M/s Mphasis Limited , Bangalore V. Deputy Commissioner Of Income-Tax- Circle-4(1)(2), Bangalore

ITA 65/BANG/2019

• Counselvise Citation: [2020] 111 COUNSELVISE.COM (IT) 0969 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 4 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-06-2020
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 03-06-2020
• Assessment Year: 2009-2010
• Appeal Filed On: 08-01-2019
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: PADAMCHAND KHINCHA
• Assessee Lawyers: PRADEEP KUMAR ITAT BENGALURU
• Keywords: Reopening of assessment; Transfer pricing; Period of limitation; Question of law; Tangible material; Difference of opinion; Time period of passing order; Change of opinion; Reassessment proceedings; TDS
• Section: 43B; 143(3); 10AA; 234B; 40(a)(ia); 80IB; 194C; 10B; 195; 144C; 192; 13; 147; 148

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT AND SHRI B R BASKARAN , ACCOUNTANT MEMBER IT A NO. 3418/BANG/2018 ASSESSMENT YEAR: 2009 - 10 THE JOINT COMMISSIONER OF INCOME TAX, SPECIAL RANGE 4, BANGALORE. VS. MPHASIS LTD., BAGMANE WORLD TECHNOLOGY CENTRE, WTC 3, BLOCK B, 1 ST FLOOR, WING A, K R PURAM, MARATHAHALLI OUTER RING ROAD, MAHADEVAPURA, BANGALORE 560 048. PAN: AAACB 6820C APPELLANT RESPONDENT IT A NO. 65/BANG/2019 ASSESSMENT Y EAR: 2009 - 10 MPHASIS LTD., BAGMANE WORLD TECHNOLOGY CENTRE, BANGALORE 560 048. PAN: AAACB 6820C VS. THE JOINT COMMISSIONER OF INCOME TAX, SPECIAL RANGE 4, BANGALORE. APPELLANT RESPONDENT APPELLANT BY : SHRI P RADEEP KUMAR, CIT(DR)(ITA T), BENGALURU. RESPONDENT BY : SHRI PADAM CHAND KHINCHA, CA DATE OF HEARING : 03 .0 6 .2020 DATE OF PRONOUNCEMENT : 03 .0 6 .2020 ITA NOS.3418/BANG/2018 & 65/BANG/2019 PAGE 2 OF 12 O R D E R PER N.V. VASUDEVAN, VICE PRESIDENT ITA NO.3418/BANG/2018 IS AN APPEAL BY THE REVENU E WHILE ITA NO.65/BANG/2019 IS AN APPEAL BY THE ASSESSEE. BOTH THESE APPEALS ARE DIRECTED AGAINST THE ORDER OF CIT(APPEALS)-IV, BANG ALORE DATED 29.10.2018 AND ARE IN RELATION TO ASSESSMENT YEAR 2009-10. 2. THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINE SS OF PROVIDING SOFTWARE DEVELOPMENT SERVICES. FOR THE AY 2009-10, THE ASSESSEE FILED A RETURN OF INCOME ON 30.9.2009 DECLARING A TOTAL INC OME OF RS.45,78,65,652 AFTER CLAIMING DEDUCTION U/S. 10A, 10B AND 10AA OF THE INCOME-TAX ACT, 1961 [THE ACT]. THE FINAL ORDER OF ASSESSMENT AFTE R DIRECTIONS OF THE DISPUTE RESOLUTION PANEL (DRP) WAS PASSED U/S. 143( 3) R.W.S. 144C OF THE ACT ON 31.3.2014. AGAINST THE AFORESAID ORDER, THE ASSESSEE PREFERRED APPEAL BEFORE THE TRIBUNAL AND THE SAME IS STATED T O BE PENDING. 3. THE AO ISSUED A NOTICE U/S. 148 OF THE ACT DATED 30.3.2016. AS WE HAVE ALREADY SEEN, THE ASSESSEE IS IN THE BUSINESS OF RENDERING SOFTWARE DEVELOPMENT SERVICES. THE SOFTWARE IS DEVELOPED BO TH ON-SITE AND OFF-SITE. THE ASSESSEE DESIGNED SOFTWARE IN INDIA IN ITS OWN PREMISES BY ITS OWN EMPLOYEES. HOWEVER, CERTAIN PARTS OF THE SOFTWARE DEVELOPMENT ARE REQUIRED TO BE EXECUTED PHYSICALLY AT THE CUSTOMER S PREMISES OUTSIDE INDIA. THE SERVICES RENDERED AT THE CUSTOMERS SIT E ARE REFERRED TO AS ON- SITE SERVICES. THE ASSESSEE SUB-CONTRACTS THE ON-S ITE SERVICES TO ITS ASSOCIATED ENTERPRISE [AE] WHICH IS LOCATED OUTSIDE INDIA. APART FROM ON- SITE SERVICES, ASSESSEES AES LOCATED OUTSIDE INDI A ALSO RENDERED MARKETING SERVICES FOR WHICH THE ASSESSEE PAYS SELL ING COMMISSION. THE ASSESSEE PAID THE FOLLOWING SUMS TO THE AE ON ACCOU NT OF ON-SITE SERVICES AND SELLING COMMISSION:- ITA NOS.3418/BANG/2018 & 65/BANG/2019 PAGE 3 OF 12 PARTICULARS AMOUNT IN RS. PAYMENTS FOR ON - SITE SERVICES 5,760,203,166 PAYMENTS FOR SELLING COMMISSION 21,802,448 TOTAL 5,782,005,614 4. ACCORDING TO THE AO, FOR THE AFORESAID PAYMENTS MADE TO THE NON- RESIDENTS, THE ASSESSEE WAS OBLIGED TO DEDUCT TAX A T SOURCE IN TERMS OF SECTION 195 OF THE ACT. SINCE THE ASSESSEE FAILED TO DEDUCT TAX AT SOURCE, THE AFORESAID PAYMENT WAS LIABLE TO BE DISALLOWED U NDER THE PROVISIONS OF SECTION 40(A)(I) OF THE ACT. SINCE NO SUCH DISALLO WANCE WAS MADE IN THE ORDER PASSED U/S. 143(3) R.W.S. 144C OF THE ACT, TH E AO INITIATED PROCEEDINGS U/S. 148 OF THE ACT. THE REASONS RECOR DED FOR INITIATING PROCEEDINGS U/S. 148 OF THE ACT ARE GIVEN IN PARA 2 OF THE ORDER OF REASSESSMENT AND THE GIST OF THE SAME HAS ALREADY B EEN NARRATED ABOVE. 5. IN THE REASSESSMENT PROCEEDINGS, THE ASSESSEE MA DE THE FOLLOWING THREE SUBMISSIONS:- (1) THE PROCEEDINGS U/S. 148 OF THE ACT HAVE BEEN I NITIATED BEYOND A PERIOD OF 4 YEARS FROM THE END OF RELEVANT PREVIOUS YEAR. SINCE THE ORDER OF ASSESSMENT U/S. 143(3) HAS ALREADY BEEN PA SSED IN THE CASE OF ASSESSEE FOR AY 2009-10, THE PROVISO TO SEC TION 147 OF THE ACT WILL APPLY AND THEREFORE THE ASSESSMENT CAN BE REOPENED ONLY WHEN THERE HAS BEEN A FAILURE ON THE PART OF ASSESS EE TO FULLY AND TRULY DISCLOSE ALL MATERIAL FACTS NECESSARY FOR ASS ESSMENT OF TOTAL INCOME OF RELEVANT PREVIOUS YEAR. ACCORDING TO THE ASSESSEE, THERE WAS NO FAILURE TO DISCLOSE FULLY AND TRULY ALL MATE RIAL FACTS AND THEREFORE THE REOPENING IS INVALID. THE ASSESSEE A LSO CONTENDED THAT EVEN IN THE REASONS RECORDED BY THE AO, THERE HAS BEEN NO ALLEGATION THAT THERE WAS A FAILURE ON THE PART OF ASSESSEE TO FULLY ITA NOS.3418/BANG/2018 & 65/BANG/2019 PAGE 4 OF 12 AND TRULY DISCLOSE ALL MATERIAL FACTS FOR ASSESSMEN T OF TOTAL INCOME OF THAT ASSESSMENT YEAR. THE ASSESSEE ALSO SUBMITTED THAT THE REASSESSMENT PROCEEDINGS HAVE BEEN INITIATED PURELY ON THE BASIS OF CHANGE OF OPINION AND ARE THEREFORE INVALID IN THE ABSENCE OF ANY TANGIBLE MATERIAL COMING INTO POSSESSION OF THE AO, AFTER CONCLUSION OF ORIGINAL ASSESSMENT PROCEEDINGS AND IN THE LIGHT OF THE HONBLE SUPREME COURT DECISION IN THE CASE OF CIT V. KELVINATOR OF INDIA LTD., 320 ITR 561 (SC) . (2) THE ASSESSEE ALSO SUBMITTED THAT THE PAYMENTS I N QUESTION ARE NOT CHARGEABLE TO TAX IN INDIA AND THEREFORE THERE WAS NO REQUIREMENT OF DEDUCTION OF TAX AT SOURCE U/S. 195 OF THE ACT AND CONSEQUENTLY THERE CANNOT BE ANY DISALLOWANCE U/S. 40(A)(I) OF T HE ACT. (3) WITHOUT PREJUDICE TO THE ABOVE SUBMISSIONS, THE ASSESSEE SUBMITTED THAT IT IS ENTITLED TO DEDUCTION U/S. 10A/10AA OF T HE ACT ON ITS PROFITS DERIVED FROM RENDERING SOFTWARE DEVELOPMENT SERVICE S AND EVEN ASSUMING THAT THE DISALLOWANCE HAS TO BE MADE U/S. 40(A)(I) OF THE ACT, THE SAME WILL GO TO ENHANCE THE PROFITS ON WHI CH DEDUCTION U/S. 10A/10AA OF THE ACT HAS TO BE ALLOWED AND CONSEQUEN TLY THERE WOULD BE NO ULTIMATE TAX LIABILITY. 6. THE AO DID NOT ACCEPT ANY OF THE AFORESAID CONTE NTIONS. HE HELD THAT REASSESSMENT PROCEEDINGS WERE VALIDLY REOPENED . HE ALSO REJECTED THE CONTENTION OF ASSESSEE THAT PAYMENT IN QUESTION IS NOT CHARGEABLE TO TAX UNDER THE ACT. CONSEQUENTLY, THE AO ADDED TO T HE TOTAL INCOME OF THE ASSESSEE, THE SUM DISALLOWED U/S. 40A(I) OF THE ACT VIZ., PAYMENT FOR ON- SITE SERVICES AND PAYMENT FOR SELLING COMMISSION BY THE ASSESSEE TO ITS AE. ITA NOS.3418/BANG/2018 & 65/BANG/2019 PAGE 5 OF 12 7. ON APPEAL BY THE ASSESSEE, THE CIT(APPEALS) UPHE LD THE ACTION OF THE AO INSOFAR AS THE CONTENTION OF ASSESSEE WITH R EGARD TO VALIDITY OF INITIATION OF REASSESSMENT PROCEEDINGS AND THE SUM IN QUESTION IS NOT CHARGEABLE TO TAX IN INDIA UNDER THE ACT. WITH REGA RD TO THE ALTERNATIVE CONTENTION THAT DISALLOWANCE U/S. 40(A)(I) WILL HAV E NO EFFECT BECAUSE DEDUCTION U/S 10A/10AA OF THE ACT HAS TO BE ALLOWED ON THE ENHANCED INCOME, THE CIT(APPEALS) AGREED WITH THE SUBMISSION OF THE ASSESSEE. 8. THE REVENUE IS AGGRIEVED BY THE ACTION OF THE CI T(APPEALS) IN ALLOWING ALTERNATIVE RELIEF TO THE ASSESSEE AND HAS FILED THE APPEAL RAISING THE FOLLOWING GROUNDS:- 1. THE ORDER OF THE LD.CIT (A) IS OPPOSED TO THE L AW AND FACTS OF THE CASE. 2. THE LD CIT (A) HAS ERRED IN ALLOWING THE APPEAL OF THE ASSESSEE WITHOUT APPRECIATING THE FACT THAT THE DED UCTION U/S 10A/10AA IS ALLOWABLE ONLY ON THE PROFITS DERIVED F ROM EXPORT OF ARTICLE OR THING OR COMPUTER SOFTWARE AND THE RECEIPTS IN CONVERTIBLE FOREIGN EXCHANGE HAVE TO BE BROUGHT TO INDIA WITHIN SIX MONTHS FROM THE END OF THE FINANCI AL YEAR AND NOT ALLOWABLE ON THE ENHANCED PROFITS DUE TO DISALL OWANCE U/S 40(A)(I). 3. THE LD CIT (A) HAS ERRED IN ALLOWING THE APPEAL OF THE ASSESSEE RELYING ON BOARD'S CIRCULAR NO.37/2016 DAT ED 02.11.2016 WHICH IS APPLICABLE TO CHAPTER VIA DEDUC TIONS ONLY AND NOT APPLICABLE TO DEDUCTIONS U/S 10A/10AA/ 10B. 4. THE LD CIT (A) FAILED TO APPRECIATE THAT THE REA L INTENTION OF THE LEGISLATURE THAT THE ASSESSEE IS NOT ALLOWED TO TAKE ADVANTAGE OF ONE PROVISION BY VIOLATING THE ANOTHER PROVISION OF THE ACT. IF THE SAME IS ALLOWED EVERY ASSESSEE C LAIMING DEDUCTION U/S 10A/10AA VIOLATE THE PROVISIONS OF TD S TO TAKE UNDUE ADVANTAGE. ITA NOS.3418/BANG/2018 & 65/BANG/2019 PAGE 6 OF 12 5. THE LD CIT(A) FAILED TO TAKE NOTE THAT ON SIMILA R ISSUE OF ALLOWING DEDUCTION U/S 10A ON ENHANCED PROFITS THE HON'BLE SUPREME COURT ADMITTED SLP IN THE CASE OF M/S LIONB RIDGE TECHNOLOGIES (P) LTD ( 96 TAXMANN.COM 495). 6. FOR THESE AND OTHER GROUNDS THAT MAY BE URGED AT THE TIME OF HEARING, IT IS PRAYED THAT THE ORDER OF THE CIT (A) IN SO FAR AS IT IS RELATES TO THE ABOVE GROUNDS MAY BE REVERSED AND THAT OF THE ASSESSING OFFICER MAY BE RESTORED. 7. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, AMEND AND/OR DELETE ANY OF THE GROUNDS THAT MAY BE URGED. 9. ON THE OTHER HAND, THE ASSESSEE IS AGGRIEVED BY THE ACTION OF THE CIT(APPEALS) IN UPHOLDING THE VALIDITY OF INITIATIO N OF REASSESSMENT PROCEEDINGS AND IN HOLDING THAT THE SUM IN QUESTION IS CHARGEABLE TO TAX. THE FOLLOWING ARE THE CONCISE GROUNDS OF APPEAL RAI SED BY THE ASSESSEE:- GROUNDS RELATING TO REOPENING OF ASSESSMENT UNDER SECTION 147 1. THE LEARNED CIT(A) ERRED IN CONFIRMING THE REASS ESSMENT PROCEEDINGS AND THE REASSESSMENT ORDER PASSED UNDER SECTION 143(3) READ WITH SECTION 147 (A) WITHOUT SA TISFYING THE PRE-REQUIREMENTS OF SECTION 147/148; (B) BEYOND THE LIMITATION PERIOD OF FOUR YEARS AS PROVIDED UNDER F IRST PROVISO TO SECTION 147; (C) WITHOUT DEMONSTRATING T HE FAILURE ON THE PART OF THE APPELLANT TO DISCLOSE FULLY AND TRULY ALL MATERIAL FACTS NECESSARY FOR THE ORIGINAL ASSESSMEN T PROCEEDINGS; (C) ON A MERE CHANGE OF OPINION WITHOU T ANY NEW TANGIBLE INFORMATION; (D) BY RELYING ON THE ORD ER PASSED UNDER SECTION 201(1)/(IA) FOR THE PURPOSES OF REASS ESSMENT. GROUNDS RELATING TO DISALLOWANCE UNDER SECTION 40(A )(I) 2. THE LEARNED CIT(A) ERRED IN CONFIRMING THE DISAL LOWANCE UNDER SECTION 40(A)(I) AMOUNTING TO RS. 578,20,05,6 14 IN RESPECT OF PAYMENTS MADE TO ASSOCIATED ENTERPRISES (AES) WITHOUT APPRECIATING THE FACT THAT THE SAID PAYMENT S WERE NOT CHARGEABLE TO TAX UNDER THE ACT AND UNDER THE D TAAS ITA NOS.3418/BANG/2018 & 65/BANG/2019 PAGE 7 OF 12 AND CONSEQUENTLY NOT LIABLE FOR TDS UNDER SECTION 1 95 AND CONSEQUENTLY NOT LIABLE FOR DISALLOWANCE UNDER SECT ION 40(A)(I). LEVY OF INTEREST UNDER SECTION 234B AND 234C 3. THE LEARNED CIT(A) ERRED IN CONFIRMING THE LEVY OF INTEREST UNDER SECTION 234B AND 234C OF THE IT ACT, 1961. ON FACTS AND CIRCUMSTANCES OF THE CASE AND LAW APPLICABLE, I NTEREST UNDER SECTION 234B AND 234C IS NOT LEVIABLE. THE AP PELLANT DENIES ITS LIABILITY TO PAY INTEREST UNDER SECTION 234B AND 234C. PRAYER 4. IN VIEW OF THE ABOVE AND OTHER GROUNDS TO BE ADD UCED AT THE TIME OF HEARING, THE APPELLANT PRAYS THAT THE REASS ESSMENT ORDER PASSED BY THE LEARNED AO UNDER SECTION 143(3) READ WITH SECTION 147 BE QUASHED OR IN THE ALTERNATIVE, THE DISALLOWANCE CONFIRMED UNDER SECTION 40(A)(I) BE DE LETED, PAYMENTS MADE TO AES BE HELD AS NOT LIABLE TDS UNDE R SECTION 195 AND INTEREST LEVIED UNDER SECTION 234B AND 234C BE DELETED. THE APPELLANT PRAYS ACCORDINGLY. 10. WE HAVE HEARD THE RIVAL SUBMISSIONS. AS FAR AS THE APPEAL OF THE REVENUE IS CONCERNED, WE ARE OF THE VIEW THAT THE S AME IS WITHOUT ANY MERIT. THERE IS NO DISPUTE REGARDING GENUINENESS O F THE EXPENDITURE THAT WAS DISALLOWED AND THE FACT THAT THE SAID EXPENDITU RE IS OTHERWISE ALLOWABLE AS DEDUCTION IN COMPUTING INCOME FROM BUS INESS. IN SUCH CIRCUMSTANCES, EVEN IF THE EXPENDITURE IS DISALLOWE D U/S.40(A)(I) OF THE ACT, THE RESULT WILL BE THAT THE DISALLOWANCE WILL GO TO INCREASE THE PROFITS OF THE BUSINESS WHICH IS ELIGIBLE FOR DEDUCTION U/S.10A/10 AA OF THE ACT AND CONSEQUENTLY THE DEDUCTION U/S. 10A/10AA OF THE ACT SHOULD BE ALLOWED ON SUCH ENHANCED PROFIT CONSEQUENT TO DISALLOWANCE U/S . 40(A)(I) OF THE ACT. IN THIS REGARD, WE FIND THAT TWO HIGH COURTS VIZ., HON 'BLE BOMBAY HIGH COURT ITA NOS.3418/BANG/2018 & 65/BANG/2019 PAGE 8 OF 12 IN THE CASE OF CIT V. GEM PLUS JEWELLERY INDIA LTD. (2010) 194 TAX MAN 192 (BORN) AND HON'BLE GUJARAT HIGH COURT IN THE CASE OF ITO VS. KEWAL CONSTRUCTION, 354 ITR 13 (GUI) HAVE TAKEN THE VIEW THAT WHEN DISALLOWANCE U/S. 40(A)(IA) OF THE ACT GOES TO ENHANCE THE PROFI TS THAT ARE ELIGIBLE FOR DEDUCTION UNDER CHAPTER VIA OF THE ACT, THE DEDUCTI ON UNDER CHAPTER VIA SHOULD BE ALLOWED ON SUCH INCREASED PROFIT. THIS PO SITION HAS ALSO BEEN NOW CONFIRMED BY THE CBDT IN ITS CIRCULAR NO.37/201 6 DATED 02.11.2016 WHEREIN THE BOARD HAS OBSERVED AS FOLLOWS:- 3. IN VIEW OF THE ABOVE, THE BOARD HAS ACCEPTED T HE SETTLED POSITION THAT THE DISALLOWANCES MADE UNDER SECTIONS 32, 40(A)(IA), 40A(3), 43B, ETC. OF THE ACT AND OTHER SPECIFIC DIS ALLOWANCES, RELATED TO THE BUSINESS ACTIVITY AGAINST WHICH THE CHAPTER VI-A DEDUCTION HAS BEEN CLAIMED, RESULT IN ENHANCEMENT O F THE PROFITS OF THE ELIGIBLE BUSINESS AND THAT DEDUCTION UNDER C HAPTER VI-A IS ADMISSIBLE ON THE PROFITS SO ENHANCED BY THE DISALL OWANCE. 11. FURTHER THE HONBLE KARNATAKA IN THE CASE OF CIT VS. M/S. M.PACT TECHNOLOGY SERVICES PVT. LTD. IN ITA NO.228/2013 OR DER DATED 11.7.2018 HAD TO DEAL WITH ADMISSIBILITY OF THE FOLLOWING SUB STANTIAL QUESTION OF LAW IN AN APPEAL BY THE REVENUE U/S.260A OF THE ACT :- 5. WHETHER THE TRIBUNAL IS CORRECT IN LAW IN NOT ADJUDICATING THE MAIN ISSUE OF APPLICABILITY OF PROVISIONS OF SECTIO N 40(A)(IA) IN RESPECT OF DISALLOWANCE OF SUB-CONTRACTING CHARES O F RS.16,21,851/- MADE BY ASSESSING AUTHORITY ON THE G ROUND THAT THE ASSESSEE HAD FAILED TO DEDUCT TAX AT SOURCE UND ER SECTION 194C OF I.T. ACT? 6. WHETHER THE TRIBUNAL IS JUSTIFIED IN LAW IN DI RECTING THE ASSESSING AUTHORITY TO ALLOW DEDUCTION UNDER SECTIO N 10A IN RESPECT OF AMOUNT DISALLOWED UNDER SECTION 40(A)(IA ) WITHOUT APPRECIATING THE FACT THAT THE INCOME ENHANCED ON A CCOUNT OF DEEMING PROVISIONS CANNOT BE CONSIDERED FOR THE PUR POSE OF CLAIMING BENEFIT UNDER THE PROVISIONS OF SECTION 10 A? ITA NOS.3418/BANG/2018 & 65/BANG/2019 PAGE 9 OF 12 12. THE HONBLE KARNATAKA HIGH COURT HELD AS FOLLOW S: 5. IN SO FAR AS THE SUBSTANTIAL QUESTION OF LAW NOS.5 AND 6 ARE CONCERNED, LEARNED COUNSEL FOR THE REVENUE SUBMITTE D THAT THE ITAT IN ITS ORDER DATED 21.12.2012 HAS RECORDED THE FINDINGS, THE RELEVANT PORTION OF WHICH IS EXTRACTED BELOW FOR RE ADY REFERENCE:- 14. HAVING HEARD BOTH THE PARTIES AND HAVING CONSID ERED THEIR RIVAL CONTENTIONS, WE FIND THAT THE DISALLOWA NCE U/S 40A (IA) IS TO BE MADE OF THE EXPENSES INCURRED AND CLAIMED BY THE ASSESSEE BUT BEFORE THE PAYMENT OF W HICH, THE ASSESSEE HAS FAILED TO DEDUCT TAX AT SOURCE. TH E GENUINENESS OF THE EXPENDITURE IS NOT IN DISPUTE. T HE DISPUTE IS WHETHER TDS WAS TO BE MADE BEFORE MAKING THE PAYMENT. WITHOUT GOING INTO THE NATURE OF THE TRANS ACTION, WE ARE INCLINED TO ACCEPT THE ALTERNATE PLEA OF THE ASSESSEE THAT THE DISALLOWANCE OF THE EXPENDITURE WOULD AUTOMATICALLY ENHANCE THE TAXABLE INCOME OF THE ASS ESSEE AND THE ASSESSEE IS ELIGIBLE FOR THE DEDUCTION U/S 10A OF THE INCOME-TAX ACT ON THE ENHANCED INCOME. THUS, TH IS GROUND OF APPEAL IS ALLOWED. 6. THE RELEVANT PORTION OF THE CIRCULAR NO.37/2016 DATED 02.11.2016 ISSUED BY THE CENTRAL BOARD OF DIRECT TAXES, DEPARTMENT OF REVENUE, MINISTRY OF FINANCE, GOVERNM ENT OF INDIA, RELATING TO THE SUBJECT: CHAPTER VI-A DEDUC TION ON ENHANCED PROFITS, IS QUOTED HEREUNDER: THE ISSUE OF THE CLAIM OF HIGHER EDUCATION ON THE ENHANCED PROFITS HAS BEEN A CONTENTIOUS ONE. HOWEVE R, THE COURTS HAVE GENERALLY HELD THAT IF THE EXPENDIT URE DISALLOWED IS RELATED TO THE BUSINESS ACTIVITY AGAI NST WHICH THE CHAPTER VI-A DEDUCTION HAS BEEN CLAIMED, THE DEDUCTION NEEDS TO BE ALLOWED ON THE ENHANCED PROFI TS. 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 O N ACCOUNT OF NON-DEDUCTION OF TDS UNDER LAW, SUCH DISALLOWANCE WOULD ULTIMATELY INCREASE ASSESSEES P ROFITS FROM BUSINESS OF DEVELOPING HOUSING PROJECT. THE UL TIMATE PROFITS OF ASSESSEE AFTER ADJUSTING DISALLOWANCE UN DER SECTION 40[A][IA] OF THE ACT WOULD QUALIFY FOR DEDU CTION ITA NOS.3418/BANG/2018 & 65/BANG/2019 PAGE 10 OF 12 UNDER SECTION 80IB OF THE ACT. THIS VIEW WAS TAKEN BY THE COURTS IN THE FOLLOWING CASES: [A] INCOME-TAX OFFICER-WARD 5[1] VS. KEVAL CONSTRUCTION, TAX APPEAL NO.443 OF 2012, DECEMBER 10 2012, GUJARAT HIGH COURT [B] COMMISSIONER OF INCOME-TAX-IV, NAGPUR VS. SUNIL VISHWAMBHARNATH TIWARI, IT APPEAL NO.2 OF 2011, SEPTEMBER 11 2015, BOMBAY HIGH COURT [II] IF DEDUCTION UNDER SECTION 40A[3] OF THE ACT I S NOT ALLOWED, THE SAME WOULD HAVE TO BE ADDED TO THE PRO FITS OF THE UNDERTAKING ON WHICH THE ASSESSEE WOULD BE ENTI TLED FOR DEDUCTION UNDER SECTION 80-IB OF THE ACT. 7. APPLYING THE SAME ANALOGY, IT CAN BE HELD THAT I F DEDUCTION U/S. 40[A][IA] OF THE ACT IS NOT ALLOWED, THE SAME WOULD HAVE BEEN TO BE ADDED TO THE PROFITS OF THE UNDERTAKING ON WHICH THE ASSESSEE WOULD BE ENTITLED FOR DEDUCTION U/S. 10A OF THE ACT . THIS VIEW IS FORTIFIED BY THE DECISION OF BOMBAY HIGH COURT IN T HE CASE OF COMMISSIONER OF INCOME TAX V. GEM PLUS JEWELLERY IN DIA LTD., [2011] 330 ITR 175 [BOM] , WHEREIN IT IS HELD THUS: 13. BY REASON OF THE JUDGMENT OF THE SUPREME COURT IN COMMISSIONER OF INCOME TAX V. ALOM EXTRUSIONS LIMIT ED [2009] 319 ITR 306 THE EMPLOYER'S CONTRIBUTION WAS LIABLE TO BE ALLOWED, SINCE IT WAS DEPOSITED BY THE DUE DATE FOR THE FILING OF THE RETURN. THE PECULIAR POSITION , HOWEVER, AS IT OBTAINS IN THE PRESENT CASE ARISES OUT OF THE FACT THAT THE DISALLOWANCE WHICH WAS EFFECTED BY THE ASSESSIN G OFFICER HAS NOT, THE COURT IS INFORMED, BEEN CHALLE NGED BY THE ASSESSEE. AS A MATTER OF FACT THE QUESTION OF L AW WHICH IS FORMULATED BY THE REVENUE PROCEEDS ON THE BASIS THAT THE ASSESSED INCOME WAS ENHANCED DUE TO THE DISALLOWANCE OF THE EMPLOYER'S AS WELL AS THE EMPLO YEES' CONTRIBUTION TOWARDS PROVIDENT FUND /ESIC AND THE O NLY QUESTION WHICH IS CANVASSED ON BEHALF OF THE REVENU E IS WHETHER ON THAT BASIS THE TRIBUNAL WAS JUSTIFIED IN DIRECTING THE ASSESSING OFFICER TO GRANT THE EXEMPT ION UNDER SECTION 10A. ON THIS POSITION, IN THE PRESENT CASE IT CANNOT BE DISPUTED THAT THE NET CONSEQUENCE OF THE DISALLOWANCE OF THE EMPLOYER'S AND THE EMPLOYEE'S ITA NOS.3418/BANG/2018 & 65/BANG/2019 PAGE 11 OF 12 CONTRIBUTION IS THAT THE BUSINESS PROFITS HAVE TO T HAT EXTENT BEEN ENHANCED. THERE WAS, AS WE HAVE ALREADY NOTED, AN ADD BACK BY THE ASSESSING OFFICER TO THE INCOME. ALL PROFITS OF THE UNIT OF THE ASSESSEE HAVE BEEN D ERIVED FROM MANUFACTURING ACTIVITY. THE SALARIES PAID BY T HE ASSESSEE, IT HAS NOT BEEN DISPUTED, RELATE TO THE MANUFACTURING ACTIVITY. THE DISALLOWANCE OF THE PRO VIDENT FUND/ESIC PAYMENTS HAS BEEN MADE BECAUSE OF THE STATUTORY PROVISIONS - SECTION 43B IN THE CASE OF T HE EMPLOYER'S CONTRIBUTION AND SECTION 36(V) READ WITH SECTION 2(24)(X) IN THE CASE OF THE EMPLOYEE'S CONT RIBUTION WHICH HAS BEEN DEEMED TO BE THE INCOME OF THE ASSES SEE. THE PLAIN CONSEQUENCE OF THE DISALLOWANCE AND THE A DD BACK THAT HAS BEEN MADE BY THE ASSESSING OFFICER IS AN INCREASE IN THE BUSINESS PROFITS OF THE ASSESSEE. T HE CONTENTION OF THE REVENUE THAT IN COMPUTING THE DEDUCTION UNDER SECTION 10A THE ADDITION MADE ON ACCOUNT OF THE DISALLOWANCE OF THE PROVIDENT FUND / ESIC PAYMENTS OUGHT TO BE IGNORED CANNOT BE ACCEPTED. NO STATUTORY PROVISION TO THAT EFFECT HAVING BEEN MADE , THE PLAIN CONSEQUENCE OF THE DISALLOWANCE MADE BY THE ASSESSING OFFICER MUST FOLLOW. THE SECOND QUESTION SHALL ACCORDINGLY STAND ANSWERED AGAINST THE REVENUE AND IN FAVOUR OF THE ASSESSEE. 13. IN VIEW OF THE AFORESAID DECISIONS AND THE CBDT CIRCULAR NO.37/2020, THERE IS NO MERIT IN THE GRIEVANCE PROJ ECTED BY THE REVENUE IN ITS APPEAL. 14. AS FAR AS APPEAL OF THE ASSESSEE IS CONCERNED, WE ARE OF THE VIEW THAT IN VIEW OF THE DISMISSAL OF THE REVENUES APPE AL, THE ISSUE WITH REGARD TO QUESTION, WHETHER THE ASSESSMENT WAS VALIDLY REO PENED OR NOT WHETHER THE SUM IN QUESTION IS CHARGEABLE TO TAX IS PURELY ACADEMIC, BECAUSE THERE MAY NOT BE ANY TAX LIABILITY ULTIMATELY. THE LD. C OUNSEL FOR THE ASSESSEE HAS, HOWEVER, DRAWN OUR ATTENTION TO THE DECISION O F THE HONBLE HIGH COURT OF KARNATAKA IN WP NO.55355/2019 (T-IT) DATED 21.1. 2020 IN THE CASE OF ASSESSEE FOR THE AY 2010-11 ON IDENTICAL REASONS RE CORDED. THE HONBLE HIGH COURT QUASHED THE INITIATION OF REASSESSMENT P ROCEEDINGS. ITA NOS.3418/BANG/2018 & 65/BANG/2019 PAGE 12 OF 12 15. AS WE HAVE ALREADY OBSERVED, BY DISMISSAL OF RE VENUES APPEAL, THERE MAY NOT BE ANY NECESSITY FOR ADJUDICATING THE VALIDITY OF INITIATION OF REASSESSMENT PROCEEDINGS IN THE PRESENT AY 2009-10. WE, HOWEVER, MAKE IT CLEAR THAT THE ASSESSEE WILL BE AT LIBERTY TO AGITATE THIS ISSUE IF CIRCUMSTANCES SO WARRANT. FOR THE VERY SAME REASON , WE ARE OF THE VIEW THAT IT IS NOT REQUIRED TO ADJUDICATE THE QUESTION AS TO, WHETHER THE SUM IN QUESTION IS CHARGEABLE TO TAX UNDER THE ACT OR NOT. THE ISSUE IS, HOWEVER, LEFT OPEN WITHOUT ADJUDICATION. 16. IN THE RESULT, BOTH THE APPEALS ARE DISMISSED. PRONOUNCED IN THE OPEN COURT ON THIS 03 RD DAY OF JUNE, 2020. SD/- SD/- ( B R BASKARAN ) ( N V VASUDEVAN ) ACCOUNTANT MEMBER VICE PRESIDENT BANGALORE, DATED, THE 3 RD JUNE, 2020. / DESAI S MURTHY / COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. BY ORDER ASSISTANT REGISTRAR ITAT, BANGALORE.