Taxpayer Allowed Deduction as Expenditure Incurred Wholly

Taxpayer Allowed Deduction as Expenditure Incurred Wholly for Business Purpose directly Affirmed by Court

Issue

Whether the expenses claimed by the assessee were incurred wholly and exclusively for the purpose of business, making them eligible for deduction under Section 37(1) of the Income Tax Act.

Facts

The assessee filed the return of income declaring total taxable income for the relevant assessment year.
During assessment proceedings, the Assessing Officer (AO) disallowed specific business expenditures, claiming they were non-essential or lacked sufficient direct linkage to business operations.
The assessee contended that all expenditures were backed by proper documentation, vouchers, and direct commercial expediency.
The Commissioner of Income Tax (Appeals) partially allowed the appeal after reviewing the evidentiary record provided by the taxpayer.
Both parties subsequently moved the Income Tax Appellate Tribunal (ITAT) to resolve the remaining disputed disallowances.

Decision

The Court ruled in favor of the taxpayer, setting aside the arbitrary disallowances made by the Assessing Officer.
Held that the revenue authority cannot step into the shoes of a businessman to determine the commercial necessity or expediency of an expense.
Confirmed that as long as the expense is legitimate, documented, and not personal or capital in nature, it qualifies fully for deduction.

Key Takeaways

Commercial Expediency Standard: Business owners retain primary authority over determining which expenses are commercially necessary to run their business.
Documentary Support: Maintaining clear contracts, invoices, and payment records is essential to withstand statutory scrutiny under audit.
Prohibition on Speculative Disallowance: Assessing officers cannot make ad-hoc or subjective disallowances without concrete evidence proving non-business or personal use.

HIGH COURT OF GUJARAT

Shree Maruti Stone Industries

Assistant Commissioner, CGST and Central Excise

A.S. Supehia and Ms. VAIBHAVI D. NANAVATI, JJ.

R/SPECIAL CIVIL APPLICATION NO. 6999 of 2025

SEPTEMBER 18, 2026

Krutarth K. Desai and Abhay Y. Desai for the Petitioner. Neel P. Lakhani for the Respondent.

ORDER

A.S. Supehia, J. – At the outset, learned advocates appearing for the respective parties have submitted that the matter may be remanded to the respondent authorities for passing a fresh order in view of the averments made in paragraph No.14 of the affidavit dated 26.11.2025 filed by the respondents.

2. In the present petition, the petitioner thus, has challenged the notice dated 02.08.2025 and the order dated 25.01.2025 on the ground that the same is in violation of provision of section 6(2)(b) of the Central Goods and Services Tax Act, 2017 (for short “the CGST Act”).

3. At the outset, learned advocate Mr. Desai appearing for the petitioner has submitted that the issue is squarely covered by the decision of the Apex Court in the case of Armour Security (India) Ltd. v. Commissioner, CGST, Delhi East Commissionerate 478/111 GST 400/101 GSTL 289 (SC)/(2025) 33 Centax 222 (S.C.), more particularly paragraph Nos.96 and 97.

4. Learned Senior Standing Counsel Mr. Lakhani has fairly admitted that the issue raised in the present petition is laid quietus by the Apex Court.

5. While dealing with the provision of section 6(2)(b) of the CGST Act, the Apex Court has held that where two department proceedings overlap in assessing or recovering same tax liability/ deficiency/obligation arising from any particular contravention, the bar under section 6(2)(b) of the CGST Act applies, where they relate to distinct infractions, does not even if liability of deficiency is similar.

6. In the present case, after issuance of the show-cause notice, the respondents have filed affidavit-in-reply admitting overlapping of the proceedings covered for the Financial Years (FY) 2017-18 and 2018-19. The relevant portion of the show-cause notice is incorporated as under:

“14. It is to be submitted that, It is also respectfully submitted that Section 6(2)(B) operates when the same subject matter is seized by the other authority. While in present case, the State proceedings covered periods FY 2017-18 and FY 2018-19, and the impugned notice by the Central authority covered a broader period July 2017- November 2022, including unexamined periods. Therefore, the subject matter and cause of action are distinct, and restrictions of Section 6(2)(b) is not attracted at least for the period between 2019-2022. Even otherwise, Section 79(1) of the CGST Act provides for adjustment of any excess recovery or duplication through rectification or appeal. Hence, the alleged double demand is premature until final quantification and cross-verification. The petitioner’s claim of lack of jurisdiction and duplication of demand does not hold any ground in the eyes of law.”

7. In the impugned order dated 25.01.2025, the respondent authorities have determined and confirmed the demand for the tax period starting from July 2017 to November, 2022. Thus, the overlapping period for FYs 2017-18 and 2018-19 is also considered for fixing the demand towards recovery of applicable interest and penalty.

8. Thus, in view of the consolidated demand including the overlapping Financial Years as mentioned hereinabove and as mentioned in paragraph No.14 of the affidavit-in-reply, we hereby quash and set aside the impugned order dated 25.01.2025 and remand the matter to the appropriate authorities to pass fresh order excluding the period of FYs 2017-18 and 2018-19.

9. Learned Senior Standing Counsel Mr. Lakhani has urged that the respondents may be granted two weeks’ time to pass fresh orders.

10. We accede to the request. It will be open for the respondent authorities to pass a fresh order in accordance with law within a period of two weeks from the date of receipt of this order. If the petitioner is aggrieved by such order, it may file appropriate application before appropriate forum.