2013 (2) TMI 68 - AT - Income Tax

Disallowance of expenditure u/s 40(a)(ia) Whether disallowance of expenditure u/s 40(a)(ia) is eligible profit from housing project u/s.80IB(10) - Held that - Yes, The income representing the amounts of addition made on account of disallowance u/s. 40(a)(ia) is not derived from eligible business then what other activity was the said income derived from. In order to have an income there must be a source. As such any addition made to the business income went to increase the business profit but such business profit being fully exempt under the provisions of section 80IB(10), the additional amount too was eligible to claim deduction and could not be taxed separately In favour of assessee

Issues Involved:
1. Interpretation of provisions under sections 80IB(10) and 40(a)(ia) of the Income Tax Act.
2. Eligibility of disallowed expenditure as "profit derived from development and construction of housing project" for deduction under section 80IB(10).
3. Whether disallowed expenditure under section 40(a)(ia) can be considered as "eligible profit" from a housing project under section 80IB(10).
4. Validity of the CIT(A)'s order against the AO's order.

Analysis:

Issue 1: Interpretation of provisions under sections 80IB(10) and 40(a)(ia) of the Income Tax Act:
The case involved a partnership firm engaged in construction and development, disputing the disallowance of expenditure under section 40(a)(ia) for the assessment year 2006-07. The CIT(A) analyzed the conditions for claiming deduction under section 80IB, emphasizing the need for the disallowed amount to be considered as part of "profits and gains from business." The CIT(A) concluded that the disallowed amount formed part of the firm's gross total income and was eligible for deduction under section 80IB(10). The Tribunal upheld this interpretation, emphasizing the necessity of a source for income and the eligibility of the disallowed amount for deduction under section 80IB(10).

Issue 2: Eligibility of disallowed expenditure for deduction under section 80IB(10):
The Revenue challenged the CIT(A)'s decision regarding the eligibility of the disallowed expenditure as "profit derived from development and construction of housing project" for deduction under section 80IB(10). The Tribunal affirmed the CIT(A)'s reasoning, highlighting that the disallowed amount, once included in the firm's profits and gains from business, was eligible for deduction under section 80IB(10). The Tribunal emphasized the necessity of the disallowed amount being derived from the eligible business to support the claim for deduction.

Issue 3: Consideration of disallowed expenditure under section 40(a)(ia) as "eligible profit" under section 80IB(10):
The dispute also revolved around whether the disallowed expenditure under section 40(a)(ia) could be considered as "eligible profit" from a housing project under section 80IB(10). The CIT(A) reasoned that the disallowed amount, forming part of the firm's business profits, was indeed derived from the eligible business and thus eligible for deduction under section 80IB(10). The Tribunal concurred with this interpretation, emphasizing that the disallowed amount contributed to the business profit and was fully exempt under section 80IB(10).

Issue 4: Validity of the CIT(A)'s order against the AO's order:
The Tribunal, after considering the arguments and material on record, upheld the CIT(A)'s decision, stating that the disallowed amount, once included in the firm's business profits, qualified for deduction under section 80IB(10). The Tribunal found no reason to interfere with the CIT(A)'s factual findings and dismissed the Revenue's appeal, affirming the CIT(A)'s reasoned decision.

In conclusion, the Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decision regarding the eligibility of the disallowed expenditure for deduction under section 80IB(10) based on the interpretation of provisions under sections 80IB(10) and 40(a)(ia) of the Income Tax Act.

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