DCIT, CHENNAI vs. AJUBA SOLUTIONS INDIA P LTD., CHENNAI

This is an Appeal by the Revenue agitating the Order by the Commissioner of Income Tax (Appeals)-1, Chennai (‘CIT(A)’ for short) dated 03.10.2016, partly allowing the assessee’s appeal contesting its assessment u/s. 143(3) r/w s. 92CA of the Income Tax Act, 1961 (‘the Act’ hereinafter) for the assessment year (AY) 2011-12 vide the order dated 30.03.2015.

The short issue arising in the instant appeal is the maintainability of the disallowance u/s. 10A in respect of sums aggregating to �. 82,65,111/-, detailed as under:

We have heard the parties, and perused the material on record. We are completely unable to appreciate the Revenue’s stand. The ‘profits and gains’ of the undertaking being not defined u/s. 10A, the same can only be regarded as that chargeable u/s. 28, i.e., as computed, in terms of sec. 29, in accordance with the provisions of sections 30 to 43D. The only condition is that the same must be derived by an eligible undertaking, and on which aspect we observe no dispute. The sums disallowed in computing the profit and gains chargeable to tax u/s. 28 do not change the character of the income under reference, which continues to be the same, but only its quantum. In other words, the disallowance would only impact the quantum and not the nature of the income derived by the assessee’s undertaking. Coming to the adjustments under reference, clearly, the provision for gratuity and for leave encashment, disallowed u/s. 40A(7) and s. 43B respectively, only artificially inflate the profits of the undertaking itself. The add back of wealth-tax u/s. 40(a)(iia), again, seeks to restore the profit to that of the assessee’s business. It is in fact this position that has been admitted by the Board per its Circular No.37/2016 dated 02.11.2016, issued in the context of profit linked deductions under 3 (AY 2011-12) Dy. CIT v. Ajuba Solutions India Pvt. Ltd. Chapter-VIA. The same shall apply in principle to deduction u/s. 10A as well and, as such, stands rightly relied upon before us. The decision in Dy. CIT v. Rameshbai C.Prajapati [2013] 140 ITD 486 (Ahd.), relied by the Revenue, speaks of disallowances of penal nature, which we find as absent in the present case. Even so, breach of law cannot be regarded as an incidence of business, which is the premises of the disallowance u/s. 37(1) of sums paid by way of penalty or fine (refer, inter alia, Hazi Aziz & Abdul Shakoor Brothers. v. CIT [1961] 41 ITR 350 (SC); Indian Aluminum Co. Ltd., v. CIT [1971] 79 ITR 514 (SC); Swadeshi Cotton Mills Co. Ltd. v. CIT [1998] 233 ITR 199 (SC)). The non consideration of such disallowance for the purpose of deduction u/s. 10A, et.al is perhaps guided by the overarching consideration not to extend the benefit of the benevolent provisions to breaches of law, defeat as it would, the disallowance u/s. 37(1). As aforesaid, the present case is not marked by any payment of penal nature, for the said decision to apply. The provision for gratuity and leave encashment are, in fact, in pursuance to sound accounting policies and, rather, mandated by the Accounting Standards recognized under company law (s. 211(3C) of the Companies Act, 1956). The payment of wealth- tax is again only toward discharge of a statutory obligation. The disallowances u/s. 40A(3); 40A(7); s. 43B, etc., it may be noted, do not involve breach of any law for the time being in force, but only mandate the substantive restrictions in computing the business income chargeable u/s. 28, and which we have regarded as the basis for determining the profit and gains of an undertaking exigible to deduction u/s. 10A. The ld. CIT(A) has rightly relied on the decision in Raj Kumar Exports v. Asst. CIT [2009-TIOL-8-8-ITAT-Mad], where the disallowance under reference was u/s. 40A(3). In view of the foregoing, we find no reason for any interference with the impugned order, which is accordingly upheld. We decide accordingly.