Allowability of Exemption under section 10AA on Profits enhanced on account of addition under section 69C disallowing 25% of alleged unverifiable purchases




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Allowability of Exemption  under section 10AA on Profits enhanced on account of addition under section 69C disallowing 25% of alleged unverifiable purchases

Short Overview  Expenditure to the extent of 25% of purchases held as non-genuine and disallowed by the AO related to the same business activity of manufacture and export in respect of which assessee was held eligible for deduction under section 10AA. Therefore, deduction under section 10AA was to be allowed on the enhanced profits in light of accepted legal position by CBDT Circular No. 37/2016, dated 2-11-2016.

AO made addition under section 69C by disallowing 25% of alleged unverifiable purchases and denied deduction under section 10AA as regards the amount so added.

It is held that  Expenditure to the extent of 25% of purchases held as non-genuine and disallowed by the AO related to the same business activity of manufacture and export in respect of which assessee was held eligible for deduction under section 10AA. Therefore, deduction under section 10AA was to be allowed on the enhanced profits in light of accepted legal position by CBDT Circular No. 37/2016, dated 2-11-2016.

Decision: In assessee’s favour.

IN THE ITAT, JAIPUR BENCH

SANDEEP GOSAIN, J.M. & VIKRAM SINGH YADAV, A.M.

Amrapali Exports v. DCIT

ITA No. 454/Jp/2019

5 January, 2021

Assessee by: P.C. Bafna (CA)

Revenue by: Monisha Choudhary (Addl.CIT)

ORDER

Vikram Singh Yadav, A.M.

This is an appeal filed by the assessee against the order of learned Commissioner (Appeals)-1, Jaipur dated 23-1-2019 wherein the assessee has taken the following grounds of appeal :–

  1. The learned Commissioner (Appeals) has erred on facts and in law in upholding the validity of the order passed under section 147 of IT. Act, 1961.
  2. The learned Commissioner (Appeals) has erred on facts and in law in upholding the rejection of books of accounts under section 145(3) of IT Act, 1961.
  3. The learned Commissioner (Appeals) has erred on facts and in law in upholding the action of assessing officer in treating the purchases ofRs. 7,54,587 made from M/s Arihant Exports as bogus by not considering the various evidences filed by the assessee. He has further erred in confirming the addition of Rs. 1,88,647 by disallowing 25% of alleged unverifiable purchases ofRs. 1,88,647 under section 69C of IT Act, 1961.
  4. The learned Commissioner (Appeals) has erred on facts and in law in confirming the addition ofRs. 15,092, being 2% of Rs. 7,54,587 on account of alleged commission paid for obtaining the accommodation entry.
  5. The learned Commissioner (Appeals) has erred on facts and in law in not accepting the contention of assessee to recomputed the deduction under section 10AA after considering the trading addition ofRs. 2,03,739 ignoring theCBDT Circular No. 37/2016 dt. 02-11-2016.
  6. 2. Briefly stated, the facts of the case are that the assessee firm is engaged in the business of manufacturing and export of gold, silver and base material jewellery plain & studded with precious & semi precious stones. It has set up its manufacturing and export unit/factory in Special Economic Zone at Sitapura Industrial Area, Jaipur and has started commercial production from 21-4-2008 and has claimed deduction under section 10AA of the Act. The assessee originally filed its return of income on 20-9-2013 at 90,220 after claiming deduction under section 10AA at 7,21,35,825. The assessment was completed under section 143(3) on 27-1-2016 wherein the returned income was accepted by the assessing officer. Subsequently, basis the information obtained from Investigation wing, Mumbai that the assessee has obtained bogus entries in the form of bogus purchases amounting toRs. 7,54,587 from M/s Arihant Exports, Surat, notice under section 148 was issued on 28-2-2017. In response to such notice, the assessee filed its return of income on 10.03.2017 declaring the income at Rs. 90,220 after claiming deduction under section 10AA at Rs. 7,21,35,825. The reassessment order under section 143(3) read with 147 was passed by the assessing officer on 13-12-2017 wherein the assessee was found eligible for deduction under section 10AA to the extent of Rs. 7,21,35,825 as originally assessed under section 143(3) of the Act. However, books of accounts were rejected under section 145(3) and a sum of Rs. 1,88,647 was added back to the total income of the assessee, being unexplained expenditure for the reason that the assessee was found indulging in obtaining accommodation entry of purchase of goods from bogus concern which was operated by Shri Rajendra Jain without any physical deliveries and such purchases amounting to Rs. 7,54,587 were treated as non genuine and 25% of such purchases were brought to tax as unexplained expenditure besides addition of Rs. 15,092, being 2% of Rs. 7,54,587 on account of alleged commission paid for obtaining the accommodation entry. On appeal, the said findings have been sustained by the learned Commissioner (Appeals) and against the said finding, the assessee is now in appeal before us.
  7. During the course of hearing, the learned AR submitted that the matter is covered in favour of the assessee by the decision of the Tribunal in assessee s own case inITA No. 190 & 191/JP/2019 for assessment years 2009- 10 & 2014-15 dated 04-11-2019 and our reference was drawn to the relevant findings of the Tribunal which are contained at paras 9 to 12 of its order which read as under :–
  8. We have heard the rival contentions and perused the materials available on record. The limited issue under consideration is whether the assessing officer is required to recompute the deduction under section 10AA after considering the addition ofRs. 2,80,500 so made by him and in that sense, the addition so made is revenue neutral. In this regard, we refer to theCBDT No. 37/2016 dated 2-11-2016 which reads as under :–

“Chapter VI-A of the Income-tax Act, 1961 (“the Act”), provides for deductions in respect of certain incomes. In computing the profits and gains of a business activity, the assessing officer may make certain disallowances, such a disallowances pertaining to Sections 32, 40(a)(ia), 40A(3), 43B etc., of the Act. At times disallowance out of specific 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.

  1. 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 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 80- IB of the Act. This view was taken by the Courts in the following cases:

ITO v. Keval Construction, Tax Appeal No. 443 of 2012, 10-12-2012, Gujarat High Court : 2013 TaxPub(DT) 1595 (Guj-HC)

CIT v. Sunil Vishwambharnath Tiwari IT Appeal no. 2 of 2011, 11-9-2015, Bombay High Court : 2015 TaxPub(DT) 3661 (Bom-HC)

(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. This view was taken by the court in the following case:

Principal CIT, Kanpur v. Surya Merchants Ltd. IT Appeal no. 248 of 2015, 3-5-2016, Allahabad High Court : 2016 TaxPub(DT) 3567 (All-HC)

The above views have been attained finality as these judgments of the High Courts of Bombay, Gujarat and Allahabad have been accepted by the Department.

  1. 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.
  2. 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.”
  3. Though the aforesaid circular has been issued by the CBDT in the context of Chapter VI-A of the Act, the deduction under section 10AA is equally profit- link deduction though the fall under Chapter III of the Act and the legal position which has been accepted by the CBDT in the aforesaid circular will equally applies to the deductions claimed section 10AA of the Act. In the said circular, the CBDT has accepted the judgment of the various High Courts wherein it has been held that if the expenditure disallowed is related to business activity against which deduction has been claimed, the deduction needs to be allowed on enhanced profit worked out taking into consideration the disallowances so made by the Assessing officer.
  4. The Co-ordinate Bench in case ofITO v. Anthelio Business Technologies Pvt. Ltd. 78 taxmann.com 203 (Mumbai) :2017 TaxPub(DT) 0084 (Mum-Trib) in context of deduction under section 10B relying on the aforesaid CBDT Circular has taken a similar view and it would be relevant to refer to the findings of the Co-ordinate Bench which read as under :–
  5. We have heard the rival contentions and also perused the material available on record including the afore-stated CBDT circular. We have observed that the assessee is registered as a 100% export oriented unit under the Software Technology Park of India Scheme and the assessee is engaged in the business of provision of information technology enabled services and other back office support services. It is also an undisputed and admitted position between both the parties that the assessee is entitled for deduction under section 10B of the Act and the profits of the assessee are exempt from payment of taxes under section 10B of the Act. We have observed that the assessee has undertaken total turnover ofRs. 32,76,00,596 which is also export turnover of the assessee and the assessee has claimed deduction under section 10B of the Act of Rs. 7,60,34,821. Additions have been proposed under section 40(a)(i) of the Act at Rs. 1,49,73,455 by the assessing officer vide draft assessment order, the details of which are as under :–
Sl. No. Name of the party Amount (Rs)
1 Mark R Luciw 22,10,258
2 Garry O Neil 1,04,57,012
3 Bruce Sugaarman 21,70,629
4 John Blyzinkyl 1,35,556
TOTAL 1,49,73,455

The above expenses were incurred by the assessee towards ‘sales and marketing expenses’ from which the assessee has not deducted tax at source. Additions were proposed by the assessing officer of Rs. 1,49,73,455 in his draft assessment order which was restricted by the learned DRP vide Order, dated 29-11-2014 to an amount of Rs. 1,35,556. With respect to the payments of Rs. 1,48,37,899, the DRP directed to delete the same as the assessee has submitted the notarized copies of passports, which as per DRP proved that three individuals at s. no 1 to 3 in above chart did not visit India during the relevant year. Hence, the DRP directed that said payments will not be subject to withholding tax under section 195 of the Act and accordingly these payment cannot be disallowed under section 40(a)(i) of the Act.. The DRP held that these payments to the tune of Rs. 1,48,73,455 are to be allowed, while, with respect to the 4th person Mr. John Blyzinskyj, the payment of Rs. 1,35,556 without deduction of tax at source had remained unsubstantiated and the learned DRP confirmed the addition of Rs. 135,556 by issuing directions under section 144C(5) of the Act, which additions were confirmed by the assessing officer in his assessment Order, dated 17-12-2014 passed under section 143(3) of the Act r.w.s. 144C(13) of the Act in pursuance of directions of DRP.. We have observed that the CBDT has issued Circular No. No. 37/2016 dated 2-11-2016, which is reproduced below :–

“SECTION 80-IB, READ WITH SECTIONS 32, 40(a)(ia), 40A(3) & 43B, OF THE INCOME-TAX ACT, 1961 – DEDUCTIONS – PROFITS AND GAINS FROM INDUSTRIAL UNDERTAKINGS OTHER THAN INFRASTRUCTURE DEVELOPMENT UNDERTAKINGS – CHAPTER VIA DEDUCTIONS ON ENHANCED PROFITS

CIRCULAR NO. 37/2016 [F.NO. 279/MISC./140/2015/ITJ], DATED 2-11- 2016

Chapter VI-A of the Income-tax Act, 1961 (“the Act”), provides for deductions in respect of certain incomes. In computing the profits and gains of a business activity, the assessing officer may make certain disallowances, such as disallowances pertaining to sections 32, 40(a)(ia), 40A(3), 43B etc., of the Act. At times disallowance out of specific 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.

  1. 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 account of non-deduction of TDS under law, such

(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. This view was taken by the court in the following case: 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 80-IB of the Act. This view was taken by the courts in the following cases:

ITO v. Keval Construction [2013] 33 taxmann.com 277 (Guj.) : 2013 TaxPub(DT) 1595 (Guj-HC)

CIT v. Sunil Vishwambharnath Tiwari [2016] 63 taxmann.com 241 (Bom.) : 2015 TaxPub(DT) 3661 (Bom-HC)

PCIT v. Surya Merchants Ltd. [2016] 72 taxmann.com 16 (All.) : 2016 TaxPub(DT) 3567 (All-HC).

The above views have attained finality as these judgments of the High Courts of Bombay, Gujarat and Allahabad have been accepted by the Department.

  1. 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.
  2. 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.”

The sum, substance and spirit of the afore-stated circular is that the Revenue does not want to continue the litigation with respect to disallowance made by the Revenue under section 32,40(a)(ia), 40A(3), 43B etc. of the Act, which ultimately led to increase in profits which are otherwise eligible for profit linked deduction under Chapter VI-A of the Act. The Board has accepted that the disallowance made under section 32, 40(a)(ia), 40A(3), 43B etc. of the Act and other disallowance out of specific expenditure related to the business activity may be made by Revenue which led to enhancement of profits against which Chapter -VIA profit linked deductions has been claimed and it is accepted that enhanced profit linked deduction under Chapter VI-A is admissible on the profits so enhanced by the said disallowance made by the Revenue. We find that the Revenue’s appeal and the assessee’s cross objection are duly covered by the CBDT circular although Section 10B of the Act is not placed under Chapter VI-A of the Act rather the same is placed under Chapter-III of the Act but the deductions under section 10B of the Act are profit linked deductions and hence there is no reason why the same should not be allowed keeping in view the spirit of afore-stated CBDT circular as the deduction under section 10 B of the Act is also profit linked deduction. Similarly, it is stated in the circular about disallowance under section 40(a)(i) of the Act which is succeeded by the word ‘etc’ wherein the circular has stated as under :–

“In computing the profits and gains of a business activity, the assessing officer may make certain disallowances, such as disallowances pertaining to sections 32, 40(a)(ia), 40A(3), 43B etc., of the Act.”

The use of the word ‘etc.’ clearly denotes that it will apply to similarly placed disallowances and disallowance under section 40(a)(i) of the Act is also disallowance due to non-deduction of withholding tax as is contemplated by Section 40(a)(ia) of the Act. Hence the CBDT circular will be applicable to deductions under section 10B of the Act as well to disallowance under section 40(a)(ia) of the Act as well. Hence the appeal of the Revenue is not sustainable/maintainable in view of afore-stated CBDT circular dated 2-11-2016 and we dismiss the appeal filed by the Revenue, while the C.O. filed by the assessee is allowed as the additions of Rs. 1,35,556 made by the assessing officer are w.r.t. disallowance under section 40(1)(ia) of the Act. In any case this issue is also covered by decision of Hon’ble jurisdictional Bombay High Court in favour of the assessee in Gem Plus Jewellery India Ltd.’s case (supra) as disallowance under section 40(a)(i) of the Act is a statutory disallowance and the hence enhanced profits due to disallowance shall be considered for deduction under section 10B of the Act. We order accordingly.

  1. In the instant case, it is not in dispute that the assessee is eligible for claim of deduction under section 10AA of the Act. It is also not in dispute that the assessee has only one business undertaking which is engaged in the business of manufacturing and export of gold, silver and base material jewellery plain & studded with precious & semi precious stones situated at Sitapura Industrial Area, Jaipur and the total turnover of the business is equivalent to the total turnover of the undertaking as well as the export turnover. The expenditure to the extent of 25% of purchases where are held as non-genuine and disallowed by the Assessing officer relates to the same business activity of manufacture and export in respect of which assessee is held eligible for deduction under section 10AA of the Act. The deduction under section 10AA therefore needs to be allowed on the enhanced profits after taking into consideration the disallowance ofRs. 2,80,500 in light of accepted legal position by the CBDT andfollowing the consistent position taken by the Co-ordinate Benches. The assessing officer is therefore directed to recompute the deduction under section 10AA taking into consideration the addition of Rs. 2,80,500. In the result, the Ground No. 5 of the assessee s appeal is allowed.
  2. Per contra, the learned DR submitted that the addition have been made under section 69C which is a deeming provision and the same cannot be considered for benefit under section 10AA which is restricted to the profit and gains derived from export. It was further submitted that theCircular No. 37/2016 dated 21-1-2016 referred by the AR is in the context of deduction on enhanced profits under chapter VIA whereas in the present case, the assessee has claimed deduction under section 10AA which falls under chapter II of the Act.
  3. 5. After hearing both the parties and going through the material available on record, we find that the matter has been examined at length by the Coordinate Bench in assessee s own case for assessment year 2009-10 and 2014-15 wherein similar contentions were advanced by the learned DR and considering the same, the assessing officer was directed to recompute the deduction under section 10AA taking into consideration the additions so made by him.

Considering the fact that there are no changes in the facts and circumstances of the present case, following the decision taken by the Coordinate Bench in assessee s own case for assessment years 2009-10 & 2014-15, the assessing officer is hereby directed to recompute the deduction under section 10AA taking into consideration the addition of Rs. 2,03,739 made by him. In the result, the ground No. 5 of the assessee s appeal is allowed.

  1. In view of the above, rest all grounds taken by assessee have become academic in nature and the same are thus dismissed as infructuous.
  2. In the result, appeal of the assessee is disposed off in light of aforesaid directions.




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