Tribunal partially allows appeal, remits disallowance, deletes addition, grants exemption, dismisses unpressed ground.

The Tribunal partly allowed the appeal by remitting the disallowance under Section 40(a)(ia) to the Assessing Officer for fresh adjudication, deleting the addition on account of a balance sheet difference, and directing the grant of exemption under Section 10AA for the assessed business income. Ground no.3 was dismissed as it was not pressed by the appellant.

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Issues Involved:
1. Disallowance of expenses under Section 40(a)(ia) of the Income Tax Act.
2. Addition on account of balance sheet difference.
3. Exemption under Section 10AA of the Income Tax Act.

Detailed Analysis:

1. Disallowance of Expenses under Section 40(a)(ia):
The primary issue concerns the disallowance of Rs. 2,08,002/- paid to Diamonds & Gems Development Corporation without deduction of tax at source, leading to its disallowance under Section 40(a)(ia). The learned CIT(A) confirmed this disallowance, prompting the assessee to appeal further.

The Tribunal observed that according to the Hon’ble Delhi High Court’s judgment in CIT vs. Ansal Landmark Townships Pvt. Ltd., the second proviso to Section 40(a)(ia) should be treated as retrospective. This implies that if the recipient has discharged their tax liability, disallowance under this section cannot be invoked. The Tribunal referenced a coordinate bench's decision in RKP & Co. vs. ITO, which supported this view, emphasizing that curative amendments should be treated as retrospective to avoid unintended hardships.

The Tribunal remitted the matter to the Assessing Officer for fresh adjudication, directing verification of whether the recipient included the payment in their income computation and paid the corresponding taxes. The Tribunal emphasized that the Assessing Officer must provide a fair hearing and issue a speaking order. Consequently, Ground no.1 was allowed.

2. Addition on Account of Balance Sheet Difference:
The second issue involves an addition of Rs. 4,57,875/- due to an alleged balance sheet difference. The Assessing Officer noted that this amount, related to the purchase of machinery, was wrongly debited to the profit and loss account but subsequently reversed. Despite proof of the machinery purchase, the Assessing Officer made the addition.

The learned CIT(A) upheld this addition, stating that the non-disclosure of the transaction violated accounting principles and the Income Tax Act. However, upon appeal, the Tribunal found the addition legally unsustainable as the entry was reasonably explained. The Tribunal directed the Assessing Officer to delete the addition of Rs. 4,57,875/-. Consequently, Ground no.2 was allowed.

3. Exemption under Section 10AA:
The third issue concerns the exemption under Section 10AA. The Assessing Officer restricted the exemption to the claimed amount and did not extend it to the entire business income. The learned CIT(A) upheld this decision.

However, the Tribunal noted that this issue was settled in favor of the assessee by the Hon’ble Bombay High Court in CIT vs. Gem Plus Jewellery India Limited and the Hon’ble jurisdictional High Court in CIT V. Mitesh Impex. The Tribunal directed the Assessing Officer to grant the exemption under Section 10AA for the assessed business income. Consequently, Ground no.4 was allowed.

Conclusion:
The appeal was partly allowed, with the Tribunal remitting the matter regarding the disallowance under Section 40(a)(ia) to the Assessing Officer for fresh adjudication, deleting the addition on account of balance sheet difference, and directing the grant of exemption under Section 10AA for the assessed business income. Ground no.3 was dismissed as it was not pressed by the appellant. The judgment was pronounced in the open Court on 28th October 2016.

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