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2026 Supreme(Online)(ITAT) 13319

INCOME TAX APPELLATE TRIBUNAL (JODHPUR BENCH)
Mitha Lal Meena, Accountant Member, Sudhir Pareek, Judicial Member
KBK Mercantile LLP – Appellant
Versus
Assistant Commissioner of Income Tax – Respondent
ITA Nos. 720 to 722/Jodh/2025|ITA Nos. 723 to 725/Jodh/2025|ITA Nos. 731, 732, 733 & 794/Jodh/2025

Advocates:
For the Appellants/Petitioners: M.S. Jhanwar
For the Respondents: Ajay Malik

Routine administrative and operational business expenses incurred for commercial expediency are allowable under Section 37(1). Assessing authorities cannot disallow such expenses based on mere suspicion or conjecture without rejecting books of account, and must adhere to the rule of consistency in the absence of fresh incriminating material.

Headnote:(A) Income Tax Act, 1961 - Section 37(1) - Business expenditure - Disallowance of administrative and routine business expenses by authorities based on suspicion and conjecture without rejection of books of account - Search and seizure action held not to be ground for disallowance when expenses are supported by documentary evidence - Rule of consistency - Once business nature is accepted, arbitrary disallowance of incidental operational expenses is unsustainable. (Paras 13, 17, 23)

(B) Appellate Jurisdiction - Principle of Consistency - Assessing officer cannot deviate from accepted historical stand without change in facts or discovery of new incriminating material - Assessment cannot be based on suspicion, conjecture or surmise. (Paras 11, 15, 18)

Facts of the case:
Multiple appeals were filed against orders upholding the disallowance of business expenditure under Section 37(1). The lower authorities had disallowed various administrative expenses, including salary, rent, and office charges, treating the assessees as dummy entities operating from a common address, relying on third-party statements recorded during search proceedings. The assessees contended that these were bona fide business expenses and that the department had consistently accepted their business model in prior years.

Findings of Court:
The court noted that the lower authorities accepted the nature of the business and statutory compliance expenses while arbitrarily disallowing other operational costs. It held that the assessment was based on generalizations rather than specific defects in the books of account. The court emphasized that operational expenses are necessary concomitants of business activity and that the authorities could not accept statutory expenses while simultaneously rejecting the administrative costs that maintain the business infrastructure.

Issues: Whether the disallowance of routine business expenditure under Section 37(1) is sustainable when based on third-party statements and assumptions of 'minimal business activity' without rejecting books of account or finding specific incriminating evidence.

Ratio Decidendi: Expenditure incurred for the purpose of business is allowable under Section 37(1) based on commercial expediency. The revenue cannot substitute its own view for that of a prudent businessman, and disallowances cannot be made on suspicion, conjecture, or surmise. A departure from a consistent past view is arbitrary in the absence of new, specific, and incriminating material. Administrative and operational expenses are essential to maintaining corporate existence and statutory compliance, and cannot be disallowed without evidence of non-genuineness.

Result: Appeals allowed.

Table of Content
1. administrative disallowances require cogent evidence; generalized search-based assumptions are insufficient. (Para 5 , 6 , 13 , 14)
2. assessment based on suspicion without rejecting books of accounts or finding specific defects is arbitrary. (Para 7 , 8 , 9 , 10 , 11)
3. consistent business patterns accepted in previous years must be followed in absence of new adverse evidence. (Para 15 , 17 , 18)
4. operational expenses necessary to support statutory compliance are valid business expenditure under section 37(1). (Para 16 , 20 , 21 , 22 , 23)
5. disallowance sustained without identifying specific non-business elements or evidence of bogusness is unsustainable. (Para 24 , 25 , 26 , 29)

ORDER

DR. MITHA LAL MEENA, A.M.:

These appeals by assessees are filed against the order of Ld. Commissioner of Income Tax Appeal, Udaipur - 2 [hereinafter referred to CIT(A)] challenging therein disallowance of business expenditure u/s 37(1) of the Act.

2. The appellant assesse KBK Mercantile LLP has raised following grounds of appeals:

ITA No. 720/Jodh/2025 (Assessment Year: 2020-21)

1. Under the facts and circumstances of the case NA and in law, the orders of the authorities below (the assessment order as upheld in the impugned CIT(A) order) have been passed without due consideration of relevant facts and applicable law, rendering the assessment improper. The disallowances/additions resultant are arbitrary, perverse and contrary to settled principles, and therefore the entire disallowance of ₹ 1,81,980/- deserves to be deleted and the impugned order quashed.

2. That the learned CIT(A) erred in upholding the disallowance of ₹1,81,980, being bona fide business expenditures (such as salaries, rent, and administrative expenses) incurred wholly and exclusively for the purposes of the business, which are fully allowable under Section 37(1) of the Income Tax Act, 1961. The disallowance is unjustified on facts and in law.

2.1 Under the facts and circumstances of the case and in law, the ld. CIT(A) has grossly erred in confirming the disallowance of ₹96,000/- in respect of Salary expenses.

2.2 Under the facts and circumstances of the case and in law, the Id. CIT(A) has erred in upholding the disallowance of ₹60,000/- being Office Rent.

2.3 Under the facts and circumstances of the case and in law, the Id. CIT(A) has erred in confirming the disallowance of ₹8,670 /- incurred on Travelling.

2.4 Under the facts and circumstances of the case and in law, the ld. CIT(A) has erred in sustaining the disallowance of ₹7,350/- towards Conveyance charges.

2.5 Under the facts and circumstances of the case and in law, the ld. CIT(A) has erred in confirming the disallowance of ₹6,340/- relating to Telephone expenses.

2.6 Under the facts and circumstances of the case and in law, the ld. CIT(A) has erred in upholding the disallowance of ₹3,620/- under the head "Office Expense".

3. That the learned CIT(A) further erred in confirming the levy of interest under Sections 234B and 234C, which is not chargeable on the facts of the case. The interest is purely consequential to the above disallowance and ought to be deleted if and to the extent the underlying addition is deleted. (The appellant denies its liability to such interest.)

4. The appellant craves leave to add, amend, alter, delete or modify any of the above grounds of appeal, either before or during the hearing of this appeal.

ITA No. 721/Jodh/2025 (Assessment Year: 2021-22)

1. Under the facts and circumstances of the case NA and in law, the orders of the authorities below (the assessment order as upheld in the impugned CIT(A) order) have been passed without due consideration of relevant facts and applicable law, rendering the assessment The resultant are arbitrary, improper. disallowances/additions perverse and contrary to settled principles, and therefore the entire disallowance of 1,78,701/- deserves to be deleted and the impugned order quashed.

2. That the learned CIT(A) erred in upholding the dis

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2026 Supreme(Online)(ITAT) 13319

INCOME TAX APPELLATE TRIBUNAL (JODHPUR BENCH)Mitha Lal Meena, Accountant Member, Sudhir Pareek, Judicial MemberKBK Mercantile LLP – AppellantVersusAssistant Commissioner of Income Tax – RespondentITA Nos. 720 to 722/Jodh/2025|ITA Nos. 723 to 725/Jodh/2025|ITA Nos. 731, 732, 733 & 794/Jodh/2025

Cases Referred (1)