Cannot disallow business expenses paid through spouse’s credit card if reimbursed: ITAT

Mumbai: Income Tax Appellate Tribunal’s (ITAT) Mumbai bench recently held that genuine business expenditure cannot be disallowed merely because it was initially paid through a spouse’s credit card and later reimbursed to her.

This order is relevant for small business owners, professionals and family-run businesses, where personal and business payment arrangements may sometimes overlap for practical reasons. According to tax experts, there are instances of small business owners using debit or credit cards of the spouse, especially when travelling overseas, to meet immediate business needs.

The ITAT order makes it clear that using a spouse’s credit card to temporarily meet a genuine business expense, followed by reimbursement, does not by itself make the expenditure inadmissible. It also does not change the nature of the reimbursement into ‘payment for services’, which would require tax to be deducted at source against the payment.

However, tax experts stress that it is crucial to establish the business purpose and maintain all supporting records. A clear audit trail must be readily available to establish that the spouse merely paid the expense initially and was subsequently reimbursed in full.

Invoices relating to the expenditure, credit card statements, details showing the business purpose of the expenditure and reimbursement records would provide the needed evidence.

In this case heard by ITAT, the tax dispute related to foreign travel expenses claimed by the taxpayer. The I-T officer had questioned, among other things, a payment of Rs 6.4 lakh made to the taxpayer’s wife, which was explained as reimbursement of expenses incurred using her credit card. The appellate commissioner also questioned why the taxpayer had routed business payments through his wife’s card and treated the arrangement as potentially involving services rendered independently by her, which required deduction of tax at source against the reimbursement amount.

ITAT rejected the view taken by the appellate commissioner. It further held that there was no legal restriction which debarred a taxpayer from using a spouse’s credit card for business expenditure and subsequently reimbursing the spouse.