Issue:

During the relevant assessment year, assessing officer observed that the assessee has not paid statutory dues of GST till the due date for filing of the return. Thereby, attracting the disallowance under section 43B of the Income-tax Act, 1961.
With reference to the above, the assessee has submitted that the amount of GST is appearing on the liability side of the balance sheet and the same was neither claimed as deduction nor was charged to profit and loss account. Assessee contended that such a disallowance was not called for by the Assessing Officer.

It is observed that the assessee follows such exclusive method of accounting consistently where the statutory dues i.e. GST is collected from the customers and such collection of statutory dues is treated as statutory liability and shown under liabilities in the balance sheet without charging it to Profit and Loss Account. This method is being followed consistently and it’s an acceptable method of accounting. Provisions of Section 43B will be applicable only when the assessee claimed those payments of statutory dues as expenditure.

To sum up, It is the contention of the assessee that, since he did not debit the amount of GST to the profit & loss account as an expenditure nor did the assessee claim any deduction in respect of the said amount and considering that the assessee is following the mercantile system of accounting, the question of disallowing the deduction not claimed would not arise.

Background:

Under section 145 of the Act for determining the income chargeable under the head profits and gains of business or profession or income from other sources, the same is to be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. The said provisions were substituted by the Finance Act, 1995 w.e.f. 01.04.1997.

Under section 145A of the Act (as amended w.e.f. 01.04.2017), for the purpose of determining the income chargeable under the head “Profits and gains of business or profession”, the valuation of purchase and sale of goods or services and of inventory, shall be adjusted to include the amount of any tax, duty, cess or fee (by whatever name called) actually paid or incurred by the assessee to bring the goods or services to the place of its location and condition as on the date of valuation. As per the explanation under the said clause, it is pointed out that for the purpose of this section, any tax, duties, cess or fees, by whatever name called, under any law for the time being in force, shall include all such payments, notwithstanding any right arising as a consequence to such payments.

ICDS-II on Valuation of Inventories notified u/s 145(2):

“Cost of inventories” shall comprise of all costs of purchase, costs of services, costs of conversion and other costs incurred in bringing the inventories to their present location and condition.”

“The costs of purchase” shall consist of purchase price including duties and taxes, freight inwards and other expenditure directly attributable to the acquisition. Trade discounts, rebates and other similar items shall be deducted in determining the costs of purchase.”

[Even prior to the ICDS becoming applicable, under the provisions of section 145A, purchases, sales and inventory were required to be valued by including therein the amount of any tax, duty, cess or fee (by whatever name called) actually paid or incurred by the assessee. It was therefore necessary to make adjustments to comply with the provisions of section 145A.]

In other words, where any expenditure is actually paid or incurred by the assessee by way of any tax, duties, cess or fees, by whatever name called, then adjustment is to be made both in the valuation of purchase and sale of goods or services and also in the valuation of inventory to include the aforesaid amounts while determining the income chargeable under head profits and gains of business or profession.

Under the provisions of clause (a) to section 43B of the Act, it is provided that certain deductions are to be made only on actual payments i.e. where any sum is payable by the assessee by way of tax, duties, cess or fees, by whatever name called, under any law for the time being in force, or any other sums which are covered by clauses (b) to (f), the same shall be allowed as a deduction in the hands of assessee, irrespective of the previous year, in which the liability to pay such sum was incurred by the assessee, according to the method of accounting regularly employed by him. Proviso further provides that the provisions of the said section shall not apply in relation to any sum, which is actually paid by the assessee on or before the due date of filing the return of income.

Analysis:

Now, coming to the issue, where the assessee had not recognized the amount of VAT/GST payable / paid in its Profit & Los s Account and had only made entries in the Balance Sheet, are the provisions of section 43B of the Act attracted in the case?

In view of the cumulative provisions of sections 145A and 43B of the Act, the assessee is entitled to claim the deduction on account of such tax, duties, cess or fees, by whatever name called and the same is to be allowed only on payments and once the payment has not been made in the year to which the said liability relates, then the said amount is to be added back as income of the assessee for the relevant year.

Thus, where the assessee collects the amount on account of VAT/GST, but does not deposit the same within the accounting period or before due date of filing the return of income, as required under section 43B of the Act, the liability to pay arises and once that liability has not been discharged, even if the amount has not routed through the Profit & Loss Account, the same is to be disallowed in the hands of assessee, as the provisions of section 145A of the Act (and mandatory ICDS-2) come into play and the consequences thereto follow. [See: Munaf Ibrahim Memon v. ITO – ITA No. 1806/Pun/2013 (PUNE)]

Recently, Hon’ble ITAT Varanasi in case of Husna Parveen vs. NFAC [2022] 142 taxmann.com 2 [Varanasi] clearly held that, in view of the provisions of section 145A requiring adjustment by inclusion of GST on sales in sales/turnover, assessee cannot escape disallowance of GST payable u/s 43B by crediting GST to separate liability account and taking it direct to balance sheet (exclusive method) instead of routing it through profit and loss account by crediting GST to sales account (inclusive method of accounting).

Note: There are contrary judgments in favour of assessee like Delhi High Court in the case of CIT v. Noble and Hewitt (I) P. Ltd., [2008] 166 Taxman 48 (Del.), etc. However the same are relating to assessment years prior to amendment in section 145 w.e.f. 01.04.1997 /S. 145A w.e.f. 01.04.2017 / introduction of ICDS.

Posted on: September 25th, 2022