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Business News/ Money / Personal Finance/  What I-T assessees must know about expenses, audits

What I-T assessees must know about expenses, audits

Disallowance of an expenditure by an auditor is neither binding on assessee nor on the AO


When eligible businesses get a statutory audit done by an independent auditor, there could be cases wherein the auditor disallows certain expenses claimed by assessees in their profit and loss (P&L) statement. Assessees have to be careful about audit provisions prescribed under the Income Tax (I-T) Act, 1961, and the consequences if any expenditure is disallowed by the auditor. The assessees have an option to claim any expenditure—disallowed by the auditor during audit—as a deduction while filing their Income-Tax Return (ITR). If the assessee does so, as per section 143(1)(a) of the I-T Act, it shall be adjusted in the total taxable income by the Assessing Officer (AO) while processing the ITR.

The question that arises then is whether an AO has to compulsorily consider the disallowance made in the audit report which is then claimed by the taxpayer in the ITR? The answer to this is no. This matter has in the past been listed at various tribunals and it was concluded that though it has been determined in section 143(1)(a) to consider disallowance prescribed under audit report and which is not considered while computing total income in return; the AO officer shall read it as: view taken in audit report in accordance with Income Tax Act, rules and notification made therein along with judgements issued by the High Courts and the Supreme Court (SC). In case of any contrary view or if it is proved that expenditure incurred by assessee is allowable based on the facts of the case, then the AO can allow such expenditure. In either of the cases–irrespective of whether the expenditure is allowed by the assessing officer–liability of the assessee will get auto computed in intimation issued under section 143(1) of IT Act.

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Taxpayers should note that the AO also holds the authority to revoke any expenditure cleared in the audit report by the auditor if the said expenditure doesn’t qualify for tax benefit as per the plain reading of the IT Act. A similar matter was listed in the SC, wherein the court had put the onus of proving the genuineness of the expenditure on the taxpayer if the latter wanted to claim deduction.

Let us consider a case wherein the auditor disallows an expenditure, which the taxpayer claims as deduction while filing ITR but the said expenditure is disallowed by the AO as well. Will a penalty be levied on the assessee in this case? The Supreme Court has held that in such cases if assessees have bonafide reasons to do so, penalty will not be levied on them.

It can be concluded that disallowance of an expenditure by an auditor is neither binding on assessee nor on the AO. However, taxpayers should be prepared that claiming deduction on the expenditure disallowed by an auditor or an AO could turn litigious, so they should be ready to justify their reasons with suitable supporting documents.

Jigar Mansatta is proprietor, at Jigar Mansatta & Associates.

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Published: 11 Sep 2022, 11:10 PM IST
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