· 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), 40A(3), 43B etc., of the Act.The effect of such disallowances is an increase in the profits of the assessee. 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.
· 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.This view was taken by the courts in the following cases:
(i) Income-tax Officer - Ward 5(1) vs. Keval Construction, Tax Appeal No. 443 of 2012, December 10,20 12 , Gujarat High Court
(ii) Commissioner of Income-tax-IV, Nagpur vs. Sunil Vishwambhamath Tiwari,IT Appeal No. 2 of 2011, September 11, 2015, Bombay High Court
(iii) Principal CIT, Kanpur vs. Surya Merchants Ltd., LT. Appeal No. 248 of 2015,May 03,2016, Allahabad High Court
· In view of the above judgments, the Board 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, and that deduction under Chapter VI-A is admissible on the profits so enhanced by the disallowance.
For further reading, refer the attachment.
Further Reading