2009 (4) TMI 471 - AT - Income Tax

Industrial Undertaking - Commissioner of Income-tax (Appeals) held that the sum disallowed by the Assessing Officer under section 40A(3) in respect of cash payments is only a deemed income and hence not entitled to deduction under section 80-IA - in respect of section 80HHC he has held that the disallowance made in the computation of income from business should also form part of the computation of eligible deduction under section 80HHC Held that - The total sale/turnover as appearing in the trading and profit and loss account is reduced by expenses/deductions as per the provisions of section 29 read with sections 30 to 43D in order to arrive at the income referred to in section 28 of the Act. Therefore when the Assessing Officer invokes section 40(3) read with section 29 what he consequently computes is the income referred to in section 28. Orders of the Assessing Officer and the Commissioner of Income-tax (Appeals) are misconceived and cannot be sustained Appeal allowed

Summary

Issues involved:
1. Disallowance under section 40A(3) and its impact on deductions under sections 80-IA and 80HHC.

Comprehensive Analysis:
The judgment pertains to two appeals by assessees against the Commissioner of Income-tax (Appeals) orders for the assessment year 2003-04. The appeals were heard together and disposed of by a consolidated order. The primary issue revolved around the disallowance under section 40A(3) and its impact on deductions under sections 80-IA and 80HHC. The Commissioner of Income-tax (Appeals) allowed partial relief, which was contested by the assessee.

The first ground raised by the assessee was regarding the treatment of the disallowed amount under section 40A(3) concerning deductions under section 80-IA. The Tribunal noted that the Assessing Officer did not consider the disallowed amount for computing the deduction under section 80-IA/IB. The Tribunal found errors in the orders of the Assessing Officer and the Commissioner of Income-tax (Appeals) and held that the disallowance under section 40A(3) does not change the nature of the income arrived at.

The second ground raised by the assessee was related to the disallowed amount forming part of the business income and its consideration for deductions under sections 80HHC and 80-IA. The Commissioner of Income-tax (Appeals) upheld the Assessing Officer's decision, citing the Madras High Court's ruling in a specific case. However, the Tribunal disagreed with this interpretation, emphasizing that the disallowance under section 40A(3) does not affect the computation of relief under section 80-IA.

The Tribunal further elaborated on the legal provisions, highlighting that section 80-IA is part of Chapter VI-A of the Income-tax Act, and deductions are available from the profits and gains of business derived by specified undertakings. The Tribunal clarified that the disallowance under section 40A(3) is part of the income computation process and does not alter the nature of the income for the purpose of deductions under section 80-IA. The Tribunal concluded that the orders of the Assessing Officer and the Commissioner of Income-tax (Appeals) were erroneous and unsustainable, ultimately allowing the appeal on the first ground.

Moreover, the Tribunal addressed the Commissioner of Income-tax (Appeals)' reliance on a specific case concerning a different section of the Income-tax Act, emphasizing that the decision cited was not applicable to the current case's facts. The Tribunal's detailed analysis focused on the correct interpretation of relevant legal provisions and their application to the disallowance under section 40A(3) in determining deductions under sections 80-IA and 80HHC.