicability of Section 44AD and its impact on claiming depreciation under Section 32. It establishes that assessees with income exceeding Rs. 40 lakhs are entitled to claim depreciation under Section 32, despite being subject to presumptive taxation under Section 44AD.

Q2. What is the impact of this decision on assessees with income above Rs. 40 lakhs?

A2.Assessees with income exceeding Rs. 40 lakhs can now claim depreciation under Section 32 of the Income Tax Act, 1961, in addition to being subject to presumptive taxation under Section 44AD. This decision provides clarity and potential tax benefits for such assessees.

Q3. Does this decision have any implications for assessees with income below Rs. 40 lakhs?

A3.No, the Supreme Court's decision specifically addresses the applicability of Section 44AD and the entitlement to claim depreciation under Section 32 for assessees with income exceeding Rs. 40 lakhs. The decision does not directly impact assessees with income below Rs. 40 lakhs.

Q4. What is the legal reasoning behind the Supreme Court's decision?

A4.The Supreme Court's decision is based on the interpretation of the proviso to Section 44AD, which states that the bar on claiming depreciation under Section 44A(2) does not apply to assessees with income exceeding Rs. 40 lakhs. Since the assessee's income exceeded this threshold, the court held that the assessee was entitled to claim depreciation under Section 32.

Q5. What are the next steps for the assessee (Awasthi Traders) after this decision?

A5.The Supreme Court has directed the revenue authorities to take necessary steps in accordance with the law for the assessment year 2009-2010, considering the applicability of Section 44AD and the assessee's entitlement to claim depreciation under Section 32. The assessee can now pursue the assessment process based on this decision.

Leave granted.

Admittedly, the proviso to Section44AD of the Income Tax Act, 1961, (herein after referred to as 'the Act') is applicable to the appellant-assesse in view of the fact that its income for the assessment year in question, i.e. 2009-2010, is above Rs.40,00,000/- (Rupees forty lakhs only). If that is so, the bar to the entitlement for depreciation under Section 44A(2) of the Act will not apply. Grant of depreciation under Section 32 of the Act would, therefore, become mandatory.

The above facts have been over looked by the High Court in holding that Section 44AD is applicable to the case of the appellant-assessee. We, therefore, set aside the order of the High Court as well as the order of the assessment and direct that necessary steps be taken in accordance with law so far as the assessment year 2009-2010 is concerned.

The appeal is disposed of in the above terms.

C.A. Nos.....@ SLP(C)...CC No. 10169/2014, SLP(C) Nos. 14325/2014, 15210/2014, 15352/2014, 15447/2014, 2720/2016 and 22533/2014

Delay condoned.

Leave granted.

The order passed in Civil Appeal arising out of SLP(C) No.27718 of 2014 shall govern these cases also. However, if on verification, it is found that the income of the assessee(s) is less than Rs.40,00,000/- (Rupees forty lakhs only) and, therefore, the proviso to Section 44AD of the Income Tax Act, 1961 has application implication, the respondents may seek modification of this order.

The appeals are disposed of accordingly.

(RANJAN GOGOI)

(PRAFULLA C. PANT)

NEW DELHI

AUGUST 30, 2016