D.B. Engineering Pvt. Ltd. Vs ACIT (ITAT Delhi)
Delhi ITAT: Enhanced Security Expenses During Directors’ Dispute Are Allowable Business Expenditure
The Delhi ITAT deleted the disallowance of ₹41.91 lakh towards watch and ward expenses, holding that additional security expenses incurred due to disputes among directors and the resulting threat perception constitute allowable business expenditure under section 37(1) and cannot be treated as personal expenses merely because they also benefit the directors.
The Assessing Officer had disallowed the increased security expenditure by observing that watch and ward expenses had risen from ₹49.58 lakh in the preceding year to ₹89.94 lakh and that the increase represented expenditure incurred for the personal security of the directors, who were embroiled in disputes over the management and control of the company. The CIT(A) upheld the disallowance under section 37(1).
Before the Tribunal, the assessee relied upon an order of the Delhi High Court passed in proceedings under the Arbitration and Conciliation Act, 1996, which recorded the disputes between the directors and appointed a Court Commissioner to oversee the affairs of the company, including payment of employees’ wages and statutory liabilities. This, according to the assessee, established the existence of a genuine dispute warranting enhanced security arrangements.
The Tribunal observed that watch and ward expenses may inherently contain some personal element, but such expenditure cannot be disallowed unless the Revenue establishes that there was no genuine threat perception or business necessity. Where additional security is necessitated because of disputes involving directors in the course of the company’s affairs, the company is justified in incurring expenditure to protect its management and business operations.
The ITAT further held that a mere increase in security expenditure does not justify treating it as personal in nature. In such circumstances, the tax authorities were expected to adopt a realistic and pragmatic approach, instead of drawing adverse inferences solely from the quantum of expenditure.
Accordingly, the Tribunal held that the disallowance under section 37(1) was unsustainable, deleted the addition of ₹41.91 lakh, and allowed the assessee’s appeal.
Cases Discussed
- State of Madra vs G.J. Coelho (SC), (1964) 53 ITR 16
- A. Builders Ltd vs CIT(A) (SC), 2007, 158 Taxman 74/288 ITR 1
- Bombay Steam Navigation Co. (1953) Vs. CIT (SC), 56 ITR 52
FULL TEXT OF THE ORDER OF ITAT DELHI
This appeal is preferred by the assessee against the order dated 12.12.2025 of the Ld. National Faceless Appeal Centre (NFAC), Delhi (hereinafter referred to as the First Appellate Authority or ‘the ld. FAA’ for short) in DIN & Order No: ITBA/NFAC/S/250/2025-26/1083638412(1) arising out of the assessment order dated 21.11.2023 u/s 147 r.w.s 144B of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) passed by National Faceless Assessment Centre, for AY: 2017-18.
2. Heard and perused the record. The assesse had filed return of income which was picked up for scrutiny for examining certain issue and while examining the issue with regard to the personal expenses booked by the company. Now, ld. AO has made addition alleging that the expenses towards watch & ward expenses as compared to earlier, which was of Rs.49,57,637/-, as there is increase in the present year of Rs.89,93,849/-, addition of Rs.41,90,899/- has to be made as there is personal element involved in watch and ward expenses. The same is sustained by ld. CIT(A) by following findings in para 5.1:
“5.1. 1 have carefully considered the Grounds of Appeal, the Assessment Order passed u/s 147 r.w.s. 144B dated 21.11.2023, and the written submissions furnished by the appellant. The core issue arising from Grounds 1 pertains to the disallowance of Rs.41,90,899/- u/s 37(1) of the Act which did not concur to business expenditure. The Assessing Officer has not disputed the genuineness of expenditure that has been actually incurred on security but has observed that it was not wholly and exclusively for business u/s 37 of the Act but for the personal security of the directors who were having disputes among themselves in respect of management and control of business. In this regard it is pertinent to mention in the appellate proceedings pending against the penalty order u/s 271B and 271(1)(c) for assessment year 2016-17 vide APPEAL No. NFAC/2015- 16/10181462-ITBA/DFAC/APL_1/2025-26/1083252439(1) DATED 03.12.2025, the assessee has mentioned that there was disputes among the directors of the company and litigation was pending in Delhi High Court.
The assessee in its written submissions has contended that security was enhanced due to threat to company however no such corroborative evidence has been filed to support its reason. In the case of State of Madra vs G.J. Coelho (1964)53 ITR 16 (SC), Supreme Court had held that personal expenses are those related to an individual person or personal needs not their business. Further the court considered expenses closely linked to business transactions as “wholly and exclusively” for the business when viewed as part of the integrated whole. In the present case the expenses were incurred for personal needs of directors as already discussed above.
In the case of Bombay Steam Navigation co. 91953) Vs. CIT 56 ITR 52, SC, the primary finding is related to allowability of interest expenses in larger context of business necessity and expediency. It is distinguishable on facts from the case of assessee. Similarly in the case of S.A. Builders Ltd vs CIT(A)2007,158 taxman 74/288 ITR1, SC, it has laid down the tests of commercial expediency for purpose of business used in section 36(1) iii and section 37(1) of the Act. There was no such commercial expediency or necessity in case of assessee as it has failed to prove it. Similarly, the other case laws quoted by assessee do not support his contention. Accordingly, the addition of Rs.41,90,899/- u/s 37(1) of the Act is upheld.”
3. On behalf of the assesse in regard to the ground as raised assesse primarily submitted that there was a dispute between the directors and for that reason litigation expenses had increased and so also the security of directors was increased, however, the same is rebutted on the ld. DR by relying order of ld. CIT(A) including the case law relied by the ld. CIT(A).
4. We have considered the rival contentions and gone through the material on record and we find that at page No. 1-6 assessee has provided copy of order dated 19.08.2016 of Hon’ble Delhi High Court in the commercial cases Petition filed u/s 34 of the Arbitration and Conciliation Act, 1996 to submit that there was a dispute between the directors which was settled and our attention was drawn to para 7 of the order wherein one of the lawyer was appointed as Court Commissioner for the purpose of realizing the wages of employees and other statutory liabilities as well as oversee the entire situation.
5. We find that ld. Tax authorities have found an element of personal nature in the expenses which would always be there in an expenses of the nature of Watch and Ward expenses and unless there is material evidence and allegation that the Watch and Ward expenses were without any possible threat perception there cannot be rejection of such expenses on basis of alleged, ‘personal nature’. In case, before us, additional security was taken out of threat perception of the directors due to their engagement with the company then obviously company has to take the responsibility to deter the threat perception of the directors and merely because there is an increase in the expenditure,same on its own does not justify imputing element of personal nature to watch and ward expenses and a realistic and pragmatic approach in such circumstances was supposed to be taken. However, the same not being done.
6. We consider it appropriate case to sustain grounds. The appeal is allowed and the impugned addition is deleted.
Order pronounced in the open court on 05.08.2026.
