Emphasising that the ITAT is required to maintain consistency on the question of disallowance of the expenses in question, particularly when there is no factual difference between the year under appeal and the earlier years, the Delhi High Court has held that while a company is a separate legal person, that fact alone does not mean that its expenses are required to be disallowed as being personal in nature.
The Court drew a clear distinction between an individual assessee and a company, and explained that in the case of an individual using a car or telephone, there is an element of personal use; however, in the case of a company, despite being a legal person, there cannot be any personal expenses. Accordingly, the Court set aside the order of the ITAT and allowed 1/6th telephone and car expenses having nexus with business of the company.
The Division Bench comprising Justice Dinesh Mehta and Justice Vinod Kumar observed that even if expenses borne by the company are reimbursed to employees or Directors, such expenses form part of the complete package given to those employees as a need of the company’s business, and are required to be allowed in totality. Until the concept of fringe benefits was introduced, every amount spent by a company or by employees (subject to limits under the Companies Act or other laws) was allowable.
The Bench also held that the findings recorded by the Assessing Officer were cursory. A company is not required to maintain a log book for cars provided to Directors or employees, nor is the Assessing Officer required to dissect which journey was personal and which was for company affairs. If the company authorises employees to use the car for personal use, it is a facility forming part of the Cost to Company (CTC). The same principle applies to telephone expenses.
Briefly, the dispute concerned the disallowance of 1/6th of telephone expenses and car expenses incurred by the appellant-company. The Assessing Officer had disallowed 1/6th of the car expenses and telephone expenses, treating them to be of a personal nature. The basis for this disallowance was that the assessee had neither maintained a log book in respect of car expenses nor had it furnished complete details of the telephone expenses.
Identical additions of this nature had been made by the Assessing Officer for Assessment Years 1995-96 to 1999-2000. In all those years, the Commissioner of Income Tax (Appeals) had set aside such disallowances, and those findings of the first appellate authority had been affirmed by the Tribunal itself. However, in the current year, the ITAT upheld the disallowance by reiterating that a company is a separate individual person.
Appearances:
Dr. Shashwat Bajpai & Mayank Chaturvedi, Advocates, for Appellant/ Taxpayer
Vipul Agrawal SSC with Sakshi Shairwal, Akshat Singh, JSCs, for Respondent/ Revenue
