2017 (1) TMI 257 - AT - Income Tax

100% EOU - Withholding tax u/s 195 - Disallowance made u/s 40(a)(i) - enhanced profits due to disallowance for non deduction of tax u/s 195 considered for deduction u/s 10B - Held that - The sum , substance and spirit of the afore-stated Circular No. No. 37/2016 dated 2nd November, 2016 is that the Revenue does not want to continue the litigation with respect to disallowance made by the Revenue u/s 32,40(a)(ia), 40A(3), 43B etc. of the Act , which ultimately led to increase in profits which are otherwise eligible for profit linked deduction under Chapter VI-A of the Act. The Board has accepted that the disallowance made u/s 32, 40(a)(ia), 40A(3), 43B etc. of the Act and other disallowance out of specific expenditure related to the business activity may be made by Revenue which led to enhancement of profits against which Chapter VIA profit linked deductions has been claimed and it is accepted that enhanced profit linked deduction under Chapter VI-A is admissible on the profits so enhanced by the said disallowance made by the Revenue. We find that the Revenue s appeal and the assessee s cross objection are duly covered by the CBDT circular although Section 10B of the Act is not placed under Chapter VI-A of the Act rather the same is placed under Chapter-III of the Act but the deductions u/s 10B of the Act are profit linked deductions and hence there is no reason why the same should not be allowed keeping in view the spirit of afore-stated CBDT circular as the deduction u/s 10 B of the Act is also profit linked deduction The use of the word etc. clearly denotes that it will apply to similarly placed disallowances and disallowance u/s 40(a)(i) of the Act is also disallowance due to non-deduction of withholding tax as is contemplated by Section 40(a)(ia) of the Act. Hence the CBDT circular will be applicable to deductions u/s 10B of the Act as well to disallowance u/s 40(a)(ia) of the Act as well. Hence the appeal of the Revenue is not sustainable/maintainable in view of afore-stated CBDT circular dated 02-11-2016 and we dismiss the appeal filed by the Revenue , while the C.O. filed by the assessee is allowed as the additions of ₹ 1,35,556/- made by the AO are w.r.t. disallowance u/s 40(1)(ia) of the Act. In any case this issue is also covered by decision of Hon ble jurisdictional Bombay High Court in favour of the assessee in CIT v. Gem Plus Jewellary India Limited in (2010 (6) TMI 65 - BOMBAY HIGH COURT) as disallowance u/s 40(a)(i) of the Act is a statutory disallowance and the hence enhanced profits due to disallowance shall be considered for deduction u/s 10B of the Act. We order accordingly.

Summary

Issues Involved:

1. Disallowance under Section 40(a)(ia) of the Income Tax Act.
2. Deduction under Section 10B of the Income Tax Act.
3. Applicability of CBDT Circular No. 37/2016.
4. Jurisdictional High Court ruling in CIT v. Gem Plus Jewellery India Ltd.

Issue-Wise Detailed Analysis:

1. Disallowance under Section 40(a)(ia) of the Income Tax Act:

The Revenue's appeal contested the deletion of disallowance of ?1,48,37,899/- made under Section 40(a)(ia) for sales and marketing expenses payable to agents abroad, arguing that these expenses are deemed to accrue in India and thus liable for tax deduction at source under Section 195. The DRP had deleted this disallowance based on notarized copies of passports proving that the individuals did not visit India during the relevant year, thus not subject to withholding tax under Section 195. However, the DRP upheld the disallowance of ?1,35,556/- related to John Blyzinskyj due to lack of substantiation regarding his period of stay in India.

2. Deduction under Section 10B of the Income Tax Act:

The assessee, a 100% export-oriented unit under the Software Technology Park of India Scheme, claimed deduction under Section 10B for its entire profit of ?7,60,34,821/-. The AO proposed disallowance of ?1,49,73,455/- under Section 40(a)(i) due to non-deduction of tax at source. The DRP directed deletion of ?1,48,37,899/- of this amount, while confirming the disallowance of ?1,35,556/-. The Tribunal noted that the enhanced profits due to disallowance under Section 40(a)(i) should be considered for deduction under Section 10B, as it is a profit-linked deduction.

3. Applicability of CBDT Circular No. 37/2016:

The Tribunal referred to CBDT Circular No. 37/2016, which states that disallowances under Sections 32, 40(a)(ia), 40A(3), 43B, etc., leading to increased profits are eligible for profit-linked deductions under Chapter VI-A. Although Section 10B is under Chapter III, the Tribunal found the circular's spirit applicable, as Section 10B deductions are also profit-linked. The circular's use of "etc." was interpreted to include disallowances under Section 40(a)(i).

4. Jurisdictional High Court ruling in CIT v. Gem Plus Jewellery India Ltd.:

The Tribunal cited the Bombay High Court's ruling in CIT v. Gem Plus Jewellery India Ltd., which held that statutory disallowances under Section 40(a)(i) enhance profits eligible for deduction under Section 10B. This precedent supported the Tribunal's decision to allow the assessee's claim for deduction on enhanced profits due to disallowance.

Conclusion:

The Tribunal dismissed the Revenue's appeal, finding it unsustainable in light of CBDT Circular No. 37/2016 and the jurisdictional High Court ruling. The assessee's cross-objection was allowed, confirming that enhanced profits due to disallowance under Section 40(a)(i) are eligible for deduction under Section 10B. The order was pronounced on 21st December 2016.