2012 (7) TMI 306 - AT - Income Tax

Entitlement to deduction u/s 80IB(10) on the amount disallowed u/s 40a(ia) - Held that - The expenditure of eligible unit stands disallowed consequently the same results in increase of the profit of the eligible unit. The deduction under section 80IB is allowable in respect of profits and gains derived from the industrial undertaking, thus any disallowance of business expenditure of the eligible unit will logically result in enhancement of deduction allowable under section 80IB - During the year as the expenditure of the eligible business is disallowed the assessee s business income derived from the eligible business of the industrial undertaking stands at increased figure and therefore, the assessee will be eligible for deduction of enhanced amount under section 801B - there cannot be a double deduction to the assessee. Since the assessee is deriving its income only from the eligible business of construction of flats in respect of which the assessee is entitled to deduction u/s 80 IB(10) there is nothing to suggest that the amount disallowed u/s 40a(ia) is not related to the business of the industrial undertaking - upholding the findings of the CIT(A) that the assessee is entitled to deduct ion u/s 80IB(10) on the amount disallowed u/s 40a(ia) - in favour of assessee.

Summary

Issues Involved:
1. Disallowance under Section 40(a)(ia) for non-deduction of tax at source.
2. Eligibility for deduction under Section 80IB(10) on the disallowed amount.
3. Interpretation of "Gross Total Income" under Section 80B(5) and Section 80A(1).
4. Applicability of the Supreme Court judgment in Liberty India Vs. CIT.

Issue-wise Detailed Analysis:

1. Disallowance under Section 40(a)(ia) for non-deduction of tax at source:
The Assessing Officer (AO) observed that the assessee made labor contract payments of Rs. 74,57,575/- without deducting tax at source as required under Section 194C of the Income-tax Act, 1961. Consequently, the AO disallowed the amount in terms of Section 40(a)(ia) and did not allow deduction under Section 80IB(10) on the enhanced income resulting from this disallowance. The AO followed his decision from the preceding assessment year.

2. Eligibility for deduction under Section 80IB(10) on the disallowed amount:
The CIT(A) allowed the assessee's claim, holding that the disallowance under Section 40(a)(ia) was directly related to the conduct of the eligible business. The CIT(A) noted that any increase or decrease in expenditure directly affects the net profit, and thus, the disallowed amount should qualify for deduction under Section 80IB(10). This view was upheld by the ITAT, which referred to its earlier decision in the assessee's own case for the previous year, where it was held that disallowance under Section 40(a)(ia) results in an increase in the eligible profit for deduction under Section 80IB(10).

3. Interpretation of "Gross Total Income" under Section 80B(5) and Section 80A(1):
The Revenue contended that the CIT(A) failed to appreciate the definition of "Gross Total Income" as per Section 80B(5) read with Section 80A(1). The Revenue argued that the addition under Section 40(a)(ia) should not be considered as income derived from the eligible business for the purpose of Section 80IB(10). However, the CIT(A) and ITAT held that the profit derived from the eligible business should be computed as per the provisions of the Act, including disallowances under Section 40(a)(ia).

4. Applicability of the Supreme Court judgment in Liberty India Vs. CIT:
The Revenue cited the Supreme Court judgment in Liberty India Vs. CIT, arguing that disallowances under Section 40(a)(ia) should not form part of the net profits of the eligible industrial undertaking for the purpose of Section 80IB. However, the ITAT distinguished this case, noting that the disallowance under Section 40(a)(ia) increases the business income derived from the eligible business, thereby qualifying for deduction under Section 80IB(10).

Conclusion:
The ITAT upheld the CIT(A)'s decision, affirming that the assessee is entitled to deduction under Section 80IB(10) on the amount disallowed under Section 40(a)(ia). The ITAT dismissed the Revenue's appeal, reiterating that any disallowance of expenditure related to the eligible business results in an enhancement of the deduction allowable under Section 80IB(10). The appeal was dismissed in its entirety, with no other pleas or arguments presented.