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The Companies Act, 1956
Section 35 in The Companies Act, 1956
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Section 41(1) in The Companies Act, 1956
Section 36(1) in The Companies Act, 1956

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Income Tax Appellate Tribunal - Mumbai
Ima -Pg India Ltd , Mumbai vs Department Of Income Tax on 20 September, 2011

IN THE INCOME TAX APPELLATE TRIBUNAL

"C" Bench, Mumbai

Before Shri B.R. Mittal, Judicial Member

and Shri B. Ramakotaiah, Accountant Member

ITA No. 2801/Mum/2005

ITA No. 3385/Mum/2006

ITA No. 2938/Mum/2009

(Assessment Years: 2001-02, 2002-03 & 2004-05)

M/s. IMA-PG India Pvt. Ltd. Addl. CIT, Range 5(2) (Formerly Precision Gears Pvt. Ltd.) Vs. Aayakar Bhavan, M.K. Road Plot No. R-677, T.T. C. Indl. Area, MIDC Mumbai 400020 Rabale, Navi Mumbai 400 701

PAN - AAACP 6442 Q

Appellant Respondent

ITA No. 3243/Mum/2005

ITA No. 2723/Mum/2007

ITA No. 3361/Mum/2006

ITA No. 2842/Mum/2007

ITA No. 2628/Mum/2009

(Assessment Years: 2001-02, 2002-03, 2003-04 & 2004-05)

D C I T - 5(2) M/s. Precision Gears Pvt. Ltd.) Room No. 571, Aayakar Bhavan Vs. Plot No. R-677, TTC Indl. Area, MIDC M.K. Road, Mumbai 400020 Rabale, Navi Mumbai 400 701 PAN - AAACP 6442 Q

Appellant Respondent

Assessee by: Shri Vipul Joshi/

Shri Rahul Rathi

Revenue by: Shri Alaxander Chandi

Date of Hearing: 20.09.2011

Date of Pronouncement: 30.09.2011

ORDER

Per Bench

These are cross appeals by the assessee and Revenue against the orders of the CIT(A)-V, Mumbai dated 21.02.05, 24.03.2006 & 16.02.2009 for assessment years 2001-02, 2002-03 & 2004-05, respectively. One 2 ITA No. 3385 + 4/Mum/2006

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revenue appeal for AY 2003-04 is against the order dated 16.01.07. There is one appeal on penalty under section 271(1)(c) in AY 2001-02 by Revenue.

2. The brief facts are that Assessee is engaged in the business of manufacturing, trading and exporting of Blister Packing Machines and automatic cartooning machinery, change parts, rivets and other goods. In the course of scrutiny proceedings the AO made additions/ disallowances and CIT(A) gave relief on many issues. Both assessee and revenue are aggrieved in various years. Since common issues are involved the cases are heard together and decided by this common order. The assessee placed on record paper books for respective years. The assesse also placed on record a chart briefing the issues and various legal propositions.

3. We have heard learned Counsel Sri Vipul Joshi and learned D.R., Dr Sri Alaxander Chandi in detail. Their arguments were incorporated as and when required in the order.

ITA No. 2801/Mum/2005 - A.Y. 2001-02

4. Assessee has raised the following grounds of appeal: -

"1) Staff Welfare Expenses disallowed Rs.5,00,000 -- The learned CIT (A) erred in retaining disallowance of Rs.5 lacs out of Rs.10 lacs disallowed by A.O.

2) Repairs & Maintenance Expenses --

The learned CIT (A) erred in.

(a) treating expenditure of Rs.8,08,267 for repairs and renovation of various Premises as capital expenditure, and

(b) not giving any decision in respect of expenses disallowed for Repairs of Fixed Assets other than Premises and Plant and Machinery viz. AC and fridge, office equipments, electrical installations and furniture and fixtures.

3) Disallowance of Rs. 16,95.206 U/s.40A (2) (b) -- The learned CIT.(A) erred in retaining disallowance of Rs. 16,95,206 out of disallowance of Rs. 23,50,000 (@ 10% of Rs.235 lacs being payments to related parties) by the A.O. u/s4OA (2) (b). 4) Interest U/s.234-D --

The learned CIT. (A) erred in not giving any direction in relation to interest of Rs.78,175 charged U/s.234-D."

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IMA-PG India Ltd. (Precision Gears P Ltd.)

5. Regarding ground No. 1, on disallowance of staff welfare expenditure on adhoc basis, during the assessment proceedings the A.O. observed that assessee company had claimed expenses of `31,56,483/- under the head staff welfare. It was also observed that the expenses mainly consisted of refreshment expenses, news paper purchases, canteen charges, bus expenses etc. Further, according to the A.O., assessee did not furnish the details of medical expenses amounting to `16,95,221/- despite specific request being made. As also, according to the A.O., assessee had failed to prove the bonafide of such expenses and thus considering these facts the A.O. disallowed `10,00,000/- as expenses incurred for non business purpose. Before the CIT(A) it was submitted that the A.O. had never asked for details of such expenses and only for the first time the details were called for was as per letter dated 05.03.2004 whereas the order is passed on 01.03.2004 and therefore the disallowance made should be deleted as the same were made without giving opportunity to assessee. It was also submitted that expenses on medical charges were paid to around 250 staff members by cheque, treated as perquisite and also submitted the details of such expenses. Further, according to assessee, full details were available for all the expenses incurred and that Assessing Officer's observation that majority of expenses were in cash was also far from actual facts of the case. Thus, according to assessee, the A.O. had made arbitrary disallowance without appreciating the facts of the case and also without allowing proper opportunity to assessee in this regard and as such the disallowance should be deleted. After considering the submission of assessee, the CIT(A) sought comments from the A.O. In reply the A.O. submitted the claim was disallowed as assessee could not submit the details and bills for verification and as such the additions were rightly made. In response the assessee submitted that the DCIT has not considered the submissions made before him and therefore the same is without appreciating the facts of the case and as such no disallowance was called for. After considering the contentions of the assessee and the report of the A.O. the CIT(A) restricted the disallowance to `5,00,000/- stating that from the details it is seen that assessee has debited expenses on furnishing as well as fixtures provided to the staff 4 ITA No. 3385 + 4/Mum/2006

IMA-PG India Ltd. (Precision Gears P Ltd.)

members. Further, assessee has not brought on record any evidence as to whether such furnishing had been included as income of such employees, e.g. The assessee had debited sum of `9,800/- as staff welfare expenses as per document No. 3446 dated 10.07.2000. From the details filed it is seen that amount was paid to Richard against payment to Attire `5000/- and soft furnishing `4,800/-. Similarly document No. 1935 dated 25.04.2000 (page No. 74 of paper book) also shows expenses on furnishing. As also document No. 4566 dated 06.09.2000 (on age No. 75 of paper book) shows expenses for purchase of 1.5 ton A.C. Machine amounting to `23,060/-. Thus considering the fact that assessee has claimed either expenses of capital nature as staff welfare, The CIT(A) restricted the disallowance to `5,00,0000/-. Aggrieved both assessee and Revenue are in appeal.

6. Before us the learned counsel reiterated the submission made before the CIT(A) and referred to the detailed paper book filed in this regard to submit that all the expenditure was vouched and with reference to the objection of the CIT(A) it was his submission that the entire expenses as attire/furnishing expenses was given to the HOD of R&D and this expenditure was considered as staff welfare. Further it was submitted that the A.C. is also provided at the cost of company for the benefit of the employee and, therefore, this is also revenue expenditure. With reference to the contention that details of medical reimbursement was not vouched the learned counsel referred to various details filed in the paper book and also submitted that this reimbursement was included in the individual hands as perquisites and, therefore, the expenditure is revenue in nature. Accordingly there is no need to disallow the amount.

6.2 The learned D.R., however, relied on the orders of the CIT(A) to the extent of disallowance confirmed whereas he submitted that the CIT(A) was not correct in restricting the amount, which the Revenue is contesting.

6.3 After considering the arguments and examining the details filed in the paper book, we are of the opinion that prima facie there is no need for disallowing the expenditure as assessee has submitted voluminous details of staff welfare expenditure including the evidence with reference to inclusion 5 ITA No. 3385 + 4/Mum/2006

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of medical expenses as perquisites. The only objection considered by the CIT(A) while restricting to `5,00,000 was that assessee also reimbursed certain attire/furnishing/ fixtures to some of the staff members, which was claimed as revenue expenditure which includes an A.C. for an amount of `23,060/-. Except the above amounts, we do not see any reason for disallowing the amounts claimed as staff welfare on adhoc basis as assessee has furnished the details. After considering the legal precedents submitted by the parties, we are of the opinion that the expenditure having been vouched there is no need for disallowing the amount. However, we are unable to understand the claim of attire/ furnishing expenditure and A.C. as revenue expenditure under the head Staff welfare. It is not on record whether this is part of contractual obligation to provide these to the employee concerned and, if so, these are included/ includable as perquisites of the said person. Therefore, to the limited extent of verifying some of the claims regarding reimbursement provided, expenditure on attire/furnishing and A.C. to the staff members, the rest of the expenditure claim has to be allowed as such. For the limited purpose of verifying the claim of expenditure on attire/ furnishings/ fixtures included in staff welfare, the matter is restored to the file of the A.O. to examine whether there is any obligation to provide this on the part of the employer and whether these amounts are included as perquisites in the individual hands, if required, so as the amount can be allowed as revenue expenditure. The A.O. is directed to examine the nature of expenditure so claimed in staff welfare expenditure and decide accordingly. Subject to the above, the rest of the claim is allowable. Therefore, assessee's grounds contesting disallowance on adhoc basis is allowed per se. The A.O. is directed to examine the nature of expenditure referred above and decide allowing the same to that extent afresh. Subject to this direction on the amount involved, assessee's ground is treated as allowed and AO is directed to allow balance claim as staff welfare exp..

6.4 Assessee has submitted a 5 page note on various case laws, which we do not intend to extract here. Suffice to say that we have considered the principles laid down therein while deciding the issue. 6 ITA No. 3385 + 4/Mum/2006

IMA-PG India Ltd. (Precision Gears P Ltd.)

7. Regarding ground No. 2 on disallowance of Repairs and Maintenance Expenditure as capital expenditure, the A.O. observed that assessee had claimed `32,00,000/- as repairs and maintenance expenses. According to the A.O., assessee could produce supporting details of `4,17,667/- only. Further from the details submitted it was found that amounts were spent on purchase of Granites, tiles, wooden materials carpenters etc. Expenses so claimed revealed that assessee had claimed under this head expenses of capital nature which was not permissible and therefore the A.O. disallowed entire claim of `32 lakhs. Before the CIT(A) it was submitted that details of `4,17,000/- submitted was for renovating the Mumbai office whereas other expenses were incurred for building which was allowed as revenue expenses. Further, according to assessee, details of repairs and maintenance was furnished before the A.O. vide letter dated 23.01.2004 which has not been considered by the A.O. According to assessee, merely using better material like granite etc for flooring of existing premises would not make the same as capital expenses as it would not be on capital field. Further, according to assessee the A.O. has also erred in allowing depreciation of 1% as against 10% allowable on such capital expenses. Assessee has also submitted that looking to the huge assets of assessee company, expenses on such renovation should be allowed. The CIT(A) asked the A.O. to give his comments on this. In response to the DCIT vide his letter stated that during the assessment proceedings assessee had not submitted copies of bills and details as required and hence the disallowance made was correct. In response to this report assessee submitted that the A.O. has not appreciated the details produced before his office based on which his report was called for. Thus looking to the details forwarded to the A.O. during remand proceedings no disallowance was required to be made. After considering the contentions of the assessee and the report of the A.O. the CIT(A) held that there is no dispute that assessee has extensively made renovation at various premises including Bombay office etc. It also appears from the details filed that an architect was appointed for such renovation. Further assessee has given details of expenses on purchases of material and labour charges etc. However, it has not filed any details regarding the type of work undertaken 7 ITA No. 3385 + 4/Mum/2006

IMA-PG India Ltd. (Precision Gears P Ltd.)

by it. Under the circumstances the work of renovation in respect of premises should be treated as capital expenses whereas in respect of expenses incurred on plant and machinery it is not a case that by virtue of such renovation any capacity of the plant and machinery was increased and therefore where by virtue of such repairs and renovation if no capital assets or enduring advantage is received the same should be allowed as revenue expenses. Further expenses also include maintenance contacts which are yearly contract expenses and accordingly should also be allowed as revenue expenses. Looking to the facts of the case, he directed the A.O. to allow the expenses on plant and machinery as revenue expenses in so far as such expenses do not result in increase in capacity of such plant and machineries so also maintenance expenses of yearly contract should also be allowed as revenue expenses. Whereas in respect of renovation of premises the same should be treated as capital expenses and accordingly depreciation should be allowed to assessee at prescribed rate.

8. Contesting the above findings of the CIT(A) and consequential orders of the A.O. in this regard, it was the contention of the learned counsel that the assessee has not brought into existence any new asset and simple renovation of existing building cannot be considered as capital expenditure. He relied on the decision of the CIT vs. Saravana Spinning Mills P. Ltd. 293 ITR 201 (SC) for considering the current repairs the basic test was to find out whether the expenditure was incurred to preserve and maintain existing assets or to bring a new asset into existence with long term advantage. It was his contention that Bombay office renovation does not yield any new asset and the expenditure is allowable as revenue expenditure. Further it is also submitted that even though the CIT(A) directed the A.O. to allow expenditure incurred for plant & machinery, while giving effect to the same the A.O. did not consider even that maintenance contract expenditure in this regard and disallowed the amounts. He referred to various details placed on record in page No. 419, 420, 430 and also page No. 236 to 271 and letter submitted to the A.O. and CIT(A) placed in the paper book. 8 ITA No. 3385 + 4/Mum/2006

IMA-PG India Ltd. (Precision Gears P Ltd.)

8.1 The learned D.R., however, relied on order of the CIT(A) to submit that the extensive renovation of office premises has given enduring benefit, therefore the amount is correctly treated as revenue expenditure.

8.2 We have considered the issue. As considered by the Hon'ble Supreme Court in the case of CIT vs. Saravana Spinning Mills P. Ltd. 293 ITR 201(SC) to decide the application of section 31(i) the test was not whether the expenditure was revenue or capital in nature but whether the expenditure was for current repairs or not. The basic test was to find out whether the expenditure was incurred to preserve and maintain an already existing asset and the expenditure must not be to bring a new asset into existence or to obtain new advantage. As seen from the details filed and the nature of type of work undertaken it is an expenditure for renovation of existing premises which the CIT(A) has considered as capital in nature. Considering the principles established by the above Supreme Court decision and also the tests which are already existing as approved by the Hon'ble Supreme Court in the case of Ballimal vs. CIT 224 ITR 414 and Empire Jute Co. Ltd. vs. CIT 124 ITR 1, we are of the opinion that the expenditure is allowable as current repairs under section 31 of the I.T. Act. Similar view was taken by the Coordinate Benches in the cases of Indian Hotels Company Ltd. vs. CIT 34 TTJ (Bom) 526, Power Build Ltd. vs. ACIT 126 TTJ (Ahd) 551 and Honda Siel Cars India Ltd. vs. ACIT 1 ITR (Trib) 497 (Del). Respectfully following the precedents on the issue, we are of the opinion that the expenditure incurred by the assessee for renovation of the existing premises does not bring into existence any new asset and is only for preserving and maintaining the existing asset. Therefore, the A.O. is directed to allow the expenditure as Revenue expenditure. We also notice that while giving effect to the order the A.O. has even considered the amounts paid for maintenance agreement towards plant & machinery also as capital expenditure even though the CIT(A) directed him to allow it as revenue expenditure. The A.O. is directed to allow the entire amount claimed as repairs and maintenance expenditure as revenue expenditure.

9 ITA No. 3385 + 4/Mum/2006

IMA-PG India Ltd. (Precision Gears P Ltd.)

9. Regarding ground No. 3 on disallowance under section 40A (2)(b) the A.O. observed that assessee had made total payments to parties listed in section 40A(2)(b) of the Act. It was also observed by the A.O. that assessee had not filed any details of such payments and comparable price in respect of such payments and therefore considering the Hon'ble Bombay High Court judgement in case of Shatrunjay Diamond 261 ITR 258 disallowed assessee's claim @10% of such total payments. Before the CIT(A) assessee submitted that the A.O. had not considered the details filed vide letter dated 23.01.2004. Further, according to assessee, sum of `24,66,819/- was paid to the Managing Director as remuneration within the limits prescribed under Companies Act and hence should not be disallowed. Further in respect of other payments it was submitted that payments were made to IMA being holding company for various services and goods purchased from them and reimbursement for expenses incurred by them and therefore no disallowance should be made in this regard. Assessee also stated that some of the payments were made to local parties as referred to in section 40A(2)(b), which were mostly against purchases and the purchases made from them were at reasonable price. The CIT(A) did not find any merit in assessee's case but for Director's remuneration of `4,54,941/- paid to Shri Anil Rao; of `18,51,616/- paid to Mr. Satish Rao, both within limits prescribed by the Companies Act; guarantee commission paid of `85,000/- (70,000 + 15,000) to Shri Satish Rao, `70,000I- to Mrs. Prema G.Rao and `40,86,3891- (29,46,775+11,39,614) being loan repayment and interest thereon paid with approval of central government. He further considered that though assessee had filed the details of such payments made, it has not filed any comparable cases to substantiate its claim that the amounts of payments were reasonable as compared with normal trade practice and price available from the open market. In absence of such reasonability being shown and that in absence of any comparative price being produced the CIT(A) declined to accept the arguments of assessee and accordingly confirmed the disallowance made by the AO except the amounts referred to above. He directed the A.O. to allow consequential relief to assessee. Aggrieved by the above decision of the CIT(A) assessee is in appeal. 10 ITA No. 3385 + 4/Mum/2006

IMA-PG India Ltd. (Precision Gears P Ltd.)

10. Before us the assessee contended that the detailed brake up along with reasons for making such payments to specific persons was given to the A.O. as well as to the CIT(A) and these were not considered in the proper perspective. As regards purchase from IMA is concerned IMA is the holding company and is supplying key components for manufacturing Blister Packing machines. Since the holding company supplied goods to the assessee company exclusively there cannot be any comparative figure available with them. However, all such payments were accepted at market rate and no such disallowance was made in A.Y. 2003-04 and A.Y. 2004-05 or in any other earlier years. Further, the payments made to IMA were accepted by the Revenue as being at Arms Length price by the A.O. and the TPO in A.Y. 2003-04 and A.Y. 2004-05. With reference to payment to Precision Gears (Indore) Pvt. Ltd., PLH Enterprises and P.G. Engineering, assessee filed invoice of relevant purchases depicting them as payment as reasonable. The other payments were reimbursement with out any mark up. It was further submitted that the CIT(A) confirmed certain disallowance on random adhoc basis and further there is double disallowance on account of same expenditure, i.e. reimbursement to IMA for exhibition expenses, travelling expenses, advertisement and sales promotion expenses made by the A.O. and deleted by the CIT(A). If these adhoc disallowances were upheld there will be disallowance under section 40A(2)(b) while allowing expenses as business expenditure under the respective heads. It was submitted that there was no reason for disallowance under section 40A(2)(b) and there is no such disallowance in the past in any of the scrutiny assessments. With reference to disallowance under section 40A(2)(b) the learned counsel also placed on record detailed legal decisions running from page No. 9 to 12 why the provisions of section 40A(2)(b) are not applicable.

11. Without going into the legal aspects of the issue we are of the opinion that the CIT(A) has wrongly confirmed some of the expenditures while allowing the payment made to the Directors partly. It was the justification of the assessee that the Directors remuneration and commission were all paid within the limits prescribed by the Companies Act. Even the guarantee commission paid were with the approval of the Central Government. While 11 ITA No. 3385 + 4/Mum/2006

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allowing certain amounts, as noted in para 12.3 by the CIT(A) he has not allowed the amounts paid to the Directors, may be by mistake, which the assessee is also contesting. On perusal of details of the amounts paid to the Directors including sitting fee and guarantee commission and the order of CIT(A) allowing partly on same facts, we are of the opinion that these amounts cannot be considered as excess payments under section 40A(2)(b). With reference to payments made to the holding company and others, in the absence of any comparative price the CIT(A) confirmed the disallowance at 10% of the above claim. However, he has ignored assessee's submission that there cannot be any comparative price as holding company was exclusively supplying to assessee company. Considering this, the argument that comparative prices were not furnished can not be a reason to disallow the amounts at 10%. Since the A.O. and the Transfer Pricing Officer accepted the price paid to the holding company as reasonable in later years, one can only conclude that the amount paid by the assessee to the holding company in this year also as reasonable in the absence of any other data brought on record by the Revenue. In view of this, we are of the opinion that there is no need to disallow any amount under section 40A(2)(b). Therefore, the adhoc disallowance of 10% made by the A.O. and partly confirmed by the CIT(A) was deleted. Assessee's ground is allowed.

12. Ground No. 4 is with reference to interest under section 234D of `78,175/-. Even though the issue of charging of interest under section 243D was raised as an additional ground, we notice that the interest was levied vide order under section 154 dated 01.02.2006 and the same was contested before the ITAT in ITA No. 2017/Mum/2008 dated 28th May 2009 in which considering the rival submissions the ITAT held that interest under section 234D can be levied prospectively w.e.f. 01.06.2003 following ITAT Special Bench decision in the case of Ekta Promoters P. Ltd. 113 ITD 719 (SB )(Del). Since the Coordinate Bench has already considered the issue on an appeal by assessee, there is no need to re-adjudicate the issue, which does not arise on the order of CIT(A). Therefore the ground is rejected for technical reasons.

13. In the result, appeal is partly allowed.

12 ITA No. 3385 + 4/Mum/2006

IMA-PG India Ltd. (Precision Gears P Ltd.)

ITA No. 3243/Mum/2004 - A.Y. 2001-02

14. Revenue has raised the following grounds of appeal: -

"(1) On the facts and in the circumstances of the case and as per law, the Ld. CIT(A) erred in deleting the disallowance of bad debt of Rs.73,41,610/- consisting of bad investment of Rs.28.7 lakhs and advances through bill discounting of Rs.44,71,610/- ignoring the fact that the assessee company is not in the business of money lending and neither the assessee company has any approval form RBI to do such business nor the audit report had mentioned that the assessee company was doing money lending business.

(2) On the facts and in the circumstances of the case and as per law, the Ld. CIT(A) erred in deleting the disallowance of expenses amounting to Rs.2,75,182/- uJs.14A of the Act, ignoring the fact that the company's balance sheet showed interest bearing funds of Rs.3.68 crores and onus was in the assessee to prove that the investment was not from the interest bearing funds.

(3) On the facts and in the circumstances of the case and as per law, the Ld. CIT(A) erred in deleting the disallowance at Rs.5 lakhs as against Rs.l0,00,000/- disallowed by the A.O. out of staff welfare expenses, ignoring the fact that the assessee has claimed either expenses of capital nature as staff welfare which does not qualify for such deduction and also that the assessee has made payment in cash for which no proper vouching is possible.

(4) On the facts and in the circumstances of the case and as per law, the Ld. CIT(A) erred in restricting the disallowance of conveyance expenses at 2.5 % as against 10% estimated by the A.O. and deleting the disallowance made by the A.O. on account of telephone expenses and vehicle expenses, all included in the disallowance of adhoc expenses of Rs. 17,78,00/-, ignoring the fact that during the course of assessment proceedings, no proper explanation was submitted by the assessee.

(5) On the facts and in the circumstances of the case and as per law, the Ld. CIT(A) erred in deleting the addition made by the A.O. of advertisement expenses amounting to Rs.5,39,822/- ignoring the fact that major portion of the expenditure was incurred in cash for lunch for guests.

(6) On the facts and in the circumstances of the case and as per law, the Ld. CIT(A) erred in deleting the disallowance made by the A.O. of exhibition expenses amounting to Rs.30,63,200/- ignoring the fact that the expenditure incurred had given enduring advantage to the assessee company.

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(7) On the facts and in the circumstances of the case and as per law, the Ld. CIT(A) erred in deleting the disallowance of interest amounting to Rs.6,07, 186/- being amount of interest relatable to bad debts written off."

15. Regarding ground No. 1, the A.O., during assessment proceedings observed that assessee had claimed as bad debts of `73,41,610/-., the aforesaid amount consisted of `28,70,000/- being investment written off and `44,71,610/- written off on account of bills discounting. Assessee was asked to show cause as to why such expenses should not be disallowed. In response assessee submitted that it was in the business of money lending and since `28,70,000/- could not be recovered being the loan granted, the same was converted into Bonds to get better security. However, since the same was being bad for recovery it was written off under section 37(1)(vii) r.w. sub-section (2) thereof. According to the A.O., the deduction under section 37(1)(vii) did not exist in the Act and may be it was section 36(1)(viii) (sic) that could have been assumed by assessee. Further, according to the A.O., assessee had failed to prove by evidence that it was into the business of money lending. According to the A.O., neither assessee had any approval from RBI to do such business, nor the audit report had mentioned that assessee was doing money lending business. It also did not furnish any detailed cash flow statement to show as to how such money was advanced in its money lending business and P & L Account did not reveal any income to match with such business. Thus in absence of such details, according to the A.O., the amount in question was capital loss and could not be allowed as business loss and accordingly he disallowed a sum of `28,70,000/- as claimed by assessee. Similarly assessee was also asked to show cause as to why amount of `44,71,610/- claimed as bad debts should not be disallowed. In response assessee had reiterated its earlier stand and submitted that loss was occurred in its money lending activities and hence allowable as bad debts. However, in line with earlier observation the A.O. also disallowed assessee's claim in this regards as well and consequently disallowed `44,71,610/- claimed as bad debts. Before the CIT(A) assessee submitted that there is no bar in its carrying on money lending business as claimed by the A.O. and no guidelines have been issued by RBI for obtaining license to 14 ITA No. 3385 + 4/Mum/2006

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carry on money lending business. It is further submitted that it is also not a case that because the audit report did not state money lending as business activity it did not carry out such activities. Further its money lending activity was an integral part of common funds, common management and common pool vis-à-vis its other manufacturing business activities. It is therefore argued that bad debts claimed should be allowed as expenses in line with section 36(1)(vii) r.w. sub-section (2) thereof. As regards Assessing Officer's observation that assessee had not disclosed any income from money lending business, it is submitted that the A.O. has not appreciated the facts of the case properly. In its support assessee filed copies of five years Balance Sheets evidencing the income from bills discounting business. Assessee has also filed copy of resolution passed by the Board of Directors in their meeting for writing off such amount. In its support assessee also relied on the judgements of ITAT Mumbai in case of ITO vs. Anil H. Rastogi 86 lTD 193, CIT vs. Govind Glass Indu Limited 110 Taxman 109 (Ahd.) and Hon'ble Gujarat High Court decision in case of CIT vs. Girish Bhagwanprasad 256 ITR 772. Pursuant to assessee's submission the CIT(A) asked for the comments of the A.O. and in response the A.O. submitted that out of total sum of `73,41,610/- sum of `28,70,000/- written off pertained to investments and since this income is not offered to tax the disallowance was rightly made, whereas in respect of other bad debts claim the A.O. has simply submitted that as claimed by assessee provision under which the deduction claimed does not exist [(i.e. 37(1)(vii)]. In response to the remand report assessee has submitted that the A.O. has merely relied on the wrong quoting of section which in any case was already envisaged by him during the original assessment proceedings as well and therefore mistake committed during the original proceedings could not be the ground of such disallowance. It is also submitted that the said mistake has been already rectified in appeal proceedings and therefore the A.O. ought to have considered the same in remand proceedings. It is thus claimed that looking to the overall facts as stated in earlier submissions the addition made by the A.O. should be deleted. After hearing the contentions of the assessee and the A.O. the CIT(A) held that it was the claim of the assessee that it was in 15 ITA No. 3385 + 4/Mum/2006

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the business of money lending and that income there from was offered for tax during the preceding previous years. The P & L Account filed for five years shows that assessee had shown the income from bills discounting and that the fact is also not denied by the A.O. The only reason for disallowance advanced is that the investment was not offered for tax in the preceding previous years or that the section under which deduction is claimed does not exist. He further held that merely because assessee had wrongly quoted section as 37(1)(vii) r.w.s 36(2) would not be the ground for disallowing the claim of assessee. Further on facts the A.O. has not found any infirmity that assessee had not done any bills discounting activity i.e. money lending activity. Therefore, deduction should be allowed for bad debts particularly considering the fact that assessee was in the business of money lending and income therefrom were offered for tax in preceding previous years. As regards `28,70,000/- claimed as deduction, the A.O. has not rebutted assessee's claim that investment represented the conversion of loan into Bond which became bad and hence the same was also allowable as deduction as bad debt. Thus the CIT(A) deleted the disallowance made by the A.O.

16. After considering the arguments of learned D.R. and learned counsel and examining the facts brought on record, we are of the opinion that CIT(A) has considered the facts and legal issues correctly which do not require any interference. There is no denial that the amounts were advanced in the course of bill discounting business and assessee offered interest in earlier years. There is also no dispute with reference to the fact of becoming bad and its write off. The CIT(A) has correctly allowed the amounts as deduction under section 36(1)(vii) r.w.s 36(2) of the Act. The revenue ground is therefore rejected.

17. Regarding ground No. 2 the A.O. observed that assessee company had earned income by way of dividend at `5,000/- out of it's investments and that out of such investments assessee had written off certain amounts as not recoverable. Further, according to the A.O., if the adjustments so made are considered assessee's investments worked out to `33,27,0001-, which 16 ITA No. 3385 + 4/Mum/2006

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according to the A.O. was made out of borrowed funds totalling to `3,68,63,338/- and its finance cost is `30,49,884/-. Thus considering the fact that investments were made out of borrowed funds, the A.O. disallowed the proportionate finance cost amounting to `2,75,182/- in relation to which income was exempt by invoking the provisions of section 14A. Before the CIT(A) assessee submitted that the A.O. has erred in not appreciating the fact that assessee had not claimed any income as exempt and not forming part of the total income and that the dividend received by it was on account of shares held in Co-op Bank and that the same is neither exempt nor claimed as such. Therefore, according to assessee, no disallowance should have been made under section 14A of the Act as the same does not have any application in its case. The CIT(A) asked for the comments of the A.O. to which the A.O. submitted that the disallowance of `2,75,182/- was made in view of the provisions of section 14A. During the proceedings the A.O. found that investments of the assessee company is to the tune of `33,27,000/- and after considering the adjustment by way of write off of investments and borrowed funds are `3.68 crores for which finance cost is debited at `30,49,884/-. During the year assessee has earned dividend income of `5,000/- and there may be chances that on some of the investment assessee company has not earned any income, but investments are from borrowed fund and hence finance cost proportionate to sale is not allowable against business income. Hence it was rightly disallowed under section 14A. In response to the remand report assessee submitted that the mere fact that the A.O. has made addition on surmises and conjecture itself suffice to deleted the addition as is clearly evident from the remand report where it has been stated that there may be chances that on some of the investment the assessee company has not earned any income but investments are not from borrowed funds. It is thus submitted that disallowance made by the A.O. without bringing on record any contrary evidence that the expenses were in fact incurred in relation to income earned which is not forming part of the total income no disallowance was called for. The CIT(A) found that there is merit in assessee's claim. He stated that during the remand proceedings the A.O. has not rebutted assessee's clam that the dividend 17 ITA No. 3385 + 4/Mum/2006

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received were not forming part of exempt income nor has brought on record any material evidencing the fact that assessee had invested funds wherefrom income would be exempt and that merely on surmises and conjecture no disallowance could be made. Therefore, he deleted the disallowance made by the A.O. Aggrieved Revenue is in appeal.

18. After considering the arguments of learned D.R. and learned counsel and examining the facts brought on record, we are of the opinion that CIT(A) has considered the facts and legal issues correctly which do not require any interference. There is no denial to the fact that assessee has not claimed any exempt income. There is also nothing on record that investments made were from borrowed funds. The CIT(A) has correctly deleted the disallowance made under section 14A of the Act. The revenue ground is therefore rejected.

19. Ground No. 3 is regarding disallowance of staff welfare expenses. The A.O. observed that assessee company had claimed expenses of `31,56,483/- under the head staff welfare which consisted of refreshment expenses, news papers purchases, canteen charges, bus expenses etc. According to the A.O. assessee failed to prove the bonafide, therefore, he disallowed `10,00,000/- as expenses incurred for non business purpose. The CIT(A) restricted the disallowance of expenses under this head to `5,00,000/- . Revenue is aggrieved and raised the ground.

20. On the issue of disallowance of staff welfare expenses the same was considered in assessee appeal above at para.5 and 6. We do not find any reason to disallow any amount on adhoc basis under this head. Certain directions were given with reference to amount that was confirmed by CIT(A). Consequent to that we see no reason to consider the ground raised by the Revenue. The ground is rejected.

21. With reference to ground No. 4 the A.O. observed that assessee incurred expenses of `177.80 lakhs on telephone, travelling and vehicle and in respect of travelling expenses no details were produced. Further assessee did not furnish any other details like foreign exchange usage, ticket expenses, hotel bills, etc. and in the absence of such details the A.O. disallowed 10% of total expenses as for non business purpose. Before the 18 ITA No. 3385 + 4/Mum/2006

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CIT(A) assessee submitted that details in respect of telephone and vehicle expenses that were furnished before the A.O. but not considered. Regarding travelling expenses it was submitted that assessee company had incurred foreign travelling expenses of `38,48,647/- and domestic travel expenses of `33,47,105/-. It is further submitted that all the expenses were incurred for the purpose of the business and no disallowance should be made. In the remand report the A.O. merely reiterated the earlier observations and according to assessee all the necessary details were produced before the A.O., therefore, no disallowance was called for. CIT(A) considered that the conveyance expenses are incurred mainly in cash and from the details filed it is not possible to find out as to whether the amount was actually spent for the purpose of business. He was of the opinion that looking to the business need and exigencies of assessee, disallowance of 10% is on higher side and, therefore, he restricted the disallowance to 2.5% as against 10% estimated by the A.O. Regarding telephone and vehicle expenses he was of the opinion that it is not a case where the expenses could be estimated of personal purpose and, therefore, he deleted the disallowance made on account of telephone expenses and vehicle expenses. In respect of travelling expenses assessee has filed details of expenses trip wise which was also forwarded to the A.O. for his comment. Since there were no adverse findings in the remand report the CIT(A) deleted the addition made on account of travelling expenses. Revenue is aggrieved on the above decision of the CIT(A).

22. After considering the arguments of learned D.R. and learned counsel and examining the facts brought on record, we are of the opinion that CIT(A) has considered the issue correctly which do not require any interference. The CIT(A) has correctly allowed the amounts as deduction under section 37(1) of the Act. The assessee also has not contested the part disallowance confirmed by CIT(A). Considering the facts and claims of assessee we consider that CIT(A) has rightly deleted the adhoc disallowance on travelling, telephone, vehicle expenses. Even the restriction of Conveyance expenses on the facts is reasonable and there is no need to differ from that. Revenue ground is therefore rejected.

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23. Ground No. 5 relates to disallowance of advertisement expenses amounting to `5,39,882/- The A.O. observed that assessee company had incurred `6,69,854/- as expenses on advertisement and sales promotion. According to the A.O. `5,39,822/- pertained to sales promotion. From the details filed it was observed that the major expenses were incurred for lunch for guests in cash. Further it was not possible to identify the purpose of the expenses and thus the A.O. disallowed entire advertisement expenses. In appeal before the CIT(A) assessee submitted that it had incurred expenses on leaflets, pamphlets, x-mas cards, video shooting for machines marketed and reimbursement of expenses incurred by IMA for expenses incurred by them on company's behalf. In the remand report A.O. has not considered the details filed and submissions made but reiterated the Assessing Officer's observation made in the assessment order. Therefore, the assessee contended that the A.O. has not found any infirmity in the details filed and hence no disallowance was called for. The CIT(A) deleted the disallowance made by the A.O. holding that the assessee had incurred expenses on leaflets, pamphlets, video shooting and reimbursement of expenses and only `18,709/- were claimed for lunch and other expenses in cash. Revenue is aggrieved.

24. Considering the fact that only `18,709 was spent on lunches and other expenses in cash, we can support the argument of AO in disallowing entire sales promotion expenses. The order of CIT(A) is there upheld and ground is rejected.

25. Ground No. 6 is with reference to disallowance of exhibition expenses amounting to `30,63,200/-. During the course assessment proceedings the A.O. found that assessee has claimed `38,29,000/- under the head exhibition expenses out of which `23,58,000/- was reimbursement to IMA SPA Italy, holding company of assessee. This amount was claimed as expenses incurred for arranging exhibition for display of its machines in the market. The details furnished by the assessee revealed that the expenses were incurred on exhibitions at Germany, Hyderabad, Poland and Chicago. 20 ITA No. 3385 + 4/Mum/2006

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The A.O. doubted the bonafide of such expenses. He was of the opinion that the said expenses had given enduring advantage to the assessee company hence the same should be treated as deferred revenue expenses. Therefore, he disallowed 4/5th of such expenses to be carried forward. The CIT(A) deleted the disallowance made by the A.O. by holding that it is well settled that if the period of advantage is not measurable in definite terms and then in that case expenses should be allowed as revenue expenses despite the fact that by incurring such expenses there could be some advantage received in future. Aggrieved Revenue is in appeal.

26. Since AO himself treated the expenses as revenue in nature and disallowed 4/5th as deferred amount, we see no reason to disallow the expenditure in the first place. The AO has not doubted the expenditure and has not treated as capital expenditure. CIT(A) has correctly allowed the amount in full. We see no reason to modify the order therefore, the Revenue ground is rejected.

27. Ground No. 7 pertains to the issue of disallowance of interest amounting to `6,07,186/- being interest relatable to bad debts written off. The A.O. disallowed assessee's claim of bad debts written off as being capital loss and in consequence disallowed the interest relatable to such advance amounting to `6,07,186/-. Since the disallowance on bad debt is deleted, the consequential disallowance of interest was also deleted by the CIT(A).

28. As the amount claimed as bad debt was allowed, there is no reason to disallow the interest claim. The order of CIT(A) is therefore confirmed and revenue ground is rejected.

29. In the result, appeal of Revenue is dismissed.

ITA No. 2723/Mum/2007 - A.Y. 2001-02

30. This appeal by Revenue is against the order of the CIT(A) V, Mumbai dated 19.01.2007 deleting the penalty under section 271(1)(c) levied by the A.O.

31. The A.O. levied penalties on the amounts disallowed on account of various expenses such as expenses on staff welfare, repairs and 21 ITA No. 3385 + 4/Mum/2006

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maintenance expenses, adhoc disallowance under section 40A(2), etc. On appeal the CIT(A) deleted the penalty as there was no clear cut finding by the A.O. on either furnishing of inaccurate particulars of income or concealment of income by the assessee. He was also of the opinion that adhoc disallowances does not call for penalty. Aggrieved on the above decision Revenue is in appeal.

32. After considering the arguments of rival parties, we see no reason to differ from the findings of CIT(A) that adhoc disallowances made and confirmed in the assessment order does not call for penalty under Sec. 271(1)(c). Moreover, in assessee appeal considered above, the adhoc disallowances on staff welfare expenditure (except a small amount for verification), repairs and maintenance exp, disallowance under section 40A(2) were deleted and assessee grounds were allowed. Therefore, there is no scope for considering any amount as income concealed under section 271(1)(c).

33. In the result appeal by Revenue is dismissed.

ITA No. 3385/Mum/2006 - AY. 2002-03

34. Ground No. 1 in assessee's appeal is with reference to disallowance of 80HHC claim by excluding 90% of sale tax refund, sundry credit balances written back and other Income and disallowance of deduction in respect of export by assessee of trading goods affected from Singapore to Sweden. The ground regarding the claim on trading goods affected from Singapore to Sweden (ground 1(b)) was not pressed and was treated as withdrawn.

35. As per assessment order assessee has earned other income of `1,10,67,708/- which inter alia include dividend, profit in sale of fixed assets, rent, commission, sundry credit balances written back and excise duty on finished goods written back. Out of these, assessee had deducted only rent, commission and interest. The AO excluded some other items at 90% under Explanation (baa) of 80HHC.

35.1 With reference to Sales tax Refund of `2,68,203/- CIT(A) confirmed the action of the A.O. following the decision of the Hon'ble Bombay High 22 ITA No. 3385 + 4/Mum/2006

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Court in the case of CIT Vs. Kantilal Chotalal 246 ITR 439 wherein it was held that both the numerator and the denominator in the above formula show that they refer to sale proceeds. Any receipt which does not form part of sale proceeds can not come within the ambit of the above ratio. The numerator and the denominator are required to have common element which is the sale proceeds. Since sales tax does not form part of turnover, it cannot come in the formula for computing deduction allowable under section 8OHHC of the I.T. Act. Therefore, the action of the AO in excluding 90% of the sales tax refund is upheld.

33.2 It was submitted that there was no sale tax refund during the year and the A.O. and CIT(A) have wrongly considered the issue. Referring to page 185, i.e. Schedule 14 of P & L Account and Balance Sheet, it was the submission of the learned counsel that there was no sale tax refund even though the heading was mentioned as there was an amount of about `27 lakhs in the previous year ending on 31.03.2001. Since there is no such amount to be adjusted exclusion of 90% of the same does not arise. In view of the above, we are of the opinion that there is no need to give any direction on this issue as no such amount was included in the other income. Assessee's ground on this is, therefore, treated as allowed.

33.3 Regarding sundry credit balance written back `59,49,808/- the assessee furnished details of these expenses written back as under:

1) Provision for Materials and Expenses provided

in previous year written back ` 9,00,913/- 2) Commission provided in earlier years written back ` 17,44,339/- 3) Sundry Creditors written back ` 7,48,161/- 4) Excess received from customers written back ` 15,550/- 5) Deposits from customers written back ` 25,40,846/- ` 59,49,809/-

It was further submitted that all the items written back as above are in respect of manufacturing (including exports) activities of the assessee company. They are merely adjusting entries and not receipts of the nature of rent, interest on commission. These items are very much connected with the regular business of assessee. Hence 90% thereof cannot be deducted. The 23 ITA No. 3385 + 4/Mum/2006

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CIT(A) considered that deduction under section 80HHC is to be computed as per the following formula: -

Profits of the business X Export turnover/Total turnover

He further observed that in the case of CIT Vs. Kantilal Chotalal 246 ITR 439 the Hon'ble Bombay High Court has held that both the numerator and the denominator in the above formula show that they refer to sale proceeds. Any receipt which does not form part of sale proceeds can not come within the ambit of the above ratio. The numerator and the denominator are required to have common element which is the sale proceeds. The items referred to above do not have element of turnover. Therefore, they cannot come in the formula for computing deduction allowable under section 8OHHC of the I.T. Act. Therefore, he upheld the action of the AO in excluding 90% of these amounts under Explanation (baa).

33.4 Regarding other income of `3,78,181/- before the CIT(A) assessee furnished the details as under: -

Excess salary recovered ` 7,099/- Amount received from POL employees gratuity fund ` 2,56,505/- from LIC

Excess salary recovered ` 6,000/- Excess custom duty paid received ` 42,400/- Advances recovered ` 2,000/- Excess amount paid and received from FICCT ` 46,266/- Amount received for rendering services ` 500/- Amount received from LIC against gratuity amount ` 14,928/- Other income in Indore Unit ` 2,863/-

It was further submitted that all the above incomes relate to manufacturing activities only and hence 90% thereof can not be deducted under explanation (baa). The CIT(A) did not accept the contentions of the assessee. In view of the above discussion he confirmed the action of the AO in excluding 90% of miscellaneous income under Explanation (baa) of Section 80HHC.

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33.5 It was the submission of the learned counsel that all the above amounts of income are claimed as expenditure in earlier years and the amounts were recovered or advances received had become business profit under section 41(1). It was the submission that this income is operational income and there is no need to exclude at 90% as was considered by the CIT(A). It was the submission that since this is operational income the principles established by the Hon'ble Supreme Court in the case of CIT vs. K. Ravindranathan Nair 295 ITR 228 will apply supported by the decision of the Hon'ble Bombay High Court in the case of Bangalore Clothing Co. Ltd. 260 ITR 371.

33.6 The learned D.R., however, relied on the order of the CIT(A).

33.7 We have considered the issue. As seen from the nature of amounts received by assessee these amounts are taxable under section 41(1). These are also part of operational income to be considered under the head profits of business. Since these amounts do not fall within the amounts as mentioned in Explanation (baa) of section 80HHC, we are of the opinion that there is no need to exclude the amount while working out the deduction under section 80HHC. The A.O. is directed to allow the deduction with out excluding the same at 90%. Grounds are allowed.

36. Ground No. 2 is regarding disallowance of software expenses of `5,00,336/-. The AO has made the disallowance since, according to him these expenses were of capital nature. Before the CIT(A) it was submitted that the life of software is uncertain and therefore, it can not be considered a capital expenditure. The Ld. AR also placed reliance on the decision in the case of Business Information Process Services vs. ACIT 239 ITR 19 (Jaipur), Media Video Ltd. vs. JCIT 122 Taxman 28 (Del) and ITC Classic Vehicles Ltd. vs. DCIT 155 Taxman 155 (Cal). It was further stated that the AO had made disallowance without giving sufficient opportunity to assessee. Assessee has also filed a copy of letter dated 20.06.2005 in which it was stated that during the year under consideration assessee had purchased five software for `11,55,200/-. Out of this, an amount of `5,00,336/- was debited to the profit and loss account and the balance amount of 25 ITA No. 3385 + 4/Mum/2006

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`6,14,864/- was taken to the Balance Sheet as 'Deferred Revenue'. It was further stated that w.e.f. A.Y. 2003-04, depreciation @ 60% is allowable in respect of computer software as against which the assessee had claimed only 44.87% of the total expenses on computer software as revenue expenditure. It was therefore submitted that the A.O. was not justified in not allowing the deduction claimed by assessee at `5,00,336/- in respect of software expenses. The CIT(A) was of the opinion that the A.O. had made the disallowance without giving sufficient opportunity to assessee. His predecessor had remanded back the matter to the A.O. The A.O. sent remand report vide his letter dated 13.06.2005, the relevant part of the remand report is extracted by the CIT(A) as under: -

"Software Expenses - Rs.5.00336/-

From the details flied it is noticed that the assesee company purchased three softwares amounting to Rs.10,54,000/-. Out of this an amount of Rs.6,14,864/- shown as deferred assets and balance debited to P & L Account as software expenses alongwith another bill for Rs.53,000/-for P C.

It is submitted that out of Rs.10,54,000/- certain amounts have been treated as deferred revenue expenses to be written off in the next two years and balance treated as revenue expenditure. The assesse further stated that the software has got indefinite life and it may become useless with change in the product or its design or it may loose its value shortly due to new invention. The contention of the assessee is not correct as it has up graded its hardware through latest software and at any stretch of imagination, it will not be just for current year as huge amount has been spent on it. The assessee is fully aware that the amount spent will derive benefit of enduring nature. Further, the amount has been disallowed simply because of non availability of bills but for the reason mentioned in the order where it has been held that the expenditure is of capital nature and benefit of enduring nature has accrued to the assessee. Thus, the amount has been correctly disallowed in the assessment order." The CIT(A) held that the issue is covered against assessee by the decision of Hon'ble Rajasthan High Court in the case of CIT vs. Aravali Construction Co. 259 ITR 30, wherein it was held that the expenditure incurred by the assessee on computer software is a capital expenditure. Following the said decision, the action of the A.O. in treating the expenditure on computer software as capital expenditure is upheld. However, the AO is directed to 26 ITA No. 3385 + 4/Mum/2006

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allow the depreciation to assessee on the said amount as per the provisions of the Act.

37. Learned counsel fairly admitted that issue require re adjudication by the A.O. in the light of principles laid down by the special bench in the case of Amway India Enterprises 111 ITD112 (Del) (SB). Accordingly the issue is restored to the file of A.O. to consider it afresh keeping in view the principles laid down by the above decision of the Special Bench or any other decision of higher judicial forum on the issue. Ground is considered allowed for statistical purpose.

38. In the result, appeal is treated as allowed for statistical purposes

39. ITA No. 3361/Mum/2006 - A.Y. 2002-03

40. In This appeal Revenue has raised 10 grounds on deletion of disallowances made by the A.O. on various heads.

41. Ground No.1 - Staff Welfare Expenses of `15,00,000/-: During the year under consideration, assessee had debited expenses of `47,39,839/- under the head staff welfare expenses. These expenses included reimbursement of medical expenses, uniform expenses, refreshment allowance, local travelling allowance, education expenses, health insurance etc. in respect of staff and employees of assessee company. The AO made disallowance of `15,00,000/- out of these expenses by making the observation that full and complete details in respect of these expenses have not been provided by assessee. Moreover, according to the A.O., substantial part of these expenses has been paid in cash. Before CIT(A) the learned A.R. furnished the details of staff welfare expenses as under: -

Emp1oyees welfare ` 20,38,708/- L.T.A. ` 2,3 1,720/- Medical expenses (Indore) ` 1,78,493/- Health Insurance ` 98,107/- Medical expenses of office and executive

staff at Bombay & Bangalore) ` 20,83,421/- ` 47,39.839/-

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42. Assessee also furnished full details of these expenses. It was stated that similar details were filed before the A.O. also, even then he proceeded to make disallowance of `15,00,000/- out of staff welfare expenses. It was submitted that the amount of `22,61,914/- is in respect of reimbursement of medical expenses to staff which has been paid through cheques within the limits prescribed by I.T. Rules and the amount of `98,107/- is in respect of staff health insurance expenses. It was also stated that except some small payments made in cash towards expenses on tea, coffee, soft drinks, snacks allowance paid to staff while on outside duties or for overtime, the rest of the payments have been made by cheques only. According to the learned A.R., there are about 350 employees of assessee company in four factories. Therefore, the expenses incurred by assessee on staff welfare are quite reasonable. It was further stated that in the preceding assessment yearn i.e. 2001-02, the A.O. had made disallowance of `10,00,000/- out of staff welfare expenses which was reduced to `5,00,000/- by the CIT (A). The CIT(A) held that the A.O. has made disallowance of `15,00,000/- out of staff welfare expenses of `47.39 lakh mainly on the ground that the expenses debited under the head 'staff welfare expenses' relate to providing of certain facilities such as refreshment, tea, coffee and facility of canteen to the employees and substantial part of these expenses has been paid in cash. From the details filed by assessee it is seen that the observation of the A.O. that most of the payment have been made in cash is not correct. The details reveal that more than 85% of the payments have been through cheques. Some payments for outdoor work, special allowance, medical expenses, etc. have been made in cash but in all such cases, complete vouchers have been maintained by assessee. The A.O. has made the disallowance by making general observations. He has not pointed out even a single instance of expenditure claimed by assessee which is of inadmissible nature. He has also not pointed out any instance of expenditure which is not supported by vouchers or any other document. In view of these facts and circumstances of the case, the CIT(A) deleted the disallowance of `15,00,000/- made by the A.O. out of staff welfare expenses.

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43. After considering the arguments of learned D.R. and learned counsel and examining the facts brought on record, we are of the opinion that CIT(A) has considered the facts and legal issues correctly which do not require any interference. There is no denial that the amounts were spent on staff welfare in the course of business. There is also no dispute with reference to the fact assessee furnished complete details and AO has not justified the disallowance and made the same on general observations devoid of any factual basis. The CIT(A) has correctly allowed the amounts as deduction. Moreover, similar adhoc disallowance made in earlier year was considered and the same was not upheld in assessee appeal above. There is no reason to consider the ground as the AO was not justified in disallowing on adhoc basis. The revenue ground is therefore rejected.

44. Ground No. 2 - Issue of Maintenance expenses of `19,77,352/-: The A.O. has made the disallowance merely by making the observation that most of the expenses are in the nature of capital expenditure and include purchase of building material, spare parts and pre paid expenses. The A.O. also made specific reference to the amount of `66,250/- being bill No.676 dated 28.06.2001, the deduction in respect of which has been claimed twice by the assessee. Before the CIT(A) it was submitted that the expenditure of `19,77,352/- relates to the repairs and maintenance of office premises, factory premises, plant and machinery etc. Assessee has furnished the bifurcation of repairs and maintenance expenses as under

Repairs of factory building, office building

at Bombay & Indore ` 2,59,430/- Repair of plant & machinery ` 8,99,839/- Repairs of office equipments ` 50,533/- Repair of electrical installations ` 89,774/- Repair of ACs and refrigerators ` 1,64,952/- Furniture & Fixture ` 1,26,905/- Other repairs ` 3,85,929/- Total ` 19,77,352/-

It was stated that similar details were filed before the A.O. during the assessment. As regards the discrepancy of `66,250/- pointed out by the 29 ITA No. 3385 + 4/Mum/2006

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A.O., it was submitted that there was no discrepancy in claiming the expenses twice. Rather, the assessee has claimed expenses of `66,250/- four times during the year under consideration. These expenses relate to the quarterly payment of computer maintenance for the year. It was stated that assessee has debited expenses of `66,250/- on 12.09.2001, 06.12.2001 & 19.03.2002 being payment of service charges made to M/s. Business Link for the quarter ending 30.09.2001, 30.12.2001, and 31.03.2002. Assessee made payment of `68,750/- to M/s. Business Link in respect of the maintenance of computers for the quarter ending 30.06.2001 on 12.04.2001. It was further submitted that from the details filed by assessee, it could be seen that no capital expenditure has been debited under the head 'repairs and maintenance charges'. Therefore, according to assessee, the A.O. was not justified in not allowing the claim of assessee in respect of repairs and maintenance charges. The CIT(A) was of the opinion that the A.O. has treated these expenses as capital expenditure merely by observing that most of the expenses are in the nature of capital expenditure and included purchase of building material, spare parts and prepaid expenses. The A.O. has not pointed out any specific instance of expenditure which is of capital nature. Merely because a particular expenditure represents purchase of building material or spare parts does not make the expenditure a capital expenditure. From the details filed by assessee, it is seen that most of the expenses represent expenses on plumbing, sanitary work, painting, repairs of plant and machinery, electric repair which cannot be said to be of capital nature. In the assessment order, the A.O. has pointed out an instance of double claim of expenditure in respect of payment made to M/s. Business Link Automachine India Ltd. However, this so called discrepancy has been satisfactorily explained by assessee as discussed in above. In view of these facts, the CIT(A) deleted the addition of `19,77,352/- made by the A.O. by treating the said amount as capital expenditure.

45. After considering the arguments of learned D.R. and learned counsel and examining the facts brought on record, we are of the opinion that CIT(A) has considered the facts correctly which do not require any interference. The CIT(A) has correctly allowed the amounts as deduction under section 31 30 ITA No. 3385 + 4/Mum/2006

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of the Act. Similar claim in earlier year was considered and allowed in assessee appeal. For the reasons stated therein, we confirm the order of CIT(A) on this issue. The revenue ground is therefore rejected.

46. Ground No. 3 - Issue of personal use of telephone: From the assessment order, it is seen that the A.O. has made disallowance of `3,35,000/- out of telephone expenses of `33,59,049/- on account of personal use of telephones by the Directors and their family members. Before the CIT(A) it was submitted that during the year under consideration, assessee incurred expenditure of `33,59,049/- in respect of the telephones installed at the office, factory and residences of the Directors and other employees. These expenses also include expenses on mobile phones provided to them. Assessee is having four factories at Bombay, Indore and Bangalore and the Directors are based in Bombay and justified the claim that they have to be in constant touch with various factories for which office telephones and residence telephones are being used by them. It was stated that the expenses claimed by assessee have been incurred wholly and exclusively for the purpose of business and are required to be allowed in entirety. It was also stated that in the preceding year, the CIT (A) had deleted the addition made by the A.O. on this account. The CIT(A) considered that in the following cases, it has been held that disallowances for personal use of car/telephone cannot be made in the case of a Limited Company: -

i. Sayaji Iron & Engg. co. Vs. CIT (253 ITR 749 (Gui) ii. Banco Products (I) Ltd. Vs. DCIT 63 lTD 370 (Ahm.) (1997) iii. ITO Vs. Ashoka Betelnut Co. (P) Ltd. (1985)21 173 465 (Mad) and iv. Perfect Pac Ltd. Vs. IAC (1993)46 17J 438

Following the above decisions and the order of CIT(A) for the preceding assessment year, the CIT(A) deleted the disallowance made by the A.O. out of telephone expenses. We do not see any reason to differ from the well- reasoned order of CIT(A). There can not be any personal expenditure in the case of company. It is not a case of non-business expenditure. Therefore the ground is rejected.

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47. Ground No. 4 - Issue of Vehicle and Travel Expenses: - During the current year, assessee had debited an amount of `11,05,490/- on account of expenses on motor cars and motor cycles. Further, a sum of `1,85,84,259/- was also incurred on travelling and conveyance by the employees and Directors of the assessee company. The A.O. has made disallowance of `19,75,000/- out of these expenses by making observation that the very nature of these expenses is such that personal expenses of the persons going on tour and their family members invariably forms part of these expenses. Before the CIT(A) it was submitted that assessee had supplied full details of vehicle and travelling expenses amounting to `1,97,49,755/- before the A.O. during assessment proceedings. The bifurcation of these expenses was given as under: -

Vehicle Expenses ` 11,65,496/- Travelling and conveyance ` 60,71,797/- Reimbursement to IMA ` 52,714/- Domestic travelling ` 34,07375/- Domestic travelling of Indore factory ` 7,72,721/- ` 1,03,04,707/- Conveyance expenses - Bombay ` 79,73,258/- " " - Indore ` 3,06,294/- Total.... ` 1,97,49,755/-

It was submitted that a lot of travelling (domestic & foreign) has to be undertaken by marketing and technical staff like engineers for the purpose of marketing the products, servicing and repairing the machines supplied to the customers and other business purposes. The Directors also require to do the travelling for business purposes. Due to the location of assessee's four factories at different places, extensive travelling has to be carried out. It was submitted that the Directors and technical staff going on domestic and foreign travelling were never accompanied by their family wards. As regards the conveyance expenses, it was submitted that the workers and staff are paid fixed conveyance allowance every month for to and for travelling between the residence and the railway station near the factory. Sometimes contract buses are also arranged for transporting the workers and staff from railway station to factory and back which are at a distance of 10 kms. The 32 ITA No. 3385 + 4/Mum/2006

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staff members also incur local conveyance expenses while on outstation duties for demonstration, sales, installations and servicing of machines, etc. It was also submitted that in the preceding assessment year, the CIT(A) has reduced the disallowance to 2.5% of the conveyance expenses. The CIT(A) held that issue is of repetitive nature and also arose in the preceding assessment year. Since the issue involved in this year is identical, the CIT(A) reduced the disallowance made by the A.O. out of conveyance expenses to 2.5% following the decision of CIT(A) for A.Y. 2001-2002. Aggrieved, Revenue is in appeal.

45.2 After considering the arguments of learned D.R. and learned counsel and examining the facts brought on record, we are of the opinion that CIT(A) has considered the issues correctly which do not require any interference. The CIT(A) has correctly allowed the amounts on travelling, telephone and vehicle expenses as deduction under section 37(1) of the Act. Following the earlier year's order he restricted the disallowance on conveyance to 2.5% of the claim which the assessee accepted. Similar issue was also considered in revenue appeal in earlier year and revenue ground is rejected. For the reasons stated therein, the revenue ground is rejected.

48. Ground No. 5 - Issue of Advertisement and Sales Promotions Expenses: - The A.O. has discussed this issue in para 9 at page 3 of the assessment order. The A.O. has made a disallowance of `6,00,000/- by making the observation that the nature of expenses incurred during the year is not different from the expenses debited in the last Financial Year. Further, according to him, these expenses include expenses on giving gifts, providing lunch to the guests and customers, expenses on get together, etc. In view of these observations, he disallowed an amount of `6,00,000/- out of advertisement and sales promotion expenses of `8,54,139/-. Before the CIT(A) it was submitted that the expenses of `8,54,139/- debited under the head advertisement and sales promotion expenses comprise of the following: -

Mumbai and Bangalore

Advertisement and Publicity ` 3,60,445/- Expenses on leaflets and Pamphlets ` 1,21,399/- 33 ITA No. 3385 + 4/Mum/2006

IMA-PG India Ltd. (Precision Gears P Ltd.)

Sales Promotion expenses ` 2,12,5 17/-

Indore

Sales Promotion ` 1,60,078/-

It was submitted that there is no element of entertainment in leaflets and pamphlets, advertisement and publicity. Only very small amount relating to the expenditure on lunch/dinner for the guests and customers has been debited under the head 'sates promotion expenses'. Assessee also filed the details of expenses debited in the books of Mumbai and Bangalore. It was further stated that in the preceding assessment year, the A.O. had made disallowance of `5,39,822/- out of sales promotion expenses in the preceding year. The said disallowance has been deleted by the CIT(A) vide his order dated 21.02.2005. The CIT(A) has examined the details filed by assessee in respect of expenditure debited under the head advertisement and sales promotion. He found that most of the expenses relate to advertisement, video shooting of Rotovac machines manufactured by assessee, advertisement in souvenirs, advertisement in Tata Yellow pages and in newspapers, reimbursement of expenses incurred by the parent company IMA in respect of exhibitions, expenses on leaflets, catalogues. Some amount also relates to the gifts given to customers or expenses incurred in connection with lunch/dinner of customers. As none of these expenses can be said to be of disallowable nature and as the A.O. has not pointed out any specific instance of expenditure which is of disallowable nature and further as similar disallowance made in the preceding assessment year has been deleted by the CIT(A), he deleted the disallowance of `6,00,000/- made by the A.O. out of advertisement and sales promotion expenses. Revenue is aggrieved.

49. After considering the arguments of learned D.R. and learned counsel and examining the facts brought on record, we are of the opinion that CIT(A) has considered the issues correctly which do not require any interference. The CIT(A) has correctly allowed the amounts. Similar issue was also considered in revenue appeal in earlier year and revenue ground is rejected. For the reasons stated therein, the Revenue ground is rejected. 34 ITA No. 3385 + 4/Mum/2006

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50. Ground No. 6 - Issue of Exhibition of Expenses: - Before the A.O. it was claimed by assessee that out of total expenditure of `28,24,058/- debited under the head 'exhibition expenses' the amount of `19,59,730/- represents reimbursement of expenses to the holding company in respect of various exhibitions held abroad. The balance amount of `8,64,324/- was stated to be incurred in India in respect of exhibitions. The A.O. did not allow these expenses as assessee company was separately incurring the expenses on advertisement, sale promotion, travelling and conveyance for the same purpose. Before the CIT(A) it was submitted that vide letter dated 30.12.2004, the A.O. was supplied full details of exhibition expenses of `28,24,058/- during the course of assessment proceedings. However, he disallowed the whole of these expenses. The A.O. ignored the importance of displaying products viz. Blister Packing Machines in exhibitions, each valued at `25 to `35 lakh. By no stretch of imagination, it can be said that there was no business purpose in incurring this expenditure. The A.O. has failed to appreciate that its holding company, i.e. IMA SPA (Italy) is a world wide organization having a number of subsidiary companies. It displays under one roof products of its own as well as of its subsidiary companies in international exhibitions for pharmaceutical machineries. The A.O. should appreciate that assessee company has to contribute towards its due share in total expenditure for exhibitions incurred by its holding company. It was submitted that in appeal in A.Y. 2001-02, disallowance out of Exhibition Expenses was deleted by the CIT(A). The CIT(A) was of the opinion that it is not in dispute that though the A.O. has made some cursory remarks regarding the details of such expenses but he has not found these expenses as bogus. The fact that 1/5 of the expenses is allowed by the A.O. and balance is allowed to be carried forward itself suggest that the A.O. has nothing to say for the actual allowance of such expenses, Further it is now well settled that if the period of advantage is not measurable in definite terms, even in that case expenses should be a1lowed as revenue expenses despite the fact that by incurring such expenses there could be some advantage received in future. Moreover, the similar disallowance made by the A.O. in the preceding year has been deleted by the CIT(A) vide his order 35 ITA No. 3385 + 4/Mum/2006

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dated 21.2.2005. The CIT(A) examined the order and was in agreement with the reasons given by him in deleting the addition on account of disallowance out of exhibition expenses. Considering these facts and the decision of his predecessor for the A.Y. 2001-2002, he deleted the disallowance made by the AO out of exhibition expenses. Revenue is aggrieved.

51. For the reasons stated in revenue appeal on similar ground in earlier year, we confirm the order of CIT(A) as no case was made out to differ from that. The revenue ground is rejected.

52. Ground No. 7 - Issue of disallowance under section 40A(2)(b): - During the assessment proceedings, the A.O. observed that assessee had made payment of `2,89,75,750/- to various persons specified in section 40A(2)(b) during the year under consideration. Out of the said amount, the A.O. disallowed 10% of the following expenses under section 40A(2)(b) of the I.T. Act.

Bombay Office:

Salary to Sh. Satish Rao ` 20,54,250/- Standing fees and membership paid to Sh.AniI Rao ` 13,346/- Standing fees paid to other Directors ` 7,200/- Payment to IMA SPA (holding company)

and its subsidiaries `1,10,37,018/- Payment to sister concerns PLH Enterprises

for purchase of goods ` 39,29,589/- Amount paid to Ms. Prema Rio (Executive) &

relative of the Director ` 2,03,885/- Indore Office:

Remuneration etc. Paid to Shri Anil Rao, MD ` 19,44,281/- Amount paid to Sh. Satish Rao for board meeting

And guarantee commission- ` 61,000/- Purchases from PG Engineers Pvt. Ltd. ` 28,34,556/- Purchases from PLH Enterprises ` 35,280/- Board meeting fees paid to other Directors ` 4,500/- Total... `2,21,24,905/-

The A.O. disallowed 10% of these expenses, since according to him, assessee company had not discharged its burden of proving the fact that these 36 ITA No. 3385 + 4/Mum/2006

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transactions were comparable. The CIT(A) discussed the above items in his order as under: -

"1) Payments to Directors Shri Satish Rao & Shri Anil Rao - (Mumbai & Indore)

10.2.1 Besides remuneration and perquisites of Rs.19,82,650 and Rs.18,49,627 respectively, the directors were also paid guarantee commission of Rs.70,000 and Rs.1,08,090. It was submitted that the remuneration and perquisites paid to the directors are within the limits prescribed by the Companies Act, 1956. Guarantee commission has been paid to them for providing guarantee to the banks for repayment of bank loans and interest thereon by the assessee company. The Delhi High Court in Mahataxmi Sugar Mills Co. Ltd., (252 ITR 691(Del.) following Supreme Court in Addl.CIT vs. Akkamamba Textiles Ltd. (227 ITR 464 (S.C.) has held that the payment of guarantee commission is allowable.

10.2.2 I have considered the submission of the appellant. My predecessor, vide his order dated 21.02.05 for the preceding year deleted both these disallowances. These disallowances are deleted following the decision of my predecessor on this issue in the preceding year.

2) Sitting Fees to other Directors (Mumbai & lndore: 10.2.3 The A.R. submitted that the directors have been paid sifting fees for attending Board Meetings at the very nominal rate of Rs.400 / 500 per meeting. This payment is permitted by the Companies, Act, 1956 with a very higher limit. This is an expenditure incurred for the purposes of business. I agree with appellants submissions. Hence, this disallowance is deleted.

3) Payments IML Industries Machine Automatic S.P.A. (Holding Co.) and its subsidiaries

10.2.4. a) Purchase of Goods Rs.1.0248266 -

The appellant filed details of imports made from IMA Spa and its subsidiaries before me. Similar details were also filed before the AO. The AR. submitted that only essential components for manufacture of machines for which know-how has been supplied by IMA were imported. No Royalty is paid to IMA. IMA supplies those components in India only to the assessee company and the assessee company purchases those components from IMA and its subsidiaries only. In such a situation, prices of the competitors can not be made available as demanded by the A.O. The AR. submitted that the decision in M/s. Satrunjaya Diamonds (261 ITR 258) relied upon by the A.O. is not applicable to the facts of the appellant's case since in that case, the assessee had imported rough diamonds from its sister concern and another supplier both from abroad, whose prices varied materially. In the instant case, no material was imported from any other supplier 37 ITA No. 3385 + 4/Mum/2006

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and, therefore, competitors' prices since not available, could not be supplied.

10.2.5 The A.R. further submitted that as confirmed by the A.O. in the assessment order, these payments are "International Transactions" and are covered by Secs. 92 to 92F of the I. Tax, Act, 1961. The assessee Company had filed along with the Return of Income, a Report in Form No. 3CED as required by Sec. 92E. The AR. submitted that with effect from the assessment year 2002-03 special provisions have been introduced in the I. Tax Act, 1961 through Sees. 92 to 92F, for dealing with International Transactions. Such transactions cannot be dealt with u/s.40A(2)(b). The AR. contended that specific provisions will over ride the general provisions. In support of this proposition, reliance has been placed on following decisions: -

1. Nalinkant Amblal Modi Vs. Narayan Row - 61 ITR 428 (S.C.)

2. O.R.M.M. SP. SV. Firm Vs. CIT - 52 ITR 801 (Mad)

3. East India Housing and Land Development Trust Ltd. Vs. CIT 42 ITR 49 (S.C.)

4. CIT Vs. Carborundum Universal Ltd. - 110 ITR 621 (Mad)

5. Subodhchandra Popatlal Vs. CIT -24 ITR 566 (Bom)

10.2.6 A.R.of the appellant also filed additional Ground of Appeal in connection with 10% disallowance of various payments in respect of these "International Transactions." The additional reads as under: - Disallowance in respect of International Transactions: A) The A.O. erred in adding 10% of the payments of Rs.1,10,37,018 made to IMA (holding Company) and its subsidiaries (Associate Enterprises) in respect of International Transactions and further erred in including the same inter alia in Disallowance of Rs.22,12,500 U/s. 40A(2) (b)

b) The A. 0. erred in not appreciating that in view of provisions of Sec. 92 and 92A to 92F, and various circulars issued by the Board from time to time, since the value of International Transactions in this case did not exceed of Rs.5 Crores, it is not a case fit for scrutiny and he further erred in not appreciating that if the case was duly picked up for Scrutiny it should have been referred to TPO.

c) The A.O. erred in not appreciating that International Transaction are especially covered by Sections 92&92A to 92F and, therefore, no addition can be made u/s. 40A(2) (b) in that respect. d) The A.O. erred in not appreciating that in this case he could not make any arbitrary addition in respect of International Transactions U/s. 40A (2) (b) or any other provision of the Act.

10.2.7 The Additional Ground was remanded to the A.O. for his report. In response to opportunity given by A.O., the assessee filed its submission before the AO vide Letter dt. 11.-11.2005 along with a 38 ITA No. 3385 + 4/Mum/2006

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copy of "Transfer Pricing Study Report" justifying the prices of various International Transactions carried out, at 'Arms Length Price." 10.2.8 The A.O. in his Remand Report dated 18th November 2005 informed that he had referred the matter to the Transfer Pricing Officer for examination who sent back the matter without examination since the assessee company raised certain objections. In the said Remand Report, the AG has reiterated that by not supplying competitors' rates, the assessee has not discharged its burden of proof. In reply to the remand report, it was contended by the A.R. that the A.O. has not considered the "Transfer Pricing Study Report" submitted to him and has not dealt with the "International Transactions" as per specific provisions contained in Secs. 92 to 92F newly introduced in the I.T Act, 1961. The A.R. further submitted that the "International Transactions Study Report" justifies the International Transactions having been at carried out at "Arm's Length Price". He submitted that the burden of proof has shifted to A.O., which the A.O. has failed to discharge.

10.2.9 I have considered the submission made by the AR. The assessee purchases the essential components for manufacture of machinery only from IMA and its subsidiaries. JMA and its subsidiaries do not supply those goods to any other party in India. Competitors' rates are not available. The assessee can not be asked to do a thing which is not possible. The case law cited by the A.O. is not applicable in this case. I agree that when there are specific provisions through Sees. 92 to 92F to deal with international transactions, these transactions can not be examined under sec.. 40A (2)(b). The A.O. has neither considered "Transfer Pricing Study Report" submitted to him nor he has proved that these transactions are not carried out at "Arm's Length Price". The A.O. has failed to discharge the burden of proof that these transactions have not been carried out at arm's length. The disallowance made is, accordingly, deleted.

b) Other Transactions with IMA:

10.2.10 The A.R. submitted that these transactions are also International Transactions and should be dealt with Sees. 92 to 92F and not by Sec. 40A(2)(b). He further submitted that they also have been dealt with in "Transfer Pricing Study Report" submitted by the assessee. He submitted that commission varying between 10% to 12.5% was paid to IMA and its subsidiaries on exports made on the basis of orders procured from them in their areas of jurisdiction as per Agency Agreements entered in to with them. He further submitted that the reimbursement of various expenses to IMA has been made on actual allocation basis without any mark up. He submitted IMA's auditors' certificate in that regard. He further submitted that transactions have been carried out at arm's length price on actual expenditure basis. He stated that his arguments in the preceding 39 ITA No. 3385 + 4/Mum/2006

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para equally apply here also. He further submitted that the A.O. has not discharged his burden of proof.

I have gone through various submissions of the AR. I agree with him, and delete the disallowances.

4) Purchase of Goods from M/s. P.L.H. Enterprises - : - 10.2.12 The A.O. has not commented specifically on this issue. The AR. submitted that the details of purchases made from PLH Enterprises were filed before the AO. Comparable instances of sale of the same items to the assessee company and to third parties were also submitted before the A.O. The same were also filed in the appeal proceedings. He submitted that prices charged by PLH Enterprises to assessee company are lower than the prices charged by PLH to third parties for same commodities.

10.2.13 I have verified the details and comparative invoices and agree with A.R.'s submissions. The disallowance is accordingly deleted.

5) Payments to Mrs. Prema G Rao (Executive) Relative of Directors: 10.2.14 In addition to guarantee commission of Rs.70,000, she has been paid salary & perquisites of Rs.1,33,885. The A.O. in the assessment order has not said anything specifically for the disallowance of 10% of the payments made to Mrs Rao. 10.2.15 The appellant submitted that Mrs. Rao is a supervising administrator in the Company. Previously she was a Director in the Company and was being paid salary and perquisites. The same salary & perquisites are being paid now. The guarantee commission of Rs.70,000 is paid to her for providing guarantee to the bank against loan repayments and interest payments by the asseesee company.

10.2.16 I have considered the AR's submissions, Guarantee commission is paid to Mrs. Rao for standing guarantor for loan which is an expenditure incurred for the purpose of the business. Hence, as held above in the case of guarantee commission paid to Directors, the disallowance is deleted. Salary & perquisites are paid to her since years. Salary of Rs.10,000 p.m. to an executive is not on higher side at all. Therefore, disallowance in respect of these payments is also deleted.

Indore

6) Purchase from P. G Engineers Pvt. Ltd. - Rs.28,34,556. l0.2.17 The A.O. has not commented specifically about this item The AR. submitted that P.G. Engineers P. Ltd. supplies machine parts rivets manufactured by it to the assessee Company. It supplies machine parts and rivets to the assessee Company at rates comparable with the rates charged from others. He produced before me the details of these purchases and a copies of few invoices in 40 ITA No. 3385 + 4/Mum/2006

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support. For example, the rivet of size 6X10 has been supplied @ Rs.360/- per 1000 to the appellant company as well as to Automobile Corporation of Goa (vide bill No.147 dt. 26-12-2001) and to Amog Engineers (vide bill No. 191 dated 26-03-2002). Further, the rivet of size 8 X 20 has been supplied to the appellant company @ Rs.725/- per 1000 pieces and the same rate has been charged from Sunderson Brake Linings Ltd. (Bill No.101 dt. 28-9-2001). On verification I find substance in his submissions. The disallowance is, accordingly, deleted.

7) Purchases from P. L.H Enterprises. - Rs.35,280

10.2.18 For the reasons mentioned above in respect of purchases of Rs.39,29,589 at Mumbai from PLH Enterprises, the disallowance is deleted."

53. In view of detailed discussion made by the CIT(A) on each of the amounts with which we agree there is no scope to consider the revenue ground. Similar issue in earlier was considered in detail in assessee appeal, on part confirmation by CIT(A), wherein we deleted that partly confirmed amount also. For the reasons stated therein, we dismiss the Revenue ground.

54. Ground No. 8 - Issue of Research & Development Expenses: - The A.O. has discussed this issue in para-14 at page-6 of the assessment order. The A.O. made the disallowance of `14,25,040/-since assessee did not explain the nature of these expenses. Before the CIT(A) it was submitted that assessee was manufacturing Blister Packing Machines (Tablets & Capsules packing machines) used by pharmaceutical industry. The suppliers of packing machinery to pharmaceutical units have to undertake Research and Development of their products to keep in pace with changing needs of Pharmaceutical Industry. For Research and Development of products, assessee has employed an engineer and 3-4 other staff since years continuously for doing the R & D work. The break up of R&D expenses of `14,25,040/- was provided by assessee to the A.O. through its letter dated 10.02.2005 during assessment proceedings. Besides expenses on salary, bonus, etc. to R & D staff and other expenses like electricity charges and telephone expenses have been incurred. The other expenses incurred include `50,000/- paid to Sharpline Automation for designing change in product and `1,80,000/- paid to Electronics Regional Test Laboratory (West) 41 ITA No. 3385 + 4/Mum/2006

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(Govt. Dept like ISI) for issuing a certificate regarding fitness of changes brought in machines manufactured by assessee. Research and Development expenses incurred are revenue expenses only. Revenue Expenses on Research and Development are fully allowable under clause (1)(i) of section 35 of I.T. Act, 1961. Capital Expenditure is allowable under clause (iv) while payments made to other institutes for R & D are allowable under clause (ii) and (iii) of sub-section (1). It was submitted that the R & D expenses incurred in earlier years shown here under were fully allowed.

2001-2002 ` 12,68,735/-

2000-2001 ` 12,21,524/-

1999-2000 ` 8,84,323/-

1998-1999 ` 3,38,181/-

1997-1998 ` 2,41,145/-

The CIT(A) opined that since the A.O. had made disallowance of research and development expenses without giving sufficient opportunity to assessee CIT(A) remanded the issue back to the A.O. for his comments. The A.O. sent his remand report vide his letter dated 13.06.2005. After considering the report and explanation of assessee and documents placed the CIT(A) gave a finding that assessee has carried out research and development work in respect of various products manufactured by it. The said expenditure is allowable under section 35 of the I.T. Act. Moreover, on perusal of the details of expenses debited under the head 'research and development expenses', it is seen that these expenses are of revenue nature and they would be otherwise allowable under section 37 of the IT. Act. In view of this discussion the CIT(A) deleted the addition of `14,25,040/- made by the A.O. on this account. Revenue is aggrieved.

55. After considering the arguments of rival parties we agree with the finding of CIT(A) on the issue. What assessee has spent was only revenue expenditure for R&D work in the form of salaries etc and certain payments for approvals. Similar expenditure in earlier years was also allowed without any disallowance. The ground raised is also not correct as the Act allows even the capital expenditure as deduction, sometimes weighted deduction, 42 ITA No. 3385 + 4/Mum/2006

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so the argument of enduring advantage is not appropriate. It seems the ground was raised without considering the provisions of IT Act. The same is therefore dismissed.

56. Ground No. 9(a): Issue of exclusion of Sales Tax and Excise Duty: In the assessment order, the A.O. has inter alia treated sales tax and excise duty as part of the total turnover. On appeal the CIT(A) held that the issue is covered in favour of the assessee by the decision of the Hon'ble Bombay High Court in the case of CIT vs. Sudarshan Chemicals 245 ITR 769. Therefore, he directed the A.O. to recompute the deduction under section 80HHC without including the sales tax and excise duty in the total turnover. Revenue is aggrieved.

57. This issue was covered against the revenue by the decision of Hon'ble Supreme Court in the case of Laxmi Machine Works 290 ITR 667(SC). The ground is accordingly rejected.

58. Ground No.10 - Issue of Excise duty written back of `15,11,411/-: While calculating the deduction under section 80HHC the A.O. has also excluded 90% of excise duty written back of `15,11,411/- on the plea that it has nothing to do with the export activity. Before the CIT(A) assessee submitted that this entry is an adjustment entry of excise duty payable provided last year in respect of closing stock of manufactured goods. At the year end, while valuing the closing stock as per section I 45A, excise duty payable in respect of manufactured goods was included. In the preceding year, an accounting entry was passed debiting "excise duty account" and crediting "excise duty payable account". In the current year, the entry was reversed by debiting "excise duty payable account" and crediting "excise duty on finished goods account" which was shown on the credit side as written back in the profit and loss account. It was further contended that assessee could have credited this amount to "excise duty paid account". However, because of computerized accounting system followed by assessee, the amount has been credited to the profit and loss account as "write back". Therefore, it was contended that 90% of the same was not required to be reduced from the profit of the business for computing deduction under 43 ITA No. 3385 + 4/Mum/2006

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section 8OHHC. After considering the submissions of assessee the CIT(A) was of the opinion that in view of the nature of entries explained by the learned A.R., 90% of the amount of `15,11,411/- was not required to be reduced from the profits of the business for computing the deduction allowable under section 80HHC. Had the assessee credited the amount of `15,11,411/- to the excise duty paid account, it would have had similar impact on the income without inviting the provisions contained in explanation (baa) to section 8OHHC. Therefore, he directed the A.O. not to deduct 90% of the amount of `15,11,411/- for computing the profits of the business. Aggrieved by the above direction Revenue is in appeal.

59. We do not see any reason to differ from the direction of CIT(A). As per accounting method followed the amount was shown separately. Even otherwise amount of refund or written back amounts are taxable as business profit under section 41(1) so, the amount was correctly treated as profits of business and there is no need to exclude 90% under (baa) of 80HHC. Revenue ground is rejected.

60. In the result appeal is dismissed

ITA No. 2842/Mum/2006 - AY. 2003-04.

61. In this appeal Revenue has raised 11 grounds on deletion of disallowances made by the A.O. on various heads.

62. Ground No.1 - Staff Welfare Expenses of `15,89,468/-: During the year under consideration, assessee had debited expenses of `50,47,066/- under the head staff welfare expenses. These expenses included reimbursement of medical expenses, uniform expenses, refreshment allowance, local travelling allowance, education expenses, health insurance etc. in respect of staff and employees of assessee company. The AO made disallowance out of these expenses by making the observation that full and complete details in respect of these expenses have not been provided by assessee. Moreover, according to the A.O., substantial part of these expenses has been paid in cash. Before CIT(A) the learned A.R. furnished the details of staff welfare expenses It was stated that similar details were 44 ITA No. 3385 + 4/Mum/2006

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filed before the A.O. also, even then he proceeded to make disallowance out of staff welfare expenses. In view of these facts and circumstances of the case, the CIT(A) deleted the disallowance made by the A.O. out of staff welfare expenses.

63. After considering the arguments of learned D.R. and learned counsel and examining the facts brought on record, we are of the opinion that CIT(A) has considered the issue correctly which do not require any interference. There is no denial that the amounts were spent on staff welfare in the course of business. There is also no dispute with reference to the fact assessee furnished complete details and AO has not justified the disallowance and made the same on general observations devoid of any factual basis. The CIT(A) has correctly allowed the amounts as deduction. Moreover, similar adhoc disallowance made in earlier year was considered and the same was not upheld in assessee appeals above. There is no reason to consider the ground as the AO was not justified in disallowing on adhoc basis. The revenue ground is therefore rejected.

64. Ground No. 2 - Issue of Maintenance expenses of `6,08,844/-: The A.O. has made the disallowance merely by making the observation that most of the expenses are in the nature of capital expenditure and include purchase of building material, spare parts. Before the CIT(A) it was submitted that the expenditure relates to the repairs and maintenance of office premises, factory premises etc. Assessee has furnished the bifurcation of repairs and maintenance expenses. It was stated that similar details were filed before the A.O. during the assessment. It was further submitted that from the details filed by assessee, it could be seen that no capital expenditure has been debited under the head 'repairs and maintenance charges'. Therefore, according to assessee, the A.O. was not justified in not allowing the claim of assessee in respect of repairs and maintenance charges. The CIT(A) was of the opinion that the A.O. has treated these expenses as capital expenditure merely by observing that most of the expenses are in the nature of capital expenditure and included purchase of building material, spare parts which are used for building repairs. In view of 45 ITA No. 3385 + 4/Mum/2006

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these facts, the CIT(A) deleted the addition made by the A.O. Revenue is contesting the same.

65. After considering the arguments of learned D.R. and learned counsel and examining the facts brought on record, we are of the opinion that CIT(A) has considered the facts correctly which do not require any interference. The CIT(A) has correctly allowed the amounts as deduction under section 31 of the Act. Similar claim in earlier years was considered and allowed in assessee/ Revenue appeal. For the reasons stated therein, we confirm the order of CIT(A) on this issue. The Revenue ground is therefore rejected.

66. Ground No. 3 - Issue of personal use of telephone: From the assessment order, it is seen that the A.O. has made disallowance of `2,58,650- out of telephone expenses of `25,86,498/- on account of personal use of telephones by the Directors and their family members. Before the CIT(A) it was submitted that during the year under consideration, assessee incurred expenditure in respect of the telephones installed at the office, factory and residences of the Directors and other employees. It was stated that the expenses claimed by assessee have been incurred wholly and exclusively for the purpose of business and are required to be allowed in entirety. It was also stated that in the preceding year, the CIT (A) had deleted the addition made by the A.O. on this account. the CIT(A) deleted the disallowance made by the A.O. out of telephone expenses. We do not see any reason to differ from the order of CIT(A). There can not be any personal expenditure in the case of company. It is not a case of non-business expenditure. Therefore the ground is rejected.

67. Ground No. 4 & 5 - Issue of Vehicle and Travel Expenses: - During the current year, assessee had debited an amount of `13,66,650/- on account of expenses on motor cars and motor cycles. Further, a sum of `1,79,51,995/- was also incurred on travelling and conveyance by the employees and Directors of the assessee company. The A.O. has made disallowance of 10% out of these expenses by making observation that the very nature of these expenses is such that personal expenses of the persons going on tour and their family members invariably forms part of these expenses. Before the 46 ITA No. 3385 + 4/Mum/2006

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CIT(A) it was submitted that assessee had supplied full details of vehicle and travelling expenses. The CIT(A) deleted the said disallowances. Aggrieved, Revenue is in appeal.

68. After considering the arguments of learned D.R. and learned counsel and examining the facts brought on record, we are of the opinion that CIT(A) has considered the issues correctly which do not require any interference. The CIT(A) has correctly allowed the amounts on travelling and vehicle expenses as deduction under section 37(1) of the Act. Similar issue was also considered in revenue appeal in earlier year and revenue ground is rejected. For the reasons stated therein, the revenue ground is rejected.

69. Ground No. 6 - Issue of Advertisement and Sales Promotions Expenses: - As in earlier years, the A.O. made a disallowance of `6,00,000/- by making the observation that the nature of expenses incurred during the year is not different from the expenses debited in the last Financial Year. Further, according to him, these expenses include expenses on giving gifts, providing lunch to the guests and customers, expenses on get together, etc. In view of these observations, he disallowed an amount of `6,00,000/- out of advertisement and sales promotion expenses. Before the CIT(A) it was submitted that the expenses of `14,25,801/- debited under the head advertisement and sales promotion expenses comprise Advertisement and Publicity, Expenses on leaflets and Pamphlets, Sales Promotion expenses at various places. The CIT(A) has examined the details filed by assessee in respect of expenditure debited under the head advertisement and sales promotion. As none of these expenses can be said to be of disallowable nature and as the A.O. has not pointed out any specific instance of expenditure which is of disallowable nature, he deleted the disallowance of `6,00,000/- made by the A.O. out of advertisement and sales promotion expenses. Revenue is aggrieved.

70. After considering the arguments of learned D.R. and learned counsel and examining the facts brought on record, we are of the opinion that CIT(A) has considered the issues correctly which do not require any interference. The CIT(A) has correctly allowed the amounts. Similar issue was also 47 ITA No. 3385 + 4/Mum/2006

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considered in revenue appeal in earlier year and revenue ground is rejected. For the reasons stated therein, the revenue ground is rejected.

71. Ground No. 7 - Issue of Exhibition of Expenses: - The A.O. out of expenditure claimed by assessee debited under the head 'exhibition expenses' the entire amount of `61,87,669/- was disallowed. Before the CIT(A) it was submitted that vide letter dated 10.12.2005, the A.O. was supplied full details of exhibition expenses during the course of assessment proceedings. However, he disallowed the whole of these expenses. It was submitted that in appeal in A.Y. 2001-02, 2002-03 disallowance out of Exhibition Expenses was deleted by the CIT(A). On the reason that TPO examined this issue and did not make any adjustment and further the AO has not made out any case on sound reasoning, he deleted the disallowance made by the AO out of exhibition expenses. Revenue is aggrieved.

72. For the reasons stated in revenue appeal on similar ground in earlier year, we confirm the order of CIT(A) as no case was made out to differ from that. The revenue ground is rejected.

73. Ground No. 8 - Issue of Research & Development Expenses: - The A.O. has discussed this issue in para-14 at page-6 of the assessment order. The A.O. made the disallowance of `14,15,042 (wrongly shown as `14,25,000/- in the ground) since assessee did not explain the nature of these expenses. Before the CIT(A) it was submitted that assessee was manufacturing Blister Packing Machines (Tablets & Capsules packing machines) used by pharmaceutical industry. Besides expenses on salary, bonus, etc. to R & D staff and other expenses like electricity charges and telephone expenses have been incurred. Research and Development expenses incurred are revenue expenses only. Revenue Expenses on Research and Development are fully allowable under clause (1)(i) of section 35 of I.T. Act, 1961. It was submitted that the R & D expenses incurred in earlier years under were fully allowed. After considering the explanation of assessee the CIT(A) held that said expenditure is allowable under section 35(1) of the I.T. Act. Moreover similar amounts were allowed in earlier year by his predecessor. In view of 48 ITA No. 3385 + 4/Mum/2006

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this discussion the CIT(A) deleted the addition made by the AO on this account. Revenue is aggrieved.

74. After considering the arguments of rival parties we agree with the finding of CIT(A) on the issue. What assessee has spent was only revenue expenditure for R&D work in the form of salaries etc and certain payments for approvals. Similar expenditure in earlier years was also allowed without any disallowance. The ground raised is also not correct as the Act allows even the capital expenditure as deduction, sometimes weighted deduction, so the argument of enduring advantage is not appropriate. The same is therefore dismissed.

75. Ground No. 9 - Issue of exclusion of Sales Tax and Excise Duty: In the assessment order, the A.O. has inter alia treated sales tax and excise duty as part of the total turnover. On appeal the CIT(A) held that the issue is covered in favour of the assessee by the decision of the Hon'ble Bombay High Court in the case of CIT vs. Sudarshan Chemicals 245 ITR 769. Therefore, he directed the A.O. to recompute the deduction under section 80HHC without including the sales tax and excise duty in the total turnover. Revenue is aggrieved.

76. This issue was covered against the Revenue by the decision of Hon'ble Supreme Court in the case of Laxmi Machine Works 290 ITR 667(SC). The ground is rejected.

77. Ground No.10 - The Revenue is aggrieved on the direction of the CIT(A) in directing not to exclude 90% of sales tax set off, sales tax refund, sundry credit balances written back, other income, marketing income, sale of scrap while working out the deduction under section 80HHC. The A.O excluded the above amount while working out the deduction invoking Explanation (baa). The CIT(A) following the order of the ITAT in A.Y. 1998-99 in ITA 2670/Mum/2002 dated 19.10.2005 deleted the same and directed the A.O. not to exclude the above amount.

78. We do not see any reason to differ from the direction of CIT(A). The CIT(A) followed the Coordinate Bench decision in the earlier year. This 49 ITA No. 3385 + 4/Mum/2006

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opinion is also supported by the principles established by the Hon'ble Bombay High Court in the case of CIT vs. Pifzer Ltd. 330 ITR 62 (Bom). The above amounts are not independent income nor receipt of a nature similar to brokerage, commission, interest, rental charges. These are not liable to be reduced to the extent of 90% while calculating the eligible profits. The amount was correctly treated as profits of business and there is no need to exclude 90% under Explanation (baa) of 80HHC. Revenue ground is rejected.

79. Depreciation on cost of in-house manufactured machinery: During the assessment proceedings the A.O. noticed that assessee has claimed depreciation amounting to `10,65,560/-, @25% in respect of Plant & Machinery added during the year on account of in-house capitalization. Assessee's representative was asked to explain the same. The A.R. explained that they are as per auditors' certificated vide letter dated 06.08.2005 alongwith details of Additions to Fixed Assets and again furnished a copy of the said Certificate. On going through the certificate the A.O. found that the auditor has stated that the company has capitalized Jigs, Tools and Dies amounting to `56,60,014/- from inventory. From the above details it was not clear whether these inventories are purchased in this year of in the earlier year and whether this was debited to the P & L Account or not in this year or in the earlier years. The A.O. was of the view that if it is debited to the P & L Account then it will amount to double deduction. Further, from the particulars of the Jigs, Tools and Dies it appears that these are machines manufactured by the assessee company itself, therefore depreciation cannot be allowed unless it is first accounted for sales. Accordingly he disallowed the clam of depreciation of `10,65,560/- and added back the same to income of the assessee. On appeal the CIT(A) held that when the assessee has converted its own stock into a machinery which is being used in the business, depreciation must be allowed, particularly because the stores utilized in making the machinery has been allowed as revenue expenses but has been capitalised. Therefore, he directed the A.O. to allow depreciation as claimed by assessee. Revenue is aggrieved. 50 ITA No. 3385 + 4/Mum/2006

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80. After considering the rival arguments we do not see any reason to differ from the findings of the CIT(A). Assessee produced some of the Jigs, Tools and Dies and these are converted from its stock to assets. Assessee passed necessary entries debiting the stock accounts and crediting the asset accounts. There is nothing wrong in claiming depreciation on the capitalized assets. The direction of the CIT(A) is upheld. Ground is rejected.

81. In the result, appeal is dismissed.

ITA No.2938/Mum/2009 - AY 2004-05

82. In this appeal only ground raised is with reference to the deduction under section 80HHC. The CTA(A) upheld the action of the A.O. in excluding 90% of sales tax refund of Rs.30,67,567/-, other income Rs.2,18,278/- and marking income of Rs.9,00,000/-. The other issue raised is with reference to the direction that foreign exchange gain shall part of the turn over, both export and total, in which export is carried out and not in the year in which export sales are realised. As far as the first issue of excluding 90% of sales tax refund, other income and marketing income are concerned, the CIT(A) in the earlier year allowed the amounts to be treated as part of business profits consequent to the decision of the ITAT in earlier year in ITA No. 2670/Mum/ 2002. This issue was considered in Revenue grounds considered and rejected in Revenue appeal for A.Y. 2003-04. In this year however the CIT(A) differed from the earlier year's finding and upheld A.O's action. Since these amounts are already allowed as part of business profit and directed not to be excluded under Explanation (baa) at 90% in earlier years, consistent with the stand assessee's ground is allowed. The A.O. is directed not to exclude the amount under sales tax refund, other income and marketing income while computing the deduction under section 80HHC.

83. The other issue contested in the ground No. 1 is with reference to the direction of the CIT(A) in considering the foreign exchange gain as part of total turnover and export turnover in the year in which export was carried out and not in the year in which export sales are realised. This decision is consistent with the decision of the ITAT Special Bench Mumbai in the case of Prakash L. Shah 115 ITD 167 (SB)(Mum). Since the CIT(A) followed the 51 ITA No. 3385 + 4/Mum/2006

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above decision, we do not see any reason to differ from the direction of the CIT(A). This decision is also supported by the provisions of section 155 (13) which allows the A.O. to modify the order of the assessment year in which year the deduction was not allowed on the ground that such income has not been received in convertible foreign exchange in India, if the same was received later as per the provisions. The assessee's accordingly on this issue is rejected.

84. In the result, appeal is partly allowed.

ITA No.2628/Mum/2009 - AY.2004-05

85. In this appeal Revenue has raised 7 grounds on deletion of disallowances made by the A.O. on various heads.

86. Ground No. 1 - Staff Welfare Expenses of `12,56,937/-: During the year under consideration, assessee had debited expenses of `52,10,637/- under the head staff welfare expenses. These expenses included reimbursement of medical expenses, uniform expenses, refreshment allowance, local travelling allowance, education expenses, health insurance etc. in respect of staff and employees of assessee company. The AO made disallowance out of these expenses by making the observation that full and complete details in respect of these expenses have not been provided by assessee. Moreover, according to the A.O., substantial part of these expenses has been paid in cash. Before CIT(A) the learned A.R. furnished the details of staff welfare expenses It was stated that similar details were filed before the A.O. also, even then he proceeded to make disallowance out of staff welfare expenses. In view of these facts and circumstances of the case, the CIT(A) deleted the disallowance made by the A.O. out of staff welfare expenses.

87. After considering the arguments of learned D.R. and learned counsel and examining the facts brought on record, we are of the opinion that CIT(A) has considered the issue correctly which do not require any interference. There is no denial that the amounts were spent on staff welfare in the course of business. There is also no dispute with reference to the fact 52 ITA No. 3385 + 4/Mum/2006

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assessee furnished complete details and AO has not justified the disallowance and made the same on general observations devoid of any factual basis. The CIT(A) has correctly allowed the amounts as deduction. Moreover, similar adhoc disallowance made in earlier year was considered and the same was not upheld in appeals above. There is no reason to consider the ground as the AO was not justified in disallowing on adhoc basis. The Revenue ground is therefore rejected.

88. Ground No. 2 - Issue of personal use of telephone: From the assessment order, it is seen that the A.O. has made disallowance of `2,57,288- out of telephone expenses of `25,72,881/- on account of personal use of telephones by the Directors and their family members. Before the CIT(A) it was submitted that during the year under consideration, assessee incurred expenditure in respect of the telephones installed at the office, factory and residences of the Directors and other employees. It was stated that the expenses claimed by assessee have been incurred wholly and exclusively for the purpose of business and are required to be allowed in entirety. It was also stated that in the preceding year, the CIT (A) had deleted the addition made by the A.O. on this account. The CIT(A) deleted the disallowance made by the A.O. out of telephone expenses. We do not see any reason to differ from the order of CIT(A). There can not be any personal expenditure in the case of company. It is not a case of non-business expenditure. Therefore the ground is rejected.

89. Ground No. 3 & 4 - Issue of Vehicle and Travel Expenses: - During the current year, assessee had debited an amount of `11,21,037/- on account of expenses on motor cars and motor cycles. Further, a sum of `1,55,48,812/- was also incurred on travelling and conveyance by the employees and Directors of the assessee company. The A.O. has made disallowance of 10% out of these expenses by making observation that the very nature of these expenses is such that personal expenses of the persons going on tour and their family members invariably forms part of these expenses. Before the CIT(A) it was submitted that assessee had supplied full details of vehicle and 53 ITA No. 3385 + 4/Mum/2006

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travelling expenses. The CIT(A) deleted the said disallowances. Aggrieved, Revenue is in appeal.

90. After considering the arguments of learned D.R. and learned counsel and examining the facts brought on record, we are of the opinion that CIT(A) has considered the issues correctly which do not require any interference. The CIT(A) has correctly allowed the amounts on travelling and vehicle expenses as deduction under section 37(1) of the Act. Similar issue was also considered in revenue appeal in earlier year and revenue ground is rejected. For the reasons stated therein, the revenue ground is rejected.

91. Ground No. 5 - Issue of Advertisement and Sales Promotions Expenses: - As in earlier years, the A.O. made a disallowance of `5,74,926/- by making the observation that the nature of expenses incurred during the year is not different from the expenses debited in the last Financial Year. Further, according to him, these expenses include expenses on giving gifts, providing lunch to the guests and customers, expenses on get together, etc. In view of these observations, he disallowed out of advertisement and sales promotion expenses. Before the CIT(A) it was submitted that the expenses of `11,82,475/- debited under the head advertisement and sales promotion expenses comprise Advertisement and Publicity, Expenses on leaflets and Pamphlets, Sales Promotion expenses at various places. The CIT(A) has examined the details filed by assessee in respect of expenditure debited under the head advertisement and sales promotion. As none of these expenses can be said to be of disallowable nature and as the A.O. has not pointed out any specific instance of expenditure which is of disallowable nature, he deleted the disallowance made by the A.O. out of advertisement and sales promotion expenses. Revenue is aggrieved.

92. After considering the arguments of learned D.R. and learned counsel and examining the facts brought on record, we are of the opinion that CIT(A) has considered the issues correctly which do not require any interference. The CIT(A) has correctly allowed the amounts. Similar issue was also considered in revenue appeal in earlier year and revenue ground is rejected. For the reasons stated therein, the revenue ground is rejected. 54 ITA No. 3385 + 4/Mum/2006

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93. Ground No. 6 - Issue of Exhibition of Expenses: - The A.O. out of expenditure claimed by assessee debited under the head 'exhibition expenses' the entire amount of `46,63,163/- was disallowed. Before the CIT(A) it was submitted that vide letter dated 10.12.2005, the A.O. was supplied full details of exhibition expenses during the course of assessment proceedings. However, he disallowed the whole of these expenses. It was submitted that in appeal in A.Y. 2001-02, 2002-03, 2003-04 disallowance out of Exhibition Expenses was deleted by the CIT(A). On the reason that, similar disallowance in earlier year was deleted, he deleted the disallowance made by the AO out of exhibition expenses. Revenue is aggrieved.

94. For the reasons stated in revenue appeal on similar ground in earlier year, we confirm the order of CIT(A) as no case was made out to differ from that. The Revenue ground is rejected.

95. Ground No. 7 - Issue of Research & Development Expenses: - The A.O. has discussed this issue in para-14 at page-6 of the assessment order. The A.O. made the disallowance of `12,75,443/- since assessee did not explain the nature of these expenses. Before the CIT(A) it was submitted that assessee was manufacturing Blister Packing Machines (Tablets & Capsules packing machines) used by pharmaceutical industry. Besides expenses on salary, bonus, etc. to R & D staff and other expenses like electricity charges and telephone expenses have been incurred. Research and Development expenses incurred are revenue expenses only. Revenue Expenses on Research and Development are fully allowable under clause (1)(i) of section 35 of I.T. Act, 1961. It was submitted that the R & D expenses incurred in earlier years were fully allowed. After considering the explanation of assessee the CIT(A) held that said expenditure is allowable under section 35(1) of the I.T. Act. Moreover similar amounts were allowed in earlier year by his predecessor. In view of this discussion the CIT(A) deleted the addition made by the AO on this account. Revenue is aggrieved.

96. After considering the arguments of rival parties we agree with the finding of CIT(A) on the issue. What assessee has spent was only revenue expenditure for R&D work in the form of salaries etc and certain payments 55 ITA No. 3385 + 4/Mum/2006

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for approvals. Similar expenditure in earlier years was also allowed without any disallowance. The ground raised is also not correct as the Act allows even the capital expenditure as deduction, sometimes weighted deduction, so the argument of enduring advantage is not appropriate. The same is therefore dismissed.

97. In the result, appeal is dismissed.

98. ITA No. 2801/Mum/2005 and ITA No. 3385/Mum/200 are allowed. ITA No. 2938/Mum/2009 is partly allowed. ITA No. 3243/Mum/2005, ITA No. 2723/Mum/2007, ITA No. 3361/Mum/2006, ITA No. 2842/Mum/2007 and ITA No. 2628/Mum/2009 are dismissed.

Order pronounced in the open court on 30th September 2011.

Sd/- Sd/-

(B.R. Mittal) (B. Ramakotaiah) Judicial Member Accountant Member

Mumbai, Dated: 30th September 2011

Copy to:

1. The Appellant

2. The Respondent

3. The CIT(A) - V, Mumbai

4. The CIT- V, Mumbai City

5. The DR, "C" Bench, ITAT, Mumbai

By Order

//True Copy//

Assistant Registrar

ITAT, Mumbai Benches, Mumbai

n.p.