Business expenditure cannot be disallowed merely because no corresponding income was offered.

The assessee-company, engaged in infrastructure and road-construction projects, received Government grants for undertaking road projects.

For Assessment Year 2011–12, it filed a return declaring total income of ₹2,54,79,210. In assessment under Section 143(3) of the Income Tax Act, 1961, the Assessing Officer, inter alia, disallowed ₹6,48,02,554 towards project expenses on the ground that no corresponding income had been offered by the assessee.

The Commissioner of Income Tax (Appeals) deleted the disallowance.

The Income Tax Appellate Tribunal, following its decision for Assessment Year 2010–11, affirmed the deletion, holding that the expenses were incurred for the assessee’s business and could not be disallowed merely because no income had been booked against them.

The Revenue challenged the Tribunal’s order under Section 260A of the Act.

Whether, on the facts and circumstances of the case, the Tribunal erred in law in upholding the deletion of the Assessing Officer’s addition of ₹6,48,02,554 towards expenses incurred on projects against which no income had been offered.

Section 37(1) of the Income Tax Act permits deduction of expenditure incurred wholly and exclusively for the purposes of business, subject to the statutory exclusions; the relevant test is commercial expediency.

The absence of income booked against particular business expenditure does not, by itself, justify disallowance where the expenditure is otherwise established to have been incurred wholly and exclusively for the assessee’s business.

If the Revenue believes that income relating to such expenditure has not been disclosed, the appropriate course is to bring that income to tax, rather than disallowing the corresponding business expenditure without disputing its business purpose.

The Court found that the impugned expenses related to road and bridge construction projects, which constituted the assessee’s principal business, and that the Revenue did not dispute that they were incurred wholly and exclusively for business purposes.

Consequently, the mere fact that no income had been booked against certain projects could not invalidate the deduction under Section 37(1).

In relation to the Rajkot–Jamnagar project, income had in fact been recorded, defeating the Assessing Officer’s factual basis for disallowance.

The railway-over-bridge projects had been undertaken for public benefit without Government grants or remuneration, but the related expenditure remained business expenditure and was not disallowable merely for want of corresponding income.

The Court also relied on the Tribunal’s concurrent findings in the assessee’s case for the preceding year, which had attained finality because the Revenue had not challenged them.

Since the expenditure was incurred wholly and exclusively for the assessee’s business, its disallowance solely because corresponding income had not been offered was unsustainable.

The Revenue’s appeal was accordingly dismissed.