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Issues involved: Three questions of law raised by the Revenue in the appeal.
Issue 1: Disallowance of various expenses The disallowance made by the Assessing Officer and confirmed by CIT(A) on adhoc basis for vehicle expenses, telephone expenses, gift expenses, and staff welfare and canteen expenses have been deleted by ITAT. ITAT followed its decision in the case of Kirloskar Engines Ltd. wherein it was held that expenditure certified by auditors of the Company and under the Income Tax Act cannot be disallowed for a limited company. The Tribunal's decision was upheld as the genuineness of the expenditure was not doubted by the assessing officer. Issue 2: Disallowance of prior period expenses ITAT deleted the disallowance of prior period expenses amounting to Rs. 40,47,074 on account of expenses not pertaining to the year under consideration. The Tribunal relied on its decision in the case of Kirloskar Pneumatic Co., holding that if expenditure is incurred in an earlier year but the demand is raised and accepted in a subsequent year, then the expenditure would be allowable in the subsequent year. The High Court found no infirmity in the ITAT's decision and dismissed the appeal. Issue 3: Allowing prior period expenses to enhance losses ITAT directed the AO to allow prior period expenses in the year under consideration, which would enhance the losses and carry them forward for set off against future income. The Revenue questioned the justification of this direction as the expenses were not claimed by the assessee in its return of income as mandated by the provisions of the Income Tax Act, 1961. However, the High Court upheld ITAT's decision, finding no merit in the Revenue's argument and dismissed the appeal.
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