The net profit rate should be adjusted for allowable expenses such as depreciation and interest on borrowings to accurately determine the net taxable income.

Rajesh Balia, J.-Heard learned counsel for the parties.

2. These two appeals filed by the Revenue relate to the assessment years 1994-95 and 1996-97.

3. Thecore question raised before us, as is apparent from the question framed at the time of admission, whether the Income-tax Appellate Tribunal was justified in law allowing interest paid to third parties.

4. Reference to CIT vs. Jain Construction Co. [2000] 245 ITR 527 (Raj), is primarily for the purpose of showing that whether on reaching this conclusion, reliance can be placed on that Judgment laying down any such rate.

5. Having perused the Judgment under appeal and other material, which has been referred to by both learned counsel, we are of the opinion that in the facts and circumstances of the case, the decision of Jain Construction Co. [2000] 245 ITR 527 (Raj) referred to above which was rendered in an application under Section 256 really does not call for any consideration in this case as the finding has been reached on appreciation of facts concerning the assessment in question.

6. The background of the question is that the Assessing Officer finding that the net profit rate disclosed in the books of account of the assessee for the previous years relevant to the assessment years in question, respectively, were not showing the true and correct picture of the trading results and therefore by rejecting the books of account, the Assessing Officer resorted to Section 145(2) and computed the income chargeable to tax for the respective assessment years by estimating the net profit rate at 11 per cent. without subject to any appropriation.

7. For considering that the books of account by the assessee do not disclose the correct picture of profit and gain from business, the Assessing Officer has referred to the net profit rate showing the trading result as per books of account was lower than previous years. Such net profit rate taken into account was without taking into account the allowable depreciation and interest paid to third parties, and the same were still to be appropriated from the net profit so disclosed by the assessee.

8. Likewise for the assessment year 1996-97 the net profit rate disclosed by the assessee in his books of account was arrived at without taking into account depreciation and interest payable to the third parties.

9. However, while increasing the net profit rate as disclosed by the assessee to 11 per cent. the Assessing Officer did not leave room for any further appropriation on account of depreciation or interest payable to third parties, or for that matter any other claim to appropriation from such net profit rate was not considered.

10. The Tribunal by tracing the history of the assessee in the matter of determining its taxable income by estimating it on the basis of net profit rate for earlier years has found : Firstly, as a fact that the assessee has declared net profit rate in the three assessment years preceding assessment year 1989-90 (the Tribunal was considering appeals arising from proceedings relating to the assessment year 1989-90 and subsequent years up to 1996-97) and the average rate of net profit applied was taken to be 11 per cent.

10.11. This net profit rate has been taken to replace the basic net profit rate as declared by the assessee under the subsequent years also.

12. Thus, finding 11 per cent. net profit rate as basic rate for computing income for the purpose of levying tax,

the Tribunal has found that the basic net profit rate fixed by the Income-tax Officer at 11 per cent. for each of

the two years in question also does not call for any change so far as percentage is concerned.

13. However, the Tribunal has further found by noticing the past record of the assessee both in the matter of

declaration of income by him and assessment made on the estimated basis by the Assessing Officer as finally

affirmed or modified by the appellate authorities that in determining the income ot the assessee on estimated

basis, past record and