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2022 (1) TMI 342 - AT - Income TaxDeduction u/s 80IA on the enhanced expenditures made to sub-contractors - allowability of inflated expenditure by way of payment to sub-contractors - assessee submitted that the AO has made the addition on the ground that the assessee has inflated its expenditure by way of payments to sub-contractors and, therefore, the same was disallowed u/s 37(1) - HELD THAT:- AO has made the addition only on the basis of inflated expenditure by way of subcontract payments, which is in the nature of disallowance u/s 37(1) of the Act. On the above order of the AO, we find that nowhere mentioned that it is other than the business expenditure of the assessee - As observed from the arguments and paper book submitted by the assessee, the amounts received by the sub-contractors have been offered as their turnover and the turnovers had been accepted by the revenue authorities. Therefore, it clearly shows that the payments made by the assessee to sub-contractors is a business expenditure of the assessee. As per Board’s Circular No. 37/2016 dated 02/11/2016 at times disallowance out of specific expenditure claimed may also be made. The effect of such disallowances is an increase in the profits. The issue of the claim of higher deduction on the enhanced profits has been a contentious one. However, the courts have generally held that if the expenditure disallowed is related to the business activity against which the Chapter VI-A deduction has been claimed, the deduction needs to be allowed on the enhanced profits. The assessee is also eligible to claim for deduction u/s 80IA on the profit earned from its business. The issue before us is also regarding the enhancement of the profit of the assessee which is covered by the said Circular quoted supra and, therefore, the assessee is eligible to claim deduction u/s 80IA of the Act - we set aside the order of the CIT(A) and direct the AO to allow the assessee’s claim of deduction u/s 80IA of the Act on the enhanced expenditure towards the payment to sub-contractors, which was disallowed by the AO and confirmed by the CIT(A) in all the appeals under consideration. We allow the grounds raised by the assessee with regard to inflated expenditure by way of sub-contract payments in all the appeals under consideration.
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