2010 (5) TMI 686 - AT - Income Tax

Deductions - Profits and gains from industrial undertakings other than infrastructure development undertakings

Issues Involved:
1. Deduction under Section 80-IB(10) of the Income-tax Act.
2. Disallowance under Section 40(a)(ia) for non-deduction of tax at source.
3. Computation of profits for the purpose of Section 80-IB(10) after disallowance under Section 40(a)(ia).

Issue-wise Detailed Analysis:

1. Deduction under Section 80-IB(10) of the Income-tax Act:
The assessee, a partnership firm engaged in building and developing housing projects, claimed a deduction under Section 80-IB(10) for the assessment year 2006-07. The profits from the housing project "Shivdarshan Co-op. Hsg. Society" were shown as Rs. 3,76,78,403, which was accepted by the Assessing Officer (AO). However, the AO disallowed certain expenses amounting to Rs. 4,50,12,485 under Section 40(a)(ia) due to non-deduction of tax, thereby adding this amount to the total income. The AO allowed the deduction under Section 80-IB(10) only on the originally claimed profit of Rs. 3,76,78,403, not on the enhanced profit after disallowance.

2. Disallowance under Section 40(a)(ia) for non-deduction of tax at source:
The AO disallowed expenses related to construction, consultancy, architect fees, commission, and professional charges totaling Rs. 4,50,12,485 under Section 40(a)(ia) as the assessee failed to deduct tax at source on these payments. This disallowed amount was added back to the net profit, resulting in a gross total income of Rs. 8,26,90,888. The CIT(A) upheld the AO's decision, stating that the disallowed expenditure cannot be considered as profits derived from the industrial undertaking for the purpose of Section 80-IB(10).

3. Computation of profits for the purpose of Section 80-IB(10) after disallowance under Section 40(a)(ia):
The Tribunal addressed whether the profits for the purpose of Section 80-IB(10) should be computed after considering the disallowance under Section 40(a)(ia). The Tribunal referred to Section 80AB, which mandates that the income derived from the eligible business must be computed in accordance with the provisions of the Act, specifically Sections 30 to 43D. Hence, the disallowed expenses under Section 40(a)(ia) should be added back to the profits, resulting in an enhanced profit eligible for deduction under Section 80-IB(10).

The Tribunal cited several judgments, including CIT v. Albright Morarji & Pandit Ltd., Grasim Industries Ltd. v. Asstt. CIT, and Plastibends India Ltd. v. Addl. CIT, to support the view that the computation of profits for deductions under Chapter VI-A should follow the provisions of Sections 30 to 43D. The Tribunal also discussed the Supreme Court's judgment in Cambay Electric Supply Industrial Co. Ltd. v. CIT, which emphasized that the total income must be computed in accordance with the other provisions of the Act before considering the specific deduction sections.

The Tribunal rejected the revenue's argument that disallowed expenses cannot be considered as operational profits derived from the housing project. The Tribunal held that the statutory provisions require the computation of profits to include both deductions and disallowances as per Sections 30 to 43D. Therefore, the enhanced profits after disallowance under Section 40(a)(ia) should be eligible for deduction under Section 80-IB(10).

Conclusion:
The Tribunal concluded that the assessee is entitled to the deduction under Section 80-IB(10) on the enhanced profit of Rs. 8,26,90,888, which includes the disallowed expenses under Section 40(a)(ia). The Tribunal emphasized the importance of adhering to the statutory provisions and binding precedents in the computation of profits for deductions under Chapter VI-A.

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