Tax Audit Clerical Error Cannot Justify Section 40(a)(ia) Disallowance: ITAT Pune Grants Relief to Partnership Firm

Case Overview: Shivani Enterprises Vs ITO (ITAT Pune)

The Income Tax Appellate Tribunal, Pune Bench, delivered a significant ruling in the matter of Shivani Enterprises Vs ITO, holding that a disallowance under Section 40(a)(ia) of the Income Tax Act, 1961 cannot be sustained when the underlying figures in the tax audit report were inadvertently copied from a sister concern's audit documentation and did not reflect any actual expenditure incurred by the assessee. The Tribunal deleted the entire addition of ₹12,66,080/- and reversed the concurrent findings of the Assessing Officer and the CIT(A).

This ruling carries broad practical relevance for assessees, auditors, and tax practitioners — particularly in cases where tax audit reports contain clerical inaccuracies that are mechanically treated as evidence of TDS defaults without independent verification of actual transactions.

Background and Facts of the Case

The Assessee and the Scrutiny Proceedings

Shivani Enterprises is a partnership firm operating in the business of fabric trading. For Assessment Year 2018-19, the firm declared total income of ₹17,32,968/- in its return of income. The case was selected for limited scrutiny by the Assessing Officer.

During the course of scrutiny proceedings, the Assessing Officer examined the tax audit report filed by the assessee's auditor. Based on observations recorded in Column No. 21 of that audit report — which pertained to details of payments on which tax had not been deducted — the Assessing Officer identified a sum of ₹12,66,080/- as allegedly representing rent payments on which tax deductible under Section 194I of the Income Tax Act, 1961 had not been deducted at source.

The Disallowance Under Section 40(a)(ia)

Treating the audit report observations at face value, the Assessing Officer passed an Assessment Order dated 24.11.2020 under Section 143(3) read with Section 143(3A) and Section 143(3B) of the Income Tax Act, 1961, disallowing ₹12,66,080/- under Section 40(a)(ia) on the ground that tax had not been deducted at source on rent expenditure.

The assessee challenged the addition before the National Faceless Appeal Centre, Delhi, which passed its order dated 22.04.2024 under Section 250 of the Income Tax Act, 1961. The CIT(A) upheld the disallowance, declining to accept the assessee's explanation and affirming the Assessing Officer's reasoning in its entirety.

Delay in Filing Appeal Before ITAT: Condonation Granted

The 401-Day Delay

Before the Tribunal could adjudicate the appeal on merits, it was required to address a preliminary issue — the appeal had been filed with a delay of 401 days beyond the prescribed limitation period. The Registry brought this delay to the Tribunal's attention, and the assessee was called upon to explain the reasons for the same.

Affidavit Explaining the Delay

The assessee's key managing partner, Ashraf Mushtaque Parwani, filed a sworn affidavit setting out the following circumstances that contributed to the delay: