Delhi HC Rules Against Arbitrary Disallowance of Corporate Business Expenses

The Delhi High Court on 14 May 2026 held that ad hoc disallowance of telephone and car expenses cannot be made in the case of a company merely on the ground of possible personal use by employees or directors. A Division Bench comprising Justice Dinesh Mehta and Justice Vinod Kumar set aside the order of the Income Tax Appellate Tribunal (ITAT), which had upheld the disallowance of 1/6th of such expenses incurred by M/s Raunaq International Ltd.

The dispute arose after the Assessing Officer disallowed a portion of telephone and car expenses for AY 2000-01 on the ground that the assessee-company had neither maintained log books for vehicles nor furnished complete details regarding telephone usage. The Revenue treated part of the expenditure as personal in nature. The Tribunal had affirmed the disallowance by relying upon the Supreme Court judgement in Standard Chartered Bank v. Directorate of Enforcement.

Before the High Court, the assessee submitted that identical disallowances made in earlier assessment years from AY 1995-96 to AY 1999-2000 had already been deleted by the Commissioner of Income Tax (Appeals), and such findings were affirmed by the Tribunal itself. It was argued that in the absence of any change in facts, the Tribunal ought to have maintained consistency. The Court highlighted that, “In case of a company, despite being a person, there cannot be any personal expenses of a company.”

The High Court observed that merely because a company is treated as a separate legal person, it does not mean that expenses incurred by it can automatically be categorised as personal expenditure. The Court held that facilities provided to employees or directors, including the use of cars and telephones, form part of the business expenditure of the company.

“Disallowance can be made only in the event when there is a finding that the amount spent was of personal nature, having no nexus with company’s business.”

The Bench further noted that a company is not expected to maintain detailed log books to segregate personal and official use of vehicles by employees. It held that if such facilities are authorised by the company, the expenditure would form part of the overall employment package and remain allowable.

Thus, the High Court allowed the appeal, set aside the Tribunal’s order dated 07.10.2005, and answered the question of law in favour of the assessee-company.