Pranav B Prem

The Bengaluru Bench of the Income Tax Appellate Tribunal has allowed Instakart Services Pvt. Ltd., a Flipkart group entity engaged in logistics and courier services, to claim business losses aggregating to ₹772.25 crore for Assessment Years 2016–17 to 2018–19. The Tribunal set aside the tax disallowances made by the Revenue, holding that genuine business losses incurred in the ordinary course of operations cannot be rejected merely on allegations of lack of profit motive.

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The appeals were decided by a Bench comprising Waseem Ahmed, Accountant Member, and Keshav Dubey, Judicial Member. In its order dated 18 December 2025, the Tribunal observed that “losses in the early years of business, therefore, cannot be regarded as abnormal or as evidence of tax avoidance,” particularly in the context of start-ups and e-commerce logistics enterprises.

Instakart was incorporated in 2015 and commenced its logistics and allied services business during Assessment Year 2016–17. Being its first year of operations, the company reported substantial losses, which it attributed to initial infrastructure creation, manpower deployment, vendor payments, and aggressive pricing strategies adopted to gain scale and geographical reach in a highly competitive e-commerce logistics market. The assessee explained that it adopted discounted pricing for its principal customer, Flipkart, while simultaneously incurring high vendor and operational costs, a strategy aimed at long-term growth rather than immediate profitability.

The Assessing Officer, however, treated the losses as artificial and recharacterised them as notional income. It was alleged that Instakart had under-charged its group concern Flipkart while overpaying third-party logistics vendors, resulting in profit shifting within the group. On this basis, the entire business loss of ₹772.75 crore was disallowed. The Commissioner of Income Tax (Appeals) affirmed the disallowance, holding that the losses were attributable to cost-shifting arrangements rather than genuine business exigencies.

Before the Tribunal, Instakart contended that the losses were real and incidental to its business operations. It demonstrated that the rates charged to Flipkart during the relevant years were identical to those charged to unrelated third-party customers. The assessee further pointed out that its loss percentage had sharply declined over subsequent years, reducing from 209% in Assessment Year 2016–17 to 20% and 7% in the following two years, reflecting commercial viability of its business strategy. It was also emphasised that all expenses were duly recorded in audited accounts, with no defects pointed out by the Revenue under Section 145(3) of the Income Tax Act.

The Tribunal accepted these submissions and held that business expediency must be assessed from the perspective of the businessman and not the tax authorities. It took judicial notice of the fact that start-ups and e-commerce companies often incur heavy losses in their formative years, citing examples of major players such as Zomato, Amazon, Swiggy, and Zepto, which have also reported substantial losses despite scale and brand value. The Tribunal held that the Revenue cannot substitute its own notion of profitability or recharacterise genuine business losses as hypothetical income.

On the allegation of profit shifting, the Tribunal examined the rate charts placed on record and found that the charges levied on Flipkart were the same as those charged to unrelated customers during the relevant period. This factual finding, according to the Tribunal, completely demolished the Revenue’s case of under-charging group entities. It further observed that the difference between customer billing and vendor payments represented additional operational and logistical costs inherent in running a nationwide e-commerce logistics business.

The Tribunal also dealt with the disallowance of Employee Stock Ownership Plan (ESOP) expenses and manpower costs. It held that ESOP expenses constitute a legitimate form of employee compensation and are allowable as business expenditure, relying on a co-ordinate Bench decision in the case of Flipkart India Pvt. Ltd. With respect to manpower expenses, the Tribunal ruled that payments made through proper banking channels with deduction of tax at source could not be disallowed merely because one of the vendors was later found to be non-existent, reiterating that genuineness must be examined at the time services were rendered.

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Accordingly, the Tribunal allowed all three appeals filed by Instakart and dismissed the Revenue’s appeals, deleting the disallowances relating to business losses, ESOP expenses, and manpower costs. The ruling reinforces the principle that genuine start-up losses incurred in the course of business cannot be recharacterised as notional income in the absence of concrete evidence to the contrary.

Appearance

For Assessee: Senior Advocate Ajay Vohra with Advocates Kishore Kunal, Ankita Prakash, Anuj Kumar

For Revenue: Shivanad Kalakeri, CIT

Cause Detail: Instakart Services Private Limited vs. The Assistant Commissioner of Income Tax

Case Number: ITA No.496/Bang/2025

Coram: Judicial Member Keshav Dubey and Accountant Member Waseem Ahmed