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Ito v. Anthelio Business Technologies Pvt. Ltd.

Income Tax Appellate Tribunal

Dec 21, 2016

Judgment

Subsequent
References

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Tribunal Order Summary: ITA No. 976/Mum/2015 (Revenue) & CO No. 51/Mum/2015 (Assessee) — Assessment Year 2010-11

Factual and Procedural Background

This order concerns Revenue appeal ITA No. 976/Mum/2015 against the assessment order dated 17.12.2014 passed by the Assessing Officer (AO) under section 143(3) read with section 144C(13) of the Income-tax Act, 1961, pursuant to directions issued under section 144C(5) by the Dispute Resolution Panel - IV (DRP) on 29.11.2014. The assessee filed Cross Objection (CO No. 51/Mum/2015) arising from the Revenue appeal. Both matters were heard together because they involve common issues.

The primary dispute concerns disallowances under section 40(a)(i) of the Act (for failure to deduct tax at source) totaling Rs. 1,49,73,455/-, originally proposed in the draft assessment order. The AO's proposed additions related to four foreign payees: Mark R. Luciw (Rs. 22,10,258), Garry O. Neil (Rs. 1,04,57,012), Bruce Sugaarman (Rs. 21,70,629) and John Blyzinskyj (Rs. 1,35,556). The DRP sustained only the addition relating to John Blyzinskyj (Rs. 1,35,556) and directed deletion of the remaining Rs. 1,48,37,899 on the footing that notarised passport copies substantiated that the first three individuals did not visit India in the relevant year and hence those payments were not chargeable to tax in India under domestic law/DTAA.

The AO confirmed the DRP's directions in the assessment order dated 17.12.2014. The Revenue appealed against the deletion of Rs. 1,48,37,899; the assessee filed cross-objections challenging confirmation of the addition of Rs. 1,35,556 and seeking related relief under section 10B.

Legal Issues Presented

Whether the DRP/AO erred in deleting disallowance of Rs. 1,48,37,899/- under section 40(a)(i) on the ground that the payments are not taxable in India (notably given DTAA/relevant facts such as passport evidence), and therefore the amounts were subject to tax withholding under section 195 or not.
Whether disallowance under section 40(a)(i) (increase in profits due to non-deduction of TDS) affects the assessee's entitlement to profit-linked deductions — specifically, whether enhanced profits after such disallowance are eligible for deduction under section 10B of the Act.
Whether the disallowance of Rs. 1,35,556/- in respect of John Blyzinskyj as confirmed by the AO should stand, and if not, whether the assessee is entitled to the corresponding deduction under section 10B.

Arguments of the Parties

Revenue's Arguments (as presented in the memo of appeal)

The DRP erred in deleting the disallowance of Rs. 1,48,37,899/- made under section 40(a)(ia) (noting the memorandum uses both 40(a)(ia) and 40(a)(i) labels in places) by treating 'sales & marketing expenses' as not being covered under specified services in Article 15(2) of the India–USA DTAA; such amounts were therefore liable to withholding under section 195.
The DRP erred in concluding that sales & marketing expenses payable to agents abroad are not deemed to accrue or arise in India and are therefore not liable for tax withholding under section 195.
The Revenue sought that the DRP decision be set aside and the AO's original assessment be restored as regards the deleted amounts.

Assessee's Arguments (as set out in the Cross Objection and submissions)

The assessee challenged confirmation of disallowance of Rs. 1,35,556/- for payment to John Blyzinskyj, contending the period of stay was substantiated (including by notarised confirmation from then CEO/Chairman and passport copies) and so the disallowance was unjustified.
The assessee argued that, without prejudice, even if any disallowance were to be sustained, the increased profits resulting from any statutory disallowance are eligible for profit-linked deductions such as under section 10B; reliance was placed on a Bombay High Court decision in CIT v. Gem Plus Jewellery India Ltd. (cited in the materials) and on CBDT Circular No. 37/2016.
The assessee sought allowance of deduction under section 10B to the extent the assessed profits are enhanced due to disallowances under section 40(a)(i)/(ia).

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
CIT v. Gem Plus Jewellery India Ltd., cited as 330 ITR 175 (Bom) / [2010] 194 Taxman 192 (Bombay High Court)	Holds that increased profits pursuant to statutory disallowances are eligible for profit-linked deductions (the opinion cites this as authority that enhanced profits after statutory disallowance shall be considered for deduction).	The Tribunal relied on this Bombay High Court authority (as referenced by the parties and in the order) to support the assessee's claim that deduction under section 10B should be allowed on enhanced profits arising from disallowances under section 40(a)(i)/(ia).
Income-tax Officer - Ward 5(1) v. Keval Construction [2013] 33 taxmann.com 277 (Guj.)	Illustrative authority (as cited in CBDT Circular No. 37/2016) supporting the view that disallowance for non-deduction of TDS leads to increased profits which qualify for profit-linked deductions.	The Tribunal referred to CBDT Circular No. 37/2016, which lists this case as an illustrative High Court decision accepting the proposition; the Tribunal accepted the circular's view and applied the principle to the facts before it.
Commissioner of Income-tax-IV, Nagpur v. Sunil Vishwambharnath Tiwari [2016] 63 taxmann.com 241 (Bom.)	Listed in the CBDT Circular as a High Court decision upholding that disallowances related to the business activity that enhance profits allow consequent profit-linked deductions.	The Tribunal treated the circular (which cites this decision) as evidencing the settled position accepted by the Department and relied on that acceptance in concluding Section 10B (a profit-linked deduction) should be allowed on enhanced profits caused by disallowance.
Principal CIT, Kanpur v. Surya Merchants Ltd. [2016] 72 taxmann.com 16 (All.)	Another High Court authority cited in the CBDT Circular to support the proposition that disallowances increasing profits permit corresponding higher profit-linked deductions.	The Tribunal noted the circular's reference to this case as part of the body of High Court authority accepted by the Department; the Tribunal relied on the circular's reasoning (and these cited cases) to apply the principle to section 10B and the present disallowances.

Court's Reasoning and Analysis

The Tribunal's analysis proceeded from the factual findings and the statutory and administrative materials on record:

Factual findings: The Tribunal recorded that the assessee is a 100% export-oriented unit (Software Technology Park of India scheme) engaged in IT-enabled and back-office services, with eligible undertaking turnover of Rs. 32,76,00,596 and profits of Rs. 7,60,34,821 which the assessee claimed as deduction under section 10B.
DRP findings & AO action: The DRP, on review of notarised passport copies, concluded that three foreign individuals (Sl. Nos. 1–3) did not visit India in the relevant year; it directed deletion of the proposed disallowances aggregating Rs. 1,48,37,899 and sustained only the Rs. 1,35,556 disallowance relating to John Blyzinskyj. The AO gave effect to DRP's directions in the assessment order.
Administrative development: The Tribunal considered CBDT Circular No. 37/2016 (dated 2-11-2016) which addresses whether disallowances under sections such as 32, 40(a)(ia), 40A(3), 43B etc., that increase profits should give rise to higher profit-linked deductions under Chapter VI-A. The circular states that High Courts have generally held that where the disallowance is related to the business activity for which a Chapter VI-A deduction is claimed, the deduction must be allowed on the enhanced profits; it lists illustrative High Court cases adopting that view and directs that the Department should not pursue appeals on this point.
Parties' positions on the circular: The assessee's counsel relied on the circular and the Gem Plus High Court decision to argue that enhanced profits following statutory disallowance should be considered for deduction under section 10B (a profit-linked deduction), and that the CBDT's use of the phrase "etc." and the circular's reasoning encompass disallowances under section 40(a)(i)/(ia). The Department Representative conceded that after issuance of the circular the Department had decided not to press such appeals and that appeals may be withdrawn/not pressed.
Tribunal's application: The Tribunal observed that while section 10B is located in Chapter III (not Chapter VI-A), it is nonetheless a profit-linked deduction; therefore, the rationale of the CBDT Circular — that disallowances increasing profits related to the business activity permit corresponding profit-linked deductions — should apply to section 10B as well. The Tribunal further noted the circular's explicit inclusion (by the words "etc.") of similarly placed disallowances like those under section 40(a)(i)/(ia).
Conclusion from reasoning: Applying the CBDT Circular's position (supported by High Court authorities cited therein and by the Gem Plus decision relied upon by the assessee), the Tribunal concluded that the Revenue's appeal challenging deletion of Rs. 1,48,37,899 was not maintainable in view of the circular and related jurisprudence, and that the assessee's cross-objection challenging the confirmation of Rs. 1,35,556 should be allowed (i.e., the disallowance confirmed by the AO should not stand in the light of the same reasoning).

Holding and Implications

Holding:

DISMISSED — The appeal filed by the Revenue in ITA No. 976/Mum/2015 is dismissed.

ALLOWED — Cross Objection No. 51/Mum/2015 filed by the assessee for assessment year 2010-11 is allowed.

Immediate consequences and implications:

The deletion directed by the DRP of disallowances aggregating Rs. 1,48,37,899/- (relating to the three foreign payees substantiated by passport evidence) stands and the Revenue's challenge to that deletion is dismissed.
The addition/disallowance of Rs. 1,35,556/- in respect of John Blyzinskyj, which had been confirmed by the AO following the DRP direction, has been set aside by the Tribunal through allowance of the assessee's cross-objection.
The Tribunal applied CBDT Circular No. 37/2016 (and the High Court authority cited by the assessee) to hold that profit-linked deductions (here, deduction under section 10B) are allowable on profits enhanced by statutory disallowances such as those under section 40(a)(i)/(ia). The Tribunal explicitly extended the circular's reasoning to section 10B (though 10B is in Chapter III), on the basis that it is a profit-linked deduction and the circular's scope (including disallowances described with "etc.") covers similarly placed disallowances.
The order records that the Department had accepted the circular's position and indicated it would not press such appeals, and the Tribunal acted consistently with that administrative position and the cited High Court authority.

Note: This summary is prepared solely from the text of the provided opinion. It reproduces the factual findings, legal issues, authorities referenced, the Tribunal's reasoning, and the operative result exactly as set out in that opinion without adding external material or inferences beyond the opinion's content.

Show all summary ...

ORDER

1. This appeal filed by the Revenue being ITA No. 976/Mum/2015 is directed against the assessment order dated 17.12.2014 passed by the learned Assessing Officer (hereinafter called "the AO") u/s. 143(3) r.w.s. 144C(13) of the Income-tax Act, 1961 (hereinafter called "the Act") passed in pursuance of directions u/s. 144C(5) of the Act passed by the Dispute Resolution Panel - IV, Mumbai (hereinafter called "the DRP)") vide orders dated 29-11-2014, for the assessment year 2010-11, and the assessee has filed the Cross objection being CO no. 51/Mum/2015 arising out of the Revenue appeal in ITA No. 976/Mum/2015. This Revenue's appeal and the CO. were heard together and are disposed of by this common order for the sake of convenience and brevity, as the issue involved is common.

2. The following grounds have been raised by the Revenue in the memo of appeal filed with the Income-Tax Appellate Tribunal (hereinafter called "the tribunal") :—

"On the facts and in the circumstances or the case and in law, the learned DRP has erred in allowing relief to the assessee to the extent impugned in the grounds enumerated below:

1. On the facts and in the circumstances of the case and in law, the Ld. DRP has erred in deleting the disallowance of Rs. 1,48,37,899/- made u/s. 40(a)(ia) ignoring the fact that sales & marketing expenses are not covered under specified services defined in Article 15(2) of the India USA DTAA Treaty and therefore liable for deduction of tax at source u/s. 195 of the Act.

2. On the facts and in the circumstances of the case and in law, the Ld. DRP has erred in deleting the disallowance of Rs. 1,48,37,899/- made u/s. 40(a)(ia) ignoring the fact that 'sales & marketing expenses' payable to agents abroad is deemed to accrue and arise in India and therefore liable for deduction of tax at source u/s. 195 of the Income Tax Act.

3. For these and other grounds that may be urged at the time of hearing, the decision of the DRP may be set aside and that of A.O. restored."

3. In the C.O. filed by the assessee, the assessee has raised the following objections in the CO filed with the tribunal :—

"I. On the facts and in the circumstances of the case, the Learned Income Tax Officer, Ward 2(1)(4), Mumbai (Ld AO')/The Learned Dispute Resolution Panel - IV, Mumbai (Ld DRP') has:-

1. erred in confirming disallowance under section 40(a)(i) of the Act of Rs. 1,35,556/- on payment made to John blyzinskyi;

2. erred in disregarding the notarised confirmation provided from then existing Chairman and CEO of the Company on the period of stay of John Blyzinskyi and holding that the Company has not substantiated the period of stay of the individual in India whereby the disallowance of Rs 135,556 u/s. 40(a)(i) of the Act has been upheld;

3. Without prejudice to Ground 1 above, erred in not granting deduction under section 10B of the Act on disallowance confirmed under section 40(a)(i) of the Act of Rs 135,556/-;

4. erred in disregarding the reliance placed by the appellant on the Hon'ble Jurisdictional High Court ruling in the case of CIT vs. Gem Plus Jewellery India Ltd. 330 ITR 175 (Bom), wherein it has been upheld that increased profits pursuant to the statutory disallowances are eligible for deduction under the Act;

II. On the facts and in the circumstances of the case the Ld. AO;

5. erred in objecting the direction of the Ld. DRP who deleted the disallowance of Rs 1,48,37,899 under section 40(a)(i) of the Act on the ground that the amounts are liable for deduction of tax at source under section 195 of the Act;

6. Erred in objecting the direction of the Ld. DRP who on the basis of the copy of passport evidencing the period of stay of the individuals not exceeded 90 days during the relevant period, held that said amount of Rs 1,48,37,899 are not chargeable to tax in India as per India-US DTAA and hence no disallowance u/s. 40(a)(i) of the Act is warranted;

7. Without prejudice to ground No. 5 & 6 above, erred in objecting the direction of DRP who deleted the disallowance of Rs. 1,48,37,899/- under section 40(a)(i) of the Act, ignoring the fact that in case the disallowance of Rs. 1,48,37,899/- u/s. 40(a)(i) of the Act is upheld, the increased business profits pursuant to the said disallowance u/s. 40(a)(i) to be considered as profit eligible for deduction u/s. 10B of the Act."

4. The main issue involved in the Revenue's appeal and the C.O. filed by the assessee is with respect to the disallowance made u/s. 40(a)(i) of the Act. The assessee is registered as a 100% export oriented unit under the Software Technology Park of India Scheme and the assessee is engaged in the business of provision of information technology enabled services and other back office support services. It is an undisputed and admitted position between both the parties that the assessee is entitled for deduction u/s. 10B of the Act and the profits of the assessee are exempt from payment of taxes u/s. 10B of the Act. The assessee has shown total turnover of the eligible undertaking at Rs. 32,76,00,596/- and profit of the undertaking is at Rs. 7,60,34,821/-. The assessee has claimed deduction u/s. 10B of the Act of Rs. 7,60,34,821/- being 100% of the profits of the undertaking. The A.O. has proposed in the draft assessment order passed u/s. 143(3) r.w.s. 144C of the Act dated 25th February, 2014 to disallow an amount of Rs. 1,49,73,455/- on the ground that the assessee has not deducted tax at source under the provisions of section 195 of the Act. The details of which are as under:—

Sl. No.	Name of the party	Amount (Rs)
1	Mark R Luciw	22,10,258/-
2	Garry O Neil	1,04,57,012/-
3	Bruce Sugaarman	21,70,629/-
4	John Blyzinkyl	1,35,556/-
	TOTAL	1,49,73,455/-

The DRP vide its directions dated 29-11-2014 has accepted that the assessee is able to substantiate the payments to the tune of Rs. 1,48,37,899/- as the assessee submitted notorized copies of the passports, which proved that three individuals at s.no 1 to 3 in above chart did not visit India during the relevant year. Hence, the said payments will not be subject to withholding tax u/s. 195 of the Act and accordingly these payment cannot be disallowed u/s. 40(a)(i) of the Act, as held by the DRP. However, the DRP held that with respect to the 4th person Mr. John Blyzinskyj, the payment of Rs. 1,35,556/- without deduction of tax at source had remained unsubstantiated and the ld. DRP confirmed the addition of Rs. 135,556/- by issuing directions u/s. 144C(5) of the Act. The A.O. passed the assessment order u/s. 143(3) of the Act r.w.s. 144C(13) of the Act wherein an addition of an amount of Rs. 1,35,556/- was confirmed u/s. 40(a)(i) of the Act vide assessment order dated 17th December, 2014 passed u/s. 143(3) r.w.s. 144C(13) of the Act, while the relief was granted of Rs. 1,48,37,899/- by the AO pursuant to directions of DRP. Both the Revenue and the assessee are before the Tribunal with their respective appeal and cross objection whereby the Revenue is challenging the deletion of the addition of Rs. 1,48,37,899/- as proposed in the draft assessment order which has been ordered to be deleted by the ld. DRP vide directions dated 29th November, 2014 passed u/s. 144C(5) of the Act while on the other hand the assessee in its C.O. is challenging the disallowance u/s. 40(a)(i) of the Act of Rs. 1,35,556/- as confirmed by the AO in assessment order dated 17.12.2014 passed u/s. 143(3) of the Act r.w.s. 144C(13) of the Act.

5. At the very outset, the ld. Counsel for the assessee submitted that the Revenue has come up with a Circular No. 37/2016 dated 2nd November, 2016 (F.No. 279/Misc/140/2015/ITJ) wherein it has been decided by the CBDT that if there are disallowance u/s. 32, 40(a)(ia), 40A(3), 43B etc. of the Act which has an effect of increasing the profit, the assessee is entitled for the profit linked deductions under Chapter VI-A on the enhanced profits. It is submitted that in the instant appeal, the addition has been made u/s. 40(a)(i) of the Act and the assessee is entitled for deduction u/s. 10B of the Act under Chapter III of the Act. It is also pointed out that while referring to the afore-stated circular that the CBDT used the word 'etc.' with respect to the disallowance pertaining to section 32, 40(a)(i), 40A(3), 43B of the Act which means that section 40(a)(ia) of the Act is also covered under the aforestated circular and the assessee will be entitled for deduction u/s. 10B of the Act on the enhanced profit. It was submitted that in any case this issue is also covered by decision of Hon'ble jurisdictional Bombay High Court in favour of the assessee in CIT v. Gem Plus Jewellery India Ltd. [2010] 194 Taxman 192 as disallowance u/s. 40(a)(i) of the Act is a statutory disallowance and the hence enhanced profits after statutory disallowance shall be considered for deduction u/s. 10B of the Act which deduction is profit linked deduction.

6. The ld. D.R. fairly conceded that it has been decided by the Revenue that such payments are covered by the afore-stated circular and such appeals should not be pressed/withdrawn before the tribunal. It is submitted that the CBDT has directed that appeals may not be filed on this ground by the department, and also that issue is covered in favour of the assesee in 194 taxman 192.

7. We have heard the rival contentions and also perused the material available on record including the afore-stated CBDT circular. We have observed that the assessee is registered as a 100% export oriented unit under the Software Technology Park of India Scheme and the assessee is engaged in the business of provision of information technology enabled services and other back office support services. It is also an undisputed and admitted position between both the parties that the assessee is entitled for deduction u/s. 10B of the Act and the profits of the assessee are exempt from payment of taxes u/s. 10B of the Act. We have observed that the assessee has undertaken total turnover of Rs. 32,76,00,596/- which is also export turnover of the assessee and the assessee has claimed deduction u/s. 10B of the Act of Rs. 7,60,34,821/-. Additions have been proposed u/s. 40(a)(i) of the Act at Rs. 1,49,73,455/- by the AO vide draft assessment order, the details of which are as under:-

Sl. No.	Name of the party	Amount (Rs)
1	Mark R Luciw	22,10,258/-
2	Garry O Neil	1,04,57,012/-
3	Bruce Sugaarman	21,70,629/-
4	John Blyzinkyl	1,35,556/-
	TOTAL	1,49,73,455/-

The above expenses were incurred by the assessee towards 'sales and marketing expenses' from which the assessee has not deducted tax at source. Additions were proposed by the A.O. of Rs. 1,49,73,455/- in his draft assessment order which was restricted by the ld. DRP vide order dated 29th November, 2014 to an amount of Rs. 1,35,556/-. With respect to the payments of Rs. 1,48,37,899/-, the DRP directed to delete the same as the assessee has submitted the notarized copies of passports, which as per DRP proved that three individuals at s. no 1 to 3 in above chart did not visit India during the relevant year. Hence, the DRP directed that said payments will not be subject to withholding tax u/s. 195 of the Act and accordingly these payment cannot be disallowed u/s. 40(a)(i) of the Act.. The DRP held that these payments to the tune of Rs. 1,48,73,455/- are to be allowed, while, with respect to the 4th person Mr. John Blyzinskyj, the payment of Rs. 1,35,556/- without deduction of tax at source had remained unsubstantiated and the ld. DRP confirmed the addition of Rs. 135,556/- by issuing directions u/s. 144C(5) of the Act, which additions were confirmed by the AO in his assessment order dated 17.12.2014 passed u/s. 143(3) of the Act r.w.s. 144C(13) of the Act in pursuance of directions of DRP.. We have observed that the CBDT has issued Circular No. No. 37/2016 dated 2nd November, 2016, which is reproduced below:—

"SECTION 80-IB, READ WITH SECTIONS 32, 40(a)(ia), 40A(3) & 43B, OF THE INCOME-TAX ACT, 1961 - DEDUCTIONS - PROFITS AND GAINS FROM INDUSTRIAL UNDERTAKINGS OTHER THAN INFRASTRUCTURE DEVELOPMENT UNDERTAKINGS - CHAPTER VIA DEDUCTIONS ON ENHANCED PROFITS

CIRCULAR NO. 37/2016 [F.NO. 279/MISC./140/2015/ITJ], DATED 2-11-2016

Chapter VI-A of the Income-tax Act, 1961 ("the Act"), provides for deductions in respect of certain incomes. 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. 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 claim for a higher profit-linked deduction under Chapter VI-A.

2. The issue of the claim of higher deduction on the enhanced profits has been a contentious one. However, 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. 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 on account of non-deduction of TDS under law, such

( ii) If 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 assessee would be entitled for deduction under section 80-IB of the Act. This view was taken by the court in the following case:

disallowance would ultimately increase assessee's profits from business of developing housing project. The ultimate profits of assessee after adjusting disallowance under section 40(a)(ia) of the Act would qualify for deduction under section 80-IB of the Act. This view was taken by the courts in the following cases:

Income-tax Officer - Ward 5(1) v. Keval Construction [2013] 33 taxmann.com 277 (Guj.)

Commissioner of Income-tax-IV, Nagpur v. Sunil Vishwambharnath Tiwari [2016] 63 taxmann.com 241 (Bom.)

Principal CIT, Kanpur v. Surya Merchants Ltd. [2016] 72 taxmann.com 16 (All.).

The above views have attained finality as these judgments of the High Courts of Bombay, Gujarat and Allahabad have been accepted by the Department.

3. In view of the above, 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.

4. Accordingly, henceforth, appeals may not be filed on this ground by officers of the Department and appeals already filed in Courts/Tribunals may be withdrawn/not pressed upon. The above may be brought to the notice of all concerned."

The sum, substance and spirit of the afore-stated circular is that the Revenue does not want to continue the litigation with respect to disallowance made by the Revenue u/s. 32,40(a)(ia), 40A(3), 43B etc. of the Act, which ultimately led to increase in profits which are otherwise eligible for profit linked deduction under Chapter VI-A of the Act. The Board has accepted that the disallowance made u/s. 32, 40(a)(ia), 40A(3), 43B etc. of the Act and other disallowance out of specific expenditure related to the business activity may be made by Revenue which led to enhancement of profits against which Chapter -VIA profit linked deductions has been claimed and it is accepted that enhanced profit linked deduction under Chapter VI-A is admissible on the profits so enhanced by the said disallowance made by the Revenue. We find that the Revenue's appeal and the assessee's cross objection are duly covered by the CBDT circular although Section 10B of the Act is not placed under Chapter VI-A of the Act rather the same is placed under Chapter-III of the Act but the deductions u/s. 10B of the Act are profit linked deductions and hence there is no reason why the same should not be allowed keeping in view the spirit of afore-stated CBDT circular as the deduction u/s. 10 B of the Act is also profit linked deduction. Similarly, it is stated in the circular about disallowance u/s. 40(a)(i) of the Act which is succeeded by the word 'etc' wherein the circular has stated as under:

"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 use of the word 'etc.' clearly denotes that it will apply to similarly placed disallowances and disallowance u/s. 40(a)(i) of the Act is also disallowance due to non-deduction of withholding tax as is contemplated by Section 40(a)(ia) of the Act. Hence the CBDT circular will be applicable to deductions u/s. 10B of the Act as well to disallowance u/s. 40(a)(ia) of the Act as well. Hence the appeal of the Revenue is not sustainable/maintainable in view of afore-stated CBDT circular dated 02-11-2016 and we dismiss the appeal filed by the Revenue, while the C.O. filed by the assessee is allowed as the additions of Rs. 1,35,556/- made by the AO are w.r.t. disallowance u/s. 40(1)(ia) of the Act. In any case this issue is also covered by decision of Hon'ble jurisdictional Bombay High Court in favour of the assessee in Gem Plus Jewellery India Ltd.'s case (supra) as disallowance u/s. 40(a)(i) of the Act is a statutory disallowance and the hence enhanced profits due to disallowance shall be considered for deduction u/s. 10B of the Act. We order accordingly.

8. In the result, appeal filed by the Revenue in ITA No. 976/Mum/2015 is dismissed and CO. No. 51/Mum/2015 for assessment year 2010-11 is allowed.

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