The Gujarat High Court has held that expenditure incurred wholly and exclusively for business purposes cannot be disallowed merely because the taxpayer did not book corresponding income from the projects concerned.
A Division Bench comprising Justice Bhargav D. Karia and Justice Pranav Trivedi found no legal infirmity in the Income Tax Appellate Tribunal’s decision deleting a disallowance of ₹6.48 crore.
The dispute concerned Assessment Year 2011-12. The taxpayer, a company engaged in road infrastructure projects, received government grants for carrying out such projects. It filed its return declaring a total income of ₹2.54 crore.
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Following scrutiny, the Assessing Officer passed an assessment order under Section 143(3) of the Income Tax Act, 1961, determining the company’s total income at ₹78.41 crore.
The additions included ₹56.22 crore towards unutilised grants treated as income, ₹1.08 crore towards alleged unrecorded receipts, ₹6.48 crore relating to project expenses against which no income had purportedly been offered, and ₹12.07 crore towards interest on deposits with the Gujarat State Financial Services.
The Commissioner of Income Tax (Appeals) allowed the company’s appeal and deleted the additions. The Revenue subsequently approached the Ahmedabad Bench of the Income Tax Appellate Tribunal.
The Tribunal upheld the appellate commissioner’s order. In relation to the disputed project expenditure of ₹6.48 crore, it followed its decision in the taxpayer’s own case for Assessment Year 2010-11, where an identical disallowance had been deleted.
The Revenue then approached the High Court under Section 260A of the Income Tax Act. It proposed the question of whether the Tribunal had erred in confirming the deletion of expenditure relating to projects for which no income had been offered.
The earlier Tribunal order, relied upon in the proceedings, stated that the essential requirement for claiming expenditure under Section 37(1) is that it must have been incurred wholly and exclusively for the taxpayer’s business.
The Tribunal had found that the Revenue did not dispute that the expenditure related to road and bridge construction, which constituted the principal business for which the company had been incorporated. The expenses also related to projects undertaken by the company.
Accordingly, once the expenditure was admittedly incurred wholly and exclusively for business, the absence of corresponding income by itself could not justify its disallowance.
The Tribunal had observed that if the Revenue believed the taxpayer had failed to book income arising from the projects or had wrongly excluded a particular receipt from its income, the appropriate course was to identify and bring that income to tax.
The department could not, in the absence of such an exercise, disallow otherwise legitimate business expenses merely because no corresponding income had been recorded.
Affirming this reasoning, the High Court noted that it was undisputed that the expenses related to projects undertaken by the company and had been incurred wholly and exclusively for carrying on its business.
The Court observed that merely because no income was booked against the expenditure, the expenses could not be disallowed when the Revenue failed to establish that the company had earned income from the projects but had either not recorded it or had failed to treat a particular receipt as income.
The High Court also examined the factual position concerning the Rajkot-Jamnagar project. It noted that the company had, in fact, booked income from that project, and this finding had not been controverted by the Assessing Officer.
Consequently, the very basis adopted for disallowing the expenses relating to the Rajkot-Jamnagar project did not survive.
The proceedings also referred to railway overbridge projects undertaken by the company for the benefit of the public at large. The company had carried out those projects without government grants or remuneration.
The Tribunal had held that the absence of income against such expenditure would not invalidate the deduction when the expenditure was otherwise undisputedly incurred wholly and exclusively for business purposes.
The High Court further noted that the Tribunal’s findings were based on its decision in the company’s case for the preceding assessment year. That earlier decision had attained finality because the Revenue had not challenged it by filing an appeal.
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