PERFECT CIRCLE INDIA LTD, MUMBAI V. ADDL CIT 5(2), MUMBAI

ITA 1616/MUM/2012

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 8084 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 7 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-10-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 20-03-2014
• Assessment Year: 2002-2003
• Appeal Filed On: 07-03-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: RAJESH S ATHAVALE
• Keywords: Capital asset; Business income; Business expenditure; Earning of tax free income; Deemed to accrue or arise in india; Proportionate interest; Revenue expenditure; Capital expenditure
• Section: 40A(3); 143(3); 80HHC; 14A; 32; 2

Judgement Text

, INCOME TAX APPELLATE TRIBUNAL,MUMBAI - C BENCH. , ! , BEFORE S/SH.VIJAY PAL RAO, JUDICIAL MEM BER & RAJENDRA,ACCOUNTANT MEMBER /. ITA NO.1616/MUM/2012, ' ' ' ' # # # # / ASSESSMENT YEAR-2002-03 PERFECT CIRCLE INDIA LTD. 10, PRASAD CHAMBERS, OPERA HOUSE, CHARNI ROAD, MUMBAI- 400004 PAN:AAACP 0482E VS AC IT 5(2), AAYAKAR BHAVAN, M.K.ROAD, MUMBAI-400020 ( $% / APPELLANT) ( &'$% / RESPONDENT) /. ITA NO.1618/MUM/2012, ' ' ' ' # # # # / ASSESSMENT YEAR-2002-03 DCIT 5(2), AAYAKAR BHAVAN, M.K.ROAD, MUMBAI-400020 VS PERFECT CIRCLE INDIA LTD. 10, PRASAD CHAMBERS, OPERA HOUSE, CHARNI ROAD, MUMBAI-400004 ( $% / APPELLANT) ( &'$% / RESPONDENT) '() '() '() '() * * * * / ASSESSEE BY : SHRI RAJESH S. ATHAVALE + * / REVENUE BY : SHRI AKHILENDRA PRATAP YADAV ' ' ' ' + ++ + ), ), ), ), / DATE OF HEARING : 30-09-2014 -.# + ), / DATE OF PRONOUNCEMENT : 17-10-2014 ' ' ' ' , 1961 1961 1961 1961 + + + + 254 254 254 254( (( (1 11 1) ) ) ) )7) 8 )7) 8 )7) 8 )7) 8 ORDER U/S.254(1)OF THE INCOME-TAX ACT,1961(ACT) PER RAJENDRA,AM ! ! ! ! ' ' ' ' : CHALLENGING THE ORDER DATED 02.12.2011 OF THE CIT(A )-9, MUMBAI,ASSESSEE AND THE ASSESSING OFFICER(AO)HAVE FILED CROSS APPEALS.GROUN DS OF APPEAL FILED BY THE ASSESSEE READ AS UNDER: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LEARNED CIT(A) ERRED IN CONFIRMING THE ACTION OF ASSESSING OFFICER (AO) OF IN DISALLOWING RS.11,71,200 BEING EXPENDITURE INCURRED ON COMPUTER SOFTWARE EXPENSES TREATING IT AS CAPITAL IN NATURE. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LEARNED CIT(A) ERRED IN CONFIRMING DISALLOWANCE OF AN AMOUNT OF RS.13,606 B EING 20% OF THE PAYMENTS MADE IN CASH UNDER SEC.40A(3). 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LEARNED CIT(A) ERRED IN DIRECTING AO TO DISALLOW AN AD-HOC 20 % OUT OF MISC ELLANEOUS EXPENSES TREATING IT AS NON-BUSINESS EXPENDITURE WITHOUT GOING INTO THE TRUE NATURE AND PURPOSE OF THE EXPENDITURE. 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LEARNED CIT(A) ERRED IN CONFIRMING THE ACTION OF AO OF DISALLOWING EXPENDIT URE TO THE TUNE OF RS.7,18,162 TREATING IT AS PRIOR PERIOD EXPENDITURE. 5. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LEARNED CIT(A) ERRED IN CALCULATING THE CLAIM UNDER 80HHC AT RS.69,85,405. WHILE CALCULATING THE CLAIM HE HAS ERRED AS FOLLOWS: (A) THE LEARNED CIT(A) HAS ERRED IN INCLUDING EXPOR T BENEFITS AMOUNTING TO RS.98,31,284 IN THE TOTAL TURNOVER CONSIDERED FOR CALCULATING TH E 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. 2 ITA NO. 1616 & 1618/M/2012 PERFECT CIRCLE INDIA LTD. THE MISCELLANEOUS INCOME INCLUDED LIABILITIES WRITT EN BACK RS.32,000, OCTROI REFUND RS.6,79,404, AND SALE OF FINISHED GOODS SCRAP RS. 4 4,85,428 WHICH HAVE BEEN EARNED IN REGULAR COURSE OF BUSINESS AND HENCE ARE NOT REQUIR ED TO BE DEDUCTED @90% UNDER SEC.80HHC(3). (C) THE LEARNED CIT(A) HAS ERRED IN NOT INCLUDING 9 0% OF EXPORT INCENTIVE TO THE TUNE OF RS.98,31,284 WHILE CALCULATING THE PROFIT FOR THE P URPOSE OF CLAIM UNDER SEC.80HHC. 6. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LEARNED CIT(A) FURTHER ERRED IN NOT ALLOWING CARRY FORWARD OF LONG TERM CAPITAL LOS S AMOUNTING TO RS. 88,97,837. YOUR APPELLANT RESERVES THE RIGHT TO ADD, TO ALTER OR AMEND ANY OF THE ABOVE GROUNDS, IF NECESSARY. ADDITIONAL GROUND: BEING AGGRIEVED BY THE ORDER PASSED BY THE COMMISSI ONER OF INCOME TAX (APPEALS) - 9 (CIT(A), FOR SHORT), MUMBAI, YOUR APPELLANT SUBMITS THE FOLL OWING ADDITIONAL GROUNDS OF APPEAL FOR YOUR SYMPATHETIC CONSIDERATION: ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN L AW, ALTHOUGH THE APPELLANT HAD CAPITALIZED COMPUTER SOFTWARE EXPENSES OF RS. 11,71,200, IT HAD NOT CLAIMED DEDUCTION U/S 32 OF THE INCOME TAX ACT, 1961. THE APPELLANT HAD ALSO NOT CLAIMED T HE ABOVE EXPENDITURE AS REVENUE EXPENDITURE. HOWEVER ASSESSING OFFICER HAD DISALLOWED THE ABOVE EXPENSES AND CIT(A) HAS ALSO CONFIRMED THE ADDITION MADE, RESULTING INTO DOUBLE ADDITION ON AC COUNT OF THE ABOVE EXPENSES. IN THESE CIRCUMSTANCES THE MATTER MAY BE RESTORED TO THE FILE OF ASSESSING OFFICER FOR VERIF ICATION AND ADJUDICATION. ITA NO. 1618/MUM/2012 AO HAS FILED FOLLOWING GROUNDS OF APPEAL: 1. 'WHETHER ON THE FACTS, CIRCUMSTANCES AND IN THE LAW, THE LD. CIT(A) ERRED IN HOLDING THAT THE PROVISIONS OF RULE 8D ARE APPLICABLE FOR AND FROM A . Y. 2008-09 ONLY AND ARE NOT APPLICABLE RETROSPECTIVELY?' 2. 'WHETHER ON THE FACTS, CIRCUMSTANCES AND IN THE LAW, THE LD. CIT(A) ERRED IN DIRECTING THE ASSESSING OFFICER TO RESTRICT THE DISALLOWANCE U/S. 14A TO 5% OF THE EXEMPT INCOME WITHOUT APPRECIATING THAT THE DISALLOWANCE U/S.14A IS TO BE COMPUTED WITH REFERENCE TO THE ACTUAL EXPENDITURE INCURRED BY THE ASSESSEE FOR EARNING EX EMPT INCOME?' THE APPELLANT PRAYS THAT THE ORDER OF THE LD.CIT(A) BE SET ASIDE AND THE ORDER OF THE AO BE RESTORED. THE APPELLANT CRAVES LEAVE TO AMEND OR ALTER ANY GR OUND OR ADD ANY OTHER GROUNDS WHICH MAY BE NECESSARY. DURING THE COURSE OF HEARING BEFORE US,THE AUTHORIS ED REPRESENTATIVE(AR)DID NOT PRESS THE GROUND OF APPEAL NO.6 AS WELL AS THE ADDITIONAL GRO UND FILED BY THE ASSESSEE.HENCE,THE ADDITIONAL GROUND AND GROUND NO.6 STAND DISMISSED,AS NOT PRESS ED. ITA NO.1616/MUM/2012 2. ASSESSEE-COMPANY,ENGAGED IN THE BUSINESS OF MANUFAC TURING OF PISTON RING, CASTING RING, GASKETS AND SEMI FINISHED PLASTICS,FURNISHED ITS RE TURN OF INCOME ON 30.10.2002 DISCLOSING TOTAL INCOME OF RS.4,00,27,130/-. THE AO ASSESSED TOTAL I NCOME OF THE ASSESSEE AT RS.5,52,00,241/- U/S. 143(3) OF THE ACT,ON 11.02.2005. 3. FIRST GROUND OF APPEAL IS ABOUT DISALLOWANCE OF RS. 11.71 LAKHS. DURING THE ASSESSMENT PROCEEDINGS,ON A PERUSAL OF THE TAX AUDIT REPORT,TH E AO FOUND THAT A SUM OF RS. 86.12 LAKHS HAD BEEN SHOWN AS EXPENDITURE OF CAPITAL NATURE,THAT OU T OF THE SAID EXPENDITURE A SUM OF RS. 73.47 3 ITA NO. 1616 & 1618/M/2012 PERFECT CIRCLE INDIA LTD. LAKHS HAD BEEN ADDED BACK TO THE TOTAL INCOME OF TH E ASSESSEE BY ITSELF, THAT THE REMAINING SUM OF RS. 12.65 LAKHS WAS CLAIMED BY IT AS REVENUE EXPEND ITURE. AFTER CONSIDERING THE EXPLANATION OF THE ASSESSEE IN THIS REGARD,THE AO HELD THAT THE ASSESS EE HAD ADDED BACK A SUM OF RS. 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 PREFE RRED AN APPEAL BEFORE THE FIRST APPELLATE AUTHOTIRY(FAA).BEFORE HIM IT WAS ARGUED THAT THE S AID SUM WAS PAID FOR ACQUIRING ERP SOFTWARE LICENSE TO M/S BAAN INFO SYSTEM (P) LTD.AFTER CONSI DERING THE SUBMISSIONS OF THE ASSESSEE AND THE ASSESSMENT ORDER THE ASSESSEE AO HELD THAT THE ASSE SSEE HAD PAID RS.9,76,000/- TO ONE M/S BAAN INFO SYSTEM FOR ERP LICENCE FOR 8 CONCURRENT APPLIC ATION USERS,THAT THE ISSUE OF PURCHASE OF ERP SOFTWARE WAS EXAMINED IN DETAIL BY THE ITAT, DE LHI BENCH IN THE CASE OF MARUTI UDYOG LTD (92 ITD 119),WHEREIN IT WAS HELD THAT THE EXPENDITU RE INCURRED ON PURCHASE OF AN ERP SOFTWARE WAS ALWAYS A CAPITAL EXPENDITURE.HE ALSO REFERRED T O THE DECISION OF THE ITAT DELHI BENCH DELIVERED IN THE CASE OF ESCORTS LTD.(104 ITD427)AN D THE DECISION OF SPECIAL BENCH OF THE TRIBUNAL DELIVERED IN THE MATTER OF AMWAY INDIA ENT ERPRISES (111ITD112).HE FURTHER HELD THAT COMPUTER SOFTWARE WAS NOT DEFINED IN THE ACT, THAT IT HAD BEEN EXPLAINED TO INCLUDE COMPUTER PROGRAMME RECORDED ON ANY DISK, TAPE, PERFORATED ME DIA OR OTHER INFORMATION STORAGE DEVICE,THAT OWNERSHIP TEST,ENDURING BENEFIT TEST AND THE FUNCTI ON TEST WERE THE THREE TEST THAT WOULD DECIDE THE ISSUE AS TO WHETHER THE EXPENDITURE WAS CAPITAL OR REVENUE,THAT ERP SOFTWARE WAS A CAPITAL ASSET,THAT IT WAS AN INTANGIBLE ASSET,THAT COMPUTER ,A TANGIBLE ASSET,ALONE COULD NOT FUNCTION WITHOUT THE HELP OF SOFTWARE,THAT THE ERP HAD ENABLED THE A SSESSEE TO CARRY OUT ITS BUSINESS MORE EFFICIENTLY,THAT THE SCOPE, POWER, LONGEVITY OF ERP ,THAT CENTRALITY TO THE FUNCTIONS OF THE BUSINESS INDICATED THAT THE SAME HAD IMPROVED ASSESSEE'S BUS INESS ORGANISATION AND MADE IT A BETTER PROFIT MAKING APPARATUS FOR ALL TIME TO COME.FINALLY,HE CO NFIRMED THE DISALLOWANCE OF RS. 11,71,200/- MADE BY THE AO. 3.2. BEFORE US,THE AR ARGUED THAT THE EXPENDITURE WAS IN CURRED FOR ERP LICENSE SYSTEM, THAT IT WAS 4 ITA NO. 1616 & 1618/M/2012 PERFECT CIRCLE INDIA LTD. ONLY SUPPORTING FEE,THAT IT WAS NOT CAPITAL EXPENDI TURE,THAT IT WAS NOT OPERATING SOFTWARE, THAT THE ASSESSEE HAD TO INCURRED SUCH EXPENDITURE EVERY THR EE YEARS, THAT IT HAD GOT THE LICENSE FOR LIMITED PERIOD.HE REFERRED TO THE DECISION OF HON'BLE JURIS DICTIONAL HIGH COURT DELIVERED IN THE CASE OF RAYCHEM RPG LTD.(346 ITR 138).HE ALSO REFERRED TO T HE PAGE NO. 85 OF THE PB.DEPARTMENTAL REPRESENTATIVE(DR)SUPPORTED THE ORDER OF THE FAA.. 3.3. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD,INCLUDING PAGE NO.85 OF THE PAPER BOOK.WE FIND THAT THE SYSTEM SOFTWARE DID NOT FORM PART OF THE PROFIT-MAKING APPARATUS OF THE ASSESSEE,THAT THE BUSINESS OF THE ASSESSEE WAS THAT OF MANUFACTURING OF PISTON RING,CASTING RING ETC.,THAT SOFTWARE WAS AN ENTERPR ISE RESOURCE AND IT FACILITATED THE ASSESSEE`S TRADING OPERATIONS OR ENABLED THE MANAGEMENT TO CON DUCT THE ASSESSEE`S BUSINESS MORE EFFICIENTLY OR MORE PROFITABLY.BUT,IT WOULD NOT MAKE THE SOFTWA RE 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 DEL IVERED IN THE MATTER OF RAYCHEM RPG LTD. (SUPRA) AND CONSIDERING THE PECULIAR FACTS OF THE C ASE,WE DECIDE FIRST GROUND OF APPEAL IN FAVOUR OF THE ASSESSEE. 4. SECOND GROUND OF APPEAL IS ABOUT DISALLOWANCE MADE BY THE AO OF RS. 13,606/-,U/S.40A(3) OF THE ACT.THE AO FOUND THAT THE TAX AUDITOR, IN HIS R EPORT,HAD REPORTED A LIST OF VOUCHERS,TOTALING OF RS.68,034/-,BEING PAYMENTS MADE IN CASH ABOVE RS .20,000/-. HE DIRECTED THE ASSESSEE TO FILE EXPLANATION ABOUT THE AMOUNT IN QUESTION.IT WAS STA TED THAT RS. 21,954/- WERE PAID TO ONE OF THE EMPLOYEES OF THE COMPANY WHO IN URGENT NEED OF MONE Y, THAT ALL OTHER PAYMENTS WERE LESS THAN RS.20,000/-.AO,HELD THAT IN THE CASE OF BALAJI TRAN SPORT & DESHMUKH TRANSPORT SERVICES PAYMENTS WERE MADE IN EXCESS OF RS. 20,000/-, THAT THE PAYEES WERE KNOWN PERSON,THAT BOTH OF THEM HAD REGULAR BUSINESS RELATION WITH THE ASSESSE E,THAT PAYMENT TO SUCH PERSON WAS NOT COVERED UNDER EXCEPTIONS PROVIDED UNDER RULE-6DD OF THE INC OME-TAX RULES,1962 (RULES). ACCORDINGLY, HE MADE A DISALLOWANCE @ 20% OF THE TOTAL AMOUNT - I.E.OF RS. 13,606/-. 4.1. IN THE APPELLATE PROCEEDINGS IT WAS ARGUED THAT IMP UGNED PAYMENTS WERE MADE TO TRANSPORT 5 ITA NO. 1616 & 1618/M/2012 PERFECT CIRCLE INDIA LTD. CONTRACTORS AGAINST SEPARATE LORRY RECEIPTS,THAT TH E TRANSPORTERS WERE FROM OUTSIDE CITY LIMITS OF NASHIK WITH NO BANK ACCOUNTS AT NASHIK,THAT DUE TO UNAVOIDABLE CIRCUMSTANCES THE IMPUGNED PAYMENTS WERE MADE IN CASH. AFTER CONSIDERING THE E XPLANATION OF THE ASSESSEE AND THE ASSESSMENT ORDER THE FAA HELD THAT THE ASSESSEE COULD NOT EXPL AIN AS TO WHY CASH PAYMENT WAS MADE BY IT TO ITS OWN EMPLOYEE WHO WAS HAVING REGULAR BANK ACCOUN T AND IN THE SAID ACCOUNT ASSESSEE HAD BEEN CREDITING SALARY AND OTHER ALLOWANCES REGULARLY.REF ERRING TO THE PROVISIONS OF SECTION 40A(3) OF THE ACT,HE HELD THAT THE ASSESSEE'S AUDITOR HAD POI NTED OUT THAT A SUM OF RS.68,034/- HAD BEEN PAID IN CASH IN VIOLATION OF PROVISION CONTAINED IN THE SAID SECTION,THAT PAYMENT TO THOSE PERSONS WAS NOT COVERED UNDER THE EXCEPTION PROVIDED UNDER RULE 6DD OF THE RULES. 4.2. BEFORE US,THEAR STATED THAT AGGREGATE AMOUNT PAID B Y THE ASSESSEE WAS NOT MORE THAN RS. 20, 000/-.HE REFERRED TO THE DECISIONS OF ALOO SUPPLY C O. AND SATYAM GINNING PRESSING AND OIL MILLS OF THE HONBLE ORISSA HIGH COURT,(121ITR680) AND OF MADHYA PRADESH HIGH COURT(217 ITR 688) RESPECTIVELY.DR RELIED UPON THE ORDER OF THE FAA. 4.3. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US.WE FIND THAT THE ASSESSEE HAD MADE A PAYMENT OF RS.21,954/- WERE PAI D TO ONE OF THE EMPLOYEES,WHO HAD BANK ACCOUNT AND HER SALARY AND OTHER EMOLUMENTS WERE DE POSITED IN THAT ACCOUNT.IN THESE CIRCUMSTANCES IT WAS TO BE EXPLAINED BY THE ASSESSE E AS WHAT WERE THE PRESSING CIRCUMSTANCES LIKE BANK HOLIDAY THAT COMPELLED IT TO MAKE THE PAYMENT IN CASH.WE FIND THAT THE ASSESSEE AUDITOR OF THE COMPANY IN HIS REPORT HAS SPECIFICALLY MENTIONE D THAT THE AMOUNT IN QUESTION WAS PAID IN VIOLATION OF THE PROVISIONS OF SECTION 40A(3), THE ASSESSEE HAD NOT PRODUCED ANY EVIDENCE BEFORE THE AUDITOR OR THE AO TO PROVE THAT THE PAYMENTS WE RE COVERED BY THE EXCEPTIONS MENTIONED IN RULE 6DD OF THE RULES. WE HAVE GONE THROUGH THE CASES RELIED UPON BY THE A SSESSEE.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 A SSESSEE HAD NOT PROVED THAT EXCEPTIONAL AND 6 ITA NO. 1616 & 1618/M/2012 PERFECT CIRCLE INDIA LTD. UNAVOIDABLE CIRCUMSTANCESEXISTED.SIMILARLY,IN THE MATTER OF ALOO SUPPLY CO.(SUPRA)HONBLE HIGH COURT HAS LAID DOWN SOME PRINCIPLES,BUT HOW TH OSE PRINCIPLES ARE APPLICABLE TO THE CASE UNDER APPEAL HAS NOT BEEN PROVED BY THE ASSESSEE.TH EREFORE,WE ARE OF THE OPINION THAT THE ORDER OF THE FAA DOES NOT SUFFER FROM ANY LEGAL INFIRMITY.UP HOLDING 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 RS. 1.43 CRORES. IT WAS STATED BY THE ASSESSEE THAT IN THE E ARLIER AY.,ME WERE DISALLOWED @ 50% TREATING THEM AS NOT A WHOLLY INCURRED FOR BUSINESS, THAT EX PENSES INCLUDED EXPENDITURE INCURRED ON DINNERS,CLUB HOUSES,GUEST HOUSES, THAT THOSE EXPENS ES COULD NOT BE TREATED AS INCURRED FOR NON- BUSINESS PURPOSES. AFTER CONSIDERING THE EXPLANATIO N OF THE ASSESSEE, THE AO HELD THAT OUT OF RS. 1.43 CRORES,RS. 16.7 LAKHS AND RS. 33.43 LAKHS WER E INCURRED UNDER THE HEAD 'DONATIONS', AND DEMERGER EXPENSES, THAT THE ASSESSEE ITSELF HAD ADD ED BACK THOSE EXPENSES,THAT IN RESPECT OF REMAINING EXPENSES OF RS. 93.58 LAKHS NO INFORMATIO N,AS TO THE EXACT NATURE OF THE EXPENSES,HAD BEEN FURNISHED, THAT IT WAS NOT CLEAR THAT WHO HAD AVAILED THE FACILITIES FOR THE EXPENDITURE INCURRED BY IT,THAT IN EARLIER YEAR ALSO DISALLOWANCE OF SUC H EXPENDITURE WAS MADE. FINALLY, HE MADE AN ADDITION OF RS. 15 LAKHS, HOLDING THAT THE EXPENDIT URE WAS NOT LED OUT FOR THE PURPOSES OF BUSINESS. IN THE APPELLATE PROCEEDINGS,FAA HELD THAT THE TRIB UNAL HAD IN THE ASSESSEES OWN CASE FOR THE AY. 2001-02,CONSIDERED 20% OF THE ME AS REASONABLE TOWARDS EXPENSES OF NON BUSINESS PURPOSES (ITA/335/2005/M/2005-AY.2001-01,DATED 17.03.2008).H E DIRECTED THE AO TO RESTRICT DISALLOW - ANCE TO 20%. 5.1. BEFORE US,THE AR STATED THAT ASSESSEE ITSELF HAD MA DE DISALLOWANCE,THAT IN THE EARLIER YEARS, THE TRIBUNAL HAD RESTRICTED THE DISALLOWANCE @ 20% OR H AD DELETED THE ENTIRE ADDITION. HE REFERRED TO THE ORDERS OF THE TRIBUNAL DELIVERED IN THE AY 2004 -05 AND AY 2006-07.HE REFERRED TO PAGES 49 TO 83 OF THE PB.DR RELIED UPON THE ORDER OF THE FAA . 7 ITA NO. 1616 & 1618/M/2012 PERFECT CIRCLE INDIA LTD. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US,WE FIND THAT THE TRIBUNAL WHILE DECIDING THE APPEALS FOR THE AY.2003-04(ITA/2 067/MUM/2007,DATED 30.06.2011) AND AY.2004-05(ITA/7653/MUM/2007,DATED 06.09.2011)DELET ED THE ADDITION MADE BY THE AO UNDER THE HEAD ME,HOLDING THAT THERE WAS NO SCOPE FOR MAK ING AD HOC DISALLOWANCE. RESPECTFULLY, FOLLOWING THE ORDERS OF THE TRIBUNAL FOR THE ABOVE TWO AYS.,WE DECIDE GROUND NO.3 IN FAVOUR OF THE ASSESSEE. 6. FOURTH GROUND OF APPEAL RELATES TO EXPENDITURE AMOU NTING TO RS. 7.18 LAKHS. DURING THE ASSESSMENT PROCEEDINGS, THE AO FOUND THAT THE ASSES SEE HAD DEBITED A SUM OF RS. 7,18,162/- AS PRIOR PERIOD EXPENSES.HE DIRECTED THE ASSESSEE TO F ILE THE DETAILS IN THIS REGARD.VIDE ITS LETTER,DATE D 18.11.2004,THE ASSESSEE COMPLIED WITH THE DIRECTION S OF THE ASSESSEE. ON EXAMINATION OF THE DETAILS,THE AO FOUND THAT THOSE PAYMENTS WERE MADE TO HUGHES ESCORTS COMMUNICATIONS LTD. FOR ANNUAL MAINTENANCE CHARGES UNDER THE HEADS ANNUAL B AND 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 CONSIDERA TION. ACCORDINGLY, HE MADE A DISALLOWANCE OF RS.7.18 LAKHS. 6.1. THE ASSESSEE,DURING THE APPELLATE PROCEEDINGS,ARGUE D 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 SA ME WERE NOT ALLOWABLE IN SUBSEQUENT AY.HE REFERRED TO THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF TAPARIA TOOLS LTD. (260 ITR102). HOWEVER,HE DIRECTED THE AO TO RE-CHECK THE FACTS AND VERIFY THE EXPENSES AND ALLOW RS.7.18 LAKHS IN AY.2001-02 ONLY,IF NOT ALLOWED ALR EADY ALLOWED IN EARLIER YEAR.HE CONFIRMED THE ORDER OF THE AO TO DISALLOW THE AMOUNT IN QUESTION FOR THE YEAR UNDER CONSIDERATION. 6.2. THE AR,BEFORE US,STATED THAT BILLS WERE RECEIVED IN THE YEAR UNDER CONSIDERATION.HE REFERRED TO THE PAGE NO.40 OF THE PB.DR SUPPORTED THE ORDER OF THE AO AND THE FAA. 8 ITA NO. 1616 & 1618/M/2012 PERFECT CIRCLE INDIA LTD. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US.WE FIND THAT THE FAA HAD SPECIFICALLY DIRECTED THE AO TO ALLOW THE EXPENDITU RE IN THE EARLIER AY.,IF SAME WAS NOT ALREADY ALLOWED IN THAT YEAR.IN OUR OPINION,THE EXPENDITURE WAS INCURRED FOR BUSINESS PURPOSES AND HAS TO BE ALLOWED IN ONE OF THE YEARS.IT IS NOT UNCOMMON B USINESS PRACTICE THAT IN SOME CASES BILLS ARE RECEIVED IN SUBSEQUENT YEAR FOR A PARTICULAR ITEM.B UT,THAT DOES NOT MEAN THAT THE ASSESSEE IS NOT ENTITLED TO CLAIM THE EXPENDITURE ONLY BECAUSE IT I S FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING.IN OUR OPINION,THE EXPENDITURE CLAIMED BY THE ASSESSEE HAS TO BE ALLOWED IN THE YEAR UNDER CONSIDERA -TION,IF SAME HAS NOT BEEN ALLOWED BY THE AO IN THE AY.2001-02,AS DIRECTED BY THE FAA.GROUND NO.4 IS ALLOWED IN FAVOUR OF THE ASSESSEE FOR STATI STICAL PURPOSES. 7. LAST GROUND OF APPEAL(GAO-5)PERTAINS TO CALCULATION OF CLAIM MADE U/S 80HHC OF THE ACT. DURING THE ASSESSMENT PROCEEDINGS, THE AO DIRECTED THE ASSESSEE TO EXPLAIN AS TO WHY THE CLAIM MADE U/S 80HHC OF THE ACT,ESPECIALLY WITH REGARD TO EXCISE DUTY, EXPORT BENEFITS, MISCELLANEOUS INCOME SHOULD NOT BE CONSIDERED FOR TOTAL TURNOVER/ SHOULD BE REDUCED FROM THE 90% OF THE CALCULATION. THE ASSESSEE FILED ITS EXPLANATION ON 28.12.2014. AFTER CONSIDERING THE REPLY OF THE ASSESSEE,THE AO HELD THAT IT HAD FURNISHED EXPLANAT ION ABOUT EXCISE DUTY AND EXPORT BENEFITS ONLY, THAT NO EXPLANATION WAS FILED BY THE ASSESSEE ABOUT MISCELLANEOUS INCOME, THAT THE TOTAL TURNOVER HAD TO ASCERTAINED WITH REFERENCE TO THE BOOKS OF A CCOUNTS, THAT THE CONTENTION OF THE ASSESSEE ABOUT EXCISE DUTY AND THE TOTAL TURNOVER WAS NOT AC CEPTABLE, THAT THE VALUE OF EXCISE DUTY WAS ESSENTIAL PART OF TOTAL SALES PRICE, THAT THE ISSUE HAD NOT REACHED FINALITY, THAT THE MATTER WAS AGITATED BY THE DEPARTMENT BEFORE THE HON'BLE APEX COURT IN THE CASE OF SUDARSHAN CHEMICALS, THAT THE ASSESSEE'S CLAIM COULD NOT BE ENTERTAINED. HE FURTHER HELD THAT OTHER EXPORTS, BENEFITS, PARTICULARLY DEPB, WOULD BE ASSESSABLE U/S 28(IV) O F THE ACT. HE REFERRED TO THE FILE NO. 153/2004/TPL DATED 08.09.2014 ISSUED BY THE CBDT TH AT PROFIT ON SALE OF DEPB WILL NOT ELIGIBLE FOR DEDUCTION U/S 80HHC. HE ALSO HELD THAT THE ASSE SSEE HAD NOT FURNISHED ANY REPLY WITH REGARD TO MISCELLANEOUS INCOME, THAT THE UNCLAIMED DEPOSIT S COULD NOT BE CLAIMED AS INCOME ARISING OUT OF BUSINESS, THAT SCRAP OF OCTRI REFUNDS WERE ALSO NOT PART OF THE BUSINESS. ACCORDINGLY, HE 9 ITA NO. 1616 & 1618/M/2012 PERFECT CIRCLE INDIA LTD. RECOMPUTED THE ASSESSEE'S CLAIM U/S 80HHC OF THE AC T AND RESTRICTED IT TO RS. 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 IN COME 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 PURPO SE OF DEDUCTION U/S.80HHC OF THE ACT,THAT THE AO SHOULD NOT INCLUDE THE SALE OF RAW MATERIAL SCRA P IN THE TOTAL TURNOVER WHILE CALCULATING THE DEDUCTION U/S.80HHC OF THE ACT,THAT SALE OF FINISHE D GOODS SCRAP HAD TO BE INCLUDED IN THE PROFITS OF BUSINESS.HE CONFIRMED THE ACTION OF THE AO,IN PA RT,WITH REGARD TO SCRAP SALE.HE FURTHER HELD THAT LIABILITIES WRITTEN BACK AND OCTORI REFUND WER E THE DEEMED INCOME OF THE ASSESSEE AS PER THE PROVISIONS U/S.41(1)OF THE ACT,THAT BOTH THE ITEMS DID NOT HAVE ELEMENT OF TURNOVER,THAT THE AO HAD RIGHTLY EXCLUDED 90%OF THE AFORESAID AMOUNTS FO RM THE PROFITS OF BUSINESS WHILE COMPUTING DEDUCTION U/S.80HHC OF THE ACT.REGARDING EXCLUSION OF EXPORT BENEFITS OF RS.92.79 LAKHS ON ACCOUNT OF DEPB BENEFIT,HE HELD THAT ISSUE WAS DECI DED AGAINST THE ASSESSEE BY THE DECISION OF THE TRIBUNAL DELIVERED FOR THE AY.2004-05(SUPRA). 7.2.BEFORE US,AR STATED THAT THE RECOMPUTATION MADE BY THE AO OF 80HHC DEDUCTION WAS NOT AS PER THE PROVISIONS OF LAW.HE RELIED UPON THE CASES OF BANGALORE CLOTHING CO. DELIVERED BY THE HONBLE BOMBAY HIGH COURT (260ITR371).HE FAIRLY CON CEDED THAT THE SUB-GROUND C WAS TO BE DECIDED AGAINST THE =,IN VIEW OF THE DECISION OF KA LPTARU COLOURS(328ITR461).DR SUPPORTED THE ORDER OF THE FAA. WE HAVE HEARD THE RIVAL SUBMISSIONS.WE FIND THAT TH E ASSESSEE HAD NOT FURNISHED THE DETAILS OF THE MISCELLANEOUS INCOME BEFORE THE AO OR THE FAA,THAT FAA CULLED OUT NECESSARY DETAILS AND HAD DECIDED THE ISSUE ON MERITS,THAT HE HAD PARTLY ALLO WED THE ISSUE OF SALE OF SCRAP IN FAVOUR OF THE ASSESSEE,THAT HE HAD FOLLOWED THE DECISION OF THE T RIBUNAL WITH REGARD TO THE BENEFITS OF RS.92.79 LAKHS.IN OUR OPINION THE ORDER OF THE FAA DOES NOT SUFFER FROM ANY LEGAL INFIRMITY.RESPECTFULLY, FOLLOWING THE ORDER OF THE TRIBUNAL FOR THE AY.2004 -05,WE DECIDE GROUND NO.5 AGAINST THE 10 ITA NO. 1616 & 1618/M/2012 PERFECT CIRCLE INDIA LTD. ASSESSEE. APPEAL FILED BY THE ASSESSEE IS ALLOWED,IN PART. ITA NO.1618/MUM/2012: 8. THE ONLY EFFECTIVE GROUND OF APPEAL FILED BY THE AO IS ABOUT DISALLOWANCE OF INTEREST EXPENSES ON INVESTMENT. DURING THE ASSESSMENT PROCEEDING, TH E AO FOUND THAT THE ASSESSEE HAD SHOWN TOTAL INVESTMENT OF RS. 11,12,91,000/-. AS PER SCHEDULE 6 OF THE BALANCE-SHEET, THAT IT HAD DEBITED RS. 4,64,53,000/- AS FINANCIAL CHARGES IN THE P&L A/C, THAT THE INTEREST BEARING FUND HAD BEEN USED FOR NON-BUSINESS PURPOSES IN THE FORM OF INVESTMENT . HE DIRECTED THE ASSESSEE TO EXPLAIN AS TO WHY THE PROPORTIONATE INTEREST RELATABLE TO INVESTMENT SHOULD NOT BE DISALLOWED FOR THE YEAR UNDER CONSIDERATION. THE ASSESSEE FILED ITS SUBMISSION ON 28.12.2004. AFTER CONSIDERING THE EXPLANATION OF THE ASSESSEE THE AO HELD THAT IT HAD MADE HUGE I NVESTMENT OF RS. 11.12 CRORES IN THE FY 2000- 01 WHICH CONTINUED TO BE IN FORCE DURING THE WHOLE FY 2001-02 ALSO, THAT ASSESSEE HAD MADE NO ATTEMPT TO ESTABLISH THE FACT THAT INVESTMENT WAS M ADE THROUGH INTERNAL APPROVALS, THAT IN THE ABSENCE OF TRANSACTION WISE NARRATION IT WAS DIFFIC ULT TO BELIEVE THAT NO BORROWED FUNDS HAD BEEN USED FOR INVESTMENT PURPOSES, THAT IN THE EARLIER Y EAR PROPORTIONATE DISALLOWANCE WAS MADE, THAT THE THEN FAA HAD UPHELD THE ORDER OF THE AO. FINALL Y, THE AO MADE A DISALLOWANCE OF RS. 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 AP PLIED PRIOR TO ASSESSMENT YEAR 2008-09 AS DECIDED BY THE HON'BLE BOMBAY HIGH COURT IN THE CAS E OF GODREJ & BOYCE MFG CO.LTD. (328ITR81).REFERRING TO THE DECISION OF VIP INDUSTR IES(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 TH E BENCH AND AR SUPPORTED THE ORDER OF THE FAA.WE FIND THAT THE AY.INVOLVED IS PRIOR TO 2008-0 9 AND AS PER THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT THE PROVISIONS OF SECTION 14A R.W.R.8D CANNOT BE INVOKED FOR MAKING 11 ITA NO. 1616 & 1618/M/2012 PERFECT CIRCLE INDIA LTD. PROPORTIONATE DISALLOWANCE.WE ARE AWARE THAT THE HO NBLE COURT ALSO HAD HELD IN THE CASE OF GODREJ & BOYCE MFG CO.LTD. THAT REASONABLE DISALLOW ANCE COULD BE MADE IN EARLIER AYS.IN OUR OPINION DISALLOWANCE SUSTAINED BY THE FAA I.E.5% OF THE EXEMPT INCOME IS REASONABLE AND DOES NOT NEED INTERFERENCE FROM OUR SIDE. EFFECTIVE GROU ND OF APPEAL,FILED BY THE AO,IS REJECTED. AS A RESULT,APPEAL FILED BY THE ASSESSEE STANDS PAR TLY ALLOWED AND THE APPEAL OF THE AO IS DISMISSED. 9): '() + 8): ; + ) <= > ' () , + '; + ) <=. ORDER PRONOUNCED IN THE OPEN COURT ON 17TH OCTOBER,2014 . 8 + -.# @ A' 17 BC ; , 201 4 . + 7 D SD/- SD/- ( / VIJAY PAL RAO) ( ! ! ! ! / RAJENDRA) / JUDICIAL MEMBER /ACCOUNTANT MEMBER / MUMBAI, A' /DATE: 17.10 . 2014. SK 8 8 8 8 + ++ + &) &) &) &) E #) E #) E #) E #) / COPY OF THE ORDER FORWARDED TO : 1. ASSESSEE / $% 2. RESPONDENT / &'$% 3. THE CONCERNED CIT(A)/ F G , 4. THE CONCERNED CIT / F G 5. DR C BENCH, ITAT, MUMBAI / H7 &)' LH LHLH LH , . . . 6. GUARD FILE/ 7 9 ') ') ') ') &) &)&) &) //TRUE COPY// 8' / BY ORDER, I / < DY./ASST. REGISTRAR , /ITAT, MUMBAI