Case Law Details
LKQ India Private Limited Vs DCIT (ITAT Bangalore)
The Income Tax Appellate Tribunal (ITAT), Bangalore partly allowed the assessee’s appeal against the addition of ₹2,34,40,921 made during processing under Section 143(1) for AY 2021-22. The dispute concerned whether a GST refund was taxable where the assessee followed the exclusive method of accounting. The assessee contended that GST paid on purchases and expenses was not debited to the profit and loss account but recorded separately as GST refund receivable under loans and advances, and therefore the refund was neither credited to the profit and loss account nor taxable. The Tribunal observed that the tax audit report merely stated that the refund was not credited to the profit and loss account and did not state that it was taxable. It held that where the GST component had not been claimed as expenditure, its refund represented recovery of an amount already shown as receivable and did not constitute income. Accordingly, the addition was deleted, while the remaining grounds were dismissed and the appeal was partly allowed.
Core Issue: The principal issue before the Tribunal was whether a GST refund of Rs.2,34,40,921, reported in Clause 16(B) of Form 3CD, could be treated as taxable income while processing the return under section 143(1), where the assessee followed the exclusive method of accounting and had accounted for the GST refund as a receivable rather than crediting it to the Profit & Loss Account.
Facts: The assessee, engaged in export business, filed its return of income for AY 2021-22 declaring total income of Rs.14,57,64,849. During processing under section 143(1), the Central Processing Centre (CPC) noticed that Clause 16(B) of the Tax Audit Report (Form 3CD) disclosed a GST/VAT refund of Rs.2,34,40,921, whereas no corresponding amount was credited to the Profit & Loss Account. Treating this as an inconsistency, CPC proposed and subsequently made an adjustment by adding the refund amount to the returned income.
The assessee objected, explaining that it consistently followed the exclusive method of accounting, under which GST paid on purchases and expenses was never debited to the Profit & Loss Account but was separately recorded as GST Refund Receivable under loans and advances. Consequently, the refund merely represented realization of an existing receivable and was never recognized as income. The JCIT(A) rejected the explanation and upheld the adjustment, holding that the GST refund constituted a revenue receipt taxable either under section 41(1) as remission of a trading liability or under section 28(iv) as a business benefit.
Findings of the ITAT: The Tribunal accepted the assessee’s accounting treatment and observed that under the exclusive method of accounting, purchases, expenses and inventories are recorded excluding the indirect tax component, while GST paid is maintained separately in dedicated ledger accounts as an asset or receivable. Since the tax component is never claimed as expenditure through the Profit & Loss Account, any subsequent refund merely represents recovery of an amount already standing as receivable.
The Tribunal examined Clause 16(B) of Form 3CD and noted that the tax audit report itself specifically stated that the GST/VAT refund had not been credited to the Profit & Loss Account. The disclosure in Form 3CD did not imply that the refund constituted taxable income; it merely disclosed the existence of the refund. Therefore, CPC erred in mechanically treating the disclosure as taxable income while processing the return under section 143(1).
The Tribunal further held that a refund of indirect taxes does not automatically acquire the character of income. Such refund becomes taxable only where the corresponding tax component had earlier been claimed as a deduction or expenditure while computing business income. In the present case, since the GST component had never been debited to the Profit & Loss Account or claimed as an allowable deduction, its subsequent refund could not result in any taxable income.
The Tribunal also rejected the reasoning adopted by the appellate authority regarding applicability of section 41(1) and section 28(iv). It held that there was neither any remission or cessation of a trading liability nor any taxable business benefit. The refund merely represented realization of an existing asset already reflected in the balance sheet.
Accordingly, the Tribunal concluded that the adjustment made by CPC under section 143(1) and sustained by the JCIT(A) was legally unsustainable.
Decision: The Tribunal partly allowed the appeal and deleted the addition of Rs.2,34,40,921 made on account of GST refund. It held that where an assessee follows the exclusive method of accounting and the indirect tax component has not been claimed as expenditure, the subsequent GST refund represents only recovery of a receivable and cannot be taxed as income merely because it is disclosed in Clause 16(B) of Form 3CD. Ground No. 2 was allowed, while the remaining grounds were dismissed as general or consequential.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
1. This appeal in ITA No. 330/Bangalore/2026has been filed by LKQ India Private Limited [ “the assessee/ Appellant] against the appellate order dated 14 November 2025 passed by the Joint Commissioner of Income Tax (Appeals)–9, Mumbai [“the learned CIT(A)”] for assessment year 2021–22. By that order, the learned CIT(A) dismissed the assessee’s appeal against the intimation dated 25 October 2022 issued under section 143(1) of the Act by the central processing center.
2. Although the assessee has raised three grounds of appeal, the principal issue is whether the GST refund of ₹ 2,34,40,921, added by the Central Processing Centre as income, is taxable when the assessee follows the exclusive method of accounting and records the refund receivable as an asset or loan and advance rather than through the profit and loss account.
3. The assessee filed its return of income on 14 March 2022 declaring total income of ₹ 14,57,64,849. During processing, a communication dated 18 May 2022 proposed an addition of ₹ 2,34,40,921 to the returned income on the basis of the amount reported in clause 16(B) of Form 3CD. The assessee objected to the proposed adjustment on 6 June 2022, stating that it follows the exclusive method of accounting. Under this method, GST paid on purchases or expenses is not debited to the profit and loss account but is recorded separately as GST refund receivable as loan and advances. Therefore, the refund of ₹ 2,34,40,921 was neither credited to the profit and loss account nor required to be offered to tax. However, the Central Processing Centre issued an intimation on 25 October 2022 adding the said GST refund to the assessee’s total income.
4. Aggrieved, the assessee appealed before the learned CIT(A) and filed detailed written submissions, reproduced in paragraph 4.1 of the appellate order. The learned CIT(A) held that the refund of GST, sales tax and service tax was a revenue receipt arising in the ordinary course of business. He further held that the assessee had received a tangible benefit by way of remission of a trading liability, taxable under section 41(1) or section 28(iv) of the Act. Accordingly, the adjustment made by the Central Processing Centre was upheld and the assessee’s appeal was dismissed.
5. Before us, the learned authorised representative reiterated the submissions made before the lower authorities. He submitted that the assessee follows the exclusive method of accounting, under which GST or service tax paid on purchases and expenses is not debited to the statement of profit and loss but is recorded as an asset under GST refund receivable. Consequently, the refund of ₹ 2,34,40,921 received during financial year 2020–21 was neither credited to the statement of profit and loss nor required to be offered as taxable income in the return filed by the assessee.
6. The learned Departmental Representative supported the orders of the lower authorities.
7. We have carefully considered the rival submissions and perused the orders of the lower authorities. The assessee, being an exporter, follows the exclusive method of accounting for indirect taxes. Under this method, purchases, expenses and inventory are recorded at their base value, excluding the tax component, while the related tax amounts are maintained separately in ledger accounts and are not merged with the cost or expenditure. The tax audit report, at serial no. 16(B), records that refund of value added tax amounting to ₹ 2,34,40,921 was not credited to the profit and loss account; however, it does not state that the amount is taxable under section 28 or otherwise. During processing, the Central Processing Centre treated this as an inconsistency because the amount credited to the profit and loss account was shown as nil, whereas Form 3CD reported ₹ 2,34,40,921. The assessee explained that, since GST was not claimed as expenditure and was accounted for separately as receivable, the corresponding refund was also not routed through the profit and loss account and could not be taxed as income. We find merit in this submission. Where the GST component has not been debited to the profit and loss account, its refund merely represents recovery of an amount already shown as receivable from the GST department and does not constitute income. The refund would assume the character of income only if the tax component had earlier been claimed as expenditure. Accordingly, the addition of ₹ 2,34,40,921 made by the Central Processing Centre and confirmed by the learned CIT(A) is unsustainable. Ground no. 2 of the assessee’s appeal is allowed.
8. Ground no. 1 is general in nature and ground no. 3 is consequential; both are dismissed.
9. In the result, the appeal filed by the assessee is partly allowed.
Order pronounced in the open court on 25th June, 2026.
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