THE DCIT, CIRCLE-1,, AHMEDABAD vs. ASCENDUM SOLUTIONS (INDIA) PVT. LTD.,, AHMEDABAD

I.T.A. No.4 29/Ah d/1 4 Assessme nt year: 20 09- 10 Page 1 of 5

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD I BENCH, AHMEDABAD [Coram: Pramod Kumar AM and Mahavir Prasad JM] I.T.A. No.429/Ahd/14 Assessment year: 2009-10 Deputy Commissioner of Income Tax Circle 1, Ahmedabad ............…………….Appellant Vs. Ascendum Solutions India Pvt Ltd ……..….…….…Respondent 19, Akshat Kayan Society Mithakali, Navarangpura, Ahmedabad 380 009 [PAN: AAAGCA8236M] Appearances by: V K Singh for the appellant Ira R Kapoor for the respondent Date of concluding the hearing : July 14, 2017 Date of pronouncing the order : September 25, 2017 O R D E R Per Pramod Kumar, AM: [1] This appeal, filed by the Assessing Officer, seeks to challenge the order dated 28th November 2013, passed by the CIT(A) in the matter of assessment under section 143(3) of the Income Tax Act, 1961, for the assessment year 2009-10. [2] In the first ground of appeal, the Assessing Officer has raised the following grievance: The CIT(A) has erred in law and on fact in 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 attention to

I.T.A. No.4 29/Ah d/1 4 Assessme nt year: 20 09- 10 Page 2 of 5 CBDT circular No. 37 dated 2nd November, 2016, and to Hon’ble jurisdictional High Court’s judgment in the case of ITO Vs Keval Constructions [(2013) 33 taxmann.com 277 (Guj)], in support of this proposition. This objection of the assessee, alongwith the CBDT circular and Hon’ble jurisdictional High Court’s judgment in the case of Keval Construction (supra), was placed before us in the documents filed before us as well. The objection of the assessee is that, in the light of the position accepted by the Central Board of Direct Taxes in the aforesaid circular, it cannot be open to the Assessing Officer to pursue this appeal which is wholly revenue neutral. What is the point of pursuing grievance against the deletion of disallowance under section 40(a)(i), learned counsel for the assessee asks, when whatever be the increase in business income, as a result of the disallowance, it is not includible in taxable income anyway. However, when learned counsel’s attention was invited to the text of the CBDT circular (supra) which covers disallowance under section 40(a)(ia) and not under section 40(a)(i), she submits that the disallowances under section 40(a)(i) and under section 40(a)(ia) are materially similar in nature, and, in any case, what is important is the principle which is accepted by the CBDT. She then also refers to this Tribunal’s judgment in the case of Mitsubishi Corporation India Pvt Ltd Vs DCIT [(2015) 44 ITR (Tribunal) 416 (Del)], in support of the position that 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 non- resident 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 with a concession extended by the CBDT circular, and, something which is not dealt in the said circular cannot be inferred to be concession by the said circular. In any case, according to the learned Departmental Representative, non- deduction of tax at source from payments to non-residents cannot be treated at par with the payments made to the residents, as there are limited modes of recovery so far as tax liabilities from non-residents are concerned. He relied upon the stand of the Assessing Officer that the taxes were deductible from payments in question, and that the non-deduction of tax at source, therefore, must be visited with disallowance under section 40(a)(ia). We are thus urged to reject the preliminary objection raised by the learned counsel, based on an executive concession, and proceed to deal with the matter on merits. [4] We have considered the rival submissions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. We find that vide circular no. 37 dated 2nd November, 2016, the Central Board [5] of Direct Taxes has, inter alia, taken the following stand: 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),

I.T.A. No.4 29/Ah d/1 4 Assessme nt year: 20 09- 10 Page 3 of 5 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. 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 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: ♦ Income-tax Officer -Ward 5(1) v. Keval Construction [2013] 33 taxmann.com 277 (Guj.) ♦ Commissioner of Income-tax-IV, Nagpur v. Sunil Vishwambharnath Tiwari [2016] 63 taxmann.com 241 (Bom.) (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. [2016] 72 taxmann.com 16 (All.). The above views have attained finality as these judgments of the High Courts of Bombay, Gujarat and Allahabad have been accepted by the Department.

I.T.A. No.4 29/Ah d/1 4 Assessme nt year: 20 09- 10 Page 4 of 5 and what holds good for disallowance under section 40(a)(ia) applies, in principle, equally to disallowance under section 40(a)(i) as well. In this view of the matter, in terms of the CBDT circular (supra), the appeal filed by the Assessing Officer, on this point, is indeed not maintainable. As regards the point made by the learned counsel that the non-deduction of tax at source from payments made to the non-residents must be dealt with at a different level, and bearing in mind the need to protect our tax base, we can only point out that lapses with respect to tax withholding obligations from payments made to non-residents is visited with several type of consequences- disallowance under section 40(a)(i), recovery under section 201, penalty under section 271C and, in certain situations, even prosecution under section 276B. What we are dealing with right now is a limited aspect of the matter having impact on computation of taxable income, and while dealing with this limited aspect of the matter, we must not bother about the considerations which are not germane to this context. As for the present context, the issue raised in the appeal, given the settled legal position, is wholly academic and revenue neutral, and, in the light of the CBDT instructions which bind all the field authorities under section 119 of the Act, cannot be pursued by the appellant. We, therefore, see no need to even deal with the matter on merits in the context of the present proceedings, even as we take on record learned counsel’s submission that, even on merits, the issue is now covered in favour of the assessee and that the assessee did not have any obligations to deduct tax at source at all. That aspect of the matter is wholly academic. In view of these discussions, and bearing in mind entirety of the case, we uphold the preliminary objection of the assessee and dismiss this ground of appeal as not maintainable. [7] Ground no. 1 is thus dismissed. [8] In ground no. 2 and 3, the Assessing Officer is aggrieved of the learned CIT(A)’s deleting the disallowance of Rs 8.16 lakhs in respect of medical and life insurance premium, and of Rs 12.89 lakhs in respect of late payment of employee’s contribution for PF/ESIC. [9] Learned representatives fairly agreed that in the event of our upholding the preliminary objection in respect of the first ground of appeal, the same will be the position with respect to these two grounds of appeal inasmuch as even if the disallowances are to be restored, the assessee will be eligible for corresponding increase in the tax exemption under section 10A. In this view of the matter, these grievances, whatever be the merits of these grievances in law, are academic in the present context and are liable to dismissed as non-maintainable in terms of the CBDT circular dated 2nd November 2016 (supra). [10] Ground nos. 2 and 3 are dismissed. [11] In the result, the appeal is dismissed. Pronounced in the open court today on the 25th day of September, 2017. Sd/- Sd/- Mahavir Prasad Pramod Kumar (Judicial Member) (Accountant Member) Dated: the 25th day of September, 2017.

I.T.A. No.4 29/Ah d/1 4 Assessme nt year: 20 09- 10 Page 5 of 5

Copies to: (1) The appellant (2) The respondent (3) The Commissioner (4) The CIT(A) (5) The DR (6) Guard File

By order etc

Assistant Registrar Income Tax Appellate Tribunal Ahmedabad benches, Ahmedabad