2017 (10) TMI 419

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....n deleting the addition of Rs. 42.66 lakhs made under section 40(a)(i) despite the fact that the assessee has not deducted tax at source as per the provisions of Section 195 of the Act. The CIT(A) has not appreciated the findings of the AO in the assessment order. [3] When this appeal was called out for hearing, learned counsel for the assessee raised a preliminary objection. She submitted that even if the plea of the Assessing Officer is to be accepted, since entire business income of the assessee is eligible for exemption under section 10A, it will be revenue neutral inasmuch as even if disallowance under section 40(a)(i) is upheld, the corresponding enhanced income eligible for section 10 A benefit will also go up. She invites our atte....

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.... by the virtue of non-discrimination clause in the respective tax treaty, a disallowance on account of non-deduction of tax from payment made to the nonresident cannot be more stringent than the provision for deduction of tax at source to resident. In any case, according to the learned counsel, disallowance under section 40(a)(i) will be on the same footing, as deduction under section 40(a)(ia), so far impact on taxable income is concerned. Learned Departmental Representative, on the other hand, submits that, as noted by the CBDT, the concession for not pursuing the appeal specifically refers to Section 40(a)(ia) and it cannot be extended to Section 40(a)(i). There is no need to bring in the notions of fairness and equity as we are dealing ....

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....c expenditure claimed may also be made. The effect of such disallowances is an increase in the profits. Doubts have been raised as to whether such higher profits would also result in claim for a higher profit-linked deduction under Chapter VI-A. 2. The issue of the claim of higher deduction 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 ....

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....ced by the disallowance. 4. Accordingly, henceforth, appeals may not be filed on this ground by officers of the Department and appeals already filed in Courts/Tribunals may be withdrawn/not pressed upon. The above may be brought to the notice of all concerned. [6] What has been accepted by the CBDT, as learned counsel rightly points out, is the principle that when a disallowance results in an enhancement of business profits but such an enhancement is revenue neutral inasmuch as related business profits, in totality, are eligible for deduction under chapter VI, such appeals need not be pursued. The reference to Section 40(a)(ia) is no more than illustrative in nature, and what holds good for disallowance under section 40(a)(ia) applies,....