These two appeals filed by assessee firm are directed against common order dt. 27th Oct., 2006 passed by CIT(A), Rajahmundry, and they pertain to asst. yrs. 2003-04 and 2004-05. As issue involved in both appeals is common, I proceed to dispose of these appeals by combined order for sake of convenience. assessee firm is engaged in business of running nursing home in name and style of M/s Arthi Nursing Home. In respect of previous years relevant to assessment years under consideration, assessee declared taxable income of Rs. 45,540 and Rs. 42,800, respectively net of partners remuneration and interest on capital and depreciation. Though returns were originally processed under s. 143(1) of IT Act, consequent to survey operations conducted on 20th Dec., 2002 notices were issued under s. 142 of Act and cases were taken up for scrutiny. During course of assessment proceedings, AO noticed that in respect of asst. yr. 2003-04 capitals of partners were taken at Rs. 2,58,387 and Rs. 4,08,881 respectively of Smt. Dr. K. Jyothi and Sri Dr. K. Chidambar. Similarly, for next assessment year, capitals of partners were shown at Rs. 2,40,626 and Rs. 4,09,179 respectively and interest was paid to partners on such capital balance. As could be noticed from computation of income of firm, assessee was not charging depreciation to P&L a/c, but claimed same in computation of total income, thereby creating artificial increase in apportioned capitals of partners. Under circumstances, AO was of view that capitals of partners have to be apportioned after reducing depreciation claimed in computation of income and by so recomputing, it was noticed that instead of credit balances in capital accounts, it resulted in debit balances implying thereby that there were withdrawals from capitals on which assessee has to charge interest @ 18 per cent per annum. He accordingly disallowed claim of payment of interest and added back interest receivable from partners as per adjusted capital accounts. Aggrieved, assessee contended before first appellate authority that Revenue authorities are not entitled to rewrite books of account and since assessee has not debited depreciation to capital accounts, balances reflected in capital accounts as per assessee ought to have been taken into consideration. In this regard, learned counsel placed reliance upon decision of Tribunal, Visakhapatnam Bench, in case of Ambica Chemical Products vs. Dy. CIT in ITA No. 612/Vizag/1999 and ITA No. 9/Visakha/1999, dt. 31st May, 2005, wherein Bench followed decision of Tribunal, Chandigarh Bench, in case of Asstt. CIT vs. Sant Shoe Store (2004) 83 TTJ (Chd) 1061: (2004) 88 ITD 524 (Chd). learned CIT(A) was not convinced with submissions of assessee. He observed that assessee admittedly claimed benefit of depreciation under IT Rules for purpose of getting benefit of reduced taxable income, but at same time, same was not taken into consideration for limited purpose of showing higher amount of profit which can be carried forward to capital accounts of partners. scheme of depreciation under IT R u l e s presupposes essential condition that in accordance with established principles of accountancy, depreciation, like any other head of expenditure, is required to be debited to P&L a/c to arrive at real profits of t h e business. profit so arrived would then be apportioned for allocating among partners. Hence, debiting of depreciation is cardinal principle of mercantile system of accounting, otherwise, figure of net profit would be reflected at unrealistic and falsely higher figure. If this is real state of affairs, then question of charging of interest on profit/capital accretion element embedded in depreciation not charged to P&L a/c does not arise at all. figures of accretion to capital year after year can be said to be exaggerated and fictitious and not in accordance with cardinal principles of accountancy. For purpose of completing assessment, correct determination of capital balances based on proper method of accounting is essential. capital balances reflected in books of assessee are not in accordance with any standard accountancy principles and therefore AO was held to be justified in correcting such error and in recomputing capitals. Thus, disallowance of claim of interest payment to partners and charge of interest on overdrawals were held to be in accordance with law. With regard to observations of Tribunal, Chandigarh Bench, in Sant Shoe Store (supra), upon which Tribunal, Visakhapatnam Bench, had relied in Ambica Chemical Products (supra), CIT(A) observed that case law is distinguishable on facts inasmuch as in instant case there is no question of rewriting of books of account. books of account have already been written for all years. What has been done by AO is verification of correctness of various heads of account, including that of capital balances of partners. In other words, AO has undertaken exercise of discovery of correctness, and on such discovery, gave finding of fact to effect that capital balances of partners had been artificially inflated so as to claim unwarranted interest expenditure under s. 40(b) which had result of reducing taxable incomes for relevant assessment years. learned CIT(A) thus upheld orders passed by AO for both assessment years. Further aggrieved, assessee is in appeal before Tribunal. learned counsel appearing on behalf of assessee submitted that in order to claim deduction of interest paid to partners, there is statutory prescription under s. 40(b) of Act, which has nothing to do with profits and it is based o n books of account maintained by assessee. In instant case, assessee having consistently followed particular method of not charging depreciation to P&L a/c, though for purpose of computation of income under IT Act depreciation was claimed as deduction, balances shown in capital accounts reflected true and correct figure and same cannot be rewritten by AO in light of decisions of Tribunal, referred to before first appellate authority. On other hand, learned Departmental Representative submitted that case law relied upon by learned counsel are distinguishable on facts. He further contended that s. 32 of IT Act has undergone change w.e.f. 1st April, 2002, whereby depreciation has to be mandatorily claimed as deduction in which event, same has to be taken into consideration by debiting it to P&L a/c so as to reflect true and correct profit which is also in tune with accountancy standards prescribed by ICAI (AS 20). Since depreciation is necessary charge to profits, in order to arrive at true and correct profit, assessee cannot artificially inflate profit and apportion such profit to capitals assessee cannot artificially inflate profit and apportion such profit to capitals of partners as it is contrary to mandatory provisions of IT Act as applicable w.e.f. 1st April, 2002. AO was justified in recomputing income to work out readjusted capitals and consequently, he was justified in disallowing claim of payment of interest as well as making addition towards interest payable by partners as per partnership deed dt. 1st April, 2002. learned Departmental Representative further submitted that even as per Expln. 3 to cl. (b) of s. 40 book profit has to be computed in manner laid down in Chapter IV-D of Act. Explanation 5 to s. 32 which is part of Chapter IV-D states that insofar as depreciation is concerned, it has to be reduced from profits of business whether or not assessee has claimed said deduction in computing its total income. Therefore, assessee is not permitted to show book profit without claiming depreciation. In other words, case of Revenue is that assessee is not entitled to artificially boost his profits. learned Departmental Representative has also relied upon decision of Hon ble Supreme Court in case of CIT vs. British Paints India Ltd. (1991) 91 CTR (SC) 108: (1991) 188 ITR 44 (SC), wherein Court observed as under: "It is not only right but duty of AO to consider whether or not books disclose true state of accounts and correct income can be deduced therefrom. It is incorrect to say, as contended on behalf of assessee, that officer is bound to accept system of accounting regularly employed by assessee correctness of which had not been questioned in past. There is no estoppel in these matters and officer is not bound by method followed in earlier years." He further contended that in case of Sant Shoe Store (supra), sum was credited to capital account of partners on account of revaluation of building owned by assessee firm. AO took view that credit entries only represented notional introduction of capital. Therefore, he disallowed interest payable on such notional capital. Under given facts, Tribunal took view that it is not correct on part of Revenue to show that share of accretion was wrongly credited to accounts of partners and accordingly held that as entry was legally made and effective, it has to be adopted and not treated as notional or inconsequential and further held that assessee is entitled to interest on such capital reflected in books of account. In other words, emphasis was on fact that revaluation is legally permissible and in such circumstances, it cannot be interfered with. accounting standards also permit revaluation of asset. However, in instant case, procedure followed by assessee is contrary to accountancy standards, i.e., AS 20. It is well-settled that depreciation is automatic charge to profits of firm and as such arriving at profits without reducing depreciation component thereby showing higher credit balance to capital accounts of partners is not legally permissible and therefore AO was justified in correcting such error. Similarly, in case of Ambica Chemical Products (supra), Visakhapatnam Bench merely followed decision of Tribunal, Chandigarh Bench, in Sant Shoe Store (supra) and even otherwise, case pertains to asst. yrs. 1994-95 and 1995-96 which falls before introduction of Expln. 5 to s. 32 of Act, whereby claim of depreciation has become mandatory under IT Act. It may be noticed that learned counsel for assessee has placed copy of decision of Tribunal, Hyderabad Bench, in case of Prasad & Co. vs. Dy. CIT (1993) 45 TTJ (Hyd) 282: (1992) 43 ITD 93 (Hyd) in support of his contention that where identical issue has already been decided by Tribunal such decision is binding on CIT(A). It may be noticed that case of learned Departmental Representative is that decision was rendered on different set of facts whereas, in instant case, case law relied upon by assessee are not applicable for assessment years under consideration. Joining issue, learned counsel appearing on behalf of assessee submitted that Expln. 5 to s. 32 of Act was followed by assessee since depreciation was already claimed for purpose of arriving at taxable profit for income-tax purposes. However, consistently, assessee followed method of not incorporating same for purpose of apportionment of profit to capitals of partners. He also submitted that accounting standards need not be followed by firms and if contrary view has to be taken on issue, matter requires to be referred to Special Bench in light of Division Bench decision of Tribunal, Visakhapatnam, in case of Ambica Chemical Products (supra) and therefore, he made alternative request to refer matter to Special Bench. I have carefully considered rival submissions and perused record. T h e assessee mainly relies upon decision of Tribunal, Visakhapatnam Bench, in case of Ambica Chemical Products (supra), which in turn is solely based upon decision of Tribunal, Chandigarh Bench in Sant Shoe Store (supra) and therefore, in order to appreciate contention of assessee, decision in case of Sant Shoe Store (supra) requires to be analysed. In para 12 of reported decision, Bench observed as under: "...When capital is brought to partnership by partner in form other than cash, its market value is credited to capital account of partner, it may be notional entry. true value of all entries can be determined only at time of dissolution of partnership when all assets and liabilities are taken into account to find out net wealth of partnership. value of share of partner thus determined is real. Everything till that date is notional only. Yet for sake of convenience and for practical purposes, entries are made having regard to market value of items and transactions involved. Till actual value is determined, Partnership Acts on above notional entries. For all practical purposes, these notional entries are as good as real. These are binding on partners and partnership." As per accounting standards, depreciation has to be charged to P&L a/c as otherwise, true and correct profits of entity cannot be deduced therefrom. Even under IT Act, by virtue of Expln. 5 to s. 32 of Act, depreciation has to be charged to arrive at correct profits. In fact, assessee has claimed depreciation for purpose of arriving at taxable income. Such being case, as observed by Tribunal, Chandigarh Bench in case of Sant Shoe Store (supra), notional entry of depreciation has to be treated as real and same has to be incorporated for purpose of arriving at correct profit and only balance amount has to be taken to capital accounts of partners. Any deviation from said method can be corrected b y AO. In instant case, AO having precisely corrected obvious omission of assessee, in not reducing depreciation from profit arrived at by assessee action of assessee is contrary to decision of Tribunal, Chandigarh Bench. Thus, decision of Tribunal, Chandigarh Bench, fully supports stand of Revenue. If it is treated as notional entry, same has to be treated as real for all practical purposes and it would be binding on partners as well as on partnership firm. Such being case, action of assessee in not charging to P&L a/c depreciation element would amount to artificially inflating capital balance of partners. Therefore, AO, in instant case, was justified in correcting said error. decision in case of Tribunal, Visakhapatnam Bench in Ambica Chemical Products (supra), was rendered without reference to accountancy standards and it was for asst. yrs. 1994-95 and 1995-96, which is prior to introduction of Expln. 5 to s. 32 of Act and thus decision of Tribunal, Visakhapatnam Bench, is distinguishable on facts. At any rate, Hon ble Supreme Court in case of British Paints India Ltd. (supra) categorically observed that unless correct method of accounting is followed by assessee, AO is duty-bound to consider whether or not books disclose true state of accounts and correct mistakes in conformity with standard method of accounting. At cost of repetition, it requires to be noticed that system adopted by assessee does not disclose true and proper income and therefore, AO was entitled to adopt proper computation to determine true income which in turn would affect amount to be apportioned to capital accounts of partners. In light of apex Court decision in British Paints India Ltd. (supra) and provisions of Expln. 5 to s. 32 of Act as well as accounting standards prescribed by Institute of Chartered Accountants and also in view of fact that method of not charging depreciation to P&L a/c would not depict true and correct state of affairs of partnership firm, I am of considered opinion that AO was justified in correcting error thereby disallowing interest claimed by assessee under s. 40(b) of Act and he is also justified in making addition towards interest receivable from partners. In result, appeals filed by assessee are dismissed. *** ARTHI NURSING HOME v. INCOME TAX OFFICER