Delhi Tribunal rules on inapplicability of disallowance for procedural breach - (Jai Surgicals)

We are pleased to release a Tax Alert which summarizes a recent ruling of Delhi Income Tax Appellate Tribunal (Tribunal) in the case of Jai Surgicals Ltd. (Taxpayer) on whether disallowance of expenditure is justified, in light of failure to comply with the procedural provision. The Tribunal held that the disallowance should not be triggered, unless the “purpose” of such expenditure amounts to an offense or is prohibited by law. Mere irregularity in procedures would not make the expenditure unlawful so as to bring it within the scope of the deeming fiction of disallowance. Accordingly, the disallowance was deleted by the Tribunal.

This well-reasoned ruling of the Tribunal is a welcome step for the taxpayers, as expenditure may not be disallowed on the ground that there is a non-compliance of procedural provisions. The ruling has clarified that the scope of the Disallowance Provision under the Indian Tax Laws is to be restricted to an expenditure which is incurred for a “purpose” which is an offense or prohibited by law. Mere non-compliance of procedures will not render an otherwise lawful expenditure, unlawful.