Chapter VI-A Deduction on Enhanced Profits due to Disallowances: CBDT Clarification

CBDT issues Circular for Clarification relating to Chapter VI-A Deduction on Enhanced Profits

The CBDT has clarified that the deduction under Chapter Vl-A is admissible on the enhanced profits due to disallowance made under sections 32, 40(a)(ia), 40A(3), 43B, etc., as under:

CBDT Circular No. 37/2016 dt. 2 Nov. 2016 F.No.279/Misc./140/2015/ITJ

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. …contd… Please refer attachment for illustrative cases.

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 Vl-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may not be filed on this ground by officers of the Department and appeals already filed in Courts/ Tribunals may be withdrawn/ not pressed upon.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.

CBDT Clarification on Chapter VI-A Deduction: Circular No. 37/2016 dt. 2 Nov. 2016

Article/ Update Shared by:
CA Abhinav Aggarwal, New Delhi Mobile: +91-9811482460; email: [email protected]

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