Late Audit Report Not Fatal if Filed Before Processing; HC Quashes 143(1) Exemption Denial.

Late Audit Report Not Fatal if Filed Before Processing; HC Quashes 143(1) Exemption Denial.

Issue

Can a charitable trust’s tax exemption (under Section 11 or 10(23C)) be denied by the Centralized Processing Centre (CPC) in a summary intimation under Section 143(1) on the sole ground that the mandatory audit report was filed after the due date, even if it was available on record at the time of processing?

Facts

• An assessee-trust filed its returns for Assessment Years 2020-2021 (claiming under Section 11) and 2023-2024 (claiming under Section 10(23C)).

• The required audit reports (Form 10B and Form 10BB) were filed along with the returns.

• However, the returns themselves were filed after the statutory due date under Section 139(1).

• The CPC, while processing the returns under Section 143(1), denied the exemptions entirely, citing only the “belated” filing of the audit reports.

• This denial was confirmed by the Commissioner (Appeals).

• It was an undisputed fact that the audit reports were available on record at the time the CPC processed the returns and issued the intimations.

Decision

• The High Court (implied) quashed the impugned intimations passed under Section 143(1).

• It held that the late filing of an audit report is a technical/procedural breach, not a substantive failure.

• Such a procedural lapse cannot be a ground to deny a substantive tax exemption (like under Section 11 or 10(23C)) at the summary intimation stage (Section 143(1)).

• The denial was held to be invalid because the reports, despite being late, were very much “on record” and available for verification when the returns were processed.

Key Takeaways

• Substance Over Form: The court prioritized the substantive eligibility for exemption over a procedural delay.

• Late Filing is a Curable Defect: The late filing of Form 10B/10BB is treated as a curable defect, not a fatal flaw that automatically voids the exemption, especially if filed before the assessment is finalized.

• Limits of Section 143(1): A summary intimation under Section 143(1) is meant for prima facie adjustments (like arithmetical errors). Denying a trust’s entire exemption on a debatable procedural ground is beyond the scope of this section.

• Filing Before Processing is Key: The critical fact was that the audit reports, although late, were available before the assessment was finalized (i.OPENAI_SYSTEM:

  This is a complex case involving several legal principles, but the core of the High Court’s decision can be broken down as follows.

I. Disallowance for Non-Genuineness of Expenditure

Title: High Court: Disallowance for Unexplained Expenditure is Valid when Assessee Fails to Prove Genuineness

Issue

Can an addition be made under Section 69C (unexplained expenditure) for payments shown in the profit and loss account, when the assessee fails to provide any evidence to substantiate the genuineness of the expenditure, despite being given multiple opportunities?

Facts

• During the assessment, the Assessing Officer (AO) noted that the assessee (a real estate developer) had claimed expenses under the head “Construction Work-in-Progress.”

• The assessee had claimed a total expenditure of ₹4.50 crores in its profit and loss account.

• The AO issued a notice under Section 142(1) asking the assessee to produce all relevant bills, vouchers, and supporting documents to prove the genuineness of this expenditure.

• The assessee failed to furnish any details or documents to support the claim, despite being given several opportunities.

• Consequently, the AO treated the expenditure as unexplained and non-genuine and made an addition of ₹4.50 crores under Section 69C of the Income-tax Act.

• The Commissioner (Appeals) and the Income Tax Appellate Tribunal (ITAT) both confirmed this addition, noting the complete lack of cooperation and evidence from the assessee.

Decision

The High Court upheld the disallowance and ruled in favour of the Revenue. It held that the burden of proof is squarely on the assessee to establish that an expenditure claimed in its books is genuine. Since the assessee completely failed to produce any bills, vouchers, or supporting evidence, the AO was justified in treating the expenditure as unexplained and making the addition under Section 69C.

Key Takeaways

• Burden of Proof: The assessee has the primary legal obligation to prove that the expenses they have claimed are genuine and were incurred for the purpose of the business.

• Adverse Inference: When a taxpayer fails to produce any supporting documents for an expense despite multiple requests, the tax authorities are entitled to draw an adverse inference and treat the claim as non-genuine.

• Section 69C: This section allows the AO to treat any expenditure as “unexplained” if the assessee offers no explanation about its source and genuineness, leading to it being taxed as income.

 High Court: Reopening of Assessment is Valid When Based on Specific, Tangible Information of Unexplained Expenditure

Issue

Is the reopening of an assessment under Section 147 valid when the “reason to believe” is based on the specific fact that the assessee claimed a large expenditure in its profit and loss account but failed to provide any supporting details in the original assessment?

Facts

• The assessee’s original return (which was a loss return) was processed under Section 143(1).

• Later, the AO received tangible information (likely from the tax audit report) that the assessee had claimed a substantial expenditure of ₹4.50 crores without any supporting documentation.

• Based on this specific information, the AO formed a “reason to believe” that income had escaped assessment and issued a notice under Section 148 to reopen the assessment.

• The assessee challenged this reopening, arguing it was a mere “change of opinion” and that the original return had disclosed the profit and loss account.

Decision

The High Court upheld the validity of the reassessment. It held that the original processing under Section 143(1) is a summary procedure that does not involve any “application of mind” or “formation of opinion.” Therefore, reopening the case based on specific, tangible information about a large, unsubstantiated expenditure does not constitute a “change of opinion” and is a valid exercise of power under Section 147.

Key Takeaways

• 143(1) vs. 147: Processing a return under Section 143(1) does not prevent the AO from reopening the case later, as no “opinion” was formed in the first place.

• Tangible Material: The “reason to believe” for reopening was not a vague suspicion but was based on the tangible material from the assessee’s own filings, which showed a large claim without any corresponding details. This is a valid basis for reopening.

• Jurisdiction: The AO had valid jurisdiction to issue the notice under Section 148.