Company expenses cannot be disallowed as personal in nature given a company's distinct legal personality.

The appellant-assessee challenged an order passed by the Income Tax Appellate Tribunal (ITAT), Delhi, dated 07.10.2005

The dispute primarily concerned the disallowance of 1/6th of total telephone and car expenses for the relevant assessment year, which the Assessing Officer (AO) categorized as personal expenses due to the lack of logbooks and complete call details

Historically, for AYs 1995-96 to 1999-2000, similar disallowances had been set aside by the CIT(A) and affirmed by the ITAT in favor of the assessee

However, in the impugned order, the ITAT departed from this consistency, citing the Supreme Court’s decision in Standard Chartered Bank v. Directorate of Enforcement regarding the separate legal personality of a company

1. Whether the ITAT was justified in departing from the principle of consistency by upholding the disallowance of 1/6th of telephone and car expenses, despite similar additions being deleted in previous years.

2. Whether a company, being a separate legal entity, can be said to incur "personal expenses" that justify a part-disallowance under the Income Tax Act.

The Court emphasized the principle of consistency in tax proceedings, holding that the Revenue should maintain a uniform stand across years unless there is a striking change in facts

It clarified the legal distinction between an individual and a corporate person; while an individual may incur personal expenses, a company, despite being a "person" under law, cannot have "personal" expenses as every expenditure incurred is either for business or forms part of the "Cost to Company" (CTC) package for employees/directors

The court distinguished Standard Chartered Bank and Ors. v. Directorate of Enforcement [2005] 275 ITR 81 (SC), noting it applied to a different context and did not support the theory of personal expenses within a company

The Court reasoned that the ITAT erred in misinterpreting the concept of a company as a "person" to justify the disallowance of expenses as "personal"

The Court observed that unlike an individual assessee, a company’s expenditure on cars and telephones provided to staff or directors is a business facility or a part of their remuneration package

Consequently, the AO’s requirement for the company to maintain a logbook to bifurcate "personal" use from "business" use was deemed legally flawed, as such expenses are inherently linked to the company's business operations or employee obligations

Since there was no factual change from previous years where such expenses were allowed, the Tribunal failed to maintain the necessary consistency

The court held that 1/6th of the telephone and car expenses cannot be disallowed on the ground of personal use in the case of a corporate assessee

The appeal was allowed with all consequential reliefs to follow