ITAT Allows ₹772 Crore Business Loss Claim Of Flipkart Group Firm Instakart

The Bengaluru Bench of the Income Tax Appellate Tribunal (ITAT) has allowed Instakart Services Pvt. Ltd., a Flipkart group logistics company, to claim Rs 772.25 Crore in business losses. The ruling sets aside tax disallowances for Assessment Years 2016-17 to 2018-19.

In an order dated December 18, 2025, Judicial Member Keshav Dubey and Accountant Member Waseem Ahmed held that the losses were genuine. The tribunal ruled that they could not be rejected solely on allegations of lack of profit motive.

"Losses in the early years of business, therefore, cannot be regarded as abnormal or as evidence of tax avoidance.", the tribunal held 

Instakart was incorporated in 2015 and commenced operations in the logistics, courier, and allied services segment during Assessment Year 2016-17. Being its first year of operations, the company reported substantial losses, which it attributed to initial infrastructure build-up, manpower deployment, vendor costs, and competitive pricing pressures in the e-commerce logistics sector.

The assessee submitted that, to build scale and ensure wider geographical coverage, it adopted a discounted pricing strategy for its principal customer, Flipkart. It further pointed out that the losses reduced significantly in subsequent years, with the loss percentage falling from 209% in AY 2016-17 to 20% and 7% in AYs 2017-18 and 2018-19, respectively.

The Assessing Officer treated the losses as artificial and reclassified them as notional income, alleging that Instakart had under-charged Flipkart while over-paying third-party vendors, resulting in profit shifting within the group. This view was upheld by the Commissioner of Income Tax (Appeals), who rejected the assessee's claim on the ground that the losses were a case of cost-shifting rather than genuine business exigency.

The ITAT rejected the Revenue's approach and reiterated that business expediency must be examined from the perspective of the businessman and not the tax authorities. It held that losses incurred in the ordinary course of business cannot be disallowed merely because the business chose to prioritise growth over immediate profitability.

The tribunal also took judicial notice of the fact that start-ups and e-commerce companies often incur heavy losses in their formative years, observing that major players such as Zomato, Amazon, Swiggy, and Zepto had reported substantial losses despite scale and brand value.

On the allegation of under-charging the group concern, the ITAT examined the rate charts for Assessment Year 2016-17 and found that the charges levied on Flipkart were identical to those charged to unrelated third-party customers, both during the relevant year and in subsequent years. The Tribunal held that this factual position demolished the allegation of profit shifting.

Addressing the mismatch between customer billing and vendor expenses, the ITAT observed that the difference represented additional logistical and operational costs inherent in a highly competitive e-commerce logistics business.

On the issue of Employee Stock Ownership Plan (ESOP) expenses being employee compensation costs incurred through grant of stock options, the Tribunal allowed the deduction by relying on a co-ordinate Bench decision in the case of Flipkart India Pvt. Ltd., a group concern of the assessee. The ITAT held that ESOP expenses constitute a legitimate form of employee compensation and cannot be disallowed merely because they are non-cash in nature.

With respect to manpower expenses amounting to ₹19.90 crore, the Revenue had disallowed the claim on the ground that one of the vendors was later found to be non-existent. The Tribunal examined Instakart's manpower sourcing model, noting that services were availed from 28 different vendors, and relied on agreements, invoices, EPF and ESI records, and bank statements.

The ITAT held that payments made through proper banking channels with deduction of tax at source under Section 194C could not be disallowed merely because the vendor was not traceable at a later stage. Relying on the Calcutta High Court's ruling in Diagnostic vs. CIT, the tribunal reiterated that the existence of the party and genuineness of the transaction must be examined at the time services were rendered.

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