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Issues involved: Disallowance u/s. 40(a)(ia) for non-deduction of TDS on rent and disallowance on account of product development expenses affecting the deduction u/s. 10A of the IT Act.
The judgment pertains to an appeal by the Revenue against the order of the CIT(A)-IV, Hyderabad dated 27.12.2011. The main contention raised by the Revenue was regarding the interpretation of exemption u/s. 10A in relation to disallowable payments. The Revenue argued that the language used in section 10A(1) ("derived from") should be interpreted restrictively, not expansively ("attributable to"). In the case at hand, there was a disallowance u/s. 40(a)(ia) of the Act for non-deduction of TDS on rent and another disallowance related to product development expenses. The CIT(A) allowed the assessee's claim and directed the Assessing Officer to consider these amounts for determining the deduction u/s. 10A. The Revenue challenged this decision in the appeal before the tribunal. The tribunal considered the disallowance u/s. 40(a)(ia) in light of a previous Special Bench order in the case of Merilyn Shipping & Transports. The tribunal held that any disallowance should be treated as income from business and considered for deduction u/s. 10A. Citing a judgment of the Bombay High Court in the case of CIT vs. Gem Plus Jewellery (India) Ltd., the tribunal affirmed that the assessee is entitled to exemption u/s. 10A even with the addition of disallowances, as it results in an increase in the business profit. Regarding the disallowance related to product development expenses, the tribunal also deemed it as business income for the purpose of determining the deduction u/s. 10A, aligning with the precedent set by the Bombay High Court. Consequently, the tribunal dismissed the Revenue's appeal, upholding the order of the CIT(A). In conclusion, the tribunal pronounced the order on 21st June 2012, confirming the allowance of deductions u/s. 10A for the disallowable payments in question.
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