Disallowance of loss from discontinued operations fails where audited disclosures and business purpose support the expenditure claim.

Disallowance of loss from discontinued operations was found unsustainable where the assessee's slump sale, audited accounts, segment disclosures and note disclosures supported the expenditure claimed. The valuation report used to fix sale consideration was held irrelevant to tax allowability, which had to be tested independently under section 37(1). As no adverse material showed the expenses were unvouched, unsupported or not incurred for business purposes, the proportionate restriction lacked a factual basis. The deletion of the addition was therefore upheld and the disallowance was directed to be removed.

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Issues: Whether the disallowance of Rs. 9.02 crores made by restricting the loss claimed from discontinued operations was justified, and whether the audited financial statements and supporting disclosures established the allowability of the expenditure.

Analysis: The assessee had sold a business segment and its subsidiary under a slump sale arrangement, and the discontinued operations were separately disclosed in the audited accounts. The loss from discontinued operations reflected in the financial statements was supported by the note disclosures, segmental presentation, and the year-end accounts. The valuation report used for determining sale consideration did not govern the tax allowability of the expenditure, which was to be tested independently under section 37(1) of the Income-tax Act, 1961. No material was brought to show that the expenses were unvouched, unsupported, or not incurred for business purposes. The proportionate restriction made by the Assessing Officer was therefore unsupported by any adverse finding on genuineness or veracity of the expenditure.

Conclusion: The disallowance was not sustainable and the deletion made by the CIT(A) was upheld. The addition of Rs. 9.02 crores was directed to be deleted.

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