[Opinion] Input Tax Credit and Commercial Expediency | A Comparative Analysis With Income Tax Jurisprudence

Vinay Shraff – [2024] 164 taxmann.com 216 (Article)

Section 16 of the CGST Act, 2017 entitles an assessee to take input tax credit (ITC) charged on any supply of goods or services which are used or intended to be used in the course or furtherance of their business.

A critical issue arises: Can an assessing officer deny ITC by questioning the commercial expediency or wisdom of a business entity’s expenditures? In other words, can ITC be denied by demanding proof that an expenditure was necessary?

While there is currently no established jurisprudence under the GST law regarding this issue, it is instructive to refer to the jurisprudence laid down by the Supreme Court in the context of Section 37 of the Income Tax Act, 1961. This section is parimateria to Section 16 of the CGST Act, as it allows an expenditure only if it is incurred wholly and exclusively for business or professional purposes.

1. Historical Context and Legislative Intent

When the Income-tax Bill of 1961 was introduced in Parliament, the “necessity” of the expenditure was initially a condition for claiming deduction under Section 37. The bill read, “any expenditure… laid out or expended wholly, necessarily and exclusively for the purposes of the business or profession shall be allowed…”. However, due to objections raised by trade and business bodies, the word “necessarily” was dropped. This change underscores the legislative intent to avoid unduly restricting business decisions by imposing an overly stringent necessity test.

2. Judicial Interpretations: Commercial Expediency

The jurisdiction of the Revenue is confined to deciding the reality of the expenditure—whether the amount claimed as a deduction was factually expended and whether it was wholly and exclusively for the purpose of the business. The reasonableness of the expenditure can only be questioned to determine whether, in fact, the amount was spent. Once it is established that there is a nexus between the expenditure and the business purpose, the Revenue cannot justifiably claim to assume the role of a businessman or the board of directors to decide the reasonableness of the expenditure.

In the case of Atherton v. British Insulated & Helsby Cables Ltd. [1925] 10 TC 155 (HL), the House of Lords held that in order to claim a deduction, it is enough to show that the money is expended, not of necessity and with a view to direct and immediate benefit, but voluntarily and on grounds of commercial expediency and in order to indirectly to facilitate the carrying on the business.

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