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2020 (6) TMI 195 - AT - Income TaxTDS u/s 195 - payments made to the non-residents - disallowance made u/s. 40(a)(i) - deduction u/s. 10A/10AA - Whether disallowance u/s. 40(a)(i) will have no effect because deduction u/s 10A/10AA of the Act has to be allowed on the enhanced income? - HELD THAT:- There is no dispute regarding genuineness of the expenditure that was disallowed and the fact that the said expenditure is otherwise allowable as deduction in computing income from business. In such circumstances, even if the expenditure is disallowed u/s.40(a)(i) of the Act, the result will be that the disallowance will go to increase the profits of the business which is eligible for deduction u/s.10A/10AA of the Act and consequently the deduction u/s. 10A/10AA of the Act should be allowed on such enhanced profit consequent to disallowance u/s. 40(a)(i) of the Act. We find that two High Courts in the case of CIT v. Gem Plus Jewellery India Ltd. [2010 (6) TMI 65 - BOMBAY HIGH COURT] and ITO vs. Kewal Construction, [2013 (7) TMI 291 - GUJARAT HIGH COURT] have taken the view that when disallowance u/s. 40(a)(ia) of the Act goes to enhance the profits that are eligible for deduction under Chapter VIA of the Act, the deduction under Chapter VIA should be allowed on such increased profit. This position has also been now confirmed by the CBDT in its Circular No.37/2016 dated 02.11.2016 - there is no merit in the grievance projected by the revenue in its appeal. - Decided in favour of assessee.
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