When eligible businesses undergo a statutory audit by an independent auditor, there may be cases where the auditor disallows certain expenses claimed by the assessees in their profit and loss (P&L) statement. The assessees have to be careful about the audit provisions prescribed under the Income Tax (IT) Act, 1961, and the consequences if any expenditure is not allowed by the auditor. The assessees have the option to claim any expenditure – disallowed by the auditor during the audit – as a deduction at the time of filing their Income Tax Return (ITR). If the assessee does so, it will be adjusted in the total taxable income by the Assessing Officer (AO) while processing the ITR, as per section 143(1)(a) of the IT Act.
The question then arises whether the AO has to compulsorily consider the rejection made in the audit report which is claimed by the taxpayer in the ITR? The answer is no. The matter has been listed in various tribunals in the past and it has been concluded that though it has been prescribed in section 143(1)(a) that the disallowance prescribed under the audit report be considered and which in turn shall be deemed to be the total income is not considered when calculating; AO officer will read it as: View taken in audit report as per Income Tax Act, Rules and Notification, along with judgments issued by High Courts and Supreme Court (SC). In case of any contrary view or if it is proved that the expenditure incurred by the assessee is acceptable based on the facts of the case, the AO may allow such expenditure. In any case – even if the expenditure is allowed by the Assessing Officer – the liability of the assessee will be automatically computed in the notice issued under section 143(1) of the IT Act.
see full image
Taxpayers should note that the AO also reserves the right to set off any expenditure cleared in the audit report by the auditor, if the said expenditure does not qualify for tax benefits as per the plain reading of the IT Act. A similar case was listed in the SC, in which the court placed the onus on the taxpayer to prove the genuineness of the expenditure, if the taxpayer wanted to claim the deduction.
Let us consider a case in which the auditor disallows an expense, which the taxpayer claims as deduction at the time of filing ITR but the said expenditure is also disallowed by the AO. Will the assessee be fined in this case? The Supreme Court has held that in such cases, if the assessees have genuine reasons to do so, they will not be fined.
It can be concluded that the disallowance of expenditure by an auditor is neither binding on the assessee nor on the AO. However, taxpayers should be prepared that it may be legal to claim a deduction on an expense disallowed by the auditor or AO, so they should be prepared to justify their reasons with appropriate supporting documents.
Jigar Mansatta is the owner at Jigar Mansatta & Associates.
catch all business News, market news, today’s fresh news events and breaking news Updates on Live Mint. download mint news app To get daily market updates.