Introduction
The Income Tax Appellate Tribunal (ITAT), Delhi Bench ‘E’, delivered a consolidated order dated 04.06.2026 in cross appeals for Assessment Year 2018-19, Health Care at Home India Pvt. Ltd. vs. DCIT. The case involves two principal issues: the ad-hoc disallowance of sales promotion expenses and the addition under Section 69C of the Income Tax Act, 1961 for capital expenditure on intangible assets. The ITAT’s decision provides critical guidance on the evidentiary burden for claiming revenue expenditure and the limits of the assessing officer’s power to invoke deemed income provisions. This commentary analyses the Tribunal’s reasoning, its practical implications for taxpayers, and the boundaries of judicial discretion in ad-hoc disallowances.
Facts
The assessee, a private limited company providing home healthcare services, filed its return of income for A.Y. 2018-19 declaring a loss of ₹31,25,46,980. The Assessment Order under Section 143(3) read with Section 144B disallowed 30% of the total sales promotion expense of ₹8,04,73,870 (i.e., ₹2,41,42,161) on the ground that a complete nexus for all categories of expenditure was not established. Separately, the Assessing Officer (AO) added ₹2,32,61,259 under Section 69C as unexplained expenditure on intangible assets. On appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] reduced the disallowance to 15% (₹1,20,71,000) and entirely deleted the Section 69C addition. Both parties appealed: the assessee challenged the sustenance of any ad-hoc disallowance, while the Revenue challenged the deletion of the intangible asset addition.
Reasoning
1. Sales Promotion Expenses – Ad-hoc Disallowance vs. Business Necessity
The ITAT examined the core contention: whether the AO and CIT(A) were justified in retaining a part of the disallowance without identifying specific defects in the books of account or supporting documents. The Tribunal noted that the assessee had routed the expenses through banking channels and provided voluminous documentary evidence. However, the assessee could not establish a “complete and verifiable nexus” for certain categories such as hospitality, client interactions, and event-related expenditure. The Tribunal observed that the Revenue’s “endeavour to disbelieve the explanation in entirety is also not justified.” This reflects a balanced approach—while the taxpayer failed to satisfy the full evidentiary standard, the Revenue could not disregard the entire expense as non-business.
Critically, the ITAT held that the disallowance was entirely ad-hoc and lacked a scientific basis. The AO had applied a flat 30% without pinpointing specific items; the CIT(A) reduced it to 15% on similar ad-hoc reasoning. To resolve the impasse, the Tribunal exercised judicial discretion and reduced the disallowance to a lump-sum 5% of the total sales promotion expenditure (₹8,04,73,870). This decision was driven by the principle that where the evidence is partially deficient but the expense is genuine, an estimated disallowance may be justified to cover “loopholes.” However, the Tribunal specifically added a rider that this shall not be treated as a precedent, thereby limiting its impact to the peculiar facts of the case.
The reasoning underscores that under Section 37(1) of the Act, expenditure incurred wholly and exclusively for business purposes is allowable. The AO cannot mechanically apply a percentage without demonstrating specific irregularities. The tax department must adduce material to show that certain outlays are not genuine. Here, the Revenue failed to do so, while the taxpayer could not fully bridge the evidential gap. The Tribunal’s approach aligns with settled principles that the burden of proof shifts between the taxpayer and the Revenue depending on the quality of documentary support.
2. Intangible Assets – Section 69C Addition Unwarranted
On the second issue, the Revenue argued that the capital expenditure on intangible assets (patient care system via Odoo software) should be treated as unexplained under Section 69C. The ITAT examined the records: the expenses were fully recorded in the books of account, supported by agreements with third-party vendors, and details of employees involved in development were filed. The AO did not bring any contrary evidence to suggest that the expenditure was not recorded or that the assessee failed to explain the source.
The Tribunal observed that Section 69C applies only where the assessee offers no explanation about the nature and source of expenditure or the explanation offered is not satisfactory. In this case, the assessee provided a complete trail of documents. The AO merely doubted the nature of the expenditure (capital vs. revenue) but did not challenge the quantum or the genuineness of the transaction. Therefore, the ITAT upheld the CIT(A)’s deletion, ruling that no interference was required. This reaffirms that the mere classification dispute cannot be transformed into a Section 69C addition; the provision is meant for cases where expenditure is either not recorded in the books or no plausible explanation is furnished.
3. Overall Balance of Justice
The ITAT’s disposition reflects a pragmatic outlook. For sales promotion expenses, it acknowledged that while the taxpayer had some weakness, the Revenue’s approach was overly rigid. By limiting the disallowance to 5% as a “lump-sum addition” and expressly stating it is not a precedent, the Tribunal ensured finality in this case without creating a rule that encourages unsubstantiated departmental estimates. For intangible assets, it rejected the Revenue’s attempt to stretch Section 69C beyond its legitimate scope.
Conclusion
The ITAT partly allowed the assessee’s appeal (ITA No. 8597/Del/2025) by reducing the disallowance of sales promotion expenses from 15% to 5% of the total expenditure, with a caveat that this is not a binding precedent. The Revenue’s appeal (ITA No. 8968/Del/2025) was dismissed, upholding the deletion of the Section 69C addition on intangible assets. The order reinforces that ad-hoc disallowances must be carefully calibrated and that the tax department cannot rely on Section 69C without establishing a failure by the assessee to explain the source of expenditure. Practitioners should note the importance of maintaining robust documentary evidence and, where nexus is partially deficient, the Tribunal may still allow a substantial portion of genuine business expenditure.