TMI Blog2020 (6) TMI 195X X X X Extracts X X X X X X X X Extracts X X X X ..... ] 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. - ITA No.3418/Bang/2018, ITA No.65/Bang/2019 - - - Dated:- 3-6-2020 - Shri N.V. Vasudevan, Vice President And Shri B R Baskaran, Accountant Member For the Appellant : Shri Pradeep Kumar, CIT(DR)(ITAT), Bengaluru. For the Respondent : Shri Padam Chand Khincha, CA ORDER PER N.V. VASUDEVAN, VICE PRESIDENT ITA No.3418/Bang/2018 is an appeal by the revenue while ITA No.65/Bang/2019 is an appeal by the assessee. Both these appeals are directed against the order of CIT(Appeals)-IV, Bangalore dated 29.10.2018 and are in relation to assessment year 2009-10. 2. The assessee is a company engaged in the business of providing software development services. For the AY 2009-10, the assessee filed a return of income on 30.9.200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m the end of relevant previous year. Since the order of assessment u/s. 143(3) has already been passed in the case of assessee for AY 2009-10, the proviso to section 147 of the Act will apply and therefore the assessment can be reopened only when there has been a failure on the part of assessee to fully and truly disclose all material facts necessary for assessment of total income of relevant previous year. According to the assessee, there was no failure to disclose fully and truly all material facts and therefore the reopening is invalid. The assessee also contended that even in the reasons recorded by the AO, there has been no allegation that there was a failure on the part of assessee to fully and truly disclose all material facts for assessment of total income of that assessment year. The assessee also submitted that the reassessment proceedings have been initiated purely on the basis of change of opinion and are therefore invalid in the absence of any tangible material coming into possession of the AO, after conclusion of original assessment proceedings and in the light of the Hon ble Supreme Court decision in the case of CIT v. Kelvinator of India Ltd., 320 ITR 561 (SC) . ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 's Circular No.37/2016 dated 02.11.2016 which is applicable to Chapter VIA deductions only and not applicable to deductions U/s 10A/10AA/10B. 4. The Ld CIT (A) failed to appreciate that the real intention of the legislature that the assessee is not allowed to take advantage of one provision by violating the another provision of the Act. If the same is allowed every assessee claiming deduction U/s 10A/10AA violate the provisions of TDS to take undue advantage. 5. The Ld CIT(A) failed to take note that on similar issue of allowing deduction u/s 10A on enhanced profits the Hon'ble Supreme Court admitted SLP in the case of M/s Lionbridge Technologies (P) Ltd ( 96 Taxmann.com 495). 6. For these and other grounds that may be urged at the time of hearing, it is prayed that the order of the CIT (A) in so far as it is relates to the above grounds may be reversed and that of the Assessing Officer may be restored. 7. The appellant craves leave to add, alter, amend and/or delete any of the grounds that may be urged. 9. On the other hand, the assessee is aggrieved by the action of the CIT(Appeals) in upholding the validity of initiation of reassessment proceedings and in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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. In this regard, we find that two High Courts viz., Hon'ble Bombay High Court in the case of CIT v. Gem Plus Jewellery India Ltd. (2010) 194 Taxman 192 (Born) and Hon'ble Gujarat High Court in the case of ITO vs. Kewal Construction, 354 ITR 13 (Gui) 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 wherein the Board has observed as follows:- 3. In view of the above, the Board has accepted the settled position that the disallowances ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6. The relevant portion of the Circular No.37/2016 dated 02.11.2016 issued by the Central Board of Direct Taxes, Department of Revenue, Ministry of Finance, Government of India, relating to the subject: Chapter VI-A deduction on enhanced profits, is quoted hereunder: The issue of the claim of higher education 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. Some illustrative cases upholding this view are as follows: [i] If an expenditure incurred by assessee for the purpose of developing a housing project was not allowable on account of non-deduction of TDS under law, such disallowance would ultimately increase assessee s profits from business of developing housing project. The ultimate profits of assessee after adjusting disallowance under section 40[a][ia] of the Act would qualify for deduction under section 80IB of the Act. This view was taken by the courts in the following cases: [a] Income-tax Officer-Ward 5[1] vs. Keval Constructio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... visions - Section 43B in the case of the employer's contribution and Section 36(v) read with Section 2(24)(x) in the case of the employee's contribution which has been deemed to be the income of the assessee. The plain consequence of the disallowance and the add back that has been made by the Assessing Officer is an increase in the business profits of the assessee. The contention of the Revenue that in computing the deduction under Section 10A the addition made on account of the disallowance of the Provident Fund / ESIC payments ought to be ignored cannot be accepted. No statutory provision to that effect having been made, the plain consequence of the disallowance made by the Assessing Officer must follow. The second question shall accordingly stand answered against the Revenue and in favour of the assessee. 13. In view of the aforesaid decisions and the CBDT Circular No.37/2020, there is no merit in the grievance projected by the revenue in its appeal. 14. As far as appeal of the assessee is concerned, we are of the view that in view of the dismissal of the revenue s appeal, the issue with regard to question, whether the assessment was validly reopened or not whe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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