3 November 2016
CBDT clarifies that deduction under Chapter VI-A is
admissible on profits enhanced by way of disallowance
Background
Recently, the Central Board of Direct Taxes (CBDT) has
1
issued a Circular clarifying that where a disallowances
made under Sections 32, 40(a)(ia), 40A(3), 43B, etc., of
the Income-tax Act, 1961 (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, deduction under Chapter VI-A is admissible
on the profits so enhanced by the disallowance.
CBDT Circular
Chapter VI-A of the Act states that while computing the
profits and gains of business, the Assessing Officer
(AO) 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 the claim for a higher
profit-linked deduction under Chapter VI-A of the Act.
Courts have held that if the expenditure disallowed is
related to the business activity against which Chapter
VI-A deduction has been claimed, the deduction needs
to be allowed on the enhanced profits.
The Gujarat High Court in the case of Keval
2
Construction and the Bombay High Court in the case of
3
Sunil Vishwambhamath Tiwari held that if an
expenditure incurred by the taxpayer for the purpose of
developing a housing project were not allowable on
account of non-deduction of tax, such disallowance
________________________
1
CBDT Circular No. 37/2016, dated 2 November 2016
2
ITO v. Keval Construction [2013] 354 ITR 13 (Guj)
3
CIT v. Sunil Vishwambhamath Tiwari (ITA No. 2 of 2011, dated 11 September
2015)
would ultimately increase taxpayer's profits from
business of developing a housing project. The
ultimate profits of the taxpayer after adjusting
disallowance under Section 40(a)(ia) of the Act
would qualify for deduction under Section 80-IB of
the Act. Further, the Allahabad High Court in the
4
case of Surya Merchants Ltd. held that if a
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 taxpayer
would be titled for deduction under Section 80-IB
of the Act.
The above views have attained finality as these
judgments of the High Courts have been accepted
by the tax department.
In view of the above, CBDT 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,
the deduction under Chapter VI-A is admissible on
the profits so enhanced by the disallowance.
Accordingly, CBDT instructed that the appeals may
not be filed on this ground by tax officers and
appeals already filed in Courts/Tribunals may be
withdrawn/not pressed upon.
__________________________________
4
PCIT v. Surya Merchants Ltd. [2016] 387 ITR 105 (All)
© 2016 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG
International”), a Swiss entity. All rights reserved.
Our comments
The issue of whether income enhanced by AO on
account of various disallowances, is eligible for
deduction under Chapter VI-A of the Act, has been
a subject matter of debate before courts.
On the one hand, the Gujarat, Bombay and
5
Allahabad High Courts have held that deduction
under Chapter VI-A is admissible on the profits
enhanced by way of the disallowance. On the other
hand, the Rajasthan High Court in the case of
6
Harshwardhan Chemicals denied the deduction on
the enhanced income since it was not derived from
industrial activities of the taxpayer.
CBDT accepted decisions of the Bombay, Gujarat,
and Allahabad High Court and directed that appeals
may not be filed on this ground by tax officers and
appeals already filed in Courts/Tribunals may be
withdrawn/not pressed upon.
In line with government’s recent initiative of issuing
a clarification on litigative matters, CBDT has issued
this clarification to attain the finality on this matter
and reduce litigation on the same. This clarification
would provide relief to the taxpayers who are facing
similar issues.
____________________
5
Keval Construction, Sunil Vishwambhamath Tiwari and Surya Merchants
Ltd.
6
CIT v. Harshwardhan Chemicals [2003] 131 Taxman 813 (Raj)
© 2016 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG
International”), a Swiss entity. All rights reserved.
www.kpmg.com/in
Ahmedabad
Commerce House V, 9th Floor,
902 & 903, Near Vodafone House,
Corporate Road,
Prahlad Nagar,
Ahmedabad – 380 051
Tel: +91 79 4040 2200
Fax: +91 79 4040 2244
Bengaluru
Maruthi Info-Tech Centre
11-12/1, Inner Ring Road
Koramangala, Bangalore 560 071
Tel: +91 80 3980 6000
Fax: +91 80 3980 6999
Chandigarh
SCO 22-23 (Ist Floor)
Sector 8C, Madhya Marg
Chandigarh 160 009
Tel: +91 172 393 5777/781
Fax: +91 172 393 5780
Chennai
No.10, Mahatma Gandhi Road
Nungambakkam
Chennai 600 034
Tel: +91 44 3914 5000
Fax: +91 44 3914 5999
Delhi
Building No.10, 8th Floor
DLF Cyber City, Phase II
Gurgaon, Haryana 122 002
Tel: +91 124 307 4000
Fax: +91 124 254 9101
Mumbai
Lodha Excelus, Apollo Mills
N. M. Joshi Marg
Mahalaxmi, Mumbai 400 011
Tel: +91 22 3989 6000
Fax: +91 22 3983 6000
Hyderabad
8-2-618/2
Reliance Humsafar, 4th Floor
Road No.11, Banjara Hills
Hyderabad 500 034
Tel: +91 40 3046 5000
Fax: +91 40 3046 5299
Noida
6th Floor, Tower A
Advant Navis Business Park
Plot No. 07, Sector 142
Noida Express Way
Noida 201 305
Tel: +91 0120 386 8000
Fax: +91 0120 386 8999
Kochi
Syama Business Center
3rd Floor, NH By Pass Road,
Vytilla, Kochi – 682019
Tel: +91 484 302 7000
Fax: +91 484 302 7001
Pune
703, Godrej Castlemaine
Bund Garden
Pune 411 001
Tel: +91 20 3050 4000
Fax: +91 20 3050 4010
Kolkata
Unit No. 603 – 604,
6th Floor, Tower – 1,
Godrej Waterside,
Sector – V, Salt Lake,
Kolkata 700 091
Tel: +91 33 44034000
Fax: +91 33 44034199
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and
timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such
information without appropriate professional advice after a thorough examination of the particular situation.
© 2016 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG
International”), a Swiss entity. All rights reserved.
The KPMG name and logo are registered trademarks or trademarks of KPMG International.
© 2016 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG
International”), a Swiss entity. All rights reserved.