TMI Blog2021 (12) TMI 973X X X X Extracts X X X X X X X X Extracts X X X X ..... added back under Section 40(a)(ia) - 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.80-IC of the Act and consequently the deduction u/s. 80-IC of the Act should be allowed on such enhanced profit consequent to disallowance u/s. 40(a)(i) of the Act. Hon'ble Bombay High Court in the case of CIT v. Gem Plus Jewellery India Ltd. [ 2010 (6) TMI 65 - BOMBAY HIGH COURT ] and Hon'ble Gujarat High Court in the case of 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. In view of the aforesaid decisions and the CBDT Circular No.37/2020, we hold that the revenue au ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... booked as sales and maintenance charges for the Financial Year 2009-10 (Assessment Year 2010-11). He noticed that some of the outstandings have been written off as bad debts in the very same year. The AO has given the details of some of the debts that have been written off to the tune of about ₹ 8,12,36,232/-. He found that the sums which were written off as bad debts were due from reputed companies like Infosys Ltd., Wipro Ltd., and TCS Ltd. The AO therefore called upon the assessee to explain the exact nature of transactions with the parties, the exact reasons for treating the debts as bad debts and irrecoverable. According to the AO, the assessee did not give any specific reasons and therefore the AO came to the conclusions that the writing of debts as bad debts was arbitrary. The AO also held that even after the amendments to the provisions to section 36(1)(vii) of the Act w.e.f. 01.04.1989, the assessee cannot simply write off debts as bad and claim the same as deduction and that the assessee is required to prove bonafide in respect of claiming huge amounts as bad debts. The AO also made a reference to the decision of the Hon ble Supreme Court in the case of TRF Ltd., V ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ub-section (1) read with subsection (2) of the section laid down conditions necessary for allowability of bad debt. It was provided that the debt must be established to have become bad in the previous year. This led to enormous litigation on the question of allowability of bad debt in a particular year, because the bad debt was not necessarily allowed by the Assessing Officer in the year in which the same had been written off on the ground that the debt was not established to have become bad in that year. In order to eliminate the disputes in the matter of determining the year in which a bad debt can be allowed and also to rationalise the provisions, the Amending Act, 1987 has amended clause (vii) of subsection (1) and clause (i) of sub-section (2) of the section to provide that the claim for the bad debt will be allowed in the year in which such a bad debt has been written off as irrecoverable in the accounts of the assessee. 6. It is thus clear that the deduction on account of bad debt as allowed u/s 36(l)(vii) read with section 36(2), after amendment by the Direct Tax Laws (Amendment) Act 1987, envisage merely wiring off the debt as irrecoverable in the accounts of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ormality. It is not necessary for the assessee to prove that the debt has become bad. But at the same time, the assessee cannot convert any live amount into a bad debt only on the basis of the technical rule of writing off. In the present case, even though the amount was not received on the balance-sheet date, the amount was received by the assessee before filing of the return itself. In fact, the balance consideration of the sale transaction covered by the dishonour of the cheque was received by the assessee company on 30.08,2005. The assessee had filed the return of income only thereafter on 29.10.2005. Therefore, it is very clear that www.taxpundit.org www.taxpundit.org www.taxpundit.org www.taxpundit.org Page 4 of 7 www.taxpundit.org www.taxpundit.org when the return of income was filed by the assessee, no debt was recoverable from the buyers of the property. We find a lot of force in the argument of the learned Commissioner of Income-tax regarding the non-committal of the assessee company in pursuing the legal remedies available before it for the recovery of the amount. Therefore, in these circumstances, we do not find that the debt has become bad debt. It was only a case of d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ircumstances of the case, the Appellant respectfully submits that the learned CIT(A) has erred. in law, and in facts. in not allowing deduction under Section 80-IC of the Act in respect of the amount added back under Section 40(a)(ia) of the Act. amounting to ₹ 116.508.888 for the 80-IC unit. b. Based on the facts and circumstances of the case. the Appellant respectfully submits that the learned CIT(A) has erred. in law, and in facts. in not allowing deduction under Section 80-IC of the Act after considering the reversal of commission expenses, amounting to ₹ 42.250 009. 11. As far as this ground is concerned, the facts are that As per the return of income filed by the assessee, the profits of the 80-IC unit was claimed at ₹ 2,44,63,386/- as per Act. Further after making adjustments as per Income-tax Act, the profits of 80-IC unit has been recomputed at ₹ 42,77,77,145/- and deduction claimed on the said sum u/s.80-IC of the Act. On examination of the claim, the AO found that the assessee has disallowed a sum of ₹ 11,65,08,868/- on account of non-deduction of TDS by invoking the provisions of section 40(a)(ia). The AO was of the view that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Taxmann.com 64) wherein it is held that amount disallowed u/s 40(a)(ia) cannot be taken into account to determine profits of business for the purpose of computing deduction u/s 80IB. 13. The AO further noticed from the computation of income eligible for deduction under 80-IC unit, that the Assessee had disallowed a sum of ₹ 58,53,925/- with a narration: unpaid Karnataka Sales Tax u/s 43-B . Thus the deduction u/s.80-IC of the Act was claimed on the sum as enhanced by unpaid sales tax liability. The AO noted that the 80-IC unit was located in the State of Uttarakhand and it has no nexus with Karnataka State Sales Tax. The AO therefore called upon the assessee to furnish the details of the nature of expenses debited under 80-IC unit along with evidence for inclusion of the said amount on the debit side of the Profit Loss account of 80-IC Unit. According to the AO, the Assessee did not furnish any information. The AO therefore presumed that that the assessee had debited the above expenditure towards Karnataka State Sales tax in respect of its business activities carried out at Bangalore, i.e., under non-STPI unit, which is engaged in domestic software implementation and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cording to the AO therefore it was very difficult to arrive at the income of various units as per the provisions of the Act. In this background, the AO held that the following three components which have been added back to the total income under 80-IC unit would not be entitled to deduction. Accordingly, disallowance made u/s 80-IC unit was worked out as under: Total Profits of 80-IC unit 42,77,77,145. Less Disallowance in respect of amount relating to non-deduction of TDS 11,65,08,888 16,46,12,822 Disallowance of unpaid Karnataka Sales Tax 58,53,925 Disallowance pertaining to commission income 4,22,50,009 Total amount disallowed from the profits of 80-IC unit Deduction allowed 26,31,64,323 17. Thus, the deduction u/s.80-IC of the Act was allowed at ₹ 26,31,64,323/- as against the claim of the Assessee for the said deduction at a sum of ₹ 42,77,77,145/-. 18. On appeal by the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 made under sections 32, 40(a)(ia), 40A(3), 43B, etc. of the Act and other specific disallowances, related to the business activity against which the Chapter VI-A deduction has been claimed, result in 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 . 21. Further the Hon ble Karnataka in the case of CIT Vs. M/s. M.Pact Technology Services Pvt. Ltd. in ITA No.228/2013 order dated 11.7.2018 had to deal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich 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 Construction, Tax Appeal No.443 of 2012, December 10 2012, Gujarat High Court [b] Commissioner of Income-tax-IV, Nagpur vs. Sunil Vishwambharnath Tiwari, IT Appeal No.2 of 2011, September 11 2015, Bombay High Court [ii] If deduction under section 40A[3] of the Act is not allowed, the same would have to be added to the profits of the undertaking on which the assessee would be entitled for deduction under section 80-IB of the Act. 7. Applying the same analogy, it can be held that if ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 23. In view of the aforesaid decisions and the CBDT Circular No.37/2020, we hold that the revenue authorities erred in not allowing deduction u/s.80-IC of the Act on a sum of ₹ 11,65,08,888/-. The claim of the assessee in this regard is accepted and the AO is directed the give necessary relief to the assessee in this regard. 24. As far as the claim for deduction under section 80-IC of the Act on reversal of commission expenses of ₹ 4,22,50,009/- is concerned, the finding of the AO and the CIT(A) is that the assessee failed to produce evidence or explanation as to how the amount of commission was disallowed towards the unit claiming deduction u/s.80-IC of the Act. This finding has not been rebutted by the assessee in the proceedings before the Tribunal also. Therefore Grd.No.1 b raised by the assessee is dismissed. 25. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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