2013 (8) TMI 141 - HC - Income Tax

Deduction u/s 80IB - Disallowance of labour expenses u/s 40(a)(ia) - Tribunal allowed deduction - Held that - It may be that certain expenditure may be disallowed on the ground that tax deductible at source at the time of making such payment was done by the assessee. Nevertheless, no effect of such disallowance would be there on the assessee s profit from its construction activity since it would be increased to that extent. Nevertheless, such increased income would also qualify for deduction, even otherwise, available under the statute - Following decision of CIT v. Radhe Developers 2011 (12) TMI 248 - GUJARAT HIGH COURT - Decided against Revenue.

Summary

Issues:
1. Disallowance of labour expenses under Section 40(a)(ia) of the Income Tax Act.
2. Disallowance of business profit deduction under Section 80-IB of the Income Tax Act.

Analysis:

Issue 1: Disallowance of Labour Expenses under Section 40(a)(ia) of the Income Tax Act
The appellant Revenue challenged the decision of the Income Tax Appellate Tribunal (ITAT) regarding the disallowance of labour expenses of Rs. 14,05,701 under Section 40(a)(ia) of the Income Tax Act. The Assessing Officer disallowed this expenditure during the assessment proceedings. The Commissioner (Appeals) partially allowed the appeal, upholding the disallowance of labour expenses but ruled in favor of the assessee regarding the deduction under Section 80-IB(10) of the Income Tax Act. The Tribunal confirmed the Commissioner's decision, stating that the disallowed expenses would also qualify for deduction under Section 80-IB(10). The High Court found no error in the Tribunal's decision, emphasizing the need for fresh consideration on the deduction issue. The Court clarified that the deduction under Section 80-IB(10) is applicable if the assessee successfully establishes the claim, including the disallowed expenses.

Issue 2: Disallowance of Business Profit Deduction under Section 80-IB of the Income Tax Act
The second issue involved the disallowance of the business profit deduction of Rs. 41,63,672 under Section 80-IB of the Income Tax Act. The Assessing Officer rejected the claim due to insufficient details provided by the assessee regarding the scheme for which the deduction was claimed. The Commissioner (Appeals) ruled in favor of the assessee on this matter. However, the Tribunal found insufficient evidence and remanded the proceedings to the Assessing Officer for fresh consideration. The High Court disagreed with the Tribunal's view that disallowance under Section 40(a)(ia) would automatically qualify for deduction under Section 80-IB(10). The Court clarified that while disallowance may increase the assessee's income, the deduction under Section 80-IB(10) should be separately established. The Court dismissed the appeal, subject to the clarification that the deduction for disallowed expenses would only apply if the assessee successfully establishes the Section 80-IB(10) claim.