Claiming Rent Expenses Invoiced Late Due to Vendor Dispute – Guidance Needed, Income Tax

[Ramanathan Seshan]

Dear experts,

Company A rented a premises starting January 2025. Due to disagreements with the (unregistered) vendor, rent invoices for February and March 2025 were not issued on time and were only raised in April 2025. No provision for these expenses was made in the books during FY 2024-25. As a result, the rent expense for Feb and Mar 2025 can't be claimed in the ITR for AY 2025-26, and if claimed in the next year, it may be disallowed as a prior period expense.

What options are available to legitimately claim these expenses? Is there a possible accounting or tax treatment that would allow for their deduction?

Regards,

S Ram

Posts / Replies

[YAGAY andSUN]

You're right to be cautious — under Income Tax Act, prior period expenses are often scrutinized and can be disallowed if they pertain to a prior financial year but are claimed in a later year. However, in your case, there are legitimate options and legal reasoning you can consider to support a valid deduction, depending on the facts and documentation available.

✅ Key Tax Principle:

Under Section 37(1) of the Income Tax Act, expenses are deductible if:

They are incurred wholly and exclusively for business, and

They are incurred in the relevant previous year.

The issue arises when expenses relating to a prior year are accounted in a later year, i.e., treated as prior period expenses.

🎯 Goal:

To ensure the expense is allowed under AY 2026–27, despite relating to FY 2024–25.

📌 Available Legitimate Options

Option 1: Establish “Crystalization” in FY 2025–26

You can argue the expense crystallized only in April 2025, due to:

Ongoing disputes with the landlord (vendor).

No certainty or obligation to pay until invoices were issued and dispute was resolved.

Lack of any legal or constructive liability before April 2025.

📚 Precedent & Reasoning:

Courts have held that an expense is allowable in the year in which the liability crystallizes, even if it relates to earlier period — as long as the liability was not ascertainable or acknowledged earlier.

🔹 Key Case Law:

Rotork Controls India (P) Ltd. v. CIT (2009 (5) TMI 16 - SUPREME COURT) – liability must be reasonably estimated and must have crystallized.

CIT v. Indian Petrochemicals Corporation Ltd. - 2016 (9) TMI 110 - GUJARAT HIGH COURT – expense related to earlier period held allowable when liability was accepted in current year.

✅ Action:

Document the nature of the dispute (e.g., email trails, legal notices, internal notes).

Include a board note or internal memo stating liability was not determinable earlier.

Recognize the rent and GST in April 2025 books, with explanation in tax audit report (Clause 22 of Form 3CD) and in financial statement notes.

Option 2: Voluntary Disclosure as Prior Period Item (with justification)

If you cannot strongly support the "crystallization" argument, consider:

Disclosing the rent as a prior period expense in FY 2025–26,

Claiming it as a deduction in AY 2026–27 with full disclosure in Tax Audit Report (Form 3CD, Clause 22).

This is less ideal, as the Assessing Officer may disallow it, but:

Courts have sometimes allowed prior period expenses if not previously claimed and if actually paid in the current year.

Option 3: Revised Computation for AY 2025–26 (if possible)

If you're still within the window:

File a revised tax audit report and revised ITR for AY 2025–26,

Book the expense through back-dated provision in March 2025 accounts (with auditor’s note).

⚠️ Risk: Only viable if books are not finalized/audited or if audit report and ITR haven't been filed yet — or can still be revised.

🔍 Recommended Approach:

Situation	Suggested Action
You can document the dispute and uncertainty	Use Option 1 — claim in FY 2025–26 as expense crystallized only on invoice receipt
Dispute was informal or weakly documented	Use Option 2 — claim as prior period expense with disclosure
Books not yet finalized or tax return not filed	Consider Option 3, if practically possible

 

📑 Disclosures Required:

If using Option 1:

Include a note in financial statements explaining why expense is recognized in FY 2025–26.

Tax audit report (Form 3CD), Clause 22: Mention the nature and year of prior expense.

If using Option 2:

Disclose clearly as prior period item in books.

Report in Clause 22 of Form 3CD.

[YAGAY andSUN]

📄 INTERNAL MEMO FOR AUDIT FILE

Subject: Crystallization of Rent Liability – Feb and Mar 2025

To: Audit File / Tax Consultant

From: Finance Department

Date: [Insert Date]

Company: [Company A Pvt. Ltd.]

Background:

Company A entered into a rental arrangement for a commercial premises starting January 2025. The vendor of the premises is unregistered under GST and did not raise invoices for February and March 2025 due to ongoing disagreements and unresolved commercial terms between both parties.

Facts:

• No written agreement was executed; the arrangement was on verbal or informal terms.
• Disputes arose in February 2025 concerning rent rates and service levels.
• Due to the dispute, the vendor did not raise any invoice or written demand for rent for Feb and Mar 2025 during FY 2024–25.
• The matter was resolved informally in April 2025, and the vendor issued invoices dated April 3, 2025, for the said months.
• Consequently, no accrual or provision was made in the books of account for FY 2024–25.

Crystallization Assessment:

As per applicable accounting principles and judicial precedents (e.g., Rotork Controls India Pvt. Ltd. v. CIT - 2009 (5) TMI 16 - SUPREME COURT), an expense is considered incurred when the liability is crystallized and reasonably ascertainable.

Given that:

• The vendor did not raise any invoice or create a demand before April 2025,
• The amount and timing of the rent were not ascertainable or agreed upon, and
• The obligation to pay became fixed only in April 2025,

it is concluded that the rent expense crystallized in April 2025, and therefore should be recognized in the books of FY 2025–26 and claimed as a deduction in AY 2026–27.

Conclusion:

The rent for February and March 2025 has been recorded in the books of account in April 2025 on the basis of invoices issued and liability crystallizing only at that time. Accordingly, the same is claimed as a deductible business expense in AY 2026–27.

[YAGAY andSUN]

📘 DRAFT BOARD NOTE / RESOLUTION

Subject: Approval for Recognition of Rent Expenses for Feb–Mar 2025 in FY 2025–26

Date: [Insert Date]

Company: [Company A Pvt. Ltd.]

Agenda:

To consider and approve the accounting treatment of rent expenses pertaining to February and March 2025, invoiced in April 2025.

Background:

The Company occupied rented premises beginning January 2025. Due to disputes with the unregistered vendor, no invoices for February and March 2025 were received during FY 2024–25. These were only issued upon resolution of the matter in April 2025.

Resolution:

After due deliberation, the Board hereby notes and resolves that:

1. The liability in respect of rent for February and March 2025 was uncertain and unascertained during FY 2024–25 and thus did not crystallize during that year.
2. The said liability has crystallized only upon receipt of invoices in April 2025, and accordingly, the expenses shall be recognized in the books of FY 2025–26.
3. The Company’s statutory auditor and tax consultant are to be informed accordingly, and necessary disclosures shall be made in the tax audit report and financial statements.

For and on behalf of the Board

[Signature]
[Name]
[Designation]
[Date]

[YAGAY andSUN]

Below is a draft disclosure for Clause 22 of Form 3CD under the Income Tax Act, 1961, tailored to your situation — where rent expense for February and March 2025 is being recognized and claimed in FY 2025–26 (AY 2026–27) due to delayed invoice issuance and dispute resolution.

📄 Clause 22 – Disclosure in Form 3CD

Clause 22:

“Amount of expenditure incurred during the previous year which is claimed by the assessee in the profit and loss account and which is otherwise allowable under the Act, but not allowable under the provisions of section 40(a).”

🔹 Note: While Clause 22 primarily refers to disallowance under section 40(a) (e.g., TDS default), it is also used to disclose expenses that may be at risk due to timing or accounting mismatches (such as prior period expenses).

🔹 Alternatively, this may be better disclosed under Clause 21(g): “Prior period items” depending on auditor judgment — both options are shown below for completeness.

✅ Clause 22 – Suggested Disclosure Format

Details of expenditure claimed in the profit and loss account for the previous year but pertaining to earlier previous year(s):

Nature of Expense	Amount (INR)	Financial Year to which it pertains	Reason for delay in booking
Rent expense (premises taken on lease)	1,00,000	FY 2024–25	Invoices for Feb and Mar 2025 not issued by unregistered vendor due to commercial disputes; liability crystallized only upon resolution and receipt of invoices in April 2025

Remarks:
The above expenditure pertains to the rent for February and March 2025. Due to disputes with the unregistered vendor, no invoices were raised or payments made during FY 2024–25. The obligation to pay became certain only in April 2025, upon resolution of the dispute and issuance of invoices. As such, the expense was recognized and claimed on crystallization basis in FY 2025–26 (AY 2026–27), in accordance with judicial precedents.

📌 Alternative (or Additional) Disclosure under Clause 21(g)

Clause 21(g): Amounts debited to the profit and loss account, being in the nature of prior period items

Disclosure under Clause 21(g):

Particulars	Amount (INR)	Remarks
Rent expense relating to Feb–Mar 2025	1,00,000	Recognized in FY 2025–26 on crystallization. Pertains to prior year but not booked earlier due to absence of invoice and ongoing dispute. Supporting documents available.

[Ramanathan Seshan]

Dear Yagay-sir,

Thanks for your detailed response.

Regards,

S Ram