Phone & Car Expenses of Company are not 'Personal Expenditure': Delhi HC Reverses Income Tax Disallowance [Read Order]

The Delhi High Court held that telephone and car expenses incurred by a company cannot be disallowed on grounds of being "personal in nature," and proceeded to set aside an Income Tax Appellate Tribunal (ITAT) order that had upheld such disallowance against a company.

M/s Raunaq International Ltd. filed an income tax appeal challenging a disallowance of 1/6th of its telephone and car expenses. The Assessing Officer (AO) made the disallowance on the ground that the assessee had not maintained a log book for car expenses and had not furnished complete details of telephone expenses.

The AO had made identical additions across previous Assessment Years from AY 1995-96 to AY 1999-2000. For all those years, the Commissioner of Income Tax (Appeals) had set aside the disallowances, and those findings had been affirmed by the Tribunal itself.

However, when the present matter was contested before the ITAT, the Tribunal departed from its own consistent position by relying upon the Supreme Court's judgment in Standard Chartered Bank and Ors. v. Directorate of Enforcement and Ors. (2005) where the Supreme Court observed that the company is a separate individual person.

The Tribunal accordingly upheld the income tax disallowance, leading to the present appeal.

Shashwat Bajpai and Mayank Chaturvedi appeared for the appellant, and argued that the Tribunal was required to maintain consistency in judgments, more particularly when there was no factual difference. Contending that the Standard Chartered Bank judgment operated in an entirely different context, they submitted that the AO was not justified in disallowing one-sixth of expenses that the company had legitimately incurred.

Senior Standing Counsel Vipul Agrawal sought for dismissal of the case, reiterating that the assessee had not maintained a log book of expenses and that the AO had given cogent finding and reasoning for disallowance.

The Division Bench of Justice Dinesh Mehta and Justice Vinod Kumar observed that while a company is indeed a separate legal person, that status does not mean its expenses are personal. The Bench noted that when an individual uses his car or telephone, there is found to be an element of personal use but a company, despite being a “person”, cannot incur any such personal expenses.

The Bench further affirmed that where a company authorises its employees or directors to use its car, there is no requirement to maintain a log book, nor is the AO entitled to dissect which of the journeys were for personal nature, and which ones were for the company; similar logic applied to telephone expenses as well.

The Court noted that any such authorised use constitutes a facility that forms part of the employee's cost to company (CTC).

Accordingly, the Delhi High Court allowed the appeal and set aside the impugned ITAT order, answering the question of law in favour of the appellant-assessee.

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