TMI Blog2014 (11) TMI 171X X X X Extracts X X X X X X X X Extracts X X X X ..... not produced any evidence before the auditor or the AO to prove that the payments were covered by the exceptions mentioned in Rule 6DD of the Rules - the assessee had not proved that 'exceptional and unavoidable circumstances' existed – thus, the order of the FAA is upheld – Decided against assessee. Adhoc disallowance @ 20% of the miscellaneous expenses(ME) – Held that:- As decided in assessee’s own case for the earlier assessment year, it has been held that the addition made by the AO under the head ME is to be set aside as there was no scope for making ad hoc disallowance – Decided in favour of assessee. Expenses incurred for business purposes disallowed – Held that:- FAA had specifically directed the AO to allow the expenditure in the earlier AY, if same was not already allowed in that year - the expenditure was incurred for business purposes and has to be allowed in one of the years - It is not uncommon business practice that in some cases bills are received in subsequent year for a particular item - But, that does not mean that the assessee is not entitled to claim the expenditure only because it is following mercantile system of accounting - the expenditure claimed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase and in law, the learned CIT(A) erred in confirming the action of AO of disallowing expenditure to the tune of ₹ 7,18,162 treating it as prior period expenditure. 5. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in calculating the claim under 80HHC at ₹ 69,85,405. While calculating the claim he has erred as follows: (a) The learned CIT(A) has erred in including export benefits amounting to ₹ 98,31,284 in the total turnover considered for calculating the claim under Sec.80HHC. (b) The learned CIT(A) has erred in reducing 90% of the miscellaneous income while arriving at the business profit for the purpose of calculating the claim under Sec.80HHC. The miscellaneous income included liabilities written back ₹ 32,000, Octroi refund ₹ 6,79,404, and sale of finished goods scrap ₹ 44,85,428 which have been earned in regular course of business and hence are not required to be deducted @90% under Sec.80HHC(3). (c) The learned CIT(A) has erred in not including 90% of export incentive to the tune of ₹ 98,31,284 while calculating the profit for the purpose of claim under Sec.80HHC. 6. On the fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income of ₹ 4,00,27,130/-. The AO assessed total income of the assessee at ₹ 5,52,00,241/- u/s. 143(3) of the Act, on 11.02.2005. 3. First Ground of appeal is about disallowance of ₹ 11.71 Lakhs. During the assessment proceedings,on a perusal of the Tax Audit Report, the AO found that a sum of ₹ 86.12 Lakhs had been shown as expenditure of capital nature, that out of the said expenditure a sum of ₹ 73.47 Lakhs had been added back to the total income of the assessee by itself, that the remaining sum of ₹ 12.65 lakhs was claimed by it as revenue expenditure. After considering the explanation of the assessee in this regard, the AO held that the assessee had added back a sum of ₹ 73.4 Lakhs, that the balance amount were capital in nature and could not be allowed as revenue expenses, that the claim of the assessee had to be rejected. 3.1. Aggrieved by the order of the AO,the assessee preferred an appeal before the First Appellate Authotiry(FAA).Before him it was argued that the said sum was paid for acquiring ERP software license to M/s Baan Info System (P) Ltd. After considering the submissions of the assessee and the assessment order th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing etc., that Software was an enterprise resource and it facilitated the assessee's trading operations or enabled the management to conduct the assessee`s business more efficiently or more profitably. But, it would not make the software a profit-making apparatus. So,the expenditure incurred by the assessee has to be held to be revenue expenditure. Respectfully following the judgment of the Bombay High Court delivered in the matter of Raychem RPG Ltd. (supra) and considering the peculiar facts of the case,we decide first ground of appeal in favour of the assessee. 4. Second ground of appeal is about disallowance made by the AO of ₹ 13,606/-, u/s. 40A(3) of the Act. The AO found that the Tax Auditor, in his report,had reported a list of vouchers,totaling of ₹ 68,034/-, being payments made in cash above ₹ 20,000/-. He directed the assessee to file explanation about the amount in question.It was stated that ₹ 21,954/- were paid to one of the employees of the company who in urgent need of money, that all other payments were less than ₹ 20,000/-. AO, held that in the case of Balaji Transport Deshmukh Transport Services payments were made in excess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Rules. We have gone through the cases relied upon by the assessee. We find that in the case of Satyam Ginning Pressing and Oil Mills(supra), it was found by the Tribunal that the payment of the sum in cash exceeding the limit prescribed in section 40A(3) of the Act was made under exceptional and unavoidable circumstances. In the present case the assessee had not proved that 'exceptional and unavoidable circumstances' existed. Similarly, in the matter of Aloo Supply Co.(supra)Hon'ble High Court has laid down some principles, but how those principles are applicable to the case under appeal has not been proved by the assessee. Therefore, we are of the opinion that the order of the FAA does not suffer from any legal infirmity. Upholding his order, we decide ground no.2 against the assessee. 5. Next ground of appeal is about adhoc disallowance @ 20% of the miscellaneous expenses(ME). During the assessment proceedings, the AO held that the assessee had claimed ME of ₹ 1.43 Crores. It was stated by the assessee that in the earlier AY., ME were disallowed @ 50% treating them as not a wholly incurred for business, that expenses included expenditure incurred on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Escorts Communications Ltd. for annual maintenance charges under the heads annual band width charges and consultancy charges, that the payments related to earlier year, that the payments did not have any relation with the year under consideration. He held that the assessee had not submitted any explanation justifying the claim of these expenses in the year under consideration. Accordingly, he made a disallowance of ₹ 7.18 Lakhs. 6.1. The assessee,during the appellate proceedings,argued that the expenditure pertained to AY.2001-02, that the invoices were received in the AY.2002-03. The FAA, after considering the facts of the case, held that as per the mercantile system of accounting expenses related to AY. 2001-02 were to be allowed in that AY. only, that same were not allowable in subsequent AY. He referred to the decision of the Hon'ble Bombay High Court in the case of Taparia Tools Ltd. (260 ITR 102). However, he directed the AO to re-check the facts and verify the expenses and allow ₹ 7.18 lakhs in AY. 2001-02 only, if not allowed already allowed in earlier year. He confirmed the order of the AO to disallow the amount in question for the year under considerat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0HHC. He also held that the assessee had not furnished any reply with regard to miscellaneous income, that the unclaimed deposits could not be claimed as income arising out of business, that scrap of octri refunds were also not part of the business. Accordingly, he recomputed the assessee's claim u/s 80HHC of the Act and restricted it to ₹ 69.85 Lakhs. 7.1. Aggrieved by the order of the AO, the assessee filed an appeal before the FAA. It did not press the ground related to inclusion of excise duty. FAA considered the submissions of the assessee and the assessment order and held that miscellaneous income consisted of scrap sales (Rs.44.85 lakhs), liabilities written back (32,000/-) and Octroi Refund (6.79 lakhs), that sale of raw material should not be included in the total turnover for the purpose of deduction u/s.80HHC of the Act, that the AO should not include the sale of raw material scrap in the total turnover while calculating the deduction u/s.80HHC of the Act,that sale of finished goods scrap had to be included in the profits of business.He confirmed the action of the AO, in part, with regard to scrap sale. He further held that liabilities written back and Octor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring the whole FY 2001-02 also, that assessee had made no attempt to establish the fact that investment was made through internal approvals, that in the absence of transaction wise narration it was difficult to believe that no borrowed funds had been used for investment purposes, that in the earlier year proportionate disallowance was made, that the then FAA had upheld the order of the AO. Finally, the AO made a disallowance of ₹ 72.56 Lakhs on proportionate basis. 8.1. In the appellate proceedings,after considering the assessment order and the submissions of the assessee, the FAA held that the Rule 8D cannot be applied prior to Assessment Year 2008-09 as decided by the Hon'ble Bombay High Court in the case of Godrej Boyce Mfg Co.Ltd. (328 ITR 81). Referring to the decision of VIP industries (ITA/7242/Mum/08 and 1004/Mum/08) he held that disallowance should be restricted to 5% of the amount of the exempted income received by the assessee. 8.2. Before us,DR left the issue to the discretion of the Bench and AR supported the order of the FAA. We find that the AY. involved is prior to 2008-09 and as per the decision of the Hon'ble jurisdictional High Court the pro ..... X X X X Extracts X X X X X X X X Extracts X X X X
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