ITAT Jodhpur Allows Business Expenditure Under Section 37(1) In Absence of Specific Adverse Findings

Background and Context

A group of connected appeals came up before the ITAT Jodhpur involving multiple corporate assessees where the central controversy was disallowance of business and administrative expenditure under Section 37(1) of the Income Tax Act 1961. The factual pattern across all matters was substantially the same, and therefore the Tribunal chose to hear them together and dispose them of through a single consolidated order.

The core dispute related to routine business expenses such as:

  • Salary and wages
  • Office rent
  • Travelling and conveyance
  • Telephone and communication costs
  • Office and miscellaneous expenses
  • Advertisement and related charges

These expenses had been disallowed wholly or partly by the Assessing Officer (AO) and confirmed by the Commissioner of Income Tax (Appeals) [CIT(A)] in varying degrees, on the premise that the assessees were shell entities with negligible real business activity.

The ITAT noted that the legal issue, factual matrix, and the nature of expenses in all appeals were identical and had been previously adjudicated by a Coordinate Jodhpur Bench in the case of KBK Mercantile LLP, MPK Equity Research LLP and Crystal Infrabuild Pvt. Ltd. vide order dated 21.05.2026. Accordingly, that earlier ruling formed the legal and factual foundation for the present decision.

For ease of discussion, the Tribunal treated ITA No. 778/Jodh/2025 (Assessment Year 2021-22) in the case of Svaraj Trading and Agencies Ltd. as the lead appeal and applied its reasoning uniformly to all other connected appeals.

Facts of the Lead Case: Svaraj Trading and Agencies Ltd.

Nature of Business and Assessment Proceedings

Svaraj Trading and Agencies Ltd. was carrying on wholesale trading on fee or contract basis, including commission agency activities. For Assessment Year 2021-22:

  • The assessee filed its return of income declaring a total income of Rs. 99,60,610/-.
  • The AO reopened the assessment under Section 147 and passed the reassessment order on 01.02.2025.
  • The AO determined the total income at Rs. 1,39,17,193/-, making an addition of Rs. 39,56,583/-.
  • This entire addition represented disallowance of business expenditure claimed in the profit and loss account.

The AO’s principal allegation was that the assessee functioned as a bogus shell company, purportedly operating from a dummy address, and conducting only minimal business transactions. On this assumption, the AO treated almost all operational overheads as not genuinely incurred for business purposes.

Order of CIT(A)

When the matter reached the CIT(A), partial relief was granted. The appellate authority drew a distinction between:

  1. Statutory / compliance-related expenses, and
  2. Other business/operational expenses.

The CIT(A):

  • Allowed expenses like:

    • Audit fees
    • Bank charges
    • Professional fees and similar charges

    These were accepted as inherent to the corporate form, required for statutory compliance, and therefore allowable even where the actual scale of business operations was questioned.

  • Disallowed a larger portion of operational expenditure, including:

    • Salary: Rs. 23,21,940/-
    • Office rent: Rs. 84,000/-
    • Travelling: Rs. 1,45,933/-
    • Conveyance: Rs. 1,25,647/-
    • Office expense: Rs. 2,18,227/-
    • Telephone: Rs. 1,17,609/-
    • Advertisement charges: Rs. 31,208/-
    • Miscellaneous expenses: Rs.