ITAT Delhi overturns 30% ad-hoc disallowance of travelling expenses for first-year business establishment

ITAT Delhi allowed the assessee's appeal against 30% ad-hoc disallowance of travelling expenses including car charges and foreign/domestic travel costs. The tribunal held that lower authorities failed to consider this was the first year of business establishment where higher travelling expenses are justified for setting up operations. The assessee provided detailed submissions with invoices and documentary evidence supporting business purposes. Citing SC precedent in Delhi Safe Deposit Co. Ltd., ITAT ruled that without disputing genuineness of vouchers or contrary evidence, the ad-hoc disallowance was erroneous as expenses were incurred for commercial expediency and business purposes.

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Issues involved:
The judgment involves the appeal filed by the Assessee against the order of Learned Commissioner of Income Tax (Appeals) for the Assessment Year 2016-17. The main issue pertains to the 30% ad-hoc disallowance of traveling expenses, specifically car charges, foreign traveling expenses, and domestic traveling expenses, totaling to Rs. 46,86,526.

Delay Condonation:
The assessee filed an application for condonation of the delay of 279 days in filing the present Appeal, citing reasons such as non-receipt of physical copy by the Tribunal despite online filing. The Tribunal, satisfied with the reasons, condoned the delay.

Facts and AO's Observations:
The AO observed that the appellant booked car charges, foreign traveling, and domestic traveling expenses but found the provided information insufficient to establish the business purpose of the travels. The AO concluded that the appellant failed to discharge its burden of proving the expenses were laid out for business purposes.

CIT(A) Order and Appeal:
The CIT(A) confirmed the additions made by the AO but corrected a computation error and restricted the disallowance to 30% of the total expenses claimed. The assessee, aggrieved by this order, filed the present appeal challenging the additions.

Contentions and Submissions:
The assessee argued that as a newly incorporated company, higher expenses in the initial years were justified for business setup. The Lower Authorities were criticized for making ad-hoc disallowance without proper basis. The Departmental Representative contended that the expenses were not proven to be exclusively for business purposes.

Judgment and Rulings:
The Tribunal noted the nature of the appellant's business and the circumstances of being a newly incorporated company. It was emphasized that the burden of proof lies on the assessee to show expenses were incurred for commercial expediency. Citing relevant case laws, the Tribunal found the ad-hoc disallowance unjustified and ruled in favor of the assessee, deleting the disallowance made by the Lower Authorities.

Conclusion:
The Tribunal allowed the appeal filed by the assessee, emphasizing the necessity for expenses in the initial years of business setup and the lack of justification for the ad-hoc disallowance. The disallowance was deleted, and the judgment was pronounced on 7th March 2024.

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