ACIT - 5(2), MUMBAI v. M/s. IMA -PG INDIA LTD, MUMBAI

ITA 2842/MUM/2007 | 2003-2004
Pronouncement Date: 30-09-2011 | Result: Dismissed

Appeal Details

RSA Number 284219914 RSA 2007
Assessee PAN AAACP6442Q
Bench Mumbai
Appeal Number ITA 2842/MUM/2007
Duration Of Justice 4 year(s) 5 month(s) 17 day(s)
Appellant ACIT - 5(2), MUMBAI
Respondent M/s. IMA -PG INDIA LTD, MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 30-09-2011
Appeal Filed By Department
Order Result Dismissed
Bench Allotted C
Tribunal Order Date 30-09-2011
Date Of Final Hearing 20-09-2011
Next Hearing Date 20-09-2011
Assessment Year 2003-2004
Appeal Filed On 12-04-2007
Judgment Text
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.) AAYAKAR BHAVAN M.K. ROAD PLOT NO. R-677 T.T. C. INDL. AREA MIDC VS. 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 & 200 4-05) D C I T - 5(2) M/S. PRECISION GEARS PVT. LTD.) ROOM NO. 571 AAYAKAR BHAVAN PLOT NO. R-677 TTC IN DL. AREA MIDC M.K. ROAD MUMBAI 400020 VS. 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 O R D E R PER BENCH THESE ARE CROSS APPEALS BY THE ASSESSEE AND REVENUE AGAINST THE ORDERS OF THE CIT(A)-V MUMBAI DATED 21.02.05 24.0 3.2006 & 16.02.2009 FOR ASSESSMENT YEARS 2001-02 2002-03 & 2004-05 RE SPECTIVELY. ONE ITA NO. 3385 + 4/MUM/2006 IMA-PG INDIA LTD. (PRECISION GEARS P LTD.) 2 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 PAC KING MACHINES AND AUTOMATIC CARTOONING MACHINERY CHANGE PARTS RIVET S AND OTHER GOODS. IN THE COURSE OF SCRUTINY PROCEEDINGS THE AO MADE ADDI TIONS/ DISALLOWANCES AND CIT(A) GAVE RELIEF ON MANY ISSUES. BOTH ASSESSE E AND REVENUE ARE AGGRIEVED IN VARIOUS YEARS. SINCE COMMON ISSUES ARE INVOLVED THE CASES ARE HEARD TOGETHER AND DECIDED BY THIS COMMON ORDER. TH E ASSESSEE PLACED ON RECORD PAPER BOOKS FOR RESPECTIVE YEARS. THE ASSESS E ALSO PLACED ON RECORD A CHART BRIEFING THE ISSUES AND VARIOUS LEGAL PROPOSI TIONS. 3. WE HAVE HEARD LEARNED COUNSEL SRI VIPUL JOSHI AND LEARNED D.R. DR SRI ALAXANDER CHANDI IN DETAIL. THEIR ARGUMENTS WER E 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 DISAL LOWANCE 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 REPAIR S 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 PLA NT AND MACHINERY VIZ. AC AND FRIDGE OFFICE EQUIPMENTS EL ECTRICAL INSTALLATIONS AND FURNITURE AND FIXTURES. 3) DISALLOWANCE OF RS. 16 95.206 U/S.40A (2) (B) THE LEARNED CIT.(A) ERRED IN RETAINING DISA LLOWANCE OF RS. 16 95 206 OUT OF DISALLOWANCE OF RS. 23 50 000 (@ 10% OF RS.2 35 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. ITA NO. 3385 + 4/MUM/2006 IMA-PG INDIA LTD. (PRECISION GEARS P LTD.) 3 5. REGARDING GROUND NO. 1 ON DISALLOWANCE OF STAFF W ELFARE EXPENDITURE ON ADHOC BASIS DURING THE ASSESSMENT PROCEEDINGS T HE A.O. OBSERVED THAT ASSESSEE COMPANY HAD CLAIMED EXPENSES OF ` 31 56 483/- UNDER THE HEAD STAFF WELFARE. IT WAS ALSO OBSERVED THAT THE EXPENS ES MAINLY CONSISTED OF REFRESHMENT EXPENSES NEWS PAPER PURCHASES CANTEEN CHARGES BUS EXPENSES ETC. FURTHER ACCORDING TO THE A.O. ASSES SEE 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 CONSID ERING THESE FACTS THE A.O. DISALLOWED ` 10 00 000/- AS EXPENSES INCURRED FOR NON BUSINESS PURPOSE. BEFORE THE CIT(A) IT WAS SUBMITTED THAT T HE 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 SHOU LD BE DELETED AS THE SAME WERE MADE WITHOUT GIVING OPPORTUNITY TO ASSESS EE. IT WAS ALSO SUBMITTED THAT EXPENSES ON MEDICAL CHARGES WERE PAI D 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 OFFICE RS 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 ARBI TRARY 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 ASS ESSEE 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 RES PONSE THE ASSESSEE SUBMITTED THAT THE DCIT HAS NOT CONSIDERED THE SUBM ISSIONS MADE BEFORE HIM AND THEREFORE THE SAME IS WITHOUT APPRECIATING THE FACTS OF THE CASE AND AS SUCH NO DISALLOWANCE WAS CALLED FOR. AFTER CONSI DERING 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 ITA NO. 3385 + 4/MUM/2006 IMA-PG INDIA LTD. (PRECISION GEARS P LTD.) 4 MEMBERS. FURTHER ASSESSEE HAS NOT BROUGHT ON RECOR D 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 DE TAILS 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 25.04.20 00 (PAGE NO. 74 OF PAPER BOOK) ALSO SHOWS EXPENSES ON FURNIS HING. AS ALSO DOCUMENT NO. 4566 DATED 06.09.2000 (ON AGE NO. 75 OF PAPER B OOK) SHOWS EXPENSES FOR PURCHASE OF 1.5 TON A.C. MACHINE AMOUNTING TO ` 23 060/-. THUS CONSIDERING THE FACT THAT ASSESSEE HAS CLAIMED EITH ER EXPENSES OF CAPITAL NATURE AS STAFF WELFARE THE CIT(A) RESTRICTED THE DISALLOWANCE TO ` 5 00 0000/-. AGGRIEVED BOTH ASSESSEE AND REVENUE AR E IN APPEAL. 6. BEFORE US THE LEARNED COUNSEL REITERATED THE SUBMIS SION 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 WIT H 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. FURTHE R IT WAS SUBMITTED THAT THE A.C. IS ALSO PROVIDED AT THE COST OF COMPANY FO R THE BENEFIT OF THE EMPLOYEE AND THEREFORE THIS IS ALSO REVENUE EXPEN DITURE. WITH REFERENCE TO THE CONTENTION THAT DETAILS OF MEDICAL REIMBURSEMEN T WAS NOT VOUCHED THE LEARNED COUNSEL REFERRED TO VARIOUS DETAILS FILED I N THE PAPER BOOK AND ALSO SUBMITTED THAT THIS REIMBURSEMENT WAS INCLUDED IN T HE INDIVIDUAL HANDS AS PERQUISITES AND THEREFORE THE EXPENDITURE IS REVE NUE 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 SUBMITT ED THAT THE CIT(A) WAS NOT CORRECT IN RESTRICTING THE AMOUNT WHICH THE RE VENUE IS CONTESTING. 6.3 AFTER CONSIDERING THE ARGUMENTS AND EXAMINING T HE 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 SUBMITT ED VOLUMINOUS DETAILS OF STAFF WELFARE EXPENDITURE INCLUDING THE EVIDENCE WI TH REFERENCE TO INCLUSION ITA NO. 3385 + 4/MUM/2006 IMA-PG INDIA LTD. (PRECISION GEARS P LTD.) 5 OF MEDICAL EXPENSES AS PERQUISITES. THE ONLY OBJECT ION 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 A NY REASON FOR DISALLOWING THE AMOUNTS CLAIMED AS STAFF WELFARE ON ADHOC BASIS AS ASSESSEE HAS FURNISHED THE DETAILS. AFTER CONSIDERING THE LE GAL PRECEDENTS SUBMITTED BY THE PARTIES WE ARE OF THE OPINION THAT THE EXPE NDITURE HAVING BEEN VOUCHED THERE IS NO NEED FOR DISALLOWING THE AMOUNT . HOWEVER WE ARE UNABLE TO UNDERSTAND THE CLAIM OF ATTIRE/ FURNISHIN G 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 P ROVIDE THESE TO THE EMPLOYEE CONCERNED AND IF SO THESE ARE INCLUDED/ INCLUDABLE AS PERQUISITES OF THE SAID PERSON. THEREFORE TO THE LIMITED EXTEN T OF VERIFYING SOME OF THE CLAIMS REGARDING REIMBURSEMENT PROVIDED EXPENDITUR E ON ATTIRE/FURNISHING AND A.C. TO THE STAFF MEMBERS THE REST OF THE EXPE NDITURE CLAIM HAS TO BE ALLOWED AS SUCH. FOR THE LIMITED PURPOSE OF VERIFYI NG THE CLAIM OF EXPENDITURE ON ATTIRE/ FURNISHINGS/ FIXTURES INCLUD ED IN STAFF WELFARE THE MATTER IS RESTORED TO THE FILE OF THE A.O. TO EXAMI NE WHETHER THERE IS ANY OBLIGATION TO PROVIDE THIS ON THE PART OF THE EMPLO YER AND WHETHER THESE AMOUNTS ARE INCLUDED AS PERQUISITES IN THE INDIVIDU AL 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 R EST OF THE CLAIM IS ALLOWABLE. THEREFORE ASSESSEES GROUNDS CONTESTING DISALLOWANCE ON ADHOC BASIS IS ALLOWED PER SE. THE A.O. IS DIRECTED TO EX AMINE THE NATURE OF EXPENDITURE REFERRED ABOVE AND DECIDE ALLOWING THE SAME TO THAT EXTENT AFRESH. SUBJECT TO THIS DIRECTION ON THE AMOUNT INV OLVED ASSESSEES GROUND IS TREATED AS ALLOWED AND AO IS DIRECTED TO ALLOW B ALANCE 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 ISS UE. ITA NO. 3385 + 4/MUM/2006 IMA-PG INDIA LTD. (PRECISION GEARS P LTD.) 6 7. REGARDING GROUND NO. 2 ON DISALLOWANCE OF REPAIRS AND MAINTENANCE EXPENDITURE AS CAPITAL EXPENDITURE THE A.O. OBSERV ED THAT ASSESSEE HAD CLAIMED ` 32 00 000/- AS REPAIRS AND MAINTENANCE EXPENSES. AC CORDING TO THE A.O. ASSESSEE COULD PRODUCE SUPPORTING DETAILS OF ` 4 17 667/- ONLY. FURTHER FROM THE DETAILS SUBMITTED IT WAS FOUND THA T AMOUNTS WERE SPENT ON PURCHASE OF GRANITES TILES WOODEN MATERIALS CARPE NTERS ETC. EXPENSES SO CLAIMED REVEALED THAT ASSESSEE HAD CLAIMED UNDER TH IS HEAD EXPENSES OF CAPITAL NATURE WHICH WAS NOT PERMISSIBLE AND THEREF ORE THE A.O. DISALLOWED ENTIRE CLAIM OF ` 32 LAKHS. BEFORE THE CIT(A) IT WAS SUBMITTED THAT D ETAILS OF ` 4 17 000/- SUBMITTED WAS FOR RENOVATING THE MUMBAI OFFICE WHEREAS OTHER EXPENSES WERE INCURRED FOR BUILDING WHICH WAS ALLOW ED AS REVENUE EXPENSES. FURTHER ACCORDING TO ASSESSEE DETAILS OF REPAIRS AND MAINTENANCE WAS FURNISHED BEFORE THE A.O. VIDE LETTER DATED 23.01.2 004 WHICH HAS NOT BEEN CONSIDERED BY THE A.O. ACCORDING TO ASSESSEE MEREL Y 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 FIEL D. FURTHER ACCORDING TO ASSESSEE THE A.O. HAS ALSO ERRED IN ALLOWING DEPREC IATION OF 1% AS AGAINST 10% ALLOWABLE ON SUCH CAPITAL EXPENSES. ASSESSEE HA S ALSO SUBMITTED THAT LOOKING TO THE HUGE ASSETS OF ASSESSEE COMPANY EXP ENSES 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 SUBMITT ED 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 WHI CH 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 M ADE RENOVATION AT VARIOUS PREMISES INCLUDING BOMBAY OFFICE ETC. IT ALSO APPEA RS 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 ITA NO. 3385 + 4/MUM/2006 IMA-PG INDIA LTD. (PRECISION GEARS P LTD.) 7 BY IT. UNDER THE CIRCUMSTANCES THE WORK OF RENOVATI ON IN RESPECT OF PREMISES SHOULD BE TREATED AS CAPITAL EXPENSES WHEREAS IN RE SPECT OF EXPENSES INCURRED ON PLANT AND MACHINERY IT IS NOT A CASE TH AT BY VIRTUE OF SUCH RENOVATION ANY CAPACITY OF THE PLANT AND MACHINERY WAS INCREASED AND THEREFORE WHERE BY VIRTUE OF SUCH REPAIRS AND RENOV ATION IF NO CAPITAL ASSETS OR ENDURING ADVANTAGE IS RECEIVED THE SAME SHOULD B E ALLOWED AS REVENUE EXPENSES. FURTHER EXPENSES ALSO INCLUDE MAINTENANCE CONTACTS WHICH ARE YEARLY CONTRACT EXPENSES AND ACCORDINGLY SHOULD ALS O BE ALLOWED AS REVENUE EXPENSES. LOOKING TO THE FACTS OF THE CASE HE DIRE CTED 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 S UCH PLANT AND MACHINERIES SO ALSO MAINTENANCE EXPENSES OF YEARLY CONTRACT SHO ULD ALSO BE ALLOWED AS REVENUE EXPENSES. WHEREAS IN RESPECT OF RENOVATION OF PREMISES THE SAME SHOULD BE TREATED AS CAPITAL EXPENSES AND ACCORDING LY DEPRECIATION SHOULD BE ALLOWED TO ASSESSEE AT PRESCRIBED RATE. 8. CONTESTING THE ABOVE FINDINGS OF THE CIT(A) AND CON SEQUENTIAL ORDERS OF THE A.O. IN THIS REGARD IT WAS THE CONTENTION O F THE LEARNED COUNSEL THAT THE ASSESSEE HAS NOT BROUGHT INTO EXISTENCE ANY NEW ASSET AND SIMPLE RENOVATION OF EXISTING BUILDING CANNOT BE CONSIDERE D AS CAPITAL EXPENDITURE. HE RELIED ON THE DECISION OF THE CIT VS. SARAVANA S PINNING MILLS P. LTD. 293 ITR 201 (SC) FOR CONSIDERING THE CURRENT REPAIRS TH E BASIC TEST WAS TO FIND OUT WHETHER THE EXPENDITURE WAS INCURRED TO PRESERV E AND MAINTAIN EXISTING ASSETS OR TO BRING A NEW ASSET INTO EXISTENCE WITH LONG TERM ADVANTAGE. IT WAS HIS CONTENTION THAT BOMBAY OFFICE RENOVATION DO ES NOT YIELD ANY NEW ASSET AND THE EXPENDITURE IS ALLOWABLE AS REVENUE E XPENDITURE. FURTHER IT IS ALSO SUBMITTED THAT EVEN THOUGH THE CIT(A) DIRECTED THE A.O. TO ALLOW EXPENDITURE INCURRED FOR PLANT & MACHINERY WHILE G IVING EFFECT TO THE SAME THE A.O. DID NOT CONSIDER EVEN THAT MAINTENANCE CON TRACT 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. ITA NO. 3385 + 4/MUM/2006 IMA-PG INDIA LTD. (PRECISION GEARS P LTD.) 8 8.1 THE LEARNED D.R. HOWEVER RELIED ON ORDER OF T HE CIT(A) TO SUBMIT THAT THE EXTENSIVE RENOVATION OF OFFICE PREMISES HAS GIV EN ENDURING BENEFIT THEREFORE THE AMOUNT IS CORRECTLY TREATED AS REVENU E EXPENDITURE. 8.2 WE HAVE CONSIDERED THE ISSUE. AS CONSIDERED BY THE HON'BLE SUPREME COURT IN THE CASE OF CIT VS. SARAVANA SPINNING MILL S 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 WH ETHER THE EXPENDITURE WAS FOR CURRENT REPAIRS OR NOT. THE BASIC TEST WAS TO FIND OUT WHETHER THE EXPENDITURE WAS INCURRED TO PRESERVE AND MAINTAIN A N ALREADY EXISTING ASSET AND THE EXPENDITURE MUST NOT BE TO BRING A NEW ASSE T INTO EXISTENCE OR TO OBTAIN NEW ADVANTAGE. AS SEEN FROM THE DETAILS FILE D AND THE NATURE OF TYPE OF WORK UNDERTAKEN IT IS AN EXPENDITURE FOR RENOVAT ION OF EXISTING PREMISES WHICH THE CIT(A) HAS CONSIDERED AS CAPITAL IN NATUR E. CONSIDERING THE PRINCIPLES ESTABLISHED BY THE ABOVE SUPREME COURT D ECISION 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 EM PIRE JUTE CO. LTD. VS. CIT 124 ITR 1 WE ARE OF THE OPINION THAT THE EXPE NDITURE IS ALLOWABLE AS CURRENT REPAIRS UNDER SECTION 31 OF THE I.T. ACT. S IMILAR VIEW WAS TAKEN BY THE COORDINATE BENCHES IN THE CASES OF INDIAN HOTEL S COMPANY LTD. VS. CIT 34 TTJ (BOM) 526 POWER BUILD LTD. VS. ACIT 126 TT J (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 PREM ISES 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 GIVI NG EFFECT TO THE ORDER THE A.O. HAS EVEN CONSIDERED THE AMOUNTS PAID FOR MAINT ENANCE AGREEMENT TOWARDS PLANT & MACHINERY ALSO AS CAPITAL EXPENDITU RE EVEN THOUGH THE CIT(A) DIRECTED HIM TO ALLOW IT AS REVENUE EXPENDIT URE. THE A.O. IS DIRECTED TO ALLOW THE ENTIRE AMOUNT CLAIMED AS REPAIRS AND M AINTENANCE EXPENDITURE AS REVENUE EXPENDITURE. ITA NO. 3385 + 4/MUM/2006 IMA-PG INDIA LTD. (PRECISION GEARS P LTD.) 9 9. REGARDING GROUND NO. 3 ON DISALLOWANCE UNDER SECTIO N 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 COMP ARABLE 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 ASSESSEES CLAIM @10% OF SUCH TOTAL PAYMENTS. BEFOR E THE CIT(A) ASSESSEE SUBMITTED THAT THE A.O. HAD NOT CONSIDERED THE DETA ILS 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 DISALLO WED. FURTHER IN RESPECT OF OTHER PAYMENTS IT WAS SUBMITTED THAT PAY MENTS WERE MADE TO IMA BEING HOLDING COMPANY FOR VARIOUS SERVICES AND GOODS PURCHASED FROM THEM AND REIMBURSEMENT FOR EXPENSES INCURRED BY THE M AND THEREFORE NO DISALLOWANCE SHOULD BE MADE IN THIS REGARD. ASSESSE E ALSO STATED THAT SOME OF THE PAYMENTS WERE MADE TO LOCAL PARTIES AS REFER RED 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 ASSESSEES CASE BUT FOR DIRECTORS REMUNERATION OF ` 4 54 941/- PAID TO SHRI ANIL RAO; OF ` 18 51 616/- PAID TO MR. SATISH RAO BOTH WITHIN LIM ITS PRESCRIBED BY THE COMPANIES ACT; GUARANTEE COMMISSI ON 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 REPAYM ENT AND INTEREST THEREON PAID WITH APPROVAL OF CENTRAL GOVERNMENT. H E FURTHER CONSIDERED THAT THOUGH ASSESSEE HAD FILED THE DETAILS OF SUCH PAYMENTS MADE IT HAS NOT FILED ANY COMPARABLE CASES TO SUBSTANTIATE ITS CLAI M THAT THE AMOUNTS OF PAYMENTS WERE REASONABLE AS COMPARED WITH NORMAL TR ADE 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 TH E AMOUNTS REFERRED TO ABOVE. HE DIRECTED THE A.O. TO ALLOW CONSEQUENTIAL RELIEF TO ASSESSEE. AGGRIEVED BY THE ABOVE DECISION OF THE CIT(A) ASSES SEE IS IN APPEAL. ITA NO. 3385 + 4/MUM/2006 IMA-PG INDIA LTD. (PRECISION GEARS P LTD.) 10 10. BEFORE US THE ASSESSEE CONTENDED THAT THE DETAILED BRAKE UP ALONG WITH REASONS FOR MAKING SUCH PAYMENTS TO SPECIFIC P ERSONS WAS GIVEN TO THE A.O. AS WELL AS TO THE CIT(A) AND THESE WERE NOT CO NSIDERED IN THE PROPER PERSPECTIVE. AS REGARDS PURCHASE FROM IMA IS CONCER NED IMA IS THE HOLDING COMPANY AND IS SUPPLYING KEY COMPONENTS FOR MANUFAC TURING BLISTER PACKING MACHINES. SINCE THE HOLDING COMPANY SUPPLIE D GOODS TO THE ASSESSEE COMPANY EXCLUSIVELY THERE CANNOT BE ANY CO MPARATIVE FIGURE AVAILABLE WITH THEM. HOWEVER ALL SUCH PAYMENTS WER E 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 PAYMENT S MADE TO IMA WERE ACCEPTED BY THE REVENUE AS BEING AT ARMS LENGTH PRI CE BY THE A.O. AND THE TPO IN A.Y. 2003-04 AND A.Y. 2004-05. WITH REFERENC E TO PAYMENT TO PRECISION GEARS (INDORE) PVT. LTD. PLH ENTERPRISE S AND P.G. ENGINEERING ASSESSEE FILED INVOICE OF RELEVANT PURCHASES DEPICT ING THEM AS PAYMENT AS REASONABLE. THE OTHER PAYMENTS WERE REIMBURSEMENT W ITH OUT ANY MARK UP. IT WAS FURTHER SUBMITTED THAT THE CIT(A) CONFIRMED CERTAIN DISALLOWANCE ON RANDOM ADHOC BASIS AND FURTHER THERE IS DOUBLE DISA LLOWANCE ON ACCOUNT OF SAME EXPENDITURE I.E. REIMBURSEMENT TO IMA FOR EXH IBITION EXPENSES TRAVELLING EXPENSES ADVERTISEMENT AND SALES PROMOT ION 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 SCRUTIN Y ASSESSMENTS. WITH REFERENCE TO DISALLOWANCE UNDER SECTION 40A(2)(B) T HE LEARNED COUNSEL ALSO PLACED ON RECORD DETAILED LEGAL DECISIONS RUNNING F ROM PAGE NO. 9 TO 12 WHY THE PROVISIONS OF SECTION 40A(2)(B) ARE NOT APPLICA BLE. 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 E XPENDITURES WHILE ALLOWING THE PAYMENT MADE TO THE DIRECTORS PARTLY. IT WAS THE JUSTIFICATION OF THE ASSESSEE THAT THE DIRECTORS REMUNERATION AND CO MMISSION WERE ALL PAID WITHIN THE LIMITS PRESCRIBED BY THE COMPANIES ACT. EVEN THE GUARANTEE COMMISSION PAID WERE WITH THE APPROVAL OF THE CENTR AL GOVERNMENT. WHILE ITA NO. 3385 + 4/MUM/2006 IMA-PG INDIA LTD. (PRECISION GEARS P LTD.) 11 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 B Y MISTAKE WHICH THE ASSESSEE IS ALSO CONTESTING. ON PERUSAL OF DETAILS OF THE AMOUNTS PAID TO THE DIRECTORS INCLUDING SITTING FEE AND GUARANTEE COMMI SSION 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 UND ER SECTION 40A(2)(B). WITH REFERENCE TO PAYMENTS MADE TO THE HOLDING COMP ANY AND OTHERS IN THE ABSENCE OF ANY COMPARATIVE PRICE THE CIT(A) CONFIRM ED THE DISALLOWANCE AT 10% OF THE ABOVE CLAIM. HOWEVER HE HAS IGNORED ASS ESSEES SUBMISSION THAT THERE CANNOT BE ANY COMPARATIVE PRICE AS HOLDING CO MPANY WAS EXCLUSIVELY SUPPLYING TO ASSESSEE COMPANY. CONSIDERING THIS TH E 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 PRI CING 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 A NY OTHER DATA BROUGHT ON RECORD BY THE REVENUE. IN VIEW OF THIS WE ARE OF T HE 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 CON FIRMED BY THE CIT(A) WAS DELETED. ASSESSEES GROUND IS ALLOWED. 12. GROUND NO. 4 IS WITH REFERENCE TO INTEREST UNDER SE CTION 234D OF ` 78 175/-. EVEN THOUGH THE ISSUE OF CHARGING OF INTE REST 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 SA ME WAS CONTESTED BEFORE THE ITAT IN ITA NO. 2017/MUM/2008 DATED 28 TH MAY 2009 IN WHICH CONSIDERING THE RIVAL SUBMISSIONS THE ITAT HELD THA T 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 T HE ISSUE ON AN APPEAL BY ASSESSEE THERE IS NO NEED TO RE-ADJUDICATE THE ISS UE WHICH DOES NOT ARISE ON THE ORDER OF CIT(A). THEREFORE THE GROUND IS REJECT ED FOR TECHNICAL REASONS. 13. IN THE RESULT APPEAL IS PARTLY ALLOWED. ITA NO. 3385 + 4/MUM/2006 IMA-PG INDIA LTD. (PRECISION GEARS P LTD.) 12 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 C ASE AND AS PER LAW THE LD. CIT(A) ERRED IN DELETING THE DISALLOWA NCE OF BAD DEBT OF RS.73 41 610/- CONSISTING OF BAD INVESTMENT OF RS.28.7 LAKHS AND ADVANCES THROUGH BILL DISCOUNTING OF RS.4 4 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 T HE AUDIT REPORT HAD MENTIONED THAT THE ASSESSEE COMPANY WAS DOING MONEY LENDING BUSINESS. (2) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND AS PER LAW THE LD. CIT(A) ERRED IN DELETING THE DISALLOWA NCE OF EXPENSES AMOUNTING TO RS.2 75 182/- UJS.14A OF THE ACT IGNORING THE FACT THAT THE COMPANYS BALANCE SHEET SHOWED INTEREST BEARING FUNDS OF RS.3.68 CRORES AND ONUS W AS 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 C ASE AND AS PER LAW THE LD. CIT(A) ERRED IN DELETING THE DISALLOWA NCE 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 T HE ASSESSEE HAS MADE PAYMENT IN CASH FOR WHICH NO PROPER VOUCHI NG IS POSSIBLE. (4) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND AS PER LAW THE LD. CIT(A) ERRED IN RESTRICTING THE DISALL OWANCE OF CONVEYANCE EXPENSES AT 2.5 % AS AGAINST 10% ESTIMAT ED BY THE A.O. AND DELETING THE DISALLOWANCE MADE BY THE A.O. ON ACCOUNT OF TELEPHONE EXPENSES AND VEHICLE EXPENSES ALL INC LUDED IN THE DISALLOWANCE OF ADHOC EXPENSES OF RS. 17 78 00/- I GNORING THE FACT THAT DURING THE COURSE OF ASSESSMENT PROCEEDIN GS NO PROPER EXPLANATION WAS SUBMITTED BY THE ASSESSEE. (5) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE 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 EXPENDI TURE WAS INCURRED IN CASH FOR LUNCH FOR GUESTS. (6) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND AS PER LAW THE LD. CIT(A) ERRED IN DELETING THE DISALLOWA NCE 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. ITA NO. 3385 + 4/MUM/2006 IMA-PG INDIA LTD. (PRECISION GEARS P LTD.) 13 (7) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND AS PER LAW THE LD. CIT(A) ERRED IN DELETING THE DISALLOWA NCE OF INTEREST AMOUNTING TO RS.6 07 186/- BEING AMOUNT OF INTERES T RELATABLE TO BAD DEBTS WRITTEN OFF. 15. REGARDING GROUND NO. 1 THE A.O. DURING ASSESSMEN T 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 DISCOUN TING. ASSESSEE WAS ASKED TO SHOW CAUSE AS TO WHY SUCH EXPENSES SHOULD NOT BE DISALLOWED. IN RESPONSE ASSESSEE SUBMITTED THAT IT WAS IN THE BUSI NESS OF MONEY LENDING AND SINCE ` 28 70 000/- COULD NOT BE RECOVERED BEING THE LOAN G RANTED THE SAME WAS CONVERTED INTO BONDS TO GET BETTER SECURIT Y. 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 AS SESSEE 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 SUC H DETAILS ACCORDING TO THE A.O. THE AMOUNT IN QUESTION WAS CAPITAL LOSS A ND COULD NOT BE ALLOWED AS BUSINESS LOSS AND ACCORDINGLY HE DISALLOWED A SU M OF ` 28 70 000/- AS CLAIMED BY ASSESSEE. SIMILARLY ASSESSEE WAS ALSO AS KED TO SHOW CAUSE AS TO WHY AMOUNT OF ` 44 71 610/- CLAIMED AS BAD DEBTS SHOULD NOT BE DISA LLOWED. IN RESPONSE ASSESSEE HAD REITERATED ITS EARLIER STA ND AND SUBMITTED THAT LOSS WAS OCCURRED IN ITS MONEY LENDING ACTIVITIES AND HE NCE ALLOWABLE AS BAD DEBTS. HOWEVER IN LINE WITH EARLIER OBSERVATION TH E A.O. ALSO DISALLOWED ASSESSEES CLAIM IN THIS REGARDS AS WELL AND CONSEQ UENTLY DISALLOWED ` 44 71 610/- CLAIMED AS BAD DEBTS. BEFORE THE CIT(A) ASSESSEE SUBMITTED THAT THERE IS NO BAR IN ITS CARRYING ON MONEY LENDI NG BUSINESS AS CLAIMED BY THE A.O. AND NO GUIDELINES HAVE BEEN ISSUED BY RBI FOR OBTAINING LICENSE TO ITA NO. 3385 + 4/MUM/2006 IMA-PG INDIA LTD. (PRECISION GEARS P LTD.) 14 CARRY ON MONEY LENDING BUSINESS. IT IS FURTHER SUBM ITTED THAT IT IS ALSO NOT A CASE THAT BECAUSE THE AUDIT REPORT DID NOT STATE MO NEY LENDING AS BUSINESS ACTIVITY IT DID NOT CARRY OUT SUCH ACTIVITIES. FURT HER ITS MONEY LENDING ACTIVITY WAS AN INTEGRAL PART OF COMMON FUNDS COMM ON MANAGEMENT AND COMMON POOL VIS--VIS ITS OTHER MANUFACTURING BUSIN ESS ACTIVITIES. IT IS THEREFORE ARGUED THAT BAD DEBTS CLAIMED SHOULD BE A LLOWED AS EXPENSES IN LINE WITH SECTION 36(1)(VII) R.W. SUB-SECTION (2) T HEREOF. AS REGARDS ASSESSING OFFICERS OBSERVATION THAT ASSESSEE HAD NOT DISCLOS ED 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 ASSE SSEE FILED COPIES OF FIVE YEARS BALANCE SHEETS EVIDENCING THE INCOME FROM BIL LS DISCOUNTING BUSINESS. ASSESSEE HAS ALSO FILED COPY OF RESOLUTION PASSED B Y THE BOARD OF DIRECTORS IN THEIR MEETING FOR WRITING OFF SUCH AMOUNT. IN IT S 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 T AXMAN 109 (AHD.) AND HON'BLE GUJARAT HIGH COURT DECISION IN CASE OF CIT VS. GIRISH BHAGWANPRASAD 256 ITR 772. PURSUANT TO ASSESSEES S UBMISSION 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 D EBTS CLAIM THE A.O. HAS SIMPLY SUBMITTED THAT AS CLAIMED BY ASSESSEE PROVIS ION 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 MER ELY RELIED ON THE WRONG QUOTING OF SECTION WHICH IN ANY CASE WAS ALREADY EN VISAGED BY HIM DURING THE ORIGINAL ASSESSMENT PROCEEDINGS AS WELL AND THE REFORE MISTAKE COMMITTED DURING THE ORIGINAL PROCEEDINGS COULD NOT BE THE GROUND OF SUCH DISALLOWANCE. IT IS ALSO SUBMITTED THAT THE SAID MI STAKE HAS BEEN ALREADY RECTIFIED IN APPEAL PROCEEDINGS AND THEREFORE THE A .O. OUGHT TO HAVE CONSIDERED THE SAME IN REMAND PROCEEDINGS. IT IS TH US CLAIMED THAT LOOKING TO THE OVERALL FACTS AS STATED IN EARLIER SUBMISSIO NS THE ADDITION MADE BY THE A.O. SHOULD BE DELETED. AFTER HEARING THE CONTENTIO NS OF THE ASSESSEE AND THE A.O. THE CIT(A) HELD THAT IT WAS THE CLAIM OF T HE ASSESSEE THAT IT WAS IN ITA NO. 3385 + 4/MUM/2006 IMA-PG INDIA LTD. (PRECISION GEARS P LTD.) 15 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 ON LY REASON FOR DISALLOWANCE ADVANCED IS THAT THE INVESTMENT WAS NOT OFFERED FOR TAX IN THE PRECEDING PREVIOUS YEARS OR THAT THE SECTION UNDER WHICH DEDU CTION IS CLAIMED DOES NOT EXIST. HE FURTHER HELD THAT MERELY BECAUSE ASSE SSEE 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 NO T FOUND ANY INFIRMITY THAT ASSESSEE HAD NOT DONE ANY BILLS DISCOUNTING ACTIVIT Y I.E. MONEY LENDING ACTIVITY. THEREFORE DEDUCTION SHOULD BE ALLOWED FO R BAD DEBTS PARTICULARLY CONSIDERING THE FACT THAT ASSESSEE WAS IN THE BUSIN ESS 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 ASSESSEES CLAIM THAT INVESTMENT REPRESENTED THE CO NVERSION OF LOAN INTO BOND WHICH BECAME BAD AND HENCE THE SAME WAS ALSO A LLOWABLE 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 O F 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 W ERE ADVANCED IN THE COURSE OF BILL DISCOUNTING BUSINESS AND ASSESSEE OF FERED INTEREST IN EARLIER YEARS. THERE IS ALSO NO DISPUTE WITH REFERENCE TO T HE 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. TH E REVENUE GROUND IS THEREFORE REJECTED. 17. REGARDING GROUND NO. 2 THE A.O. OBSERVED THAT ASSES SEE COMPANY HAD EARNED INCOME BY WAY OF DIVIDEND AT ` 5 000/- OUT OF ITS INVESTMENTS AND THAT OUT OF SUCH INVESTMENTS ASSESSEE HAD WRITTEN O FF CERTAIN AMOUNTS AS NOT RECOVERABLE. FURTHER ACCORDING TO THE A.O. IF THE ADJUSTMENTS SO MADE ARE CONSIDERED ASSESSEES INVESTMENTS WORKED OUT TO ` 33 27 0001- WHICH ITA NO. 3385 + 4/MUM/2006 IMA-PG INDIA LTD. (PRECISION GEARS P LTD.) 16 ACCORDING TO THE A.O. WAS MADE OUT OF BORROWED FUND S 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 FUN DS 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 SEC TION 14A. BEFORE THE CIT(A) ASSESSEE SUBMITTED THAT THE A.O. HAS ERRED I N NOT APPRECIATING THE FACT THAT ASSESSEE HAD NOT CLAIMED ANY INCOME AS EX EMPT AND NOT FORMING PART OF THE TOTAL INCOME AND THAT THE DIVIDEND RECE IVED BY IT WAS ON ACCOUNT OF SHARES HELD IN CO-OP BANK AND THAT THE SAME IS N EITHER 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 C OMMENTS 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 P ROCEEDINGS 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 OF F 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 DI VIDEND INCOME OF ` 5 000/- AND THERE MAY BE CHANCES THAT ON SOME OF TH E INVESTMENT ASSESSEE COMPANY HAS NOT EARNED ANY INCOME BUT INVESTMENTS ARE FROM BORROWED FUND AND HENCE FINANCE COST PROPORTIONATE TO SALE I S NOT ALLOWABLE AGAINST BUSINESS INCOME. HENCE IT WAS RIGHTLY DISALLOWED UN DER SECTION 14A. IN RESPONSE TO THE REMAND REPORT ASSESSEE SUBMITTED TH AT THE MERE FACT THAT THE A.O. HAS MADE ADDITION ON SURMISES AND CONJECTU RE 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 S OME OF THE INVESTMENT THE ASSESSEE COMPANY HAS NOT EARNED ANY INCOME BUT INVESTMENTS ARE NOT FROM BORROWED FUNDS. IT IS THUS SUBMITTED THAT DISA LLOWANCE MADE BY THE A.O. WITHOUT BRINGING ON RECORD ANY CONTRARY EVIDEN CE 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 ASSESSEES CLAIM. HE STATED THAT DURING THE REMAND PROCEEDINGS THE A.O. HAS NOT REBUTTED ASSESSEES CL AM THAT THE DIVIDEND ITA NO. 3385 + 4/MUM/2006 IMA-PG INDIA LTD. (PRECISION GEARS P LTD.) 17 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 O F 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 A SSESSEE HAS NOT CLAIMED ANY EXEMPT INCOME. THERE IS ALSO NOTHING ON RECORD THAT INVESTMENTS MADE WERE FROM BORROWED FUNDS. THE CIT(A) HAS CORRECTLY DELET ED THE DISALLOWANCE MADE UNDER SECTION 14A OF THE ACT. THE REVENUE GROU ND IS THEREFORE REJECTED. 19. GROUND NO. 3 IS REGARDING DISALLOWANCE OF STAFF WEL FARE EXPENSES. THE A.O. OBSERVED THAT ASSESSEE COMPANY HAD CLAIMED EXP ENSES OF ` 31 56 483/- UNDER THE HEAD STAFF WELFARE WHICH CONSISTED OF REF RESHMENT EXPENSES NEWS PAPERS PURCHASES CANTEEN CHARGES BUS EXPENSES ETC . ACCORDING TO THE A.O. ASSESSEE FAILED TO PROVE THE BONAFIDE THEREFORE H E 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 EXPEN SES 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 CONS IDER THE GROUND RAISED BY THE REVENUE. THE GROUND IS REJECTED. 21. WITH REFERENCE TO GROUND NO. 4 THE A.O. OBSERVED TH AT ASSESSEE INCURRED EXPENSES OF ` 177.80 LAKHS ON TELEPHONE TRAVELLING AND VEHICLE A ND IN RESPECT OF TRAVELLING EXPENSES NO DETAILS WERE P RODUCED. FURTHER ASSESSEE DID NOT FURNISH ANY OTHER DETAILS LIKE FOREIGN EXCH ANGE USAGE TICKET EXPENSES HOTEL BILLS ETC. AND IN THE ABSENCE OF S UCH DETAILS THE A.O. DISALLOWED 10% OF TOTAL EXPENSES AS FOR NON BUSINES S PURPOSE. BEFORE THE ITA NO. 3385 + 4/MUM/2006 IMA-PG INDIA LTD. (PRECISION GEARS P LTD.) 18 CIT(A) ASSESSEE SUBMITTED THAT DETAILS IN RESPECT O F TELEPHONE AND VEHICLE EXPENSES THAT WERE FURNISHED BEFORE THE A.O. BUT NO T 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 E XPENSES WERE INCURRED FOR THE PURPOSE OF THE BUSINESS AND NO DISALLOWANCE SHO ULD BE MADE. IN THE REMAND REPORT THE A.O. MERELY REITERATED THE EARLIE R OBSERVATIONS AND ACCORDING TO ASSESSEE ALL THE NECESSARY DETAILS WER E PRODUCED BEFORE THE A.O. THEREFORE NO DISALLOWANCE WAS CALLED FOR. CI T(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 AM OUNT 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% A S AGAINST 10% ESTIMATED BY THE A.O. REGARDING TELEPHONE AND VEHICLE EXPENSE S HE WAS OF THE OPINION THAT IT IS NOT A CASE WHERE THE EXPENSES COULD BE E STIMATED 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 WH ICH WAS ALSO FORWARDED TO THE A.O. FOR HIS COMMENT. SINCE THERE WERE NO ADVER SE FINDINGS IN THE REMAND REPORT THE CIT(A) DELETED THE ADDITION MADE ON ACCOUNT OF TRAVELLING EXPENSES. REVENUE IS AGGRIEVED ON THE ABOVE DECISIO N 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 O F THE OPINION THAT CIT(A) HAS CONSIDERED THE ISSUE CORRECTLY WHICH DO NOT REQ UIRE ANY INTERFERENCE. THE CIT(A) HAS CORRECTLY ALLOWED THE AMOUNTS AS DED UCTION UNDER SECTION 37(1) OF THE ACT. THE ASSESSEE ALSO HAS NOT CONTEST ED THE PART DISALLOWANCE CONFIRMED BY CIT(A). CONSIDERING THE FACTS AND CLAI MS OF ASSESSEE WE CONSIDER THAT CIT(A) HAS RIGHTLY DELETED THE ADHOC DISALLOWANCE ON TRAVELLING TELEPHONE VEHICLE EXPENSES. EVEN THE RESTRICTION O F CONVEYANCE EXPENSES ON THE FACTS IS REASONABLE AND THERE IS NO NEED TO DIF FER FROM THAT. REVENUE GROUND IS THEREFORE REJECTED. ITA NO. 3385 + 4/MUM/2006 IMA-PG INDIA LTD. (PRECISION GEARS P LTD.) 19 23. GROUND NO. 5 RELATES TO DISALLOWANCE OF ADVERTISEME NT EXPENSES AMOUNTING TO ` 5 39 882/- THE A.O. OBSERVED THAT ASSESSEE COMPANY HAD INCURRED ` 6 69 854/- AS EXPENSES ON ADVERTISEMENT AND SALES P ROMOTION. ACCORDING TO THE A.O. ` 5 39 822/- PERTAINED TO SALES PROMOTION. FROM THE DETAILS FILED IT WAS OBSERVED THAT THE MAJOR EXPENS ES 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 ADVERT ISEMENT 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 E XPENSES INCURRED BY THEM ON COMPANYS BEHALF. IN THE REMAND REPORT A.O. HAS NOT CONSIDERED THE DETAILS FILED AND SUBMISSIONS MADE BUT REITERAT ED THE ASSESSING OFFICERS 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) DE LETED THE DISALLOWANCE MADE BY THE A.O. HOLDING THAT THE ASSESSEE HAD INCU RRED EXPENSES ON LEAFLETS PAMPHLETS VIDEO SHOOTING AND REIMBURSEME NT 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 E XHIBITION EXPENSES AMOUNTING TO ` 30 63 200/-. DURING THE COURSE ASSESSMENT PROCEEDIN GS 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 DISP LAY OF ITS MACHINES IN THE MARKET. THE DETAILS FURNISHED BY THE ASSESSEE REVEA LED THAT THE EXPENSES WERE INCURRED ON EXHIBITIONS AT GERMANY HYDERABAD POLAND AND CHICAGO. ITA NO. 3385 + 4/MUM/2006 IMA-PG INDIA LTD. (PRECISION GEARS P LTD.) 20 THE A.O. DOUBTED THE BONAFIDE OF SUCH EXPENSES. HE WAS OF THE OPINION THAT THE SAID EXPENSES HAD GIVEN ENDURING ADVANTAGE TO T HE ASSESSEE COMPANY HENCE THE SAME SHOULD BE TREATED AS DEFERRED REVENU E EXPENSES. THEREFORE HE DISALLOWED 4/5 TH OF SUCH EXPENSES TO BE CARRIED FORWARD. THE CIT(A) DELETED THE DISALLOWANCE MADE BY THE A.O. BY HOLDIN G THAT IT IS WELL SETTLED THAT IF THE PERIOD OF ADVANTAGE IS NOT MEASURABLE I N 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 REAS ON TO DISALLOW THE EXPENDITURE IN THE FIRST PLACE. THE AO HAS NOT DOUB TED 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 ORD ER 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 WR ITTEN OFF. THE A.O. DISALLOWED ASSESSEES CLAIM OF BAD DEBTS W RITTEN OFF AS BEING CAPITAL LOSS AND IN CONSEQUENCE DISALLOWED THE INTEREST REL ATABLE TO SUCH ADVANCE AMOUNTING TO ` 6 07 186/-. SINCE THE DISALLOWANCE ON BAD DEBT IS D ELETED THE CONSEQUENTIAL DISALLOWANCE OF INTEREST WAS ALSO DELETED BY THE CIT(A). 28. AS THE AMOUNT CLAIMED AS BAD DEBT WAS ALLOWED THER E 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 ITA NO. 3385 + 4/MUM/2006 IMA-PG INDIA LTD. (PRECISION GEARS P LTD.) 21 MAINTENANCE EXPENSES ADHOC DISALLOWANCE UNDER SECT ION 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 PARTICU LARS OF INCOME OR CONCEALMENT OF INCOME BY THE ASSESSEE. HE WAS ALSO OF THE OPINION THAT ADHOC DISALLOWANCES DOES NOT CALL FOR PENALTY. AGGR IEVED ON THE ABOVE DECISION REVENUE IS IN APPEAL. 32. AFTER CONSIDERING THE ARGUMENTS OF RIVAL PARTIES W E SEE NO REASON TO DIFFER FROM THE FINDINGS OF CIT(A) THAT ADHOC DISAL LOWANCES 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 DISALLO WANCE UNDER SECTION 40A(2) WERE DELETED AND ASSESSEE GROUNDS WERE ALLOW ED. THEREFORE THERE IS NO SCOPE FOR CONSIDERING ANY AMOUNT AS INCOME CONCE ALED 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 ASSESSEES APPEAL IS WITH REFERENCE TO DISALLOWANCE OF 80HHC CLAIM BY EXCLUDING 90% OF SALE TAX REFUND S UNDRY CREDIT BALANCES WRITTEN BACK AND OTHER INCOME AND DISALLOWANCE OF DEDUCTION IN RESPECT OF EXPORT BY ASSESSEE OF TRADING GOODS AFFECTED FROM S INGAPORE TO SWEDEN. THE GROUND REGARDING THE CLAIM ON TRADING GOODS AFFECTE D FROM SINGAPORE TO SWEDEN (GROUND 1(B)) WAS NOT PRESSED AND WAS TREATE D AS WITHDRAWN. 35. AS PER ASSESSMENT ORDER ASSESSEE HAS EARNED OTHER INCOME OF ` 1 10 67 708/- WHICH INTER ALIA INCLUDE DIVIDEND PR OFIT IN SALE OF FIXED ASSETS RENT COMMISSION SUNDRY CREDIT BALANCES WR ITTEN 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 TH E HON'BLE BOMBAY HIGH ITA NO. 3385 + 4/MUM/2006 IMA-PG INDIA LTD. (PRECISION GEARS P LTD.) 22 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 T HE ABOVE RATIO. THE NUMERATOR AND THE DENOMINATOR ARE REQUIRED TO HAVE COMMON ELEMENT WHICH IS THE SALE PROCEEDS. SINCE SALES TAX DOES NO T FORM PART OF TURNOVER IT CANNOT COME IN THE FORMULA FOR COMPUTING DEDUCTION ALLOWABLE UNDER SECTION 8OHHC OF THE I.T. ACT. THEREFORE THE ACTIO N OF THE AO IN EXCLUDING 90% OF THE SALES TAX REFUND IS UPHELD. 33.2 IT WAS SUBMITTED THAT THERE WAS NO SALE TAX RE FUND 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 BAL ANCE 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 AM OUNT OF ABOUT ` 27 LAKHS IN THE PREVIOUS YEAR ENDING ON 31.03.2001. SI NCE 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 N O NEED TO GIVE ANY DIRECTION ON THIS ISSUE AS NO SUCH AMOUNT WAS INCLUDED IN THE OTHER INCOME. ASSESSEES 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 WRITT EN 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 BA CK ` 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) ACTIVI TIES 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 CAN NOT BE DEDUCTED. THE ITA NO. 3385 + 4/MUM/2006 IMA-PG INDIA LTD. (PRECISION GEARS P LTD.) 23 CIT(A) CONSIDERED THAT DEDUCTION UNDER SECTION 80HH C IS TO BE COMPUTED AS PER THE FOLLOWING FORMULA: - PROFITS OF THE BUSINESS X EXPORT TURNOVER/TOTAL TU RNOVER HE FURTHER OBSERVED THAT IN THE CASE OF CIT VS. KAN TILAL CHOTALAL 246 ITR 439 THE HONBLE BOMBAY HIGH COURT HAS HELD THAT BOT H 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 PROCEE DS 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 P ROCEEDS. THE ITEMS REFERRED TO ABOVE DO NOT HAVE ELEMENT OF TURNOVER. THEREFORE THEY CANNOT COME IN THE FORMULA FOR COMPUTING DEDUCTION ALLOWAB LE UNDER SECTION 8OHHC OF THE I.T. ACT. THEREFORE HE UPHELD THE ACT ION OF THE AO IN EXCLUDING 90% OF THESE AMOUNTS UNDER EXPLANATION (B AA). 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 DE DUCTED UNDER EXPLANATION (BAA). THE CIT(A) DID NOT ACCEPT THE CO NTENTIONS OF THE ASSESSEE. IN VIEW OF THE ABOVE DISCUSSION HE CONFIRMED THE AC TION OF THE AO IN EXCLUDING 90% OF MISCELLANEOUS INCOME UNDER EXPLANA TION (BAA) OF SECTION 80HHC. ITA NO. 3385 + 4/MUM/2006 IMA-PG INDIA LTD. (PRECISION GEARS P LTD.) 24 33.5 IT WAS THE SUBMISSION OF THE LEARNED COUNSEL T HAT ALL THE ABOVE AMOUNTS OF INCOME ARE CLAIMED AS EXPENDITURE IN EAR LIER YEARS AND THE AMOUNTS WERE RECOVERED OR ADVANCES RECEIVED HAD BEC OME BUSINESS PROFIT UNDER SECTION 41(1). IT WAS THE SUBMISSION THAT THI S INCOME IS OPERATIONAL INCOME AND THERE IS NO NEED TO EXCLUDE AT 90% AS WA S CONSIDERED BY THE CIT(A). IT WAS THE SUBMISSION THAT SINCE THIS IS OP ERATIONAL INCOME THE PRINCIPLES ESTABLISHED BY THE HON'BLE SUPREME COURT IN THE CASE OF CIT VS. K. RAVINDRANATHAN NAIR 295 ITR 228 WILL APPLY SUPPO RTED BY THE DECISION OF THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF BANGAL ORE 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 UNDE R SECTION 41(1). THESE ARE ALSO PART OF OPERATIONAL INCOME TO BE CONSIDERE D 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 WORKIN G 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 C IT(A) IT WAS SUBMITTED THAT THE LIFE OF SOFTWARE IS UNCERTAIN AND THEREFOR E IT CAN NOT BE CONSIDERED A CAPITAL EXPENDITURE. THE LD. AR ALSO PLACED RELIANC E ON THE DECISION IN THE CASE OF BUSINESS INFORMATION PROCESS SERVICES VS. A CIT 239 ITR 19 (JAIPUR) MEDIA VIDEO LTD. VS. JCIT 122 TAXMAN 28 (DEL) AND I TC CLASSIC VEHICLES LTD. VS. DCIT 155 TAXMAN 155 (CAL). IT WAS FURTHER STATED THAT THE AO HAD MADE DISALLOWANCE WITHOUT GIVING SUFFICIENT OPPORTU NITY TO ASSESSEE. ASSESSEE HAS ALSO FILED A COPY OF LETTER DATED 20.0 6.2005 IN WHICH IT WAS STATED THAT DURING THE YEAR UNDER CONSIDERATION ASS ESSEE 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 BALA NCE AMOUNT OF ITA NO. 3385 + 4/MUM/2006 IMA-PG INDIA LTD. (PRECISION GEARS P LTD.) 25 ` 6 14 864/- WAS TAKEN TO THE BALANCE SHEET AS DEFER RED REVENUE. IT WAS FURTHER STATED THAT W.E.F. A.Y. 2003-04 DEPRECIATI ON @ 60% IS ALLOWABLE IN RESPECT OF COMPUTER SOFTWARE AS AGAINST WHICH THE A SSESSEE HAD CLAIMED ONLY 44.87% OF THE TOTAL EXPENSES ON COMPUTER SOFTW ARE 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 TH AT 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 ASSES EE 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 ALONG WITH 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 WRI TTEN OFF IN THE NEXT TWO YEARS AND BALANCE TREATED AS REVENUE EXPEN DITURE. THE ASSESSE FURTHER STATED THAT THE SOFTWARE HAS GOT IN DEFINITE LIFE AND IT MAY BECOME USELESS WITH CHANGE IN THE PRODUCT OR IT S DESIGN OR IT MAY LOOSE ITS VALUE SHORTLY DUE TO NEW INVENTION. T HE 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 I T. THE ASSESSEE IS FULLY AWARE THAT THE AMOUNT SPENT WILL DERIVE BE NEFIT OF ENDURING NATURE. FURTHER THE AMOUNT HAS BEEN DISALLOWED SIM PLY BECAUSE OF NON AVAILABILITY OF BILLS BUT FOR THE REASON MENTIO NED IN THE ORDER WHERE IT HAS BEEN HELD THAT THE EXPENDITURE IS OF C APITAL NATURE AND BENEFIT OF ENDURING NATURE HAS ACCRUED TO THE ASSES SEE. THUS THE AMOUNT HAS BEEN CORRECTLY DISALLOWED IN THE ASSESSM ENT ORDER. THE CIT(A) HELD THAT THE ISSUE IS COVERED AGAINST A SSESSEE 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 EXPENDITUR E INCURRED BY THE ASSESSEE ON COMPUTER SOFTWARE IS A CAPITAL EXPENDIT URE. FOLLOWING THE SAID DECISION THE ACTION OF THE A.O. IN TREATING THE EX PENDITURE ON COMPUTER SOFTWARE AS CAPITAL EXPENDITURE IS UPHELD. HOWEVER THE AO IS DIRECTED TO ITA NO. 3385 + 4/MUM/2006 IMA-PG INDIA LTD. (PRECISION GEARS P LTD.) 26 ALLOW THE DEPRECIATION TO ASSESSEE ON THE SAID AMOU NT 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 TH E SPECIAL BENCH IN THE CASE OF AMWAY INDIA ENTERPRISES 111 ITD112 (DEL) (SB). A CCORDINGLY 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 BENC H OR ANY OTHER DECISION OF HIGHER JUDICIAL FORUM ON THE ISSUE. GROUND IS CO NSIDERED ALLOWED FOR STATISTICAL PURPOSE. 38. IN THE RESULT APPEAL IS TREATED AS ALLOWED FOR STA TISTICAL PURPOSES 39. ITA NO. 3361/MUM/2006 A.Y. 2002-03 40. IN THIS APPEAL REVENUE HAS RAISED 10 GROUNDS ON DEL ETION 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 EXPE NSES OF ` 47 39 839/- UNDER THE HEAD STAFF WELFARE EXPENSES. THESE EXPENS ES INCLUDED REIMBURSEMENT OF MEDICAL EXPENSES UNIFORM EXPENSES REFRESHMENT ALLOWANCE LOCAL TRAVELLING ALLOWANCE EDUCATION EX PENSES 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 RESPE CT 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. BEFO RE 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/- ITA NO. 3385 + 4/MUM/2006 IMA-PG INDIA LTD. (PRECISION GEARS P LTD.) 27 42. ASSESSEE ALSO FURNISHED FULL DETAILS OF THESE EXPEN SES. IT WAS STATED THAT SIMILAR DETAILS WERE FILED BEFORE THE A.O. ALS O 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 TH ROUGH 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 STA TED THAT EXCEPT SOME SMALL PAYMENTS MADE IN CASH TOWARDS EXPENSES ON TEA COFF EE 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 I N FOUR FACTORIES. THEREFORE THE EXPENSES INCURRED BY ASSESSEE ON STA FF WELFARE ARE QUITE REASONABLE. IT WAS FURTHER STATED THAT IN THE PRECE DING 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 REL ATE TO PROVIDING OF CERTAIN FACILITIES SUCH AS REFRESHMENT TEA COFFEE AND FAC ILITY OF CANTEEN TO THE EMPLOYEES AND SUBSTANTIAL PART OF THESE EXPENSES HA S 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 COMPL ETE VOUCHERS HAVE BEEN MAINTAINED BY ASSESSEE. THE A.O. HAS MADE THE DISAL LOWANCE BY MAKING GENERAL OBSERVATIONS. HE HAS NOT POINTED OUT EVEN A SINGLE INSTANCE OF EXPENDITURE CLAIMED BY ASSESSEE WHICH IS OF INADMIS SIBLE NATURE. HE HAS ALSO NOT POINTED OUT ANY INSTANCE OF EXPENDITURE WH ICH IS NOT SUPPORTED BY VOUCHERS OR ANY OTHER DOCUMENT. IN VIEW OF THESE FA CTS 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. ITA NO. 3385 + 4/MUM/2006 IMA-PG INDIA LTD. (PRECISION GEARS P LTD.) 28 43. AFTER CONSIDERING THE ARGUMENTS OF LEARNED D.R. AND LEARNED COUNSEL AND EXAMINING THE FACTS BROUGHT ON RECORD WE ARE O F 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 W ERE 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 OBSERVATI ONS DEVOID OF ANY FACTUAL BASIS. THE CIT(A) HAS CORRECTLY ALLOWED THE AMOUNTS AS DEDUCTION. MOREOVER SIMILAR ADHOC DISALLOWANCE MADE IN EARLIE R YEAR WAS CONSIDERED AND THE SAME WAS NOT UPHELD IN ASSESSEE APPEAL ABOV E. 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 EXPEND ITURE 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 BEFOR E THE A.O. DURING THE ASSESSMENT. AS REGARDS THE DISCREPANCY OF ` 66 250/- POINTED OUT BY THE ITA NO. 3385 + 4/MUM/2006 IMA-PG INDIA LTD. (PRECISION GEARS P LTD.) 29 A.O. IT WAS SUBMITTED THAT THERE WAS NO DISCREPANC Y IN CLAIMING THE EXPENSES TWICE. RATHER THE ASSESSEE HAS CLAIMED EX PENSES OF ` 66 250/- FOUR TIMES DURING THE YEAR UNDER CONSIDERATION. THE SE EXPENSES RELATE TO THE QUARTERLY PAYMENT OF COMPUTER MAINTENANCE FOR THE Y EAR. 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 BE EN DEBITED UNDER THE HEAD REPAIRS AND MAINTENANCE CHARGES. THEREFORE ACCORDING TO ASSESSEE THE A.O. WAS NOT JUSTIFIED IN NOT ALLOWING THE CLAI M 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 EXPENDIT URE MERELY BY OBSERVING THAT MOST OF THE EXPENSES ARE IN THE NATURE OF CAPI TAL 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 EXPENDI TURE REPRESENTS PURCHASE OF BUILDING MATERIAL OR SPARE PARTS DOES NOT MAKE T HE EXPENDITURE A CAPITAL EXPENDITURE. FROM THE DETAILS FILED BY ASSESSEE IT IS SEEN THAT MOST OF THE EXPENSES REPRESENT EXPENSES ON PLUMBING SANITARY W ORK PAINTING REPAIRS OF PLANT AND MACHINERY ELECTRIC REPAIR WHICH CANNO T BE SAID TO BE OF CAPITAL NATURE. IN THE ASSESSMENT ORDER THE A.O. HAS POINT ED OUT AN INSTANCE OF DOUBLE CLAIM OF EXPENDITURE IN RESPECT OF PAYMENT M ADE TO M/S. BUSINESS LINK AUTOMACHINE INDIA LTD. HOWEVER THIS SO CALLED DISCREPANCY HAS BEEN SATISFACTORILY EXPLAINED BY ASSESSEE AS DISCUSSED I N 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 O F THE OPINION THAT CIT(A) HAS CONSIDERED THE FACTS CORRECTLY WHICH DO NOT RE QUIRE ANY INTERFERENCE. THE CIT(A) HAS CORRECTLY ALLOWED THE AMOUNTS AS DED UCTION UNDER SECTION 31 ITA NO. 3385 + 4/MUM/2006 IMA-PG INDIA LTD. (PRECISION GEARS P LTD.) 30 OF THE ACT. SIMILAR CLAIM IN EARLIER YEAR WAS CONSI DERED AND ALLOWED IN ASSESSEE APPEAL. FOR THE REASONS STATED THEREIN WE CONFIRM THE ORDER OF CIT(A) ON THIS ISSUE. THE REVENUE GROUND IS THEREF ORE 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 THE IR 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 INC URRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS AND ARE REQ UIRED 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 ACCOU NT. 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 (G UI) II. BANCO PRODUCTS (I) LTD. VS. DCIT 63 LTD 370 (A HM.) (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 DISALLOWANC E 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 PERS ONAL EXPENDITURE IN THE CASE OF COMPANY. IT IS NOT A CASE OF NON-BUSINESS E XPENDITURE. THEREFORE THE GROUND IS REJECTED. ITA NO. 3385 + 4/MUM/2006 IMA-PG INDIA LTD. (PRECISION GEARS P LTD.) 31 47. GROUND NO. 4 - ISSUE OF VEHICLE AND TRAVEL EXPENSE S: - 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 T HE EMPLOYEES AND DIRECTORS OF THE ASSESSEE COMPANY. THE A.O. HAS MAD E DISALLOWANCE OF ` 19 75 000/- OUT OF THESE EXPENSES BY MAKING OBSERVA TION THAT THE VERY NATURE OF THESE EXPENSES IS SUCH THAT PERSONAL EXPE NSES OF THE PERSONS GOING ON TOUR AND THEIR FAMILY MEMBERS INVARIABLY F ORMS PART OF THESE EXPENSES. BEFORE THE CIT(A) IT WAS SUBMITTED THAT A SSESSEE HAD SUPPLIED FULL DETAILS OF VEHICLE AND TRAVELLING EXPENSES AMOUNTIN G 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 EN GINEERS FOR THE PURPOSE OF MARKETING THE PRODUCTS SERVICING AND REPAIRING THE MACHINES SUPPLIED TO THE CUSTOMERS AND OTHER BUSINESS PURPOSES. THE DIRE CTORS ALSO REQUIRE TO DO THE TRAVELLING FOR BUSINESS PURPOSES. DUE TO THE LO CATION OF ASSESSEES FOUR FACTORIES AT DIFFERENT PLACES EXTENSIVE TRAVELLING HAS TO BE CARRIED OUT. IT WAS SUBMITTED THAT THE DIRECTORS AND TECHNICAL STAFF GO ING 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 T HE WORKERS AND STAFF FROM RAILWAY STATION TO FACTORY AND BACK WHICH ARE AT A DISTANCE OF 10 KMS. THE ITA NO. 3385 + 4/MUM/2006 IMA-PG INDIA LTD. (PRECISION GEARS P LTD.) 32 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 ASSESSM ENT 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 AR OSE IN THE PRECEDING ASSESSMENT YEAR. SINCE THE ISSUE INVOLVED IN THIS Y EAR IS IDENTICAL THE CIT(A) REDUCED THE DISALLOWANCE MADE BY THE A.O. OUT OF CO NVEYANCE 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 O F THE OPINION THAT CIT(A) HAS CONSIDERED THE ISSUES CORRECTLY WHICH DO NOT RE QUIRE ANY INTERFERENCE. THE CIT(A) HAS CORRECTLY ALLOWED THE AMOUNTS ON TRA VELLING TELEPHONE AND VEHICLE EXPENSES AS DEDUCTION UNDER SECTION 37(1) O F THE ACT. FOLLOWING THE EARLIER YEARS ORDER HE RESTRICTED THE DISALLOWANCE ON CONVEYANCE TO 2.5% OF THE CLAIM WHICH THE ASSESSEE ACCEPTED. SIMILAR ISSU E WAS ALSO CONSIDERED IN REVENUE APPEAL IN EARLIER YEAR AND REVENUE GROUND I S REJECTED. FOR THE REASONS STATED THEREIN THE REVENUE GROUND IS REJEC TED. 48. GROUND NO. 5 - ISSUE OF ADVERTISEMENT AND SALES PRO MOTIONS EXPENSES: - THE A.O. HAS DISCUSSED THIS ISSUE IN PA RA 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 L AST FINANCIAL YEAR. FURTHER ACCORDING TO HIM THESE EXPENSES INCLUDE EXPENSES O N 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 COM PRISE OF THE FOLLOWING: - MUMBAI AND BANGALORE ADVERTISEMENT AND PUBLICITY ` 3 60 445/- EXPENSES ON LEAFLETS AND PAMPHLETS ` 1 21 399/- ITA NO. 3385 + 4/MUM/2006 IMA-PG INDIA LTD. (PRECISION GEARS P LTD.) 33 SALES PROMOTION EXPENSES ` 2 12 5 17/- INDORE SALES PROMOTION ` 1 60 078/- IT WAS SUBMITTED THAT THERE IS NO ELEMENT OF ENTERT AINMENT IN LEAFLETS AND PAMPHLETS ADVERTISEMENT AND PUBLICITY. ONLY VERY S MALL 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 YEA R THE A.O. HAD MADE DISALLOWANCE OF ` 5 39 822/- OUT OF SALES PROMOTION EXPENSES IN THE PRECEDING YEAR. THE SAID DISALLOWANCE HAS BEEN DELE TED 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 TH E HEAD ADVERTISEMENT AND SALES PROMOTION. HE FOUND THAT MOST OF THE EXPE NSES RELATE TO ADVERTISEMENT VIDEO SHOOTING OF ROTOVAC MACHINES M ANUFACTURED BY ASSESSEE ADVERTISEMENT IN SOUVENIRS ADVERTISEMENT IN TATA YELLOW PAGES AND IN NEWSPAPERS REIMBURSEMENT OF EXPENSES INCURR ED BY THE PARENT COMPANY IMA IN RESPECT OF EXHIBITIONS EXPENSES ON LEAFLETS CATALOGUES. SOME AMOUNT ALSO RELATES TO THE GIFTS GIVEN TO CUST OMERS OR EXPENSES INCURRED IN CONNECTION WITH LUNCH/DINNER OF CUSTOME RS. AS NONE OF THESE EXPENSES CAN BE SAID TO BE OF DISALLOWABLE NATURE A ND AS THE A.O. HAS NOT POINTED OUT ANY SPECIFIC INSTANCE OF EXPENDITURE WH ICH 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 AN D SALES PROMOTION EXPENSES. REVENUE IS AGGRIEVED. 49. AFTER CONSIDERING THE ARGUMENTS OF LEARNED D.R. A ND LEARNED COUNSEL AND EXAMINING THE FACTS BROUGHT ON RECORD WE ARE O F THE OPINION THAT CIT(A) HAS CONSIDERED THE ISSUES CORRECTLY WHICH DO NOT RE QUIRE ANY INTERFERENCE. THE CIT(A) HAS CORRECTLY ALLOWED THE AMOUNTS. SIMIL AR ISSUE WAS ALSO CONSIDERED IN REVENUE APPEAL IN EARLIER YEAR AND RE VENUE GROUND IS REJECTED. FOR THE REASONS STATED THEREIN THE REVENUE GROUND IS REJECTED. ITA NO. 3385 + 4/MUM/2006 IMA-PG INDIA LTD. (PRECISION GEARS P LTD.) 34 50. GROUND NO. 6 - ISSUE OF EXHIBITION OF EXPENSES: - BEFORE THE A.O. IT WAS CLAIMED BY ASSESSEE THAT OUT OF TOTAL EXPENDITU RE OF ` 28 24 058/- DEBITED UNDER THE HEAD EXHIBITION EXPENSES THE AM OUNT 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 EXHIBI TIONS. THE A.O. DID NOT ALLOW THESE EXPENSES AS ASSESSEE COMPANY WAS SEPARA TELY INCURRING THE EXPENSES ON ADVERTISEMENT SALE PROMOTION TRAVELLI NG AND CONVEYANCE FOR THE SAME PURPOSE. BEFORE THE CIT(A) IT WAS SUBMITTE D THAT VIDE LETTER DATED 30.12.2004 THE A.O. WAS SUPPLIED FULL DETAILS OF E XHIBITION EXPENSES OF ` 28 24 058/- DURING THE COURSE OF ASSESSMENT PROCEED INGS. HOWEVER HE DISALLOWED THE WHOLE OF THESE EXPENSES. THE A.O. IG NORED THE IMPORTANCE OF DISPLAYING PRODUCTS VIZ. BLISTER PACKING MACHINES I N EXHIBITIONS EACH VALUED AT ` 25 TO ` 35 LAKH. BY NO STRETCH OF IMAGINATION IT CAN BE SA ID THAT THERE WAS NO BUSINESS PURPOSE IN INCURRING THIS EXP ENDITURE. 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 COM PANIES. IT DISPLAYS UNDER ONE ROOF PRODUCTS OF ITS OWN AS WELL AS OF IT S SUBSIDIARY COMPANIES IN INTERNATIONAL EXHIBITIONS FOR PHARMACEUTICAL MACHIN ERIES. THE A.O. SHOULD APPRECIATE THAT ASSESSEE COMPANY HAS TO CONTRIBUTE TOWARDS ITS DUE SHARE IN TOTAL EXPENDITURE FOR EXHIBITIONS INCURRED BY ITS H OLDING COMPANY. IT WAS SUBMITTED THAT IN APPEAL IN A.Y. 2001-02 DISALLOWA NCE 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 C URSORY REMARKS REGARDING THE DETAILS OF SUCH EXPENSES BUT HE HAS N OT 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 SUG GEST THAT THE A.O. HAS NOTHING TO SAY FOR THE ACTUAL ALLOWANCE OF SUCH EXP ENSES 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 TH ERE 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 ITA NO. 3385 + 4/MUM/2006 IMA-PG INDIA LTD. (PRECISION GEARS P LTD.) 35 DATED 21.2.2005. THE CIT(A) EXAMINED THE ORDER AND WAS IN AGREEMENT WITH THE REASONS GIVEN BY HIM IN DELETING THE ADDITION O N 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 AGGRI EVED. 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 SECTI ON 40A(2)(B) DURING THE YEAR UNDER CONSIDERATION. OUT OF THE SAI D AMOUNT THE A.O. DISALLOWED 10% OF THE FOLLOWING EXPENSES UNDER SECT ION 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/- T OTAL... ` 2 21 24 905/- THE A.O. DISALLOWED 10% OF THESE EXPENSES SINCE AC CORDING TO HIM ASSESSEE COMPANY HAD NOT DISCHARGED ITS BURDEN OF PROVING TH E FACT THAT THESE ITA NO. 3385 + 4/MUM/2006 IMA-PG INDIA LTD. (PRECISION GEARS P LTD.) 36 TRANSACTIONS WERE COMPARABLE. THE CIT(A) DISCUSSED THE ABOVE ITEMS IN HIS ORDER AS UNDER: - 1) PAYMENTS TO DIRECTORS SHRI SATISH RAO & SHRI A NIL 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 SUB MITTED THAT THE REMUNERATION AND PERQUISITES PAID TO THE DIRECTORS ARE WITHIN THE LIMITS PRESCRIBED BY THE COMPANIES ACT 1956. GUARA NTEE COMMISSION HAS BEEN PAID TO THEM FOR PROVIDING GUARANTEE TO TH E BANKS FOR REPAYMENT OF BANK LOANS AND INTEREST THEREON BY THE ASSESSEE COMPANY. THE DELHI HIGH COURT IN MAHATAXMI SUGAR MI LLS CO. LTD. (252 ITR 691(DEL.) FOLLOWING SUPREME COURT IN ADDL. CIT VS. AKKAMAMBA TEXTILES LTD. (227 ITR 464 (S.C.) HAS HEL D THAT THE PAYMENT OF GUARANTEE COMMISSION IS ALLOWABLE. 10.2.2 I HAVE CONSIDERED THE SUBMISSION OF THE APPE LLANT. MY PREDECESSOR VIDE HIS ORDER DATED 21.02.05 FOR THE PRECEDING YEAR DELETED BOTH THESE DISALLOWANCES. THESE DISALLOWANC ES ARE DELETED FOLLOWING THE DECISION OF MY PREDECESSOR ON THIS IS SUE IN THE PRECEDING YEAR. 2) SITTING FEES TO OTHER DIRECTORS (MUMBAI & LNDORE : 10.2.3 THE A.R. SUBMITTED THAT THE DIRECTORS HAVE B EEN PAID SIFTING FEES FOR ATTENDING BOARD MEETINGS AT THE VERY NOMIN AL RATE OF RS.400 / 500 PER MEETING. THIS PAYMENT IS PERMITTED BY THE COMPANIES ACT 1956 WITH A VERY HIGHER LIMIT. THIS IS AN EXPENDITU RE INCURRED FOR THE PURPOSES OF BUSINESS. I AGREE WITH APPELLANTS SUBMI SSIONS. 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 IM A SPA AND ITS SUBSIDIARIES BEFORE ME. SIMILAR DETAILS WERE ALSO F ILED BEFORE THE AO. THE AR. SUBMITTED THAT ONLY ESSENTIAL COMPONENTS FO R MANUFACTURE OF MACHINES FOR WHICH KNOW-HOW HAS BEEN SUPPLIED BY IM A WERE IMPORTED. NO ROYALTY IS PAID TO IMA. IMA SUPPLIES T HOSE COMPONENTS IN INDIA ONLY TO THE ASSESSEE COMPANY AND THE ASSES SEE COMPANY PURCHASES THOSE COMPONENTS FROM IMA AND ITS SUBSIDI ARIES 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 TH E A.O. IS NOT APPLICABLE TO THE FACTS OF THE APPELLANTS CASE SIN CE IN THAT CASE THE ASSESSEE HAD IMPORTED ROUGH DIAMONDS FROM ITS SISTE R CONCERN AND ANOTHER SUPPLIER BOTH FROM ABROAD WHOSE PRICES VAR IED MATERIALLY. IN THE INSTANT CASE NO MATERIAL WAS IMPORTED FROM ANY OTHER SUPPLIER ITA NO. 3385 + 4/MUM/2006 IMA-PG INDIA LTD. (PRECISION GEARS P LTD.) 37 AND THEREFORE COMPETITORS PRICES SINCE NOT AVAIL ABLE 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 A CT 1961. THE ASSESSEE COMPANY HAD FILED ALONG WITH THE RETURN OF INCOME A REPORT IN FORM NO. 3CED AS REQUIRED BY SEC. 92E. TH E AR. SUBMITTED THAT WITH EFFECT FROM THE ASSESSMENT YEAR 2002-03 S PECIAL PROVISIONS HAVE BEEN INTRODUCED IN THE I. TAX ACT 1961 THROUG H SEES. 92 TO 92F FOR DEALING WITH INTERNATIONAL TRANSACTIONS. SUCH T RANSACTIONS CANNOT BE DEALT WITH U/S.40A(2)(B). THE AR. CONTENDED THAT SPECIFIC PROVISIONS WILL OVER RIDE THE GENERAL PROVISIONS. I N 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 L TD. VS. CIT 42 ITR 49 (S.C.) 4. CIT VS. CARBORUNDUM UNIVERSAL LTD. - 110 ITR 62 1 (MAD) 5. SUBODHCHANDRA POPATLAL VS. CIT -24 ITR 566 (BOM ) 10.2.6 A.R.OF THE APPELLANT ALSO FILED ADDITIONAL G ROUND OF APPEAL IN CONNECTION WITH 10% DISALLOWANCE OF VARIOUS PAYMENT S IN RESPECT OF THESE INTERNATIONAL TRANSACTIONS. THE ADDITIONAL READS AS UNDER: - DISALLOWANCE IN RESPECT OF INTERNATIONAL TRANSACTI ONS : 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 TRANSACTIO NS 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 TRAN SACTIONS 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 INTERNAT IONAL TRANSACTION ARE ESPECIALLY COVERED BY SECTIONS 92&92A TO 92F AN D THEREFORE NO ADDITION CAN BE MADE U/S. 40A(2) (B) IN THAT RESPEC T. D) THE A.O. ERRED IN NOT APPRECIATING THAT IN THIS CASE HE COULD NOT MAKE ANY ARBITRARY ADDITION IN RESPECT OF INTERNATI ONAL 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. T HE ASSESSEE FILED ITS SUBMISSION BEFORE THE AO VIDE LETTER DT. 11.-11.200 5 ALONG WITH A ITA NO. 3385 + 4/MUM/2006 IMA-PG INDIA LTD. (PRECISION GEARS P LTD.) 38 COPY OF TRANSFER PRICING STUDY REPORT JUSTIFYING THE PRICES OF VARIOUS INTERNATIONAL TRANSACTIONS CARRIED OUT AT ARMS LE NGTH PRICE. 10.2.8 THE A.O. IN HIS REMAND REPORT DATED 18TH NOV EMBER 2005 INFORMED THAT HE HAD REFERRED THE MATTER TO THE TRA NSFER PRICING OFFICER FOR EXAMINATION WHO SENT BACK THE MATTER WI THOUT EXAMINATION SINCE THE ASSESSEE COMPANY RAISED CERTAIN OBJECTION S. IN THE SAID REMAND REPORT THE AG HAS REITERATED THAT BY NOT SU PPLYING COMPETITORS RATES THE ASSESSEE HAS NOT DISCHARGED ITS BURDEN OF PROOF. IN REPLY TO THE REMAND REPORT IT WAS CONTEN DED BY THE A.R. THAT THE A.O. HAS NOT CONSIDERED THE TRANSFER PRICING S TUDY REPORT SUBMITTED TO HIM AND HAS NOT DEALT WITH THE INTERN ATIONAL TRANSACTIONS AS PER SPECIFIC PROVISIONS CONTAINED IN SECS. 92 TO 92F NEWLY INTRODUCED IN THE I.T ACT 1961. THE A.R. FUR THER SUBMITTED THAT THE INTERNATIONAL TRANSACTIONS STUDY REPORT JUSTI FIES THE INTERNATIONAL TRANSACTIONS HAVING BEEN AT CARRIED O UT AT ARMS LENGTH PRICE. HE SUBMITTED THAT THE BURDEN OF PROO F 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 MAN UFACTURE OF MACHINERY ONLY FROM IMA AND ITS SUBSIDIARIES. JMA A ND 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 C ITED BY THE A.O. IS NOT APPLICABLE IN THIS CASE. I AGREE THAT WHEN THER E ARE SPECIFIC PROVISIONS THROUGH SEES. 92 TO 92F TO DEAL WITH INT ERNATIONAL TRANSACTIONS THESE TRANSACTIONS CAN NOT BE EXAMINE D UNDER SEC.. 40A (2)(B). THE A.O. HAS NEITHER CONSIDERED TRANSFER P RICING STUDY REPORT SUBMITTED TO HIM NOR HE HAS PROVED THAT THE SE TRANSACTIONS ARE NOT CARRIED OUT AT ARMS LENGTH PRICE. THE A. O. HAS FAILED TO DISCHARGE THE BURDEN OF PROOF THAT THESE TRANSACTIO NS HAVE NOT BEEN CARRIED OUT AT ARMS 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 THA T THEY ALSO HAVE BEEN DEALT WITH IN TRANSFER PRICING STUDY REPORT SUBMITTED BY THE ASSESSEE. HE SUBMITTED THAT COMMISSION VARYING BETW EEN 10% TO 12.5% WAS PAID TO IMA AND ITS SUBSIDIARIES ON EXPOR TS MADE ON THE BASIS OF ORDERS PROCURED FROM THEM IN THEIR AREAS O F JURISDICTION AS PER AGENCY AGREEMENTS ENTERED IN TO WITH THEM. HE F URTHER SUBMITTED THAT THE REIMBURSEMENT OF VARIOUS EXPENSES TO IMA H AS BEEN MADE ON ACTUAL ALLOCATION BASIS WITHOUT ANY MARK UP. HE SUB MITTED IMAS AUDITORS CERTIFICATE IN THAT REGARD. HE FURTHER SU BMITTED THAT TRANSACTIONS HAVE BEEN CARRIED OUT AT ARMS LENGTH PRICE ON ACTUAL EXPENDITURE BASIS. HE STATED THAT HIS ARGUMENTS IN THE PRECEDING ITA NO. 3385 + 4/MUM/2006 IMA-PG INDIA LTD. (PRECISION GEARS P LTD.) 39 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. ENTERPRISE S - : - 10.2.12 THE A.O. HAS NOT COMMENTED SPECIFICALLY ON THIS ISSUE. THE AR. SUBMITTED THAT THE DETAILS OF PURCHASES MADE FR OM PLH ENTERPRISES WERE FILED BEFORE THE AO. COMPARABLE IN STANCES 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 F ILED IN THE APPEAL PROCEEDINGS. HE SUBMITTED THAT PRICES CHARGED BY PL H 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) RELATIV E 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 GUARAN TEE COMMISSION OF RS.70 000 IS PAID TO HER FOR PROVIDING GUARANTEE TO THE BANK AGAINST LOAN REPAYMENTS AND INTEREST PAYMENTS BY TH E ASSEESEE COMPANY. 10.2.16 I HAVE CONSIDERED THE ARS SUBMISSIONS GUA RANTEE COMMISSION IS PAID TO MRS. RAO FOR STANDING GUARANT OR FOR LOAN WHICH IS AN EXPENDITURE INCURRED FOR THE PURPOSE OF THE B USINESS. HENCE AS HELD ABOVE IN THE CASE OF GUARANTEE COMMISSION PAID TO DIRECTORS THE DISALLOWANCE IS DELETED. SALARY & PERQUISITES ARE P AID 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 3 4 556 . L0.2.17 THE A.O. HAS NOT COMMENTED SPECIFICALLY AB OUT 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 P RODUCED BEFORE ME THE DETAILS OF THESE PURCHASES AND A COPIES OF F EW INVOICES IN ITA NO. 3385 + 4/MUM/2006 IMA-PG INDIA LTD. (PRECISION GEARS P LTD.) 40 SUPPORT. FOR EXAMPLE THE RIVET OF SIZE 6X10 HAS BE EN 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). FUR THER THE RIVET OF SIZE 8 X 20 HAS BEEN SUPPLIED TO THE APPELLANT COMP ANY @ 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 DI SALLOWANCE 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 CO NSIDER 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 DIS MISS THE REVENUE GROUND. 54. GROUND NO. 8 - ISSUE OF RESEARCH & DEVELOPMENT EXPE NSES: - THE A.O. HAS DISCUSSED THIS ISSUE IN PARA-14 AT PAGE-6 OF TH E 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 U NDERTAKE RESEARCH AND DEVELOPMENT OF THEIR PRODUCTS TO KEEP IN PACE WITH CHANGING NEEDS OF PHARMACEUTICAL INDUSTRY. FOR RESEARCH AND DEVELOPME NT OF PRODUCTS ASSESSEE HAS EMPLOYED AN ENGINEER AND 3-4 OTHER STA FF 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. TH ROUGH ITS LETTER DATED 10.02.2005 DURING ASSESSMENT PROCEEDINGS. BESIDES E XPENSES ON SALARY BONUS ETC. TO R & D STAFF AND OTHER EXPENSES LIKE ELECTRICITY CHARGES AND TELEPHONE EXPENSES HAVE BEEN INCURRED. THE OTHER EX PENSES INCURRED INCLUDE ` 50 000/- PAID TO SHARPLINE AUTOMATION FOR DESIGNING CHANGE IN PRODUCT AND ` 1 80 000/- PAID TO ELECTRONICS REGIONAL TEST LABORA TORY (WEST) ITA NO. 3385 + 4/MUM/2006 IMA-PG INDIA LTD. (PRECISION GEARS P LTD.) 41 (GOVT. DEPT LIKE ISI) FOR ISSUING A CERTIFICATE REG ARDING FITNESS OF CHANGES BROUGHT IN MACHINES MANUFACTURED BY ASSESSEE. RESEA RCH AND DEVELOPMENT EXPENSES INCURRED ARE REVENUE EXPENSES ONLY. REVENU E EXPENSES ON RESEARCH AND DEVELOPMENT ARE FULLY ALLOWABLE UNDER CLAUSE (1)(I) OF SECTION 35 OF I.T. ACT 1961. CAPITAL EXPENDITURE IS ALLOWA BLE UNDER CLAUSE (IV) WHILE PAYMENTS MADE TO OTHER INSTITUTES FOR R & D ARE ALL OWABLE 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 FUL LY 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 DISA LLOWANCE 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 PL ACED 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. MOREOVE R ON PERUSAL OF THE DETAILS OF EXPENSES DEBITED UNDER THE HEAD RESEARCH AND DE VELOPMENT EXPENSES IT IS SEEN THAT THESE EXPENSES ARE OF REVENUE NATURE A ND 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 S PENT WAS ONLY REVENUE EXPENDITURE FOR R&D WORK IN THE FORM OF SALARIES ET C AND CERTAIN PAYMENTS FOR APPROVALS. SIMILAR EXPENDITURE IN EARLIER YEARS WAS ALSO ALLOWED WITHOUT ANY DISALLOWANCE. THE GROUND RAISED IS ALSO NOT COR RECT AS THE ACT ALLOWS EVEN THE CAPITAL EXPENDITURE AS DEDUCTION SOMETIME S WEIGHTED DEDUCTION ITA NO. 3385 + 4/MUM/2006 IMA-PG INDIA LTD. (PRECISION GEARS P LTD.) 42 SO THE ARGUMENT OF ENDURING ADVANTAGE IS NOT APPROP RIATE. IT SEEMS THE GROUND WAS RAISED WITHOUT CONSIDERING THE PROVISION S OF IT ACT. THE SAME IS THEREFORE DISMISSED. 56. GROUND NO. 9(A): ISSUE OF EXCLUSION OF SALES TAX A ND EXCISE DUTY: IN THE ASSESSMENT ORDER THE A.O. HAS INTER ALIA TREAT ED SALES TAX AND EXCISE DUTY AS PART OF THE TOTAL TURNOVER. ON APPEAL THE C IT(A) HELD THAT THE ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION O F THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. SUDARSHAN CHEMICA LS 245 ITR 769. THEREFORE HE DIRECTED THE A.O. TO RECOMPUTE THE DE DUCTION UNDER SECTION 80HHC WITHOUT INCLUDING THE SALES TAX AND EXCISE DU TY IN THE TOTAL TURNOVER. REVENUE IS AGGRIEVED. 57. THIS ISSUE WAS COVERED AGAINST THE REVENUE BY THE D ECISION OF HONBLE SUPREME COURT IN THE CASE OF LAXMI MACHINE WORKS 29 0 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. BEFO RE 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 M ANUFACTURED GOODS. AT THE YEAR END WHILE VALUING THE CLOSING STOCK AS PER SE CTION I 45A EXCISE DUTY PAYABLE IN RESPECT OF MANUFACTURED GOODS WAS INCLUD ED. IN THE PRECEDING YEAR AN ACCOUNTING ENTRY WAS PASSED DEBITING EXCI SE DUTY ACCOUNT AND CREDITING EXCISE DUTY PAYABLE ACCOUNT. IN THE CUR RENT 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 WA S NOT REQUIRED TO BE REDUCED FROM THE PROFIT OF THE BUSINESS FOR COMPUTI NG DEDUCTION UNDER ITA NO. 3385 + 4/MUM/2006 IMA-PG INDIA LTD. (PRECISION GEARS P LTD.) 43 SECTION 8OHHC. AFTER CONSIDERING THE SUBMISSIONS OF ASSESSEE THE CIT(A) WAS OF THE OPINION THAT IN VIEW OF THE NATURE OF EN TRIES 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 COMPUT ING THE DEDUCTION ALLOWABLE UNDER SECTION 80HHC. HAD THE ASSESSEE CRE DITED THE AMOUNT OF ` 15 11 411/- TO THE EXCISE DUTY PAID ACCOUNT IT WOU LD HAVE HAD SIMILAR IMPACT ON THE INCOME WITHOUT INVITING THE PROVISION S CONTAINED IN EXPLANATION (BAA) TO SECTION 8OHHC. THEREFORE HE D IRECTED 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 DIRECTI ON OF CIT(A). AS PER ACCOUNTING METHOD FOLLOWED THE AMOUNT WAS SHOWN SEP ARATELY. 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 DEL ETION 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 EXPE NSES OF ` 50 47 066/- UNDER THE HEAD STAFF WELFARE EXPENSES. THESE EXPENS ES INCLUDED REIMBURSEMENT OF MEDICAL EXPENSES UNIFORM EXPENSES REFRESHMENT ALLOWANCE LOCAL TRAVELLING ALLOWANCE EDUCATION EX PENSES HEALTH INSURANCE ETC. IN RESPECT OF STAFF AND EMPLOYEES OF ASSESSEE COMPANY. THE AO MADE DISALLOWANCE OUT OF THESE EXPENSES BY MAKING THE OB SERVATION THAT FULL AND COMPLETE DETAILS IN RESPECT OF THESE EXPENSES HAVE NOT BEEN PROVIDED BY ASSESSEE. MOREOVER ACCORDING TO THE A.O. SUBSTANT IAL 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 ITA NO. 3385 + 4/MUM/2006 IMA-PG INDIA LTD. (PRECISION GEARS P LTD.) 44 FILED BEFORE THE A.O. ALSO EVEN THEN HE PROCEEDED TO MAKE DISALLOWANCE OUT OF STAFF WELFARE EXPENSES. IN VIEW OF THESE FACTS A ND CIRCUMSTANCES OF THE CASE THE CIT(A) DELETED THE DISALLOWANCE MADE BY T HE 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 O F THE OPINION THAT CIT(A) HAS CONSIDERED THE ISSUE CORRECTLY WHICH DO NOT REQ UIRE ANY INTERFERENCE. THERE IS NO DENIAL THAT THE AMOUNTS WERE SPENT ON S TAFF WELFARE IN THE COURSE OF BUSINESS. THERE IS ALSO NO DISPUTE WITH R EFERENCE TO THE FACT ASSESSEE FURNISHED COMPLETE DETAILS AND AO HAS NOT JUSTIFIED THE DISALLOWANCE AND MADE THE SAME ON GENERAL OBSERVATI ONS DEVOID OF ANY FACTUAL BASIS. THE CIT(A) HAS CORRECTLY ALLOWED THE AMOUNTS AS DEDUCTION. MOREOVER SIMILAR ADHOC DISALLOWANCE MADE IN EARLIE R YEAR WAS CONSIDERED AND THE SAME WAS NOT UPHELD IN ASSESSEE APPEALS ABO VE. 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 EXPEND ITURE AND INCLUDE PURCHASE OF BUILDING MATERIAL SPARE PARTS. BEFORE THE CIT(A) IT WAS SUBMITTED THAT THE EXPENDITURE RELATES TO THE REPAI RS 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 SEE N THAT NO CAPITAL EXPENDITURE HAS BEEN DEBITED UNDER THE HEAD REPAIR S AND MAINTENANCE CHARGES. THEREFORE ACCORDING TO ASSESSEE THE A.O . WAS NOT JUSTIFIED IN NOT ALLOWING THE CLAIM OF ASSESSEE IN RESPECT OF REPAIR S 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 A ND INCLUDED PURCHASE OF BUILDING MATERIAL SPARE PARTS WHICH ARE USED FOR B UILDING REPAIRS. IN VIEW OF ITA NO. 3385 + 4/MUM/2006 IMA-PG INDIA LTD. (PRECISION GEARS P LTD.) 45 THESE FACTS THE CIT(A) DELETED THE ADDITION MADE B Y 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 O F THE OPINION THAT CIT(A) HAS CONSIDERED THE FACTS CORRECTLY WHICH DO NOT RE QUIRE ANY INTERFERENCE. THE CIT(A) HAS CORRECTLY ALLOWED THE AMOUNTS AS DED UCTION UNDER SECTION 31 OF THE ACT. SIMILAR CLAIM IN EARLIER YEARS WAS CONS IDERED AND ALLOWED IN ASSESSEE/ REVENUE APPEAL. FOR THE REASONS STATED TH EREIN 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 THE IR FAMILY MEMBERS. BEFORE THE CIT(A) IT WAS SUBMITTED THAT DURING THE YEAR UNDER CONSIDERATION ASSESSEE INCURRED EXPENDITURE IN RESPECT OF THE TEL EPHONES INSTALLED AT THE OFFICE FACTORY AND RESIDENCES OF THE DIRECTORS AN D OTHER EMPLOYEES. IT WAS STATED THAT THE EXPENSES CLAIMED BY ASSESSEE HAVE B EEN INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS AND ARE REQ UIRED 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 ACCOU NT. 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). THER E CAN NOT BE ANY PERSONAL EXPENDITURE IN THE CASE OF COMPANY. IT IS NOT A CAS E OF NON-BUSINESS EXPENDITURE. THEREFORE THE GROUND IS REJECTED. 67. GROUND NO. 4 & 5 - ISSUE OF VEHICLE AND TRAVEL EXPE NSES: - 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 T HE EMPLOYEES AND DIRECTORS OF THE ASSESSEE COMPANY. THE A.O. HAS MAD E DISALLOWANCE OF 10% OUT OF THESE EXPENSES BY MAKING OBSERVATION THAT TH E VERY NATURE OF THESE EXPENSES IS SUCH THAT PERSONAL EXPENSES OF THE PERS ONS GOING ON TOUR AND THEIR FAMILY MEMBERS INVARIABLY FORMS PART OF THESE EXPENSES. BEFORE THE ITA NO. 3385 + 4/MUM/2006 IMA-PG INDIA LTD. (PRECISION GEARS P LTD.) 46 CIT(A) IT WAS SUBMITTED THAT ASSESSEE HAD SUPPLIED FULL DETAILS OF VEHICLE AND TRAVELLING EXPENSES. THE CIT(A) DELETED THE SAID DI SALLOWANCES. 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 O F THE OPINION THAT CIT(A) HAS CONSIDERED THE ISSUES CORRECTLY WHICH DO NOT RE QUIRE ANY INTERFERENCE. THE CIT(A) HAS CORRECTLY ALLOWED THE AMOUNTS ON TRA VELLING AND VEHICLE EXPENSES AS DEDUCTION UNDER SECTION 37(1) OF THE AC T. SIMILAR ISSUE WAS ALSO CONSIDERED IN REVENUE APPEAL IN EARLIER YEAR AND RE VENUE GROUND IS REJECTED. FOR THE REASONS STATED THEREIN THE REVENUE GROUND IS REJECTED. 69. GROUND NO. 6 - ISSUE OF ADVERTISEMENT AND SALES PRO MOTIONS EXPENSES: - AS IN EARLIER YEARS THE A.O. MADE A D ISALLOWANCE OF ` 6 00 000/- BY MAKING THE OBSERVATION THAT THE NATURE OF EXPENS ES INCURRED DURING THE YEAR IS NOT DIFFERENT FROM THE EXPENSES DEBITED IN THE LAST FINANCIAL YEAR. FURTHER ACCORDING TO HIM THESE EXPENSES INCLUDE E XPENSES ON GIVING GIFTS PROVIDING LUNCH TO THE GUESTS AND CUSTOMERS EXPENS ES ON GET TOGETHER ETC. IN VIEW OF THESE OBSERVATIONS HE DISALLOWED AN AMO UNT 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 SALE S PROMOTION EXPENSES AT VARIOUS PLACES. THE CIT(A) HAS EXAMINED THE DETAILS FILED BY ASSESSEE IN RESPECT OF EXPENDITURE DEBITED UNDER THE HEAD ADVER TISEMENT 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 SPEC IFIC INSTANCE OF EXPENDITURE WHICH IS OF DISALLOWABLE NATURE HE DEL ETED THE DISALLOWANCE OF ` 6 00 000/- MADE BY THE A.O. OUT OF ADVERTISEMENT AN D 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 O F THE OPINION THAT CIT(A) HAS CONSIDERED THE ISSUES CORRECTLY WHICH DO NOT RE QUIRE ANY INTERFERENCE. THE CIT(A) HAS CORRECTLY ALLOWED THE AMOUNTS. SIMIL AR ISSUE WAS ALSO ITA NO. 3385 + 4/MUM/2006 IMA-PG INDIA LTD. (PRECISION GEARS P LTD.) 47 CONSIDERED IN REVENUE APPEAL IN EARLIER YEAR AND RE VENUE GROUND IS REJECTED. FOR THE REASONS STATED THEREIN THE REVENUE GROUND IS REJECTED. 71. GROUND NO. 7 - ISSUE OF EXHIBITION OF EXPENSES: - T HE 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 10.1 2.2005 THE A.O. WAS SUPPLIED FULL DETAILS OF EXHIBITION EXPENSES DURING THE COURSE OF ASSESSMENT PROCEEDINGS. HOWEVER HE DISALLOWED THE WHOLE OF TH ESE EXPENSES. IT WAS SUBMITTED THAT IN APPEAL IN A.Y. 2001-02 2002-03 D ISALLOWANCE OUT OF EXHIBITION EXPENSES WAS DELETED BY THE CIT(A). ON T HE 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 DE LETED 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 EXPE NSES: - THE A.O. HAS DISCUSSED THIS ISSUE IN PARA-14 AT PAGE-6 OF TH E 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 N ATURE OF THESE EXPENSES. BEFORE THE CIT(A) IT WAS SUBMITTED THAT ASSESSEE WA S MANUFACTURING BLISTER PACKING MACHINES (TABLETS & CAPSULES PACKING MACHIN ES) USED BY PHARMACEUTICAL INDUSTRY. BESIDES EXPENSES ON SALARY BONUS ETC. TO R & D STAFF AND OTHER EXPENSES LIKE ELECTRICITY CHARGES A ND TELEPHONE EXPENSES HAVE BEEN INCURRED. RESEARCH AND DEVELOPMENT EXPEN SES 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 EARLI ER YEARS UNDER WERE FULLY ALLOWED. AFTER CONSIDERING THE EXPLANATION OF ASSES SEE THE CIT(A) HELD THAT SAID EXPENDITURE IS ALLOWABLE UNDER SECTION 35(1) O F THE I.T. ACT. MOREOVER SIMILAR AMOUNTS WERE ALLOWED IN EARLIER YEAR BY HIS PREDECESSOR. IN VIEW OF ITA NO. 3385 + 4/MUM/2006 IMA-PG INDIA LTD. (PRECISION GEARS P LTD.) 48 THIS DISCUSSION THE CIT(A) DELETED THE ADDITION MAD E 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 S PENT WAS ONLY REVENUE EXPENDITURE FOR R&D WORK IN THE FORM OF SALARIES ET C AND CERTAIN PAYMENTS FOR APPROVALS. SIMILAR EXPENDITURE IN EARLIER YEARS WAS ALSO ALLOWED WITHOUT ANY DISALLOWANCE. THE GROUND RAISED IS ALSO NOT COR RECT AS THE ACT ALLOWS EVEN THE CAPITAL EXPENDITURE AS DEDUCTION SOMETIME S WEIGHTED DEDUCTION SO THE ARGUMENT OF ENDURING ADVANTAGE IS NOT APPROP RIATE. 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 TREAT ED SALES TAX AND EXCISE DUTY AS PART OF THE TOTAL TURNOVER. ON APPEAL THE C IT(A) HELD THAT THE ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION O F THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. SUDARSHAN CHEMICA LS 245 ITR 769. THEREFORE HE DIRECTED THE A.O. TO RECOMPUTE THE DE DUCTION UNDER SECTION 80HHC WITHOUT INCLUDING THE SALES TAX AND EXCISE DU TY IN THE TOTAL TURNOVER. REVENUE IS AGGRIEVED. 76. THIS ISSUE WAS COVERED AGAINST THE REVENUE BY THE D ECISION OF HONBLE SUPREME COURT IN THE CASE OF LAXMI MACHINE WORKS 29 0 ITR 667(SC). THE GROUND IS REJECTED. 77. GROUND NO.10 THE REVENUE IS AGGRIEVED ON THE DIRE CTION 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 SECT ION 80HHC. THE A.O EXCLUDED THE ABOVE AMOUNT WHILE WORKING OUT THE DED UCTION INVOKING EXPLANATION (BAA). THE CIT(A) FOLLOWING THE ORDER O F THE ITAT IN A.Y. 1998-99 IN ITA 2670/MUM/2002 DATED 19.10.2005 DELETED THE S AME AND DIRECTED THE A.O. NOT TO EXCLUDE THE ABOVE AMOUNT. 78. WE DO NOT SEE ANY REASON TO DIFFER FROM THE DIRECTI ON OF CIT(A). THE CIT(A) FOLLOWED THE COORDINATE BENCH DECISION IN TH E EARLIER YEAR. THIS ITA NO. 3385 + 4/MUM/2006 IMA-PG INDIA LTD. (PRECISION GEARS P LTD.) 49 OPINION IS ALSO SUPPORTED BY THE PRINCIPLES ESTABLI SHED BY THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. PIFZER LTD . 330 ITR 62 (BOM). THE ABOVE AMOUNTS ARE NOT INDEPENDENT INCOME NOR RECEIP T 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. REVEN UE GROUND IS REJECTED. 79. DEPRECIATION ON COST OF IN-HOUSE MANUFACTURED MACHI NERY: DURING THE ASSESSMENT PROCEEDINGS THE A.O. NOTICED THAT ASSESS EE HAS CLAIMED DEPRECIATION AMOUNTING TO ` 10 65 560/- @25% IN RESPECT OF PLANT & MACHINERY ADDED DURING THE YEAR ON ACCOUNT OF IN-HO USE CAPITALIZATION. ASSESSEES REPRESENTATIVE WAS ASKED TO EXPLAIN THE SAME. THE A.R. EXPLAINED THAT THEY ARE AS PER AUDITORS CERTIFICATED VIDE LE TTER DATED 06.08.2005 ALONGWITH DETAILS OF ADDITIONS TO FIXED ASSETS AND AGAIN FURNISHED A COPY OF THE SAID CERTIFICATE. ON GOING THROUGH THE CERTIFIC ATE 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 I N 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 V IEW THAT IF IT IS DEBITED TO THE P & L ACCOUNT THEN IT WILL AMOUNT TO DOUBLE DED UCTION. FURTHER FROM THE PARTICULARS OF THE JIGS TOOLS AND DIES IT APPE ARS THAT THESE ARE MACHINES MANUFACTURED BY THE ASSESSEE COMPANY ITSEL F THEREFORE DEPRECIATION CANNOT BE ALLOWED UNLESS IT IS FIRST A CCOUNTED FOR SALES. ACCORDINGLY HE DISALLOWED THE CLAM OF DEPRECIATION OF ` 10 65 560/- AND ADDED BACK THE SAME TO INCOME OF THE ASSESSEE. ON A PPEAL 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. THEREFOR E HE DIRECTED THE A.O. TO ALLOW DEPRECIATION AS CLAIMED BY ASSESSEE. REVEN UE IS AGGRIEVED. ITA NO. 3385 + 4/MUM/2006 IMA-PG INDIA LTD. (PRECISION GEARS P LTD.) 50 80. AFTER CONSIDERING THE RIVAL ARGUMENTS WE DO NOT SEE ANY REASON TO DIFFER FROM THE FINDINGS OF THE CIT(A). ASSESSEE PR ODUCED SOME OF THE JIGS TOOLS AND DIES AND THESE ARE CONVERTED FROM ITS STO CK TO ASSETS. ASSESSEE PASSED NECESSARY ENTRIES DEBITING THE STOCK ACCOUNT S AND CREDITING THE ASSET ACCOUNTS. THERE IS NOTHING WRONG IN CLAIMING DEPREC IATION ON THE CAPITALIZED ASSETS. THE DIRECTION OF THE CIT(A) IS UPHELD. GROU ND 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 O F THE A.O. IN EXCLUDING 90% OF SALES TAX REFUND OF RS.30 67 567/- OTHER IN COME RS.2 18 278/- AND MARKING INCOME OF RS.9 00 000/-. THE OTHER ISSUE RA ISED 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 AN D NOT IN THE YEAR IN WHICH EXPORT SALES ARE REALISED. AS FAR AS THE FIRST ISSU E OF EXCLUDING 90% OF SALES TAX REFUND OTHER INCOME AND MARKETING INCOME ARE C ONCERNED 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 Y EAR 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 THI S YEAR HOWEVER THE CIT(A) DIFFERED FROM THE EARLIER YEARS FINDING AND UPHELD A.OS ACTION. SINCE THESE AMOUNTS ARE ALREADY ALLOWED AS PART OF BUSINESS PRO FIT AND DIRECTED NOT TO BE EXCLUDED UNDER EXPLANATION (BAA) AT 90% IN EARLI ER YEARS CONSISTENT WITH THE STAND ASSESSEES 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 WI TH 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 W HICH EXPORT WAS CARRIED OUT AND NOT IN THE YEAR IN WHICH EXPORT SALES ARE R EALISED. THIS DECISION IS CONSISTENT WITH THE DECISION OF THE ITAT SPECIAL BE NCH MUMBAI IN THE CASE OF PRAKASH L. SHAH 115 ITD 167 (SB)(MUM). SINCE THE CIT(A) FOLLOWED THE ITA NO. 3385 + 4/MUM/2006 IMA-PG INDIA LTD. (PRECISION GEARS P LTD.) 51 ABOVE DECISION WE DO NOT SEE ANY REASON TO DIFFER FROM THE DIRECTION OF THE CIT(A). THIS DECISION IS ALSO SUPPORTED BY THE PROV ISIONS OF SECTION 155 (13) WHICH ALLOWS THE A.O. TO MODIFY THE ORDER OF THE AS SESSMENT YEAR IN WHICH YEAR THE DEDUCTION WAS NOT ALLOWED ON THE GROUND TH AT SUCH INCOME HAS NOT BEEN RECEIVED IN CONVERTIBLE FOREIGN EXCHANGE IN IN DIA 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 DELE TION 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 EXPE NSES OF ` 52 10 637/- UNDER THE HEAD STAFF WELFARE EXPENSES. THESE EXPENS ES INCLUDED REIMBURSEMENT OF MEDICAL EXPENSES UNIFORM EXPENSES REFRESHMENT ALLOWANCE LOCAL TRAVELLING ALLOWANCE EDUCATION EX PENSES HEALTH INSURANCE ETC. IN RESPECT OF STAFF AND EMPLOYEES OF ASSESSEE COMPANY. THE AO MADE DISALLOWANCE OUT OF THESE EXPENSES BY MAKING THE OB SERVATION THAT FULL AND COMPLETE DETAILS IN RESPECT OF THESE EXPENSES HAVE NOT BEEN PROVIDED BY ASSESSEE. MOREOVER ACCORDING TO THE A.O. SUBSTANT IAL 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 A ND CIRCUMSTANCES OF THE CASE THE CIT(A) DELETED THE DISALLOWANCE MADE BY T HE 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 O F THE OPINION THAT CIT(A) HAS CONSIDERED THE ISSUE CORRECTLY WHICH DO NOT REQ UIRE ANY INTERFERENCE. THERE IS NO DENIAL THAT THE AMOUNTS WERE SPENT ON S TAFF WELFARE IN THE COURSE OF BUSINESS. THERE IS ALSO NO DISPUTE WITH R EFERENCE TO THE FACT ITA NO. 3385 + 4/MUM/2006 IMA-PG INDIA LTD. (PRECISION GEARS P LTD.) 52 ASSESSEE FURNISHED COMPLETE DETAILS AND AO HAS NOT JUSTIFIED THE DISALLOWANCE AND MADE THE SAME ON GENERAL OBSERVATI ONS DEVOID OF ANY FACTUAL BASIS. THE CIT(A) HAS CORRECTLY ALLOWED THE AMOUNTS AS DEDUCTION. MOREOVER SIMILAR ADHOC DISALLOWANCE MADE IN EARLIE R 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 THE IR FAMILY MEMBERS. BEFORE THE CIT(A) IT WAS SUBMITTED THAT DURING THE YEAR UNDER CONSIDERATION ASSESSEE INCURRED EXPENDITURE IN RESPECT OF THE TEL EPHONES INSTALLED AT THE OFFICE FACTORY AND RESIDENCES OF THE DIRECTORS AN D OTHER EMPLOYEES. IT WAS STATED THAT THE EXPENSES CLAIMED BY ASSESSEE HAVE B EEN INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS AND ARE REQ UIRED 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 ACCOU NT. 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). THER E CAN NOT BE ANY PERSONAL EXPENDITURE IN THE CASE OF COMPANY. IT IS NOT A CAS E OF NON-BUSINESS EXPENDITURE. THEREFORE THE GROUND IS REJECTED. 89. GROUND NO. 3 & 4 - ISSUE OF VEHICLE AND TRAVEL EXPE NSES: - 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 T HE EMPLOYEES AND DIRECTORS OF THE ASSESSEE COMPANY. THE A.O. HAS MAD E DISALLOWANCE OF 10% OUT OF THESE EXPENSES BY MAKING OBSERVATION THAT TH E VERY NATURE OF THESE EXPENSES IS SUCH THAT PERSONAL EXPENSES OF THE PERS ONS 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 ITA NO. 3385 + 4/MUM/2006 IMA-PG INDIA LTD. (PRECISION GEARS P LTD.) 53 TRAVELLING EXPENSES. THE CIT(A) DELETED THE SAID DI SALLOWANCES. 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 O F THE OPINION THAT CIT(A) HAS CONSIDERED THE ISSUES CORRECTLY WHICH DO NOT RE QUIRE ANY INTERFERENCE. THE CIT(A) HAS CORRECTLY ALLOWED THE AMOUNTS ON TRA VELLING AND VEHICLE EXPENSES AS DEDUCTION UNDER SECTION 37(1) OF THE AC T. SIMILAR ISSUE WAS ALSO CONSIDERED IN REVENUE APPEAL IN EARLIER YEAR AND RE VENUE GROUND IS REJECTED. FOR THE REASONS STATED THEREIN THE REVENUE GROUND IS REJECTED. 91. GROUND NO. 5 - ISSUE OF ADVERTISEMENT AND SALES PRO MOTIONS EXPENSES: - AS IN EARLIER YEARS THE A.O. MADE A D ISALLOWANCE OF ` 5 74 926/- BY MAKING THE OBSERVATION THAT THE NATURE OF EXPENS ES INCURRED DURING THE YEAR IS NOT DIFFERENT FROM THE EXPENSES DEBITED IN THE LAST FINANCIAL YEAR. FURTHER ACCORDING TO HIM THESE EXPENSES INCLUDE E XPENSES ON GIVING GIFTS PROVIDING LUNCH TO THE GUESTS AND CUSTOMERS EXPENS ES ON GET TOGETHER ETC. IN VIEW OF THESE OBSERVATIONS HE DISALLOWED OUT OF ADVERTISEMENT AND SALES PROMOTION EXPENSES. BEFORE THE CIT(A) IT WAS SUBMIT TED THAT THE EXPENSES OF ` 11 82 475/- DEBITED UNDER THE HEAD ADVERTISEMENT AN D SALES PROMOTION EXPENSES COMPRISE ADVERTISEMENT AND PUBLICITY EXPE NSES ON LEAFLETS AND PAMPHLETS SALES PROMOTION EXPENSES AT VARIOUS PLAC ES. THE CIT(A) HAS EXAMINED THE DETAILS FILED BY ASSESSEE IN RESPECT O F EXPENDITURE DEBITED UNDER THE HEAD ADVERTISEMENT AND SALES PROMOTION. A S NONE OF THESE EXPENSES CAN BE SAID TO BE OF DISALLOWABLE NATURE A ND AS THE A.O. HAS NOT POINTED OUT ANY SPECIFIC INSTANCE OF EXPENDITURE WH ICH 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 O F THE OPINION THAT CIT(A) HAS CONSIDERED THE ISSUES CORRECTLY WHICH DO NOT RE QUIRE ANY INTERFERENCE. THE CIT(A) HAS CORRECTLY ALLOWED THE AMOUNTS. SIMIL AR ISSUE WAS ALSO CONSIDERED IN REVENUE APPEAL IN EARLIER YEAR AND RE VENUE GROUND IS REJECTED. FOR THE REASONS STATED THEREIN THE REVENUE GROUND IS REJECTED. ITA NO. 3385 + 4/MUM/2006 IMA-PG INDIA LTD. (PRECISION GEARS P LTD.) 54 93. GROUND NO. 6 - ISSUE OF EXHIBITION OF EXPENSES: - T HE 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 10.1 2.2005 THE A.O. WAS SUPPLIED FULL DETAILS OF EXHIBITION EXPENSES DURING THE COURSE OF ASSESSMENT PROCEEDINGS. HOWEVER HE DISALLOWED THE WHOLE OF TH ESE 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 H E 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 EXPE NSES: - THE A.O. HAS DISCUSSED THIS ISSUE IN PARA-14 AT PAGE-6 OF TH E 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 EXPENS ES LIKE ELECTRICITY CHARGES AND TELEPHONE EXPENSES HAVE BEEN INCURRED. RESEARC H AND DEVELOPMENT EXPENSES INCURRED ARE REVENUE EXPENSES ONLY. REVENU E 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 A LLOWABLE UNDER SECTION 35(1) OF THE I.T. ACT. MOREOVER SIMILAR AMOUNTS WER E 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 AGGRIEVE D. 96. AFTER CONSIDERING THE ARGUMENTS OF RIVAL PARTIES WE AGREE WITH THE FINDING OF CIT(A) ON THE ISSUE. WHAT ASSESSEE HAS S PENT WAS ONLY REVENUE EXPENDITURE FOR R&D WORK IN THE FORM OF SALARIES ET C AND CERTAIN PAYMENTS ITA NO. 3385 + 4/MUM/2006 IMA-PG INDIA LTD. (PRECISION GEARS P LTD.) 55 FOR APPROVALS. SIMILAR EXPENDITURE IN EARLIER YEARS WAS ALSO ALLOWED WITHOUT ANY DISALLOWANCE. THE GROUND RAISED IS ALSO NOT COR RECT AS THE ACT ALLOWS EVEN THE CAPITAL EXPENDITURE AS DEDUCTION SOMETIME S WEIGHTED DEDUCTION SO THE ARGUMENT OF ENDURING ADVANTAGE IS NOT APPROP RIATE. 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. 32 43/MUM/2005 ITA NO. 2723/MUM/2007 ITA NO. 3361/MUM/2006 ITA NO. 2 842/MUM/2007 AND ITA NO. 2628/MUM/2009 ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 30 TH SEPTEMBER 2011. SD/- SD/- (B.R. MITTAL) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI DATED: 30 TH 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.