Chapter VI-A deduction allowable on disallowance u/s 40(a)(ia) for profits of the eligible business so enhanced – ITAT

Chapter VI-A deduction allowable on disallowance u/s 40(a)(ia) for profits of the eligible business so enhanced by the disallowance- ITAT

ABCAUS Case Law Citation:
ABCAUS 2457 (2018) 08 ITAT

The instant appeal was filed by the assessee challenging the order passed by CIT(A) confirming inter alia disallowance u/s 40(a)(ia) of the Income Tax Act, 1961 (the Act)

The AO noticed that design & development charges were paid by the assessee in the year under consideration without deducting tax at source. According to him, the said expenditure was liable to be disallowed u/s 40(a)(ia) of the Act and the allowance of the same in the assessment originally completed u/s 143(3) had resulted in escapement of assessee’s income to that extent.

He therefore re-opened the assessment and issued a notice u/s 148 after recording the reasons. Consequently, the assessment was completed u/s 143(3)/147 by making the said disallowance.

The CIT(A) confirmed the disallowance made by the AO.

The Tribunal observed that the expenditure in question was incurred by the assessee company in respect of its division, the entire income of which was exempt u/s 10A of the Act, being a 100% Export Oriented Unit.

The Tribunal observed that the assessee had placed reliance on the CBDT Circular No. 37/2016 issued on 02.11.2016 wherein it has been clarified that the CBDT has accepted the settled position that the disallowance made inter alia u/s 40(a)(ia) of the Act related to the business activity against which the chapter VI-A a deduction has been claimed, result as enhancement of the profits of the eligible business and that deduction under Chapter VI-A is admissible on the profits so enhanced by the disallowance.

The Tribunal opined that the spirit of this CBDT Circular was applicable in the present case inasmuch as the disallowance made u/s 40(a)(ia) on account of design & development charges related to the the Unit of the assessee company would result in enhancement of the profits of the said division and the profits so enhanced would be entitled for exemption u/s 10A resulting into no addition to the total income of the assessee.

Accordingly the Tribunal decided this issue in favour of the assessee and allowed the relevant ground resulting into deletion of the addition made by the AO and confirmed by CIT(A)

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