Delhi ITAT: Enhanced Security Expenses During Directors’ Dispute Are Allowable Business Expenditure

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