Disallowance of expenditure merely because they do commensurate against income earned bad in law: ITAT

The Income Tax Appellate Tribunal (ITAT Ahmedabad) in the matter of ACIT Vs. Gujarat State Road Development Corporation Ltd. has held that, as long as the expenses were incurred wholly and exclusively for the purpose of business, the claim of the assessee cannot be denied for the reason that no income was earned against the same.

Brief facts relating to the case are that the assessee is domestic company engaged in building infrastructure projects including roads. Its main objects, for which it has been incorporated, is to carry out construction and development of roads and do all work being handled by the Roads and Building department of the Government of Gujarat, under the BOT, BOOT or BOLT schemes or any other manner, and also to undertake projects outside Gujarat, develop and provide consultancy and construction services in connection with the infrastructure building activities.

We have heard the rival contentions and gone through the orders of authorities below. We have noted that the Hon’ble jurisdictional High Court in decisions referred to by the ld.counsel for the assessee before us, in the case of SAR Infracon P.Ltd. (supra) and in the case of Gujarat Municipal Finance Board (supra) has categorically held that the grants given by the State Governments stipulating deposits of the surplus grants in a particular mode and interest earned thereon ,also treated as part of the grants, the same could not be treated as income of the assessee. In the present case, the assessee has deposited surplus grants admittedly as per the directions of the State Government with GSFS and earned interest income amounting to Rs.2,54,85,315/-.

We have gone through the Memorandum and Articles of Association of the assessee-company, which was filed before us at PB Page No.117 to 159 and we find that clause 13A categorically states that surplus received by the assessee from the State Government have to be deposited as per the direction of the State Government and the company cannot make any profits out of this.

It is evident from the above that the interest earned on surplus funds, was not freely available to the assessee so as to utilize it in the manner it desired and make profits out of it.

In view of the same, the aforestated decisions of the Hon’ble jurisdictional High Court, will clearly apply to the present case and the interest received on the surplus funds by the assessee, therefore, cannot be treated as income of the assessee.

The addition therefore made to the income of the assessee by treating the interest on surplus funds as income of the assessee amounting to Rs.2,54,85,315/- is directed to be deleted. Ground no.1 of the assesses appeal is allowed.

Ground No.2 reads as under:

“ii) The Ld. CIT(A) has further erred in not allowing full deduction of Rs.34671427/- In respect of exps. incurred for the purpose of business. The Id. AO had taken the view that these are the exps. On projects for which no income is offered out of which the Id. CIT(A) allowed the deduction of exps. Of Rs.21053596/-. It is submitted that the Id. CIT(A) ought to have held that when the exps. are incurred for the purpose of business it is not necessary that the expenditure must have result into income. No where the Id. AO nor Id. CIT(A) has held that the expenditure are not incurred for the purpose of business. And hence, it is respectfully submitted that the expenditure incurred for the purpose of project should have been allowed as deduction, as the expenditure is incurred for the purpose of business.”

The issue relates to the expenses incurred on projects against which no income was earned by the assessee. The ld.CIT(A) had upheld the disallowance to the tune of Rs.1.36 crores which related to the expenses incurred by the assessee on Bhuj-Nakhatrana Project and reasoning with the ld.CIT(A) was that there was no reason as to why the assessee would incur expenses without any commensurate income against the same earned.

We have already dealt with this aspect in the Revenue’s appeal in ITA No.136/Ahd/2014 above at ground nos.3 & 4, wherein we have held that, as long as fact that the expenses were incurred wholly and exclusively for the purpose of business of the assessee is not disputed, the claim of the assessee cannot be denied for the reason that no income was earned against the same.

We have dealt with this aspect elaborately in ground no.3 & 4 of the Revenue’s appeal and therefore, following the reasoning laid down therein, we hold that the disallowance of expenditure incurred on Bhuj-Nakhatrana amounting to Rs.1.36 crores was not in accordance with law. We, therefore, direct deletion of the same. Ground No.2 raised by the assessee is allowed.

In effect the appeal of the assessee is allowed.

In the result, the appeal of the Revenue is dismissed, while that of the assessee is allowed.

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