Company's Car, Telephone Costs Not 'Personal' Despite Being Separate Legal Entity: Delhi High Court

The Delhi High Court has held that telephone and car expenses incurred by a company cannot be disallowed as “personal” expenses merely because a company is treated as a separate legal person.

A division bench of Justices Dinesh Mehta and Vinod Kumar allowed the company's appeal and set aside an order of the Income Tax Appellate Tribunal (ITAT), which had upheld disallowance of one-sixth of the company's telephone and car expenses on the ground of possible personal use.

The company argued that similar additions made in earlier assessment years from 1995-96 to 1999-2000 had already been deleted by the Commissioner of Income Tax (Appeals), and such findings had been affirmed by the ITAT itself. It contended that the Tribunal ought to have maintained consistency in the absence of any change in facts.

The Revenue, however, defended the disallowance by arguing that the assessee had failed to maintain logbooks for cars and complete details of telephone expenses, justifying the Assessing Officer's conclusion that part of the expenditure was personal in nature.

Rejecting the Revenue's stand, the High Court observed that although a company is recognised as a separate legal person, that does not automatically imply that its expenses can be characterised as personal expenses.

“It is true that a company is a separate legal person, but simply because a company can be said or considered to be a person, it does not necessarily mean that its expenses are required to be disallowed for being personal in nature,” the Court observed.

The Court explained that while disallowance for personal use may be justified in the case of an individual assessee, a company cannot have personal expenses merely because it is treated as a legal person

“...in case of a company, despite being a person, there cannot be any personal expenses of a company,” the bench said.

The Court further noted that if a company provides cars or telephones to its directors or employees, such facilities form part of the overall compensation package and are intrinsically linked to the company's business.

“Even if expenses are borne by the company are reimbursed to the employees or even Directors, it will be treated to be a part of the complete package given to those employees, as a need of company's business,” the Court said.

The bench also disapproved of the Assessing Officer's insistence on maintaining logbooks to segregate personal and official use of company vehicles.

“In case, a company's car is provided to the Directors or the employees, the company is not required to maintain a log book nor is the Assessing Officer supposed to go into the log book and dissect, which journey was of employee's personal nature and which was for the affairs of the company,” it held.

Observing that disallowance could only be made where expenditure had no nexus with the company's business, the Court concluded that the Tribunal had erred in upholding the disallowance.

The appeal was accordingly allowed in favour of the assessee.

For Appellant: Advocate Dr. Shashwat Bajpai and Advocate Mayank Chaturvedi

For Respondent: Senior Standing Counsel Vipul Agrawal with Advocates Sakshi Shairwal and Akshat Singh