Assessee is eligible for claiming deduction under Chapter VIA under Section 80IE of the Income Tax Act 1961 on the increased income.
In a recent judgment, ITAT has held that assessee is eligible for deduction under Chapter VIA under Section 80IE of the Act on the increased income of eligible business due to disallowances.
ABCAUS Case Law Citation:
5200 (2026) (08) abacus.in ITAT
Rule 8 of the Income Tax Rules, 1962 provides methodology for computing income from manufacture of the tea. It provides that income derived from the sale of tea grown and manufactured by the seller in India shall be computed as if it were income derived from business, and forty per cent of such income shall be deemed to be income liable to tax. Further, in computing such income an allowance shall be made in respect of the cost of planting bushes in replacement of bushes that have died or become permanently useless in an area already planted, if such area has not previously been abandoned, and for the purpose of determining such cost, no deduction shall be made in respect of the amount of any subsidy which, under the provisions of clause (30) of section 10, is not includible in the total income.
In the instant case, the assessee had divided the net income earned from manufacture and sale of tea, proportionately between that manufactured out of self cultivated leaves and that manufactured out of bought leaves in a particular ratio and thereafter applied Rule 8 of Income Tax Rules, 1962 on the income from self cultivated leaves.
The net income so apportioned had been arrived at after debiting among other expenses, expenses classified as cultivation expenses.
The AO noted that the cultivation expenses had been reduced from the total turnover whereas actual production from self grown leaves was much lesser than the out of purchased leaf. Accordingly, he has disallowed cultivation expenses charged into Profit & Loss Account to the extent of that ratio. The assessee was asked to explain in this regard, the assessee furnished copy of ledger of cultivation expenses. The AO was not satisfy with the detail submitted by the assessee and he pointed out that the cultivation expenses towards earning of agriculture income is not appropriate accordingly, he disallowed expenses in the ratio attributable to tea manufactured out of self cultivated leaves,
The CIT(A) confirmed the order of AO observing that the cultivation expenses had been claimed from the bought tea leaves.
Before the Tribunal, the assessee submitted that there were no separate books of accounts maintained by the assessee and Income-tax Act also does not specify for maintaining separate books of accounts, so for eligibility of claim of deduction under Section 80IE of the Act on these expenses had been divided in the ratio of production from purchase leaves and production from sale of grown leaves and the assessee computed income as per Rule 8 of Income Tax Rules, 1962 that 60% has been considered as a agriculture income and 40% is business income.
The assessee further submitted that it had been allowed deduction under Section 80IE of the Act on the business income even if the business income is increased due to disallowance made by the AO under the head “business income” the assessee is eligible for deduction on the same as per section 80IE of the Act.
The Tribunal observed that there was no dispute that the assessee was eligible for deduction under Section 80IE of the Act for the impugned assessment year and while computing assessed income the AO himself had given deduction under Section 80IE of the Act and business income had been increased by the amount of addition made.
The Tribunal observed that CBDT Circular No. 37/2016, dated 02.11.2026 whereby the Department had accepted the settled position that the disallowances made under section 32, 40(a)(ia), 40A(3), 43B etc., and other specific disallowances related to the business activity against which the Chapter VIA deduction has been claimed, result in enhancement of the profit the eligible business, the deduction under Chapter VIA is admissible on the enhanced profits.
Accordingly, the Tribunal held that the assessee was eligible for deduction under Chapter VIA under Section 80IE of the Act on the increased business income.
As a result, appeal of the assessee was allowed. The AO was directed to delete the addition.
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