Delhi ITAT Deletes Rs 14.98 Cr Ad-Hoc Disallowance on Mankind Pharma's Travel Expenses

Background of the Case

Mankind Pharma, engaged in trading pharmaceutical products, claimed a total travelling and conveyance expenditure of Rs. 18,73,43,027/- for the year. Of this, Rs. 18,19,13,422/- was reimbursed to MRs as part of the company’s approved reimbursement policy. These expenses were primarily for door-to-door marketing and sales activities, including visits to chemists and doctors, as well as inter-state travel for business purposes.

While a portion of the expenditure was directly paid to vendors such as taxi operators and hotels, the majority comprised reimbursements to employees, subject to management approval.

The Assessing Officer (AO) disallowed approximately 80% of the total expenses, amounting to Rs. 14,98,74,422/-, citing that supporting documentation was provided only on a sample basis and that the reimbursements lacked substantiation through underlying bills or vouchers. The assessee appealed before the Commissioner of Income Tax (Appeals) [CIT(A)], providing detailed documentation, including monthly and individual employee reimbursement reports, travel-related bills, vouchers, and ledger entries.

CIT(A) Findings

The CIT(A), in the order dated 08.08.2024, reduced the AO’s disallowance from 80% to 20%, observing:

"Upon reviewing the appellant's submissions and the policy framework for reimbursements, it is clear that the policy is based on commercial expediency and aims to simplify the process of reimbursing employees for legitimate business expenses. Further it goes without saying that travelling expenses of MR are integral to this line of business. The policy has been designed to reduce the administrative burden of collecting and verifying every minor expense voucher, which is impractical given the scale of operations."

CIT(A) further noted:

"The AO's reliance on the absence of complete supporting vouchers as the sole reason for the disallowance overlooks the reasonableness of the policy and the fact that it has been consistently followed in previous years without dispute... the appellant's policy is reasonable, consistent, and backed by a robust system of checks and balances."

Tribunal Analysis

On appeal, the ITAT examined the company’s business model, emphasizing that MRs travel extensively to procure orders and make product presentations. The tribunal noted that many expenses were incurred in areas lacking organized accommodation or transport facilities, making the production of proper invoices or bills challenging.

The tribunal highlighted the company’s policy, which reimbursed travel at Rs. 2.80 per km and provided daily allowances depending on designation and travel location. It further emphasized that the reimbursement claims underwent multiple levels of verification by the management before payment.

As per the tribunal:

"To consider the eligibility of any expenditure, the business model of assessee, product range, marketing and selling functions needs to be understood well... In the present case, every expenditure was supported by a declaration of an employee coupled with the inherent system of approvals/checks and balances."

The tribunal also relied on precedents, including CIT vs. Larsen & Toubro Ltd. [313 ITR 1 (SC)] and Hero MotoCorp Ltd. vs. ACIT [156 TTJ 139 (Delhi - Trib.)], which held that expenses reimbursed on the basis of company policy and employee certification could not be disallowed solely for lack of vouchers.

The ITAT observed:

"Even assuming without admitting, that employees were reimbursed higher than the actual expenditure, even then the higher re-imbursement by assessee employer on Bonafide basis constitute an expenditure incurred for the purpose of business in hands of the assessee company and cannot be considered personal or non-business expenditure, warranting disallowance."

The tribunal also noted that similar reimbursement policies had been accepted in prior assessment years (2013-14, 2015-16, 2018-19, 2020-21) without dispute, reinforcing the principle of consistent treatment.

Subsequently, the ITAT concluded that the AO’s ad-hoc disallowance of 80% of travelling and conveyance expenses was unjustified. It allowed the assessee’s appeal while dismissing the Revenue’s appeal, holding that the expenses of Rs. 18,73,43,027/- were eligible as business deductions.

The order was pronounced in open court on 27th August 2025 by Shri S. Rifaur Rahman and Shri Anubhav Sharma.