2018 (11) TMI 1240 - AT - Income Tax

Non-granting of deduction u/s 80IC - enhancement of income due to certain additions/disallowances made in the assessment order - Held that - It is evident from the nature of additions made by the AO, which led to the reduction in the amount of deduction u/s 80IC, that the same are on account of business transactions. First disallowance is u/s 40(a)(ia) on account of the failure of the assessee to deduct tax at source on business expenses incurred. Second disallowance is at 20% of the purchases made by the assessee for want of availability of complete vouchers and there are other two disallowances u/s 43B of the Act. To sum up, these additions made by the Assessing Officer relate to the business activity of the eligible unit for which the assessee is entitled to deduction u/s 80IC of the Act. The Assessing Officer has also not disputed the otherwise availability of deduction to the assessee. CBDT Circular No.37/2016 dated 02.11.2016 issued in the context of deductions under Chapter VI-A on enhanced profits says that f there is an enhancement of income because of such disallowances, the deductions under Chapter VIA should be granted on the enhanced income. It has been clearly spelt out in para 4 of the Circular that not only the fresh appeals be not filed on such issue, but the appeals already filed in Courts/Tribunals should be withdrawn or not pressed. To put it simply, the Department has accepted the position that enhancement of income due to the above additions/disallowances should be coupled with the proportionately increased amount of deductions under Chapter VI-A of the Act. Since all the disallowances/additions made in the assessment order resulting in the enhancement of income fall within the nature of disallowances mentioned in the Circular, we hold that the assessee should be allowed deduction u/s 80IC at the enhanced amount of income resulting from such disallowances etc.

Summary

Issues:
1. Non-granting of deduction u/s 80IC of the Income-tax Act, 1961 on the enhancement of income due to certain additions/disallowances made in the assessment order.
2. Interpretation of CBDT Circular No. 37/2016 regarding deductions under Chapter VI-A on enhanced profits.

Analysis:

Issue 1:
The appeal filed by the assessee challenges the order passed by the CIT (A) concerning the assessment year 2010-11, particularly on the non-granting of deduction u/s 80IC of the Act due to additions/disallowances made in the assessment order. The Assessing Officer disallowed amounts under various sections, including u/s 40(a)(ia) for failure to deduct tax at source and u/s 43B, resulting in an increase in the income. Despite these disallowances, the assessee was allowed a deduction u/s 80IC, but the CIT (A) upheld the assessment order. The Tribunal noted that the disallowances were related to business transactions and the eligible unit for which the deduction u/s 80IC was claimed. The Tribunal referred to a CBDT Circular emphasizing that disallowances related to business activity should be considered while computing deductions under Chapter VI-A. Consequently, the Tribunal allowed the deduction u/s 80IC at the enhanced income amount resulting from the disallowances, following a similar precedent set by another Delhi Bench of the Tribunal.

Issue 2:
The Tribunal extensively analyzed the CBDT Circular No. 37/2016, which clarified that disallowances under specific sections, including 40(a)(ia), 43B, etc., related to business activity should lead to an increase in profits for eligible businesses, allowing deductions under Chapter VI-A on the enhanced profits. The Circular highlighted court cases supporting this view and directed that appeals should not be filed on this ground. The Tribunal applied this Circular to the case at hand, concluding that the assessee should be granted deductions under Chapter VI-A on the enhanced income due to the disallowances made in the assessment order. The Tribunal's decision was further supported by a similar ruling in Sukam Power Systems Ltd. vs. ACIT. Additionally, a specific ground concerning the disallowance of a deemed dividend was dismissed as it was not pressed by the assessee's representative.

In conclusion, the Tribunal partly allowed the appeal, emphasizing that deductions under Chapter VI-A should be granted on the enhanced income resulting from disallowances related to business activities, in line with the CBDT Circular and established judicial precedents.