Retrospective VAT Registration Cancellation Does Not Automatically Make Purchases Bogus: ITAT Ahmedabad

Samta S. Jain Vs ACIT (ITAT Ahmedabad)

In Samta S. Jain Vs ACIT, the Ahmedabad ITAT considered an appeal against the order of the CIT(A), NFAC, for Assessment Year 2012-13 relating to disallowance of cost of improvement claimed while computing short-term capital gains from sale of land. The assessee had declared short-term capital gain from sale of land at Kheda after claiming cost of acquisition and cost of improvement. During reassessment proceedings, the Assessing Officer disallowed improvement expenses amounting to Rs. 98.63 lakh and added the same to income.

The assessee challenged the reopening proceedings as well as the disallowance on merits. The Tribunal observed that the notice under Section 148 was issued within the stipulated period and the assessee had responded by treating the original return as filed in response to the notice. Accordingly, the Tribunal dismissed the additional ground challenging reopening proceedings.

On merits, the assessee submitted that disallowance of Rs. 79.67 lakh was made only because VAT registrations of certain suppliers were later cancelled retrospectively. The assessee argued that all purchases were made during 2010-11 when the VAT numbers were active and payments were completed before cancellation dates. Ledger copies, invoices, bank statements, and copies from the commercial department regarding cancellation dates were furnished before the Assessing Officer. Payments were made through account payee cheques.

The assessee further contended that the purchases were genuine because civil development work such as construction of boundary walls, filling potholes, levelling, and development of land had actually been carried out before sale of the non-agricultural land. The assessee also provided details of labour expenses, brokerage, conversion charges for converting agricultural land into non-agricultural land, and miscellaneous expenses, stating that supporting ledgers and banking records had already been submitted.

The Department relied on the assessment order and the CIT(A)’s findings. After hearing both sides and examining the material on record, the Tribunal observed that the assessee had produced purchase bills and supporting evidence, though complete transportation details were not available in all cases. The Tribunal held that the matter required further verification regarding transportation bills, purchase bills, and sales bills.

Accordingly, the ITAT remanded the issue back to the Assessing Officer for verification of relevant documents and directed that the matter be adjudicated afresh in accordance with law after providing the assessee an opportunity of hearing and following principles of natural justice. The appeal was allowed for statistical purposes.

FULL TEXT OF THE ORDER OF ITAT AHMEDABAD

The appeal filed by the assessee is against the order passed by the Ld. Commissioner of Income Tax (Appeals), (in short “Ld. CIT(A)”), National Faceless Appeal Centre (in short “NFAC”), Delhi on 15.03.2025 for A.Y. 20127-13.

2. The grounds of appeal raised by the assessee are as under:

“1.1 The order passed by U/s.250 passed on 15.03.2025 for A.Y. 2012-13 by NFAC, [CIT(A)], Delhi (for short CIT(A)” upholding the cost of improvement to the extent of Rs. 79,67,111/- and Rs. 13,07,920/- aggregating to Rs. 92,75,031/- made by A.O. is wholly illegal, unlawful and against the principles of natural justice.

1.2 The ld. CIT(A), has grievously erred in law and or on facts in not considering fully and properly the explanation furnished with documents/evidence with regard to the claim of cost of improvement.

2.1 The ld. CIT(A), has grievously erred in law and or on facts in confirming the disallowance of cost of improvement aggregating to Rs. 92,75,031/- (Rs. 79,67,111/-and Rs.13,07,920/-) though the complete details/evidence were furnished.

2.2 That in the facts and circumstances of the case the ld. CIT(A), ought to have upheld the disallowance of cost of improvement aggregating to Rs. 92,75,031/- (Rs. 79,67,111/- and Rs. 13,07,920/-) though the complete details/evidence were furnished.”

3. The assessee filed return of income declaring Rs. 2,62,97,400/- for A.Y. 2012-13 on 31.12.2012. The assessment under Section 143(3) of the Income Tax act was completed on 04.02.2015 thereby assessing the income at Rs. 2,62,97,400/-. The assessee is an individually earning income from partnership share and short term capital gain. Subsequently, on verification of computation of income profit and loss and submissions of the assessee in respect of sale and purchase of land, the Assessing Officer observed that assessee has shown short term capital gain of Rs. 2,62,71,712/- from the sale of land at Kheda for Rs. 5,45,80,652/- after reducing cost of acquisition of Rs. 2,83,08,940/-, after issuing statutory notices the assessee filed the detailed submissions. The assessees submitted a recomputation of the short term capital gain and explanation of expenditure of Rs. 38,96,092/- was also given therein. The assessee has given the cost of improvement valued at Rs. 1,29,87,990/- which was reproduced at Page 2 of the assessment order. After taking cognizance of all the details, the Assessing Officer made addition of improvement being disallowed and added the same at Rs. 98,63,223/-.

4. Being aggrieved by the assessment order, the assessee filed appeal before the CIT(A). The CIT(A) partly allowed the appeal of the assessee.

5. The Ld. AR filed an Additional Grounds thereby stating the initiation of reassessment proceedings under Section 147 thereby stating that it is without any jurisdiction and has not followed the conditions laid down under the proviso to Sectin148. The Ld. AR further submitted that on merit the Ld. Assessing Officer passed an order by making an addition of Rs. 98,63,223/-being the cost of Improvement Charges disallowed. Out of this Rs. 79,67,111/- were disallowed on the ground that the VAT numbers of four parties were cancelled. The Ld. AR submitted that the VAT numbers of all parties were active at the time of purchase. The mere fact that the VAT numbers were cancelled on a later date from retrospective date does not mean that the purchases made are not genuine. The details of the parties are as follows:

The Ld. AR submitted that the assessee has submitted the ledger copies along with invoices of purchases made from the above parties. Also, the copy from the commercial department showing that the VAT numbers were cancelled on later date was submitted before the Assessing Officer. The assessee provided the purchase bills at the time of assessment proceedings. The Ld. AR submitted that the payment of all the goods purchased was done via account payee cheque only and are reflected in the ledger copies and bank statement of the assessee. Copy of bank statement were also submitted. Therefore, the Ld. AR submitted that the said purchase cannot be said to be fraudulent and not genuine. The assessee could not finish the civil work of land if the purchases were not received by the party. Thus, the Ld. AR submitted that the purchases done by the assessee are genuine, and the assessee has shown sales because of the purchase done from this party along with other purchases. Furthermore, the purchase cost of improvement was not considered by the Assessing Officer solely on the grounds that VAT number were cancelled, but that neither implies that the purchase was not done nor did the Assessing Officer rejected the purchase. Additionally, it was clearly mentioned in the Sale Deed on Page 6 as well that the land being sold is non-agricultural land, hence cost was incurred to make the border walls of the property and potholes were filled along with levelling and developing the land. This all work would have not been possible without buying the goods/services from the above purchase parties. The Ld. AR also pointed out Sale Deed for both the lands. The Ld. AR gave clarifications for the remaining amount of Rs. 18,96,112/- as under:

The ledger copies of above expenditures were already given at the time of assessment proceedings. The payment for all the above expenses were done via account payee cheque only. The Ld. AR submitted that this can be verified from the bank statement. Thus, the entire amount of Rs. 98,63,223/-claimed by the assessee as cost of improvement is genuine and cannot be disallowed solely on the grounds that the VAT numbers was cancelled.

6. The Ld. DR relied upon the assessment order and the order of the CIT(A).

7. We have heard both the parties and perused all the relevant materials available on record. As regards the additional ground, from the perusal of records of notice under Section 148 issued to the assessee, the assessment year is of 2012-13 and the notice was issued within the stipulated time prior to four years period and the assessee has filed the letter dated 09.06.2017 thereby stating that the assessee’s return of income filed for A.Y. 2012-13 dated 31.12.2012 be treated as the return of income in response to notice under Section 148 of the Act. Thus, the objection / additional ground raised by the assessee does not sustain related to the procedural aspect of reopening and issuance of notice under Section 148 of the Act. Thus, the additional ground is dismissed.

8. As regards the merits of the case, the assessee is submitting that the vendors registration under GST has been cancelled, but the assessee has made full payment for his purchase and the assessee has submitted the evidence of purchase bills (sample bills) of the assessee but related to transportation bill except few the assessee could not file all the details. Therefore, it will be appropriate to remand back this matter to the file of the Assessing Officer for verifying the details related to transportation bills and also to that extent of purchase bills and sales bills and thereafter adjudicate the same as per Income Tax Act. Needless to say the assessee be given opportunity of hearing by following principles of natural justice.

9. In the result, the appeal of the assessee is allowed for statistical purposes.

This Order pronounced in Open Court on 20/05/2026