Issue for consideration
100% of the profits derived from a housing project is eligible for deduction u/s. 80-IB(10) of the Income -tax Act. Like many other provisions of chapter VI-A of the Act, this provision also does not lay down the guidelines for computing the profits from the housing project and in turn leaves a doubt about the quantum of profits that is eligible for deduction. Is it the amount of profits that is computed as per the books of account that is eligible for deduction or is the deduction based on the amount of income computed as per the provisions of the Act and if yes, is deduction limited to the returned income or is allowed w.r.t the assessed income? These are the questions that routinely arise in interpretation of the provisions of chapter VI-A that grant deduction for profits derived from specified sources.
While many of the decisions have taken a view that the term ‘profits’ referred to in the said chapter means and includes the assessed profit that should be eligible for deduction under the respective provisions, some of the decisions, including the recent one of the Ahmedabad bench of the tribunal, have taken a view that the entire assessed income after disallowance should not be eligible for deduction and the deduction should be restricted to profits as per the books of account. The Ahmedabad bench of the tribunal in holding so, also distinguished the case where profits as per the books is increased on account of the disallowance of an expenditure and the one on account of statutory non compliance of the law. The position also needs to be examined in view of the decisions of the apex court in the cases of Pandian Chemicals Ltd. and Liberty India.
Rameshbhai C. Prajapati’s case
The issue recently arose in the case of Rameshbhai C. Prajapati, 23 ITR (Trib.) 516 (Ahd.). In this case, the AO disallowed an amount of Rs. 1,20,895 representing a business expenditure, on which tax, though deducted, was deposited after the due date of filing the return of income. The disallowance had the effect of enhancing the business income of the assessee, the source of which was from a housing project that was otherwise eligible for full deduction u/s. 80-IB(10). The AO restricted the deduction u/s. 80-IB(10) to the profits as per the books of account and denied the deduction on the amount disallowed u/s. 40(a)(ia) in the course of assessment. On appeal, the CIT(A) allowed the deduction based on the assessed business income by observing as under;
“3……., there is merit in the submissions that the addition on account of disallowance of expenditure would result in increased business income of the appellant which would be eligible for deduction u/s. 80-IB(10). Hence while holding that he Assessing Officer’s disallowance u/s. 40(a)(ia) is justified the appellant’s claim of admissibility of deduction u/s. 80-IB(10) on this addition is also justified. Therefore while confirming the order of the Assessing Officer with regard to disallowance of Rs. 1,28,895 he is directed to consider the amount while computing the assessee’s claim of deduction u/s. 80-IB(10).”
On appeal to the tribunal, the Revenue supported the findings of the AO and contended that the CIT(A) erred in allowing deduction u/s. 80-IB (10) of the Act on the addition made u/s. 40(a)(ia) of the Act, without appreciating the fact that the addition was not on account of disallowance of any expenditure but was on account of infringement of law, and the AO’s finding that the assessee had deducted tax at source but had violated the law by not depositing the same in time, thereby attracting provisions of section 40(a)(ia) of the Act. The assesssee on the other hand relied upon the order of the CIT(A).
The tribunal, on hearing the rival submissions, and carefully perusing the materials on record, noted that, in the case before them, the addition made on account of disallowance of expenditure was due to the deeming fiction created by the penal section of 40(a)(ia) of the Act and the effect of the same could not be imported into a beneficial provision of section 80-IB(10) of the Act. It observed that the deeming fiction created under any provision of the Act could not be imported into a beneficial provision of the Act. It also noted that while computing deduction u/s. 80-IB (10) of the Act, the plain meaning of the language of the Act had to be given effect to and the legal fiction created by virtue of section 40(a)(ia) could not be extended to determine the profit of the business for the purpose of computing deduction u/s. 80-IB(10) of the Act, which had to be applied only for the definite and limited purpose for which it was created.
The tribunal noted with approval the decision in the case of Executors & Trustees of Sir Cawasji Jehangir vs. CIT, 35 ITR 537 (Bom), where it had been explained that unless it was clearly and expressly provided, it was not permissible to impose a supposition on a supposition of law and that it was not permissible to sub-join or track a fiction upon fiction. In light of the said decision, it was apparent to the tribunal that in determining the quantum of deduction u/s 80 IB of the Act, one had to strictly follow the provisions of that section and compute the deduction accordingly without infusing any other provision of the Act, which created a legal fiction. The tribunal held that for computing the profits derived from the business of an undertaking that was developing and building housing projects, for claiming deduction u/s. 80-IB(10) of the Act, any deeming fiction provided under the Act, such as section 40(a)(ia), should not be infused. Instead the normal provisions of the Act had to be adopted and only the profits thus worked out should be eligible for deduction u/s. 80-IB(10) of the Act.
It was accordingly held that the deduction u/s. 80-IB(10) should not be increased on account of disallowance u/s. 40(a)(ia).
S.B. Builders & Developers’ case
The same issue had come up before the Mumbai bench of thee tribunal in the case of S.B. Builders & Developers, 136 TTJ 420 (Mum.). The assessee in that case was a partnership firm, engaged in the business of building and developing a housing project. During the relevant accounting year, the assessee had only one housing project in hand in respect of which, in filing the return of income, it had claimed a deduction u/s. 80-IB(10) of Rs. 3,76,78,403 which represented the profits from the said project as shown in the Profit & Loss Account. The AO found that, in respect of certain payments relating to the cost of construction, RCC consultancy, architect’s fees, commission and professional charges aggregating to Rs. 4,50,12,485, the assessee had not deducted tax in time, though it was required to do so. He accordingly disallowed the said payments u/s. 40(a)(ia) and added back the said amount to the net profit and determined the gross total income at Rs. 8,26,90,888. Finally, he restricted the deduction u/s. 80-IB(10) to Rs. 3,76,78,403, only, i.e. the amount originally claimed in the return of income, and brought to tax Rs. 4,50,12,485, the amount that was disallowed u/s. 40(a)(ia).
On appeal to the CIT(A), the firm claimed that the assessee was entitled to the deduction u/s. 80-IB(10) in respect of the profits computed by AO after making the disallowance u/s. 40(a)(ia). The CIT(A), not impressed by the contention, held that the disallowed expenditure could not be considered to be the profits generated by the industrial undertaking, i.e. the housing project, there being no nexus between the disallowed expenditure and the industrial undertaking. In other words, he held that insofar as the disallowed expenditure was concerned, the industrial undertaking was not the source of the same and section 80-IB(10) could apply only in relation to profits which were “derived” from the industrial undertaking. Relying on the judgments of the Supreme Court in CIT vs. Sterling Foods, 237 ITR 579, Pandian Chemicals Ltd. vs. CIT, 262 ITR 278 and Liberty India vs. CIT, 317 ITR 218 , he held that the assessee was not entitled to the deduction u/s. 80-IB(10) in respect of the disallowed expendi-ture of Rs. 4,50,12,485 and the deduction was rightly restricted by the AO to the profit of Rs. 3,76,78,403 shown in the Profit and Loss Account. He accordingly confirmed the action of the AO.
On second appeal to the tribunal, the assessee firm relied upon several decisions in support of the case for deduction. In reply, the Revenue contended as under;
• The decisions relied upon by the assesseee were concerned with deductions to be allowed, whereas in the present case, the deduction was not to be allowed because the assessee had failed to deduct and pay the taxes within the time-frame prescribed and thus it was a case of statutory disallowance of an expenditure and add-back of the same, to which the ratio of the judgments cited could not apply.
• In the case of Distributors (Baroda) (P.) Ltd. vs. Union of India 155 ITR 120(SC) , the earlier judgment of the court in the case of Cloth Traders (P.) Ltd. vs. Addl. CIT, 118 ITR 243, wherein the court had held that the deduction u/s. 80M had to be computed with reference to the gross amount of dividend received by the assessee, was overruled and it was held that the deduction was to be given on the net amount of dividend calculated in accordance with the provisions of the Act.
• The Supreme Court in Liberty India’s case (supra) held that the profits derived from the eligible business in section 80-IB(1) only meant the operational profits of the eligible business and since in the given case before the tribunal, the amount disallowed u/s. 40(a)(ia ) could not be termed as such profits, it could not qualify for the deduction.
• Acceptance of the assessee’s contention would result into an artificial inflation of the profits from the housing project which would be against common sense and reality, and would convert an expenditure disallowed into qualifying income of the assessee; a proposition which could not at all be accepted.
• The Amritsar Bench of the tribunal in the case of Kashmir Tubes vs. ITO ,IT Appeal No. 145 (Asr.) of 2005, dated 07-12-2007, held that a disallowed expenditure could not be considered to be profits derived from the eligible business for the purpose of section 80-IA/80-IB.
The tribunal, on a detailed consideration of the law on the subject, observed as under;
• U/s. 80-IB(1), an assessee was allowed a deduction in respect of the profits and gains ‘derived’ from any eligible business which inter alia included developing and constructing a housing project mentioned in s/s. (10). The deduction in computing the gross total income was to be given @ 100% of the profits and gains derived from the housing project.
• Though profits and gains ‘derived’ from the eligible business was not defined in the relevant section as also in chapter VI-A of which the said section was part of, section 80AB afforded a complete answer to the issue in dispute, while stating that for the purpose of computing any deduction under the chapter, notwithstanding anything contained in that section, it was the amount of income of the nature as computed in accordance with the provisions of this Act (before making any deduction under this Chapter) that alone shall be deemed to be the amount of income of that nature which was derived or received by the assessee and which was included in his gross total income.
• In other words, u/s. 80AB, the income that was derived from the eligible business must be computed in accordance with the provisions of sections 30 to 43D, as provided in section 29, and as such, effect must be given to section 40(a)(ia) in computing the profits and gains derived from the housing project.
• The payment made without tax deduction had to be disallowed and added back to the profits and the resultant figure of profits, enhanced by the amount of disallowance, was eligible for the deduction u/s. 80-IB(10).
• It hardly mattered whether, while computing the profits in accordance with the above sections, an amount was allowed as a deduction or was disallowed and added back to the profits, since ‘computation’ included both allowance of a deduction and disallowance or restriction of a deduction in accordance with the statutory provisions.
• The contention of the revenue, that the accep-tance of the assessee’s claim resulted in an artificial inflation of the profits from the housing project, was against common sense and reality.
• The words “computed in the manner laid down in this Act” must take precedence over notions like “commercial profits” and one should not be bogged down by the theory that the disallowed expenditure could not be considered as profits “derived” from the housing project or as “operational profits”.
• The ratio of the judgments in the cases of CIT vs. Albright Morarji & Pandit Ltd. 236 ITR 914 , Grasim Industries Ltd. vs. ACIT, 245 ITR 677, Plastibends India Ltd. vs. Addl. CIT, 318 ITR 352 and Cambay Electric Supply Industrial Co. Ltd. vs. CIT 113 ITR 84. supported the case for an enhanced deduction.
The tribunal distinguished the decisions relied upon by the revenue and in particular the decisions in the cases of Distributors (Baroda) (P.) Ltd., Sterling Foods (supra) and Pandian Chemicals Ltd.(supra).
In the result, it was held that the assessee would be entitled to the deduction u/s. 80-IB(10) in respect of the profits of Rs. 8,26,90,888 assessed by AO as prof-its of the housing project for the year under appeal.
4. Observations
It is very disturbing that in the present time, when the law is believed to be settled on the subject, the revenue should press such issues in unwarranted litigation. The courts are flooded with such frivolous cases, and one of the major steps to avoid piling up of the cases in the courts will be to stop flooding them with such issues. The only reason this controversy is addressed in this column is to highlight and understand the very novel contention of the revenue for denying the deduction on the enhanced income that found favour with the tribunal. There was no need to have engaged ourselves in this analysis, had the tribunal rejected the revenue’s contentions.
Section 40(a)(ia) disallows a claim for the deduction of an expenditure, in respect of which tax has not been deducted at source and/or paid in time. Section 40(a)(ia) is a part of chapter IV-D that provides for computation of the profits and gains of business. While computing the profits and gains in accordance with the said chapter, no distinction can be made between a section which allows the deduction and a section which disallows or restricts the deduction for failure to fulfill certain conditions. Neither can a distinction be made between an addition or a disallowance. Both the types of sections, those providing for allowance and those for disallowance, are parts of the computation provisions and both have to be given effect to in computing the profits and gains of business. It is this profit so determined, which constitutes the profits that is deemed to be derived from the eligible business. This understanding of the law, as pointed out by the Mumbai bench of the tribunal, is amply clarified by section 80AB when it advisedly uses the expression “…the amount of income of that nature as computed in accordance with the provisions of this Act.”
Section 80AB has an overriding effect over the sections under Chapter VI-A, insofar as the computation of the income eligible for the deduction is concerned. The Mumbai bench of the tribunal, in S.B. Builders case, very aptly took notice of the first proviso to section 92C, which provides that no deduction u/s. 10A, 10AA and 10B or under Chapter VI-A shall be allowed in respect of the amount of income by which the total income of the assessee is enhanced after computation of income under the said section 92C. The said section 92C provides for computation of arms length price in relation to an international transaction, and the effect of the proviso is that if an addition is made on the ground that the price charged is not at arms’ length, the added amount will not enjoy the exemption under the aforementioned sections. No such provision is available in chapter VI-A and in particular in section. 80AB or in section 80-IB(10) or in section 40(a)(ia) of the Act, and to read such a prescription therein, in the absence of statutory mandate, is impermissible in law.
In dealing with the effect of an addition u/s. 41(2) on the quantum of deduction u/s. 80E of chapter VI-A, the Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd. (supra) while explaining the steps involved in allowing the deduction, observed that the first step involved was to compute the total income of the assessee in accordance with the other provisions of the Act, without considering section 80E. It was then observed that the words “as computed in accordance with the other provisions of this Act” clearly contain a mandate that the total income of the concerned assessee must be computed in accordance with the other provisions of the Act without reference to section 80E and since in the case before them, it was income from business, the same was to be computed in accordance with sections 30 to 43A, that included section 41(2).
The Mumbai bench of the tribunal in S.B. Builders’ case observed that “We will be ignoring the mandate of section 80AB read with section 29 of the Act if we are to accept the stand of the revenue. There is no authority given by these sections to ignore the effect of section 40(a)(ia). Those sections do not say that the assessee will be allowed all the deductions from the profits, but when it comes to disallowing certain claims of expenditure, somehow those provisions will have to be ignored.”
It is useful to note that the Gujarat high court in the case of Keval Constructions, 33 taxmann.com 277 has held that the assessee was eligible for deduction u/s. 80-IB(10) on an amount that was increased by disallowance u/s. 40(a)(ia). This decision delivered on 10-12-2012 was delivered subsequent to 21-09-2012, the date on which the Ahmedabad bench of the tribunal rendered its decision in the case of Ramesh C. Prajapati. We are sure that, with the sole high court decision on the subject, the controversy for the time being should be rested. The Pune bench of the tribunal in the cases of Magarpatta Township Development, 32 taxmann.com 63 and Kalbhor Gawde Builders, 141 ITD 612 has also upheld the claim of the assessee for a higher deduction u/s. 80-IB(10) on the profits derived from housing project duly enhanced by the amount of disallowance u/s. 40(a)(ia) of the Act.
