2021 (10) TMI 409 - AT - Income Tax

Deduction u/s 80P(2)(a)(i) - HELD THAT - CBDT vide its Circular No. 37/2016, dated 02.11.2016, we have no hesitation in observing that as the disallowance of the provision for expenses and the assessee's claim for donation had enhanced the resultant business income of the assessee, therefore, the consequential claim for deduction u/s 80P(2)(a)(i) would also have to be worked out on such enhanced income. We, thus, in terms of our aforesaid observations allow the aforesaid claim of the assessee and direct the A.O to recompute the assessee's claim for deduction u/s 80P(2)(a)(i) on the enhanced income.

Summary

Issues:
1. Disallowance of provisions for expenses under Sec. 80P(2)(a)(i)
2. Disallowance of donations and eligibility for deduction under Sec. 80P(2)(a)(i)
3. Consideration of deduction under Sec. 80P(2)(c)

Analysis:

Issue 1: Disallowance of provisions for expenses under Sec. 80P(2)(a)(i)
The assessee, a cooperative credit society, filed its return for A.Y. 2014-15 claiming a deduction under Sec. 80P. The AO disallowed provisions for expenses and donations, resulting in an enhanced income assessment. The CIT(A) upheld the disallowances, partially allowing the appeal. The assessee contended that the disallowance of expenses should lead to a re-computation of deduction under Sec. 80P(2)(a)(i). Citing CBDT Circular No. 37/2016 and relevant case laws, the ITAT held that if disallowances enhance business income, deduction under Chapter VI-A is admissible on the enhanced profits. Relying on the Bombay High Court judgment, the ITAT allowed the claim for deduction under Sec. 80P(2)(a)(i) on the enhanced income.

Issue 2: Disallowance of donations and eligibility for deduction under Sec. 80P(2)(a)(i)
The AO disallowed donations and provisions for expenses, leading to an increased income assessment. The CIT(A) upheld the disallowances, partially allowing the appeal. The assessee argued that the disallowances should impact the deduction under Sec. 80P(2)(a)(i). The ITAT, considering the CBDT Circular and relevant case laws, allowed the claim for deduction under Sec. 80P(2)(a)(i) on the enhanced income due to disallowances, in line with the Bombay High Court's decision.

Issue 3: Consideration of deduction under Sec. 80P(2)(c)
The assessee claimed a deduction under Sec. 80P(2)(c) of ?50,000, which was not addressed in the impugned order. The ITAT ruled that as the claim was not raised before them, it could not be considered. Consequently, the claim for deduction under Sec. 80P(2)(c) was dismissed.

In conclusion, the ITAT partly allowed the appeal, directing the AO to recompute the deduction under Sec. 80P(2)(a)(i) on the enhanced income due to disallowances. The ITAT emphasized the admissibility of deduction under Chapter VI-A on enhanced profits resulting from disallowances, aligning with relevant legal precedents and the CBDT Circular.