Case Law Details

Case Name : M/s. Meha Medicure Vs ITO (ITAT Mumbai)
Appeal Number : ITA No. : 3420/Mum/2011
Date of Judgement/Order : 02/03/2012
Related Assessment Year : 2007-08
Courts : All ITAT (5333) ITAT Mumbai (1663)

It is undisputed fact that the appellant is an undertaking and is engaged in the manufacturing of article specified in Fourteenth schedule and in a specified category of states for which it is eligible for deduction u/s.80IC. Such an exemption has been allowed in the earlier years by the Assessing 0fficer himself i.e. for the Assessment Year 2005-06 and 2006-07. Sub-section 3 of section 80IC categorically provides that the deduction would be available for 100% of such profits and gains for 10 assessment years if the profits and gains have been derived from such business activities.

In this case, the disallowance have been made on account of non deduction of TDS on the items which are directly attributable/related to the business of the appellant, which is apparent from the heads of expenses under which these disallowances have been made. Income derived from such eligible business must be computed in accordance with the provisions of section 30 to 43D as has been provided under section 29. Section 40 is a non-obstante clause which places embargo on the allowability of expenses / expenditure from section 30 to 38. Therefore, any disallowance u/s.40(a)(ia) will go to enhance the profit of the assessee from the eligible business. This preposition of law is now squarely covered by the decision of the ITAT, Mumbai ‘E’ Bench in the case of S.B. Builders & Developers v. ITO (supra).

Similarly in the case of M/s. Jitsan Enterprises v. ITO (supra), the ITAT after relying on various judgments has held that the assessee would be entitled to deduction u/s.801B on the amount disallowed u/s.40(a)(ia) while working out the eligible profits of the industrial undertaking.

In view of the aforesaid preposition of law and ratio laid down by the various courts, we hold that disallowance of Rs. 7,38,038/- made u/s.40(a)(ia) by the Assessing Officer will go to enhance the profit which would again be eligible for full deduction u/s.801C as it provides for 100% deduction from the profits and gains from the eligible business.

INCOME TAX APPELLATE TRIBUNAL, MUMBAI

ITA No. : 3420/Mum/2011 – Assessment Year: 2007-08

M/s. Meha Medicure Vs. IT0

Date of Pronouncement : 02.03.2012

ORDER

PER AMIT SHUKLA (J.M.):

The present appeal has been filed by the appellant against order dated 31.03.2011 passed by the learned Commissioner of Income Tax (Appeals)-28, Mumbai for the quantum of assessment passed u/s. 143 for the Assessment Year 2007-08. The only issue involved in the present appeal is the disallowance of deduction u/s.80IC to the extent of Rs. 7,38,038/- in pursuance of disallowance u/s.40(a)(ia).

2. Facts of the case, in brief, are that the appellant which is a partnership firm is engaged in the business of manufacturing of soaps, detergents, shampoos and lotions. For the activities carried out by it, it has been claiming deduction u/s.80IC of the Income Tax Act, which is 100% of the profits derived from eligible business in certain special category states. Such a claim has been found to be eligible and accepted by the department in the earlier years. The Assessment Year 2007-08 is a third year in which deduction u/s.80IC have been claimed in the return of income. Even in the impugned assessment year the Assessing 0fficer has completed the assessment after allowing 100% deductions u/s.80IC. However, he noted that the assessee has not deducted the tax on the following payments on after deducting the same has not paid within the due date. The details of such payment are as under :-

a) TDS on Contractors 19,99,470

b) TDS on Clearing & Forwarding Charges 6,68,807

c) TDS on Security Charges 40,290

d) TDS on Commission Charges 28,941

e) TDSonProfessional 1,12,426

Accordingly, after computing the income, the Assessing 0fficer disallowed the entire expenses as above after invoking section 40(a)(ia) and made the additions over and above the return income.

2.1 In the first appeal, the learned CIT(Appeals) reduced the disallowance at .7,38,038/- after holding that the appellant has deducted the tax on the payments made to the contractors and on professional charges and has also paid the TDS as per the provisions of the Act, which was also verified by the Assessing 0fficer. The balance amount of .7,38,038/- consisted of clearing and forwarding charges, security charges and commission charges. The learned CIT(Appeals) thus held that the provisions of section 40(a)(ia) are clearly applicable on  those claim of expenses which has to be added over and above the return income.

3. The learned authorised representative did not disputed the applicability of section 40(a)(ia), however vehemently contented that the sum of .7,38,038/- which has been disallowed u/s.40(a)(ia) will go to enhance the profits of the eligible business u/s.80IC, because such a disallowance is directly related to the manufacturing and business activity of the appellant. In support of her contention reliance was placed on following decisions :-

(i) S. B. Builders & Developers v. IT0 (2011) 50 DTR (Mumbai) (Tribunal) 299.

(ii) M/s. Jitsan Enterprises v. IT0 passed by ITA Ahmedabad Bench in ITA No.1652/Ahd/2009 vide order dated 13.04.20 10

(iii) CIT vs. Allied Industries (2010) 31(I) ITCL 222 (HP-HC)

(iv) Rajkumar Exports (P) Ltd. v. Asstt. CIT (2009) 30 (II) ITCL 474 (Chen-Tribunal)

4. 0n the other hand, the learned DR relied upon the findings of the Assessing 0fficer and the learned CIT(Appeals) and contented that disallowance u/s.40(a)(ia) is a specific disallowance and has no correlation with the income computed u/s.80IC.

5. We have carefully considered the rival submissions and gone through the orders of the authorities below and the judgments relied upon by the learned AR. It is undisputed fact that the appellant is an undertaking and is engaged in the manufacturing of article specified in Fourteenth schedule and in a specified category of states for which it is eligible for deduction u/s.80IC. Such an exemption has been allowed in the earlier years by the Assessing 0fficer himself i.e. for the Assessment Year 2005-06 and 2006-07. Sub-section 3 of section 80IC categorically provides that the deduction would be available for 100% of such profits and gains for 10 assessment years if the profits and gains have been derived from such business activities. In this case, the disallowance have been made on account of non deduction of TDS on the items which are directly attributable/related to the business of the appellant, which is apparent from the heads of expenses under which these disallowances have been made. Income derived from such eligible business must be computed in accordance with the provisions of section 30 to 43D as has been provided under section 29. Section 40 is a non-obstante clause which places embargo on the allowability of expenses / expenditure from section 30 to 38. Therefore, any disallowance u/s.40(a)(ia) will go to enhance the profit of the assessee from the eligible business. This preposition of law is now squarely covered by the decision of the ITAT, Mumbai ‘E’ Bench in the case of S.B. Builders & Developers v. ITO (supra) wherein it was observed and held as under:

“Held: Under section 80AB the income that is derived from the eligible business must be computed in accordance with the provisions of sections 30 to 43D, as provided in section 29. Section 29 provides that the income chargeable to tax under the head “profits and gains of business” “shall be computed in accordance with the provisions contained in sections 30 to 43D”. Unquestionably, section 40(a)(ia) is a section falling between sections 30 to 43D and therefore efect must be given to the same in computing the profits and gains derived from the eligible business, which in this case is a housing project. It follows that if the assessee has not deducted tax from any payment which it was required to or has failed to deposit the tax within the prescribed time-limit, it cannot claim any deduction in respect of the payment while computing the profits derived from the eligible business. The payment has to be disallowed and added back to the profits, thereby swelling the same. The resultant figure of profits, enhanced by the amount of disallowance, would be eligible for the deduction u/s. 80-IB(1 0). The profits and gains of   the eligible business, for the purpose of the sections falling under the heading “C-Deductions in respect of certain incomes”, have to be computed in accordance with the computation provisions of ss. 30 to 43D as mandated by s.29. Therefore, it hardly matters whether while computing the profits in accordance with the above sections, an amount is allowed as a deduction or is disallowed and added back to the profits since “computation” would include both allowing a deduction and disallowing or restricting a deduction in accordance with the statutory provisions. Section 40(a)(ia) authorises the disallowance of the deduction if the tax has not been deducted and paid in time. It is part of the provisions for computation of the profits. Sec. 80AB advisedly uses the expression “… the amount of income of that nature as computed in accordance with the provisions of this Act… . “. The section would have been diferently worded if the contention of the Revenue is to be accepted. One would be ignoring the mandate of s.80AB r/w s. 29 it one accepts the stand of the Revenue. There is no authority given by these sections to ignore the efect of s.40(a)(ia). Those sections do not say that the assessee will be allowed all the deductions from the profits, but when it comes to disallowing certain claims to expenditure somehow, those provisions will have to be ignored. While giving efect to the computation provisions contained in ss. 30 to 43D one should not be bogged down by the theory that the disallowed expenditure cannot be considered as profits “derived”from the housing project or as “operational profits”.

5.1 Similarly in the case of M/s. Jitsan Enterprises v. ITO (supra), the ITAT after relying on various judgments has held that the assessee would be entitled to deduction u/s.801B on the amount disallowed u/s.40(a)(ia) while working out the eligible profits of the industrial undertaking. Likewise the other two decisions relied upon by the learned AR also support the case of the appellant.

6. In view of the aforesaid preposition of law and ratio laid down by the various courts, we hold that disallowance of Rs. 7,38,038/- made u/s.40(a)(ia) by the Assessing Officer will go to enhance the profit which would again be eligible for full deduction u/s.801C as it provides for 100% deduction from the profits and gains from the eligible business.

7. In the result, the appeal filed by the appellant is allowed.

0rder pronounced on this 2nd day of March, 2012.

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Category : Income Tax (27939)
Type : Judiciary (12121)
Tags : ITAT Judgments (5514) section 40(a)(ia) (212)

0 responses to “Assessee entitled to deduction u/s.801C on amount disallowed u/s.40(a)(ia)”

  1. V.K.Dadoo says:

    I have been assessed. I have availed benefit u/s 80IC in AY 2007-08. The assessing officer has disallowed the deduction u/s 80c, 80D and 80G , and this has been upheld by the CIT appeal.
    I donot find any such provisions in the aact.
    Kindly advise.
    Thanking You
    V.K.Dadoo

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