Beneficial CBDT Circular for allowance of disallowed expenditures - V. K. Subramani - Article published in Business Advisor, dated November 25, 2016 - http://www.magzter.com/IN/Shrinikethan/Business-Advisor/Business/

1. Volume XVII Part 4 November 25, 2016 16 Business Advisor
Beneficial CBDT Circular for allowance of
disallowed expenditures
V. K. Subramani
The income-tax law continues to evolve as the taxpayers
and tax gatherers continue to pursue their objectives
relentlessly. Even after so many court decisions and
amendments over the years, the law continues to be a
challenge for the practitioners for the way it is interpreted
by any of the stakeholders such as the taxpayers, tax
professionals or the judiciary.
Recently, the CBDT has issued a Circular No.37/2016
dated 02.11.2016 which prima facie is a useful circular
from the taxpayers‟ perspective and could prove to be an interesting one
with multiple interpretations in the days to come.
Legal decisions which prompted the circular
Circulars of the CBDT are always binding on the tax officers; however, any
such circular which is contrary to law could be struck down by the court.
For example, the CBDT Circular No.739 dated 25.03.1996 mandating the
conditions of partnership deed for allowance of working partner salary in
the case of firms was held as beyond its scope in Durga Dass Devki Nandan
v. ITO (2012) 342 ITR 17 (HP). The court held that the CBDT can only clarify
issues but cannot insert terms and conditions which are not part of the
main statute.
The recent Circular of CBDT dated 02.11.2016 is prompted by a host of
court decisions which are discussed in this write-up.
Keval construction’s case
In ITO v. Keval Construction (2013) 354 ITR 13 (Guj), the assessee eligible for
deduction under section 80-IB(10) (applicable for property developers) was
subjected to disallowance of Rs 10.93 lakh under section 40(a)(ia) for failure
to deduct tax at source on payment of transportation charges. The CIT
(Appeals) confirmed the disallowance. Before the ITAT, the assessee took two
stands, viz. (i) being the first year of the applicability of the section 40(a)(ia)
and out of ignorance the tax was not deducted at source; and (ii) such
disallowance under section 40(a)(ia) when goes to enhance the income, such

2. Volume XVII Part 4 November 25, 2016 17 Business Advisor
enhanced income must be eligible for deduction under section 80-IB(10) of
the Act. The tribunal upheld the claim of the assessee.
The Revenue challenged the order of the tribunal before the court by raising
the issue as to whether disallowance leading to enhancement of income
would entitle claim of deduction and if so whether such claim would lead to
allowance of double deduction, viz. at the time of assessment and
subsequently when the tax is deducted and remitted under chapter XVII-B.
The Court held that there was no error in tribunal‟s conclusion that even if
a certain expenditure was not allowable under section 40(a)(ia) for the
reason that tax was not deducted at source, it cannot be denied that such
disallowance would ultimately go to increase the assessee‟s profit from the
business of developing the housing project. The court did not however
answer the second question, viz. whether the assessee would get
double deduction when such tax is deducted and remitted in the
subsequent year.
If such deduction and remittance is made after the time period for availing the
deduction under Chapter VI-A, the taxpayer may stand to gain by claiming
the deduction once again.
Surya Merchants case
In Principal CIT v. Surya Merchants Ltd (2016) 387 ITR 105 (All), in the
assessment a sum of Rs 272.63 lakh was disallowed by invoking section
40A(3) of the Act. The assessee was eligible for deduction under section 80-
IB (13) of the Act. There was a search in the premises of the assessee and
there was an undisclosed income of Rs 568.80 lakh.
The CIT (Appeals) observed that the amount disallowed under section 40A(3)
would become income of the „eligible project‟ and there was no reason to
deny the benefit of deduction on such adjusted income under section 80-IB
of the Act. The tribunal too decided the case in favour of the taxpayer.
The issue before the court was whether the deduction under section 80-IB is
The CIT (Appeals) observed that the amount disallowed under
section 40A(3) would become income of the „eligible project‟
and there was no reason to deny the benefit of deduction on
such adjusted income under section 80-IB of the Act.

3. Volume XVII Part 4 November 25, 2016 18 Business Advisor
allowable on undisclosed income that was declared in consequence of
search and the amount disallowed under section 40A(3) would also qualify
for deduction under section 80-IB(13).
The court held that both the CIT (Appeals) and tribunal have observed that
if deduction under section 40A(3) is not allowed, then too as the amount
relates to the profits of the undertaking, it would be entitled to benefit under
section 80-IB of the Act. Thus court accordingly decided in favour of the
assessee.
Sunil Vishwambharnath Tiwari’s case
In CIT v. Sunil Vishwambharnath Tiwari (2016) 388 ITR 630 (Bom), similar to
Keval Constructions case (supra), expenses were added to the income of the
assessee for non-deduction of tax at source by applying section 40(a)(ia) of
the Act. The claim of deduction under section 80-IB(10) after such
disallowance was the issue before the court. The court took note of the
fact that the assessee did not have any other source of income except
the eligible business. Disallowance of expenditure only adds to such
income which is eligible for deduction under section 80-IB(10). It upheld the
decision of CIT (Appeals) and held that the disallowance under section
40(a)(ia) cannot be treated separately and it gets added back to the gross
total income of the assessee and such income is eligible for deduction under
section 80-IB.
Circular of the CBDT
The CBDT in Circular No.37/2016 has stated, “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 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.” It advised that the appeals need not be filed by the
officers of the Department and appeals already filed in courts/ tribunals
In CIT v. Sunil Vishwambharnath Tiwari (2016) 388 ITR 630
(Bom), similar to Keval Constructions case (supra), expenses
were added to the income of the assessee for non-deduction
of tax at source by applying section 40(a)(ia) of the Act.

4. Volume XVII Part 4 November 25, 2016 19 Business Advisor
may be withdrawn/ not pressed upon.
Similar requirement
The first and second provisos to section 50C were inserted by the Finance
Act, 2016 w.e.f. 1st April, 2017 to reduce the hardship caused to the
transferors on sale of immovable property. Where the agreement is made
and advance is received otherwise than by cash, the stamp duty value on
the date of agreement could be adopted for the purpose of section 50C
instead of the stamp duty value on the date of transfer of property. Already
section 43CA meant for transfer of immovable property held as stock in
trade and section 56(2)(vii) meant for buyers of immovable property are
available in statute.
When the transferor of immovable property enters into an agreement before
the date of sale such protection was not available previously. The provisos to
section50C were inserted by the Finance Act, 2016 to remove the hardship
caused to the taxpayers and hence must be given retrospective applicability
as held in Dharamshibhai Sonani v. Asstt. CIT (2016) 142 DTR (Ahd) (Trib)
62.
Conclusion
The recent Circular of the CBDT is welcome by upholding the court
decisions and accepting magnanimously. However, when such incentive
provisions are availed fully by the taxpayer for specified number of years
and thereafter if the tax is deducted at source and remitted whether it
would be eligible for deduction in that year has not been clarified. With
respect, the Gujarat High Court in Kevel Construction (supra) has not
answered that part of the legal question posed before it and the taxpayers
may use that leeway to their advantage.
This circular also does not state whether ALP adjusted covered by section
92C(4) would also be covered by the said circular.
(V. K. Subramani is Chartered Accountant, Erode.)
The recent Circular of the CBDT, upholding the court
decisions and accepting magnanimously, is welcome.