2020 (1) TMI 1182 - AT - Income Tax

Deduction u/s. 10AA - TDS u/s 195 - payments made to M/s. Eka Software Solutions Inc. EKA, USA as business service-marketing charges - assessee failed to deduct tax at source on the aforesaid payment made to a non-resident - HELD THAT - As noticed from the order of CIT(Appeals) that in assessee s own case for AY 2010-11 2015 (1) TMI 1445 - ITAT BANGALORE the Tribunal has held that disallowance of business service-marketing charges will go to increase the profits of the business which is eligible for deduction u/s. 10AA of the Act and that deduction u/s. 10AA of the Act should be allowed on such enhanced profit consequent to disallowance u/s. 40(a)(i) of the Act. In this regard, we find that in the case of CIT v. Gem Plus Jewellery India Ltd. 2010 (6) TMI 65 - BOMBAY HIGH COURT and ITO v. Kewal Construction 2013 (7) TMI 291 - GUJARAT HIGH COURT have taken the view that when disallowance u/s. 40(a)(ia) of the Act goes to enhance the profits that are eligible for deduction under Chapter VIA of the Act, the deduction under Chapter VIA should be allowed on such increased profit. This position has also been now confirmed by the CBDT in its Circular No.37/2016 dated 02.11.2016 It therefore appears that there will be no tax liability on the assessee, consequent to disallowance u/s. 40(a)(i) of the Act. In such circumstances, we are of the view that the question whether disallowance u/s. 40(a)(i) of the Act is justified or not, is academic, if the alternative relief is provided to the assessee. We therefore dismiss the appeal with a direction to the AO to comply with the directions of CIT(Appeals) in allowing relief u/s. 10AA of the Act on the enhanced profit consequent to disallowance u/s. 40(a)(i) - Decided against assessee.

Summary

Issues:
Disallowance of payments made to a non-resident under section 195 of the Income-tax Act, 1961.
Disallowance under section 40(a)(i) of the Act.
Computation of deduction under Section 10AA of the Act.
Allowance of deduction under Chapter VI-A of the Act on enhanced profits.

Analysis:
1. Disallowance under Section 40(a)(i) of the Act:
The Appellate Tribunal ITAT Bangalore heard an appeal filed by the assessee against the order of the CIT(Appeals) relating to the assessment year 2011-12. The AO had made an addition due to the disallowance of payments made to a non-resident as "business service-marketing charges" under section 195 of the Income-tax Act, 1961. The AO invoked section 40(a)(i) of the Act to make the disallowance. The CIT(Appeals) sustained the disallowance, but the assessee argued for an alternate relief under section 10AA of the Act, stating that the disallowance would increase the profits eligible for deduction under this section.

2. Computation of Deduction under Section 10AA of the Act:
The assessee contended that if the disallowance is upheld, the deduction under section 10AA should be computed on the basis of the assessed income. The CIT(Appeals) observed that the genuineness and reasonableness of the expenses claimed by the appellant were not adequately verified due to incomplete documentation. However, the CIT(Appeals) directed the AO to follow the ITAT's directions in the appellant's own case for AY 2010-11 regarding the computation of income and deduction under section 10AA.

3. Allowance of Deduction under Chapter VI-A of the Act on Enhanced Profits:
The Tribunal noted that in the appellant's case for AY 2010-11, it was held that disallowance of expenses would increase the profits eligible for deduction under section 10AA. The Tribunal cited precedents from the Bombay High Court and the Gujarat High Court, along with a CBDT Circular, to support the position that disallowances enhancing eligible business profits should allow deductions under Chapter VI-A. Consequently, the Tribunal dismissed the appeal but directed the AO to allow relief under section 10AA on the enhanced profits due to the disallowance under section 40(a)(i) of the Act.

In conclusion, the Tribunal upheld the disallowance under section 40(a)(i) of the Act but directed the AO to provide relief under section 10AA on the increased profits. The decision was based on the principle that disallowances enhancing eligible business profits should allow corresponding deductions under Chapter VI-A of the Income-tax Act.