HC Rules AO Cannot Add Expenses Not Claimed as Deduction in ITR

Case Details: Kedaara Captial Fund II LLP v. Assessment Unit, National Faceless Assessment Centre (NFAC), Delhi - [2025] 178 taxmann.com 430 (Bombay) 

Judiciary and Counsel Details

• B. P. Colabawalla & Amit S. Jamsandekar, JJ.
• Jehangir Mistry, Sr Counsel, Harsh Kapadia & Sameer Dalal, Advs. for the Petitioner
• Ms Mamta Omle for the Respondent

Facts of the Case

The assessee was a Category II AIF, a closed-ended fund registered with SEBI. It filed its return declaring nil income. It was an investment fund as defined under Section 115UB and earned only short-term capital gains of a certain amount, which were exempt under Section 10(23FBA) read with Section 115UB.

During the year, the assessee made significant investments aggregating to a substantial amount using the capital raised from its unit holders. The assessee had incurred certain expenses, including management fees and other related costs paid to its investment advisor, as well as other expenses such as personnel costs and salaries. Same were debited to the statement of profit and loss for the year. Assessing Officer (AO) disallowed expenses on the ground that expenses were neither found genuine nor any income had been offered against these expenses, and added the same to the assessee’s income.

The aggrieved assessee filed a writ petition to the Bombay High Court.

High Court Held

The Bombay High Court held that the AO wrongly relied on the accounting treatment to make the aforesaid addition. He failed to recall the well-established principle of law that treatment given by the assessee in its books of account is not decisive/conclusive for determining the taxable income under the Act. Whether an assessee is entitled to a deduction or not entirely depends upon the provisions of the Act dehors the disclosure in its books of account.

In the instant case, it was undisputed that the addition of expenses made by the AO was never claimed as a deduction by the assessee in its return of income. In other words, these expenses were never claimed as a deduction to give rise to the AO to add back those deductions in the income returned by the assessee. Therefore, the addition of expenses made by the AO in the income returned by the assessee was wholly unsustainable.

List Of Cases Reviewed

• Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 (SC) (para 10)
• Taparia Tools Ltd. v. Jt. CIT [2015] 55 taxmann.com 361/231 Taxman 5/372 ITR 605 (SC) (para 10)
• United Commercial Bank v. CIT [1999] 106 Taxman 601/240 ITR 355 (SC) (para 10) Followed.

List of Cases Referred To

• Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 (SC) (para 10)
• Taparia Tools Ltd. v. Jt. CIT [2015] 55 taxmann.com 361/231 Taxman 5/372 ITR 605 (SC) (para 10)
• United Commercial Bank v. CIT [1999] 106 Taxman 601/240 ITR 355 (SC) (para 10).