Gujarat High Court on Allowability of Project Expenses Without Matching Income Booking

Background of the Dispute

The Gujarat High Court in PCIT-3 Vs Gujarat State Road Developement Corporation Limited examined whether business expenditure can be disallowed merely because no corresponding income has been offered in the same year, when such expenditure is otherwise accepted as incurred wholly and exclusively for business purposes.

The Revenue approached the High Court under Section 260A of the Income Tax Act 1961, challenging the order dated 31/10/2023 passed by the Income Tax Appellate Tribunal, Ahmedabad “B” Bench, in ITA No.2798/Ahd/2014 and C.O.No.319/Ahd/2014, for Assessment Year (AY) 2011-12.

The substantial question proposed by the Revenue was focused on a disallowance of Rs.6,48,02,554/-, which represented project-related expenditure allegedly pertaining to projects “for which no income is offered”.

Facts in Brief

Nature of Business and Return Filing

  • The assessee is a company engaged in the business of developing infrastructure projects, primarily road projects.
  • The assessee executes such projects and receives grants from the Government to undertake infrastructure road work.
  • For AY 2011-12, the assessee filed its return of income declaring a total income of Rs.2,54,79,210/-.

Scrutiny Assessment and Additions

The return was selected for scrutiny under CASS and the Assessing Officer (AO) completed assessment under Section 143(3) on 21/01/2014. The AO determined the total income at Rs.78,41,21,174/-, after making, inter alia, the following additions:

  • Rs.56,22,59,000/- as income on account of unutilised grant treated as taxable;
  • Rs.1,08,22,957/- as unrecorded receipt;
  • Rs.6,48,02,554/- as disallowance of project expenses “for which no income was offered”; and
  • Rs.12,07,57,449/- as interest on deposits with GSFS.

First Appeal Before CIT(A)

The assessee challenged the assessment before the Commissioner of Income Tax (Appeals) [CIT(A)].

  • By order dated 14/07/2014, the CIT(A) allowed the appeal and deleted all the above additions, including the disallowance of Rs.6,48,02,554/- relating to project expenses.

Revenue’s Appeal Before ITAT

  • The Revenue preferred an appeal before the Tribunal in ITA No.2798/Ahd/2014.
  • The assessee filed Cross-Objection in C.O.No.319/Ahd/2014.

The Tribunal examined the matter by relying substantially on its own earlier decision in the assessee’s case for AY 2010-11 in ACIT Vs Gujarat State Road Development Corporation Ltd. — ITA No.136/Ahd/2014.

Key points from the Tribunal’s reasoning for AY 2011-12 were:

  • The addition of Rs.56,22,59,000/- relating to unspent grant was deleted following the prior year’s order.
  • The addition of Rs.1,08,22,957/- towards unrecorded receipts was deleted as the Department could not demonstrate any error in the reasoning of the CIT(A).
  • Regarding the disallowance of Rs.6,48,02,554/- as project expenses where no income was offered, the Tribunal again followed its earlier decision for AY 2010-11, as the nature of disallowance was identical.

Tribunal’s Reasoning in Earlier Year (Followed for AY 2011-12)

Since the Tribunal’s earlier order for AY 2010-11 formed the core basis for deciding AY 2011-12, the High Court recounted the following important aspects from that decision:

Test Under Section 37(1)

The Tribunal highlighted the core principle under Section 37(1) of the Act: