SHRI SHRISHAIL RANA,JAIPUR vs. INCOME TAX OFFICER, WARD-6-4, JAIPUR

Being aggrieved, the assessee carried the matter in appeal before ld. CIT(A) who has confirmed the finding of the Assessing Officer and held that since the assessee has failed to substantiate the claim made in respect of extra-ordinary high expenditures, therefore, the AO has rightly disallowed the expenses of Rs. 32,51,310/-. Against the said finding, the assessee is now in appeal before us.

During the course of hearing, the ld. AR submitted that all the material evidences together with the books of accounts audited by a Chartered Accountant were verified by the AO during the course of the assessment proceedings but not a single specific instance/defects was pointed out by him in the books of account maintained nor did he brought on record any single 3 Shri Shrishail Rana, Jaipur Vs. The ITO, Jaipur instance of inflation of expenditure. It was accordingly submitted that merely on surmises and conjectures, the ld. AO made arbitrary disallowance of expenditure to the extent of Rs. 32.51 lakhs and that too without even specifying that how much is being disallowed out of which expenditure head. It was submitted that imports from outside India constitute major expenditure and almost the entire expenditure is incurred through the banking channels and tax has been deducted at source wherever applicable. It was further submitted that the details of program development expenses, customer support charges and computer software expenses were duly submitted during the course of assessment proceedings. It was submitted that the programme development expenses relates to purchase of the small programmes (Codes) for our products through credit cards, the customer support charges are the expenses which are carried out to support the customers to whom we have already exported the softwares and computer software relates to purchase of small softwares which facilitates exports from India. It was submitted that the expenditure in the software development industry is of fixed nature and do not directly vary with regard to the variations in turnover. It was further submitted that the yardstick for incurring any expenditure for business has to be judged from businessman point of view and the AO cannot step into the shoes of the businessman and determine the necessity of incurring any expenditure. It was further submitted that in AY 2006-07, on similarly facts, the expenses have been disallowed by the Assessing Officer which were deleted by the ld. CIT(A). Regarding disallowance of the expenditure in AY 2012-13, on appeal, ld. CIT(A) restricted the disallowance to Rs. 5,00,000/- out of telephone and travelling expenditure and no further appeal has been filed by the Revenue against the said ld. CIT(A). It was further submitted that in the subsequent AY 2014-15, the assessment was framed by the ld. AO u/s 143(3) accepting the entire declared income without making any addition/disallowance. It was accordingly submitted that even the past history of the assessee has been completely 4 Shri Shrishail Rana, Jaipur Vs. The ITO, Jaipur ignored by the Assessing Officer while framing the assessment for the year under consideration.

The ld DR is heard who has relied on the findings of the lower authorities which we have already noted above and hence, not discussed again for the sake of brevity.

Heard both the parties and pursued the material available on record. In our view, what has to be seen is whether the expenditure so claimed by the assessee has the necessary nexus with the business of the assessee or not and whether such expenditure has been incurred for the purposes of the business of the assessee. In the instant case, we find that it is not the case of the Revenue authorities that the expenditure has not been incurred for the purposes of the business of export of computer software. The case of the Revenue is that there is an increase in expenditure as a percentage of turnover over the previous years and the given that the same is not verifiable, excess of expenditure over revenues have been disallowed. In our view, an increase in the expenditure could be a good starting point for carrying out further examination of the expenses so claimed by the assessee, however, the same cannot be a basis for disallowance of the expenses so claimed by the assessee. Further, the assessee has produced details of the program development expenses, customer support charges and computer software expenses so called for during the course of assessment proceedings in respect of M/s Systweak Inc and no specific defect has been pointed by the AO or the ld CIT(A). Further, the AO has relied on the findings of his predecessor who has disallowed loss in AY 2012-13 which has already been deleted by the ld CIT(A) and the Revenue is not in appeal against the said findings of the ld CIT(A). In our view, the findings of the AO regarding non- genuinessness of expenditure and disallowance of loss is self-contradictory given that the loss is excess of expenditure over the revenues. The AO has accepted the revenues and has 5 Shri Shrishail Rana, Jaipur Vs. The ITO, Jaipur accepted part of the expenditure. Once a part of the expenditure has been accepted, unless and until specific instances of expenditure which are bogus in nature or held to be not incurred for the purposes of the business are segregated, it is incorrect to hold a part of the expenditure falling in the same head as allowable and a part of the expenditure as not allowable. Further, the assessee has carried out its business activities during the year and therefore, there cannot be any basis to hold that the loss so incurred while carrying out its business activities won’t be allowed. In the entirety of facts and circumstances, we donot see any justifiable basis to upheld the action of the Assessing officer who has arbitrarily disallowed the loss so incurred by the assessee. In the result, we delete the disallowance so made by the Assessing officer and the ground of appeal so taken by the assessee is hereby allowed.