2015 (9) TMI 806 - HC - Income Tax

Eligibility for deduction under section 80IB - additions were made u/s 40(a)(ia) for TDS default - whether ITAT was justified in holding that the disallowance made under section 40(a)(ia) separately is not permissible under the scheme of the Income Tax Act? - Held that - The fact that TDS was not effected by the respondent assessee, is not in dispute. In view of the scheme of Section 40 of the Act, as TDS is not effected, payment to contractors cannot be deducted, as those expenditure become inadmissible. The expenditures therefore are added back to the income, which is nothing but, eligible income. This income which is eligible for deduction in terms of Section 80IB(10) of the Act, therefore, only increases by said figure of disallowed expenditure. CIT (Appeals) has in this background referred to judgment in case of Shirke Constructions and Equipments Ltd (2000 (7) TMI 40 - BOMBAY High Court), wherein distinction between certain Sections of Chapter VIA, which refer to deduction out of gross total income and other sections of Chapter VIA, which do not make such reference to gross total income, has been explained. CIT (appeals) has correctly pointed out that the deduction allowable under Section 80IB(10) of the Act is with reference to the respondents gross total income. Hence, disallowance under Section 40 a ia cannot be treated separately and it gets added back to the gross total income of the assessee. Section 40 itself points out that due to error of assessee, such expenditure cannot be deducted while computing income chargeable under the head profit and gains of business or profession . That is the only limited effect of the lapse on the part of the respondent assessee in the present matter.ITAT has considered these facts and upheld the same. - Decided in favour of assessee.

Summary

Issues:
1. Eligibility for deduction under Section 80IB of the Income Tax Act.
2. Disallowance made under section 40(a)(ia) of the Income Tax Act.

Analysis:
1. Eligibility for deduction under Section 80IB:
The appellant, the Income Tax Department, challenged the decision regarding the eligibility for deduction under Section 80IB of the Income Tax Act. The appellant disputed the ITAT's decision to allow the entire gross total income of the assessee for deduction under Section 80IB. The dispute arose from disallowance of expenses under Section 40(a)(ia) for failure to deduct TDS at the source. The Assessing Officer allowed deductions under Section 80IB(10) but assessed the total income due to the disallowance. The CIT (Appeals) held that deductions under Section 80IB should be allowed on the gross total income of the assessee. The ITAT rejected the appeal by the Income Tax Department.

2. Disallowance under Section 40(a)(ia):
The appellant contended that the disallowance made under Section 40(a)(ia) was not arising from eligible business activities due to the violation of Sections 194C and 194H of the Act. The appellant argued that the disallowance should not impact the eligibility for deduction under Section 80IB. On the other hand, the respondent, the assessee, argued that the disallowance of expenses only added to the eligible income and did not change the nature of income. The respondent emphasized that the deduction of payments made to contractors was from eligible profits and, even if ignored for computing net income, it added to the eligible income. The respondent highlighted that the disallowance of expenditure did not render the income taxable, especially considering the respondent had filed a 'nil' return.

In conclusion, the High Court upheld the decisions of the CIT (Appeals) and ITAT, dismissing the appeal by the Income Tax Department. The Court found that the disallowance under Section 40(a)(ia) should be added back to the gross total income of the assessee for the purpose of deduction under Section 80IB(10) of the Act. The Court emphasized that the disallowance did not change the nature of income but only affected the computation of eligible income for deduction purposes.