Meaning of “Expenditure”

The meaning of expenditure under section 14A of the Income Tax Act is not defined in the act itself. But we can take guidance from decisions by various high courts. Here are excerpts of courts orders in which the Hon’ble High Court tried to explain the meaning of expenditure.

Meaning of expenditure defined by court

The phrase ‘expenditure’ used in 14A of the Income Tax Act came up before various high courts as detailed under :

1. Hon’ble ITAT-Mumbai explained the meaning of ‘expenditure’ while delivering judgment in Navin Bharat Industries Ltd. Vs. Dy. CIT [2004] 90 ITD 1 (Mum. – Trib.) as under :

Section : 14A

Meaning: Spending’ in the sense of ‘paying out or away’ of money is the primary meaning of ‘expenditure’. ‘Expenditure’ is what is paid out or away and is something which is gone irretrievably. Expenditure relates to disbursements, that means something that a trade paid out indicating a sort of volition on his part.

2. Hon’ble ITAT-Mumbai explained the meaning of ‘expenditure’ while delivering judgment in Kalpataru Construction Overseas (P.) Ltd. Vs. Dy. CIT [2007] 13 sot 194 (Mum. – Trib.) as under :

Section : 14A

Meaning: The term ‘expenditure’ occurring in section 14a would take in its sweep not only direct expenditure but also all forms of expenditure regardless of whether it is fixed, variable, direct, indirect, administrative, managerial or financial.

3. Hon’ble Delhi High Court explained the meaning of ‘expenditure’ while delivering judgment in CIT Vs. Bharat Overseas Bank Ltd. [2000] 242 ITR 314 (Delhi) as under :

Section : 35B

Meaning: Section 35B of the act refers to “any expenditure”. Expenditure refers to the outgoing. If the monies had been expended, all such monies would qualify for weighted deduction, provided the expenditure was incurred for any one of the purposes referred to in section 35b of the act. It is significant that the section refers to “any expenditure”.

The use of the word “any” preceding the word “expenditure” would also indicate that the focus is on the expenditure actually incurred by way of outgoing, and once it is established that such expenditure had been incurred, there is no occasion for making any deductions therefrom.

4. Hon’ble Supreme Court explained the meaning of ‘expenditure’ while delivering judgment in Indian Molasses Co. (P.) Ltd. Vs. CIT [1959] 37 ITR 66 (SC) as under :

Section : 37(1)

Meaning: Expenditure’ is equal to ‘expense’ and ‘expense’ is money laid out by calculation and intention though in many uses of the word this element may not be present, as when one speaks of a joke at another’s expense. But the idea of ‘spending’ in the sense of ‘paying out or away’ money is the primary meaning which is relevant. ‘Expenditure’ is, thus, what is ‘paid out or away’ and is something which has gone irretrievably.

5. Hon’ble Supreme Court explained the meaning of ‘expenditure’ while delivering judgment in CIT vs. Nainital Bank Ltd. [1966] 62 ITR 638 (SC) as under :

Section : 37(1)

Meaning : In its normal meaning, the expression ‘expenditure’ denotes ‘spending’ or ‘paying out or away’, i.E., Something that goes out of the coffers of the assessee. A mere liability to satisfy an obligation by an assessee is undoubtedly not ‘expenditure’ : it is only when he satisfies the obligation by delivery of cash or property or by settlement of accounts, that there is expenditure.

But expenditure does not necessarily involve actual delivery of or parting with money or property. If there are cross-claims – one by the assessee against a stranger and the other by the stranger against the assessee – and as a result of accounting, the balance due only is paid,

the amount which is debited against the assessee in the settlement of accounts may appropriately be termed ‘expenditure’ within the meaning of section 10(2)(xv) of the 1922 act [corresponding to section 37(1) of the 1961 act]. However, a mere forbearance to realise a claim is not ‘expenditure’.

6. Hon’ble Madhya Pradesh High Court explained the meaning of ‘expenditure’ while delivering judgment in M.P. Financial Corpn. Vs. CIT [1986] 26 taxman 42 (MP) as under :

Section : 37(1)

Meaning: The expression ‘expenditure’, as used in section 37, may in the circumstances of a particular case, cover an amount, which is really a loss and the said amount has not gone out from the pockets of the assessee.

7. Hon’ble Karnataka High Court explained the meaning of ‘expenditure’ while delivering judgment in Mysore Kirloskar Ltd. Vs. CIT [1987] 30 taxman 467 (Kar.) as under :

Section : 37(1)

Meaning: The ‘expenditure’ primarily denotes the idea of ‘spending’ or ‘paying out or away’. It is something which has gone irretrievably, but should not be in respect of an unascertained liability of the future. It must be an actual liability in praesenti, as opposed to contingent liability of the future.

8. Hon’ble Karnataka High Court explained the meaning of ‘expenditure’ while delivering judgment in Akash Films Vs. CIT [1991] 191 ITR 32 (Kar.) as under :

Section :37(1)

Meaning: The income-tax act has not defined the word ‘expenditure’. In the absence of a statutory definition, the court will have to consider the meaning of a word in the manner it is understood generally by those who deal with the subject in question.

9. Hon’ble Supreme Court explained the meaning of ‘expenditure’ while delivering judgment in Madras Industrial Investment Corpn. Ltd. Vs. CIT [1997] 91 taxman 340/225 ITR 802 (SC) as under :

Section : 37(1)

Meaning : Expenditure’ is not necessarily confined to the money which has been actually paid out. It covers a liability which has accrued or which has been incurred although it may have to be discharged at a future date. However, a contingent liability which may have to be discharged in future cannot be considered as expenditure.

Although expenditure primarily denotes the idea of spending or paying out, it may, in given circumstances, also cover an amount of loss which has not gone out of the assessee’s pocket but which is all the same, an amount which the assessee has had to give up. It also covers a liability which the assessee has incurred inpraesenti although it is payable in future. A contingent liability that may arise in future is, however, not ‘expenditure’. It would also cover not just a one-time payment but a liability spread out over a number of years.

10. Hon’ble Supreme Court explained the meaning of ‘expenditure’ while delivering judgment in B.K. Khanna & co. (P.) Ltd. Vs. CIT [2000] 113 taxman 164 (Delhi) as under :

Section : 37(1)

Meaning: Spending’ in the sense of ‘paying out or away’ of money is the primary meaning of ‘expenditure’. The word expenditure means what is paid out or away and is something which is gone irretrievably.

11. Hon’ble ITAT-Mumbai explained the meaning of ‘expenditure’ while delivering judgment in Mahindra & Mahindra Ltd. Vs. Dy. Cit [1997] 61 ITD 129 (Mum.-Trib.) (TM) as under :

Section : 37(1)

Meaning: The words that are placed in the brackets in section 37(1) qualify ‘any expenditure’ with the sole purpose of making it clear that the term ‘any expenditure’ means expenditure, the nature of which is not described in sections 30 to 3.

12. Hon’ble Supreme Court explained the meaning of ‘expenditure’ while delivering judgment in CIT Vs. Woodward Governor India (P.) Ltd. [2009] 179 Taxman 326/312 ITR 254/223 CTR (SC)1 as under :

Section : 37(1)

Meaning: The expression ‘expenditure’ as used in section 37 may, in the circumstances of a particular case, cover an amount which is really a ‘loss’, even though said amount has not gone out from the pocket of the assessee.

13. Hon’ble Bombay High Court explained the meaning of ‘expenditure’ while delivering judgment in Nectar Beverages (p.) Ltd. Vs. DCIT [2004] 139 taxman 70/267 ITR 385 (Bom.) as under :

Section : 41(1)

Meaning: The expression ‘expenditure’ occurring in section 41(1) is wide enough not only to include revenue but also capital expenditure.

14. Hon’ble Delhi High Court explained the meaning of ‘expenditure’ while delivering judgment in Oriental Fire & General Insurance Co. Ltd. Vs. CIT [2004] 140 taxman 446 (Delhi) as under :

Schedule  : Fifth schedule

Meaning: Provision for taxation’ is neither an ‘expenditure‘ nor an ‘allowance’.

15. Hon’ble Supreme Court explained the meaning of ‘expenditure’ while delivering judgment in Attar Singh Gurmukh Singh Vs. ITO [1991] 191 ITR 667 (SC) as under :

Section : 40

Meaning: The word ‘expenditure’ in section 40a(3) has not been defined in the act. It is a word of wide import. Section 40a(3) refers to the expenditure incurred by the assessee in respect of which payment is made. It means that all outgoings are brought under the word ‘expenditure’ for the purpose of the section.

The expenditure for purchasing stock-in-trade is one of such outgoings. Rule 6dd of the income-tax rules, 1962, also contemplates payments made for stock-in-trade and raw materials. This rule is in accordance with the terms of section 40a(3). Section 40a(3) is, therefore, attracted to payments made for acquiring stock-in-trade and other materials.

16. Hon’ble Rajasthan high court explained the meaning of ‘expenditure’ while delivering judgment in Fakri Automobiles Vs. CIT [1986] 24 taxman 578/160 ITR 504 (Raj.) as under :

Section : 40A

Meaning: The word ‘expenditure’ in section 40a(3) includes purchase price of stock-in-trade and/or raw materials and expenses which are taken into account while determining gross profit.

17.Hon’ble Rajasthan high court explained the meaning of ‘expenditure’ while delivering judgment in Kejriwal Iron Stores Vs. CIT [1987] 31 taxman 311/badrilal phool chand rodawat vs. CIT as under :

Section : 40A

Meaning: Payments made by the assessee for purchase of goods are covered by word ‘expenditure’ occurring in section 40a(3).

18. Hon’ble Rajasthan High Court explained the meaning of ‘expenditure’ while delivering judgment in Mahgi Lal Vs. CIT [1987] 31 taxman 459/167 ITR 139 (Raj.) as under :

Section : 40A

Meaning: The word ‘expenditure’, as used in section 40a(3), includes expenditure incurred in purchases and there is nothing in this section which restricts the meaning of the word ‘expenditure’ to payment like wages and salary only. A perusal of rule 6dd, which has been framed in terms of second proviso to section 40a(3), would reveal that the purchases are covered by the word ‘expenditure’.

19. Hon’ble Allahabad high court explained the meaning of ‘expenditure’ while delivering judgment in Ratan Udyog Vs. ITO [1977] 109 ITR 1 (all.) as under :

Section : 40a

Meaning: Having regard to the wider meaning of the word ‘expenditure’ so as to embrace whatever is paid out or away, there is no reason why payments made for the purchase of stock-in-trade or raw materials should not be regarded as expenditure for purposes of section 40a(3) of the 1961 act.

20. Hon’ble ITAT-Chennai explained the meaning of ‘expenditure’ while delivering judgment in [2007] 106 ttj (Chennai – trib.) 739 as under :

Section : 40a

Meaning: In its normal meaning, the expression ‘expenditure’ denotes ‘spending’ or ‘paying out or away’ i.e. Something that goes out of the coffers of the assessee. Mere liability to satisfy an obligation by an assessee is undoubtedly not ‘expenditure’.

21. Hon’ble Kolkata High Court explained the meaning of ‘expenditure’ while delivering judgment in Pranab Kumar Moulik Vs. ITO [2011] 46 sot 78/11 taxmann.Com 401 (Kol.) as under :

Section :40a

Meaning: The word ‘expenditure’ in section 40a(3) cannot be restricted only to expenditure, which is allowed as deduction under sections 30 to 38, being overhead expenses such as rent, taxes, repairs, insurance, salary, etc., Deductible from gross profit in order to arrive at a net profit liable to tax. The word ‘expenditure’ in section 40a(3) is of wide import and includes expenses which are taken into account while determining the gross profit. The object of the rules is to relax the rigours of section 40a(3) in genuine and bona fide cases to avoid hardship and harassment in such cases.

22. Hon’ble Chennai High Court explained the meaning of ‘expenditure’ while delivering judgment in ITO Vs. Smt. N. Padma [2007] 106 TTJ (Chennai) 739 as under :

Section : 40a

Meaning: In its normal meaning, the expression ‘expenditure’ denotes ‘spending’ or ‘paying out or away’ i.E. Something that goes out of the coffers of the assessee. Mere liability to satisfy an obligation by an assessee is undoubtedly not ‘expenditure’.

Section 14A of Income Tax Act

Expenditure incurred in relation to income not includible in total income.

14A. (1) For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act.

(2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed63, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act.

(3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act :

Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001.

In this article, you can get guidance from high courts on the meaning of expenditure under section 14A of the Income Tax Act.

Updated up to Finance Act 2021