2015 (12) TMI 566 - HC - Income Tax

Disallowance u/s 40(a) (ia) - as per revenue benefit of deduction under Section 10A cannot be extended to such income, which is a result of disallowance - whether disallowance of expenditure under Section 43B of the Act was added to the income of the Assessee therein but deduction under Section 10A of the Act was sought to be denied to the extent of disallowed expenditure? - Held that - The plain consequence of disallowance of the expenditure would be to add back the disallowed expenditure to the Respondent-Assessee s income. The entire income of the Respondent-Assessee is attributable to the activity of export of computer softwares and is entitled to deduction under Section 10A of the Act. In the circumstances, the disallowed expenditure, becomes a part of the income derived from the activity of export of software and entitled to the deduction under Section 10A of the Act. In these circumstances, as the issue stands concluded by the decision of this Court in the case of Gem Plus Jewellery India Ltd. (2010 (6) TMI 65 - BOMBAY HIGH COURT) against the Revenue and in favour of the Respondent Assessee.

Summary

Issues:
- Challenge to ITAT order dismissing Revenue's appeal for Assessment Year 2007-2008.
- Disallowance of expenditure under Section 40(a)(ia) and its impact on Section 10A deduction.

Analysis:
1. The appeal filed by the Revenue challenged the ITAT order dismissing their appeal for Assessment Year 2007-2008.
2. The substantial question of law raised was whether disallowance under Section 40(a)(ia) would defeat the purpose of discouraging non-deduction of tax at source and impact the deduction under Section 10A.
3. The Respondent claimed deduction on expenditure of Rs. 46.11 lakhs, disallowed by the Assessing Officer for failure to deduct tax at source under Section 40(a)(ia).
4. The Commissioner of Income Tax (Appeals) allowed the Respondent's appeal, citing that the disallowance would result in an additional claim under Section 10A, following the decision in Commissioner of Income Tax Vs. Gem Plus Jewellery India Ltd.
5. The Revenue appealed to the Tribunal, which upheld the Commissioner's order, relying on the Gem Plus Jewellery India Ltd. case and dismissing the Revenue's appeal.
6. The Revenue contended that disallowance under Section 40(a)(ia) should result in the disallowed expenditure being taxed, not eligible for Section 10A deduction, distinguishing it from the Gem Plus Jewellery India Ltd. case under Section 43B.
7. The Court referred to the Gem Plus Jewellery India Ltd. case, where disallowed expenditure was added to income but still eligible for Section 10A deduction, rejecting the Revenue's argument.
8. In the present case, the disallowed expenditure is part of the income from export activity eligible for Section 10A deduction, following the Gem Plus Jewellery India Ltd. precedent.
9. The Court dismissed the appeal, stating no substantial question of law arose, in line with the Gem Plus Jewellery India Ltd. decision.

This detailed analysis covers the issues of challenging the ITAT order and the impact of disallowance under Section 40(a)(ia) on Section 10A deduction, providing a comprehensive understanding of the judgment.