What I-T assessees should learn about bills, audits

When eligible companies get a statutory audit completed by an impartial auditor, there could possibly be circumstances whereby the auditor disallows sure bills claimed by assessees of their revenue and loss (P&L) assertion. Assessees need to watch out about audit provisions prescribed underneath the Income Tax (I-T) Act, 1961, and the implications if any expenditure is disallowed by the auditor. The assessees have an choice to say any expenditure—disallowed by the auditor throughout audit—as a deduction whereas submitting their Income-Tax Return (ITR). If the assessee does so, as per part 143(1)(a) of the I-T Act, it shall be adjusted within the whole taxable revenue by the Assessing Officer (AO) whereas processing the ITR.

The query that arises then is whether or not an AO has to compulsorily contemplate the disallowance made within the audit report which is then claimed by the taxpayer within the ITR? The reply to that is no. This matter has previously been listed at numerous tribunals and it was concluded that although it has been decided in part 143(1)(a) to contemplate disallowance prescribed underneath audit report and which isn’t thought-about whereas computing whole revenue in return; the AO officer shall learn it as: view taken in audit report in accordance with Income Tax Act, guidelines and notification made therein together with judgements issued by the High Courts and the Supreme Court (SC). In case of any opposite view or whether it is proved that expenditure incurred by assessee is allowable based mostly on the details of the case, then the AO can enable such expenditure. In both of the circumstances–no matter whether or not the expenditure is allowed by the assessing officer–legal responsibility of the assessee will get auto computed in intimation issued underneath part 143(1) of IT Act.

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Taxpayers ought to be aware that the AO additionally holds the authority to revoke any expenditure cleared within the audit report by the auditor if the mentioned expenditure doesn’t qualify for tax profit as per the plain studying of the IT Act. An identical matter was listed within the SC, whereby the court docket had put the onus of proving the genuineness of the expenditure on the taxpayer if the latter needed to say deduction.

Let us contemplate a case whereby the auditor disallows an expenditure, which the taxpayer claims as deduction whereas submitting ITR however the mentioned expenditure is disallowed by the AO as nicely. Will a penalty be levied on the assessee on this case? The Supreme Court has held that in such circumstances if assessees have bonafide causes to take action, penalty won’t be levied on them.

It may be concluded that disallowance of an expenditure by an auditor is neither binding on assessee nor on the AO. However, taxpayers needs to be ready that claiming deduction on the expenditure disallowed by an auditor or an AO may flip litigious, so they need to be able to justify their causes with appropriate supporting paperwork.

Jigar Mansatta is proprietor, at Jigar Mansatta & Associates.

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