If statutory liabilities are not routed through the profit and loss account, will they still be disallowed under Section 43?

Grand Motors Vs ITO (ITAT Raipur)

Abstract: In a cross appeal filed by both the assessee and the department against the order of the Commissioner of Income Tax (Appeals) [CIT(A)], the focus was on disallowances under Section 43B of the Income Tax Act for the assessment year 2018-19. The case stems from an intimation issued by the Centralized Processing Centre (CPC) under Section 143(1), increasing the assessee’s taxable income due to unpaid VAT, Entry Tax, and CST liabilities. The assessee argued that the VAT amounting to ₹6,23,2262, although unpaid within the prescribed timeline, was not debited to the profit and loss account, asserting it followed an exclusive accounting method. Despite citing case law, including Ganpati Motors and Payal Verma, the CIT(A) upheld the disallowance, relying on Section 43B and Income Computation and Disclosure Standards (ICDS), which mandate the inclusion of VAT in total turnover. The CIT(A) also noted discrepancies between the original and revised Tax Audit Reports, with liabilities dropping from ₹2,50,90,568 to ₹67,41,366. The assessee’s argument that the disallowance was debatable and should not be invoked under Section 143(1) was dismissed. The CIT(A) ruled in favor of the department, stressing that VAT is part of sales turnover and subject to statutory accounting principles, including the application of Section 43B.

If statutory liabilities are not routed through the profit and loss account, will they still be disallowed under Section 43?

1. Case Summary:-

The taxpayer, a partnership firm, filed its Income Tax Return (ITR) for the financial year 2017-18, relevant to the Assessment Year 2018-19, on March 31, 2019, declaring a total income of Rs. 9,42,610/-. The Assessing Officer (AO-CPC) processed the ITR under Section 143(1) of the Income Tax Act, determining the total income to Rs. 2,61,28,820/-. During this process, the AO-CPC had observed that the disallowance of expenditure under section 43B of the I.T Act amounting to Rs 2,50,90,568/- towards unpaid statutory liability was indicated in the Tax Audit Report (TAR), but the same was not taken into account while computing total income for the A.Y 2018-19.  Therefore, the AO-CPC disallowed Rs. 2,50,90,568/- under Section 43B, invoking sub-clause (iv) of clause (a) of Section 143(1), due to unpaid statutory liabilities, including:-

(1) VAT of Rs. 2,42,29,739/-,

(2) Entry Tax of Rs.7,28,661/-, and

(3) CST of Rs.1,32,168/-

which were not paid before the ITR was filed under Section 139(1) of the Act. Dissatisfied with this decision, the taxpayer appealed to the First Appellate Authority.

2 Decision of the JCIT/CIT(A):-

2.1 Issue No. 1:

The taxpayer/appellant contended that they followed an exclusive accounting method and therefore, the AO-CPC made an error by including VAT charged and collected from the buyer as part of the taxpayer’s total sales/turnover. They further argued that this issue is debatable and should not be addressed under section 143(1). Additionally, the taxpayer pointed out that the auditor’s Tax Audit Report stated that the method of accounting used by the taxpayer had no effect on their profit. The taxpayer stated in its ground of appeal that the VAT liability of Rs. 2,42,29,739/- comprised an opening balance of Rs. 1,79,97,376/- as of April 1, 2017, a credit balance of Rs. 62,65,068/-, and a debit balance of Rs. 32,706/- for the financial year 2017-18, leading to a closing balance of Rs. 2,42,29,739/- as of March 31, 2018. The taxpayer contended that if at all any disallowance under Section 43B, should only apply to the net outstanding amount of Rs. 62,32,262/-.

The JCIT (Appeals) agreed with the taxpayer’s argument that the opening balance could not be disallowed under Section 43B for the financial year 2017-18 relevant to the Assessment Year 2018-19. However, the JCIT confirmed that the outstanding balance of Rs. 62,32,262/- was subject to Section 43B. The JCIT pointed out that failing to route statutory liabilities such as VAT through the profit and loss account was not acceptable, as Section 145 of the Income Tax Act requires VAT to be included in turnover. Additionally, the implementation of ICDS clarifies that the taxpayer cannot use an exclusive method to circumvent the provisions of Section 43B. It was further held by the JCIT (Appeals) that the opening balance should be disallowed if it was not paid before filing return of income u/s 139(1) in the respective earlier years.

2.2 Issue No. 2: Concerning the Entry Tax, the taxpayer reported an opening balance of Rs. 4,32,759/- and a current payable amount of Rs. 2,95,902/-, resulting in a closing balance of Rs. 7,28,661/- as on 31.3.2018. The taxpayer admitted that while they included the entry tax in the profit and loss account, the outstanding amount of Rs. 7,28,661/- was not paid before filing the return under Section 139(1). The JCIT (Appeals) upheld the disallowance of Rs. 2,95,902/- for the current year and instructed the Jurisdictional Assessing Officer (JAO) to apply Section 43B to the opening balance of Rs. 4,32,759/- in the relevant years.

2.3 Issue No. 3: Regarding the CST payable of Rs. 1,32,168/-, the JCIT (Appeals) overturned the disallowance under Section 43B because the amount pertained entirely to the opening balance. However, the JCIT (Appeals) directed the JAO to apply the disallowance under Section 43B to the opening balance of Rs. 1,32,168/- in the relevant years.

3. Both the taxpayer and the revenue filed cross-appeals with the ITAT, Raipur Bench. The ITAT Raipur Bench issued the following order:-

4. Decision of the ITAT:-

4.1 Before the ITAT, the taxpayer challenged only the disallowance of the VAT payable amount of Rs. 62,32,262/- upheld by the JCIT (Appeals). The appellant also contested the JCIT (Appeals)’s direction to the JAO to revisit earlier years for VAT not paid before the return under Section 139(1) was filed. The ITAT[1] upheld the JCIT (Appeals)’s order, noting that the taxpayer could not use an exclusive accounting method when Section 145(ii) mandates VAT inclusion in turnover. The ITAT cited the Bombay High Court’s decision in CIT Vs Knight Frank[2] and rejected the appellant’s arguments, relying on the Chhattisgarh High Court decision of Ganapathi Motors[3]. The ITAT affirmed that the JCIT (Appeals) correctly dismissed the taxpayer’s exclusive accounting method after recorded his dissatisfaction and doubt on the exclusive method of accounting of the taxpayer. The ITAT has pointed out that the errors on the part of the reveune in Ganapathi Motors case had been addressed in the current case after distinguishing the facts. The ITAT thus dismissed the taxpayer’s appeal. During the proceedings, the taxpayer withdrew its appeal grounds related to the JCIT (Appeals)’s direction to the JAO regarding disallowance of the opening balance of Rs. 1,79,97,376/- under Section 43B if it was unpaid before the due date for filing return of income.

4.2 Regarding the revenue’s cross-appeal challenging the JCIT (Appeals)’s decision to delete the disallowance of Rs. 1,79,97,376/- related to the VAT opening balance, The ITAT ruled that according to established legal principles, any additions or disallowances of expenses for a year other than the one currently under consideration cannot be made in the relevant year. The ITAT agreed with the JCIT (Appeals)’s decision and found no merit in the revenue’s arguments. Consequently, the ITAT upheld the JCIT (Appeals)’s decision and rejected the revenue’s cross-appeal.

5. Conclusions :- If statutory liabilities like VAT/GST are not routed through the profit and loss account, will they be disallowed under Section 43B? The answer is yes. According to Section 145A, the valuation of purchases and sales of goods or services and inventory must include any tax, duty, cess, or fee actually paid or incurred to bring the goods or services to their location and condition as of the valuation date. Additionally, ICDS 2 states that the purchase cost should encompass the purchase price, including duties and taxes, freight inwards, and other directly related expenses. Only trade discounts and rebates should be excluded. Consequently, under income tax provisions, turnover must include all taxes. Therefore, a taxpayer cannot use a method that bypasses the profit and loss account and directly places GST/VAT liabilities on the balance sheet, as this approach may not be acceptable under the Income Tax Act.

(This article is intended to raise tax awareness and is meant for academic purposes)[i]

[1] ITA No. 195/RPR/2024, ITAT, Raipur Bench, Raipur dated 09.07.2024

[2] CIT Vs Knight Frank  (India) Pvt Ltd, Bombay High Court decision in ITA No.247 of 2014 dated 16.08.2016

[3] Ganapathi Motors vs JCIT, Bhilai Range in Tax Case (Income tax Appeal) no. 8 of 2017 of High Court of     Chattisgarh

[i] Authors’ note

FULL TEXT OF THE JUDGMENT/ORDER OF THE ITAT RAIPUR

The aforesaid cross appeals are instituted at the instance of the assessee as well as the department against the order of Commissioner of Income Tax (Appeals), ADDL/ JCIT(A-3), Chennai (in short “Ld. CIT(A)”), dated 15.03.2024, passed u/s 250 of the Income Tax Act, 1961 (in short “The Act”), for the Assessment Year 2018-19, which was resulted in consideration of appeal of the assessee before the Ld. CIT(A), against the intimation u/s 143(1) of the Act, issued on 09.02.2020 by Centralized Processing Centre (CPC), Income Tax Department, Bangaluru (in short “Ld. AO”).

2. First, we shall be taking up the appeal of the assessee in ITA No. 195/RPR/2024, wherein grounds of appeal raised, reads as under:

1. The learned CIT (Appeal) erred in not appreciating the facts of the appellant’s case and hence the basis on which the proceedings are completed is not in accordance with the law.

2. That the Id. CIT(A) erred in sustaining addition of Rs. 6232262/- on account of VAT, which has not been debited to profit & loss account. The case of the appellant is covered by Jurisdiction High Court decision in the case of Ganpati motors v/s State of Chhattisgarh and Hon’ble ITAT Raipur Bench in the case of Payal Verma v/s ITO ward- (l) 3, Bhilai, (C.G.).

3. The CIT(A) erred in upholding the disallowance of Rs.6232262/- in terms of provisions of section 143(1) of the Act in the Intimation by invoking provisions of section 43B as the incorrect claims. Since the claim was in conformity with the judgement of the jurisdictional High Court in the case of Ganpati Motors.

4. In the facts and circumstances of the case the learned CIT (Appeal) ought to have appreciated that provisions of section 43B are not applicable to the appellant and hence disallowance of Rs.6232262/- cannot be made under section 43B. The ld CIT (Appeal) ought to have deleted the whole amount.

5. The learned CIT (Appeal) erred in not considering the fact that the amount of Rs.6232262, in respect of VAT payable even though reported in clause 26A of the TAR was not debited to the profit & loss A/c or passed through the profit & loss A/c to claim it as revenue expenditure.

6 The learned CIT (Appeal)failed to appreciate that the appellant follows exclusive method of accounting. Hence, the learned CIT (Appeal) erred in observing that VAT charged and collected from the buyer forms part of total sales/ turnover of the appellant.

7 The learned CIT (Appeal) ought to have appreciated that Tax Auditor had categorically mentioned in the Tax Audit Report that there is no impact on the profit of the appellant based on the method of accounting followed by the appellant.

8 That the CIT (Appeal) has no power to issue directions to A.O. to reopen the case of earlier years as held by ITAT in the case of ITA No. 140 and 141/RPR/2017. The directions given by CIT(Appeal) be deleted.

9 The appellant reserves the right to add, alter and omit all or any of the grounds of appeal with the permission of the Hon’ble appellate authority.

3. The brief facts of the case are that the assessee is a firm, had filed its return of income for the AY 2018-19 on 31.03.2019, declaring total income of Rs.9,42,610/-. Subsequently, the Assessing Officer, CPC has processed the return of assessee and issued an intimation u/s 143(1) on 09.02.2020, making therein certain disallowances, thus, enhancing the total taxable income of the assessee at Rs.2,61,28,820/-. The specific disallowances are made u/s 43B on account of non-payment of liabilities such as VAT, Entry Tax, CST before the prescribed date of filing the return of income u/s 139(1) of the Act.

4. Aggrieved with the aforesaid additions, assessee preferred an appeal before the first appellate authority i.e., Ld. CIT(A) u/s 246A(1)(a) of the Act.

5. Contentions of the assessee were duly considered by the Ld. CIT(A) during the appellate proceedings before him, however, he was not fully persuaded with the explanations / arguments of the assessee, consequently, the appeal of the assessee was partly allowed by the Ld. CIT(A) with the following observations / decision:

5. Decision:-

5.1 The primary contention in this case revolves around the disallowance by the AO(CPC) of Rs. 2,50,90,568/- towards outstanding VAT liabilities of Rs. 2,42,29,739/- Entry tax amounting to Rs.7,28,661/-, and CST Rs.1,32,168/-under section 43B of the Income Tax Act due to the inconsistencies between ITR and TAR (Tax Audit Report) which was filed in Form 3CD on 30.3.2019.

5.2 It is observed from records that the appellant had filed original Form 3CD on 30.3.2019 for the A.Y. 2018-19, wherein the auditor has reported unpaid statutory liabilities of Rs. 2,50,90,568/- as on 31.3.2018 as under:-

5.3  The appellant has filed a revised Tax Audit Report in Form3CD on 24.08.2022 for the A.Y. 2018-19 wherein the auditor has reported the unpaid salutatory liabilities at Rs. 67,41,366/- as on 31.03.2018 as under:

On comparison of the above two tables, it is observed that there was a drastic reduction of outstanding liabilities as on 31.3.2018 from Rs 2,50,90,568/- to Rs.67,41,366/-. In this regard, the appellant states that the difference is due to inclusion of opening balance of the liabilities while filing the original Form 3CD.

The issues are discussed as follows:-

5.4 VAT: The appellant argues that the VAT liability of Rs. 2,42,29,739/-comprises an opening balance of Rs. 1,79,97,376/-, current year credit balance of Rs. 62,65,068/-, and a debit balance of Rs. 32,706/-. Thus, the closing VAT balance as of 31.3.2018 stands at Rs. 2,42,29,739/-. The appellant contests that the opening balance should not be subject to disallowance under section 43B, as only the current year payable of Rs. 62,32,362/- is relevant. The appellant argued that the VAT payable has not been routed through the profit and loss account, citing an exclusive accounting method and referring to various case laws.

5.4.1 The appellant’s contention is perused, however, it is noted that the VAT payable of Rs. 62,32,362/- was not paid within the prescribed time limit as per section 43B, evident from its outstanding status in the Balance Sheet. The appellant’s assertion of not debiting this amount in the profit and loss account is deemed untenable, as VAT is integral to sales and turnover, requiring proper accounting treatment. Statutory provisions and accounting standards necessitate the inclusion of VAT in turnover, rendering the appellant’s attempt to avoid section 43B through alternative accounting methods impermissible.

5.4.2 Additionally, the implementation of Income Computation and Disclosure Standards (ICDS) and Section 145 of the Income Tax Act mandates the inclusion of VAT in total turnover, rendering the appellant’s exclusive method inconsistent with statutory requirements.

5.4.3 The inclusion of VAT in turnover has been upheld by Income Tax Appellate Tribunal (ITAT), Varanasi by the Honorable ITAT, Varanasi vide ITA No. ITA No.3/VNS/2022 dated 25.8.2022 Assessment Year: 2019-2020 in the case of Smt. Husna Parveen, N-12/224, Bajardiha, Varanasi PAN-CSEPP4360A vs Commissioner of Income Tax (Appeal), National Faceless Appeal Centre (NFAC), Delhi, following the Supreme Court decision in the case of Chowringhee Sales Bureau (P.) Ltd. v. CIT [1973] 87 ITR 542 (SC).

5.4.4 The appellant’s argument that the issue is debatable and cannot be invoked under section 143(1) is rejected. The AO(CPC) utilized clauses (a)(iv) of subsection (1) of section 143(1) to disallow the GST payable. The broad scope of ‘intimation’ under section 143(1)(a), allowing adjustments based on errors apparent from the return of income, is supported by a relevant decision of the Hon’ble Madras High Court. AA520 in the case of Veerappampalayam Primary Agricultural Cooperative Credit Society Ltd. vs. DCIT (2022) 138 taxmann.com 571 Therefore, the appellant’s claim that CPC cannot make such adjustments is deemed invalid.

5.4.5 Considering the legal stance and presented facts, the AO(CPC)’s adjustment of VAT payable to the extent of Rs. 62,32,262/- for the current year (A.Y. 2018-19) is confirmed. However, the disallowance made for the opening balance of Rs. 1,79,97,376/- is hereby deleted as it pertains to earlier years. Further, JAO is directed to verify the opening balance of VAT of 1,79,97,376/- in the earlier years and disallow the same in the earlier years if it is not paid before filing return of income u/s. 139(1).

5.5 Entry Tax: The appellant states an opening balance of Rs. 4,32,759/­, with a current payable of Rs. 2,95,902/-, resulting in a closing balance of Rs. 7,28,661/-. The appellant admits routing the entry tax payable of Rs. 2,95,902/-through the profit and loss account. As proof of payment for this entry tax before filing the income tax return was not provided, it falls under the purview of section 43B. Therefore, the adjustments made by the AO(CPC) to the extent of Rs. 2,95,902/- are confirmed. Further, JAO is directed to verify the opening balance of entry tax of 4,32,759/- in the earlier years and disallow the same in the earlier years if it is not paid before filing return of income u/s. 139(1).

5.6 CST: The entire CST balance of Rs. 1,32,168/- is an opening balance as of 1.4.2017. As this amount pertains to earlier years, it cannot be disallowed in the A.Y. 2018-19. Therefore, the disallowance made to the extent of Rs.1,32,168/- is deleted. However, JAO is directed to verify the opening balance of CST in the earlier years and disallow the same in the earlier years if it is not paid before filing return of income u/s. 139(1).

As a result, the appeal is PARTLY ALLOWED.

6. Since, Ld. CIT(A) had partly accepted the contention of the assessee in allowing part reliefs out of the additions / disallowances imposed through intimation u/s 143(1), aggrieved thereby the assessee, to assail the issue qua the prejudice caused to the extent the disallowances have been sustained by first appellate authority, carried the matter further before ITAT, which is under consideration in the present case.

7. While the hearing for the present case was initiated, Ld. AR on behalf of the assessee, had made a request seeking withdrawal of ground no. 8 of the present appeal, comprising the issue, that Ld. CIT(A) has no power to issue directions to Ld. AO to reopen the case of assessee for earlier years. On such request of the Ld AR to withdraw the aforesaid ground, revenue has not shown any protest. Considering the request of the assessee, which was not objected by the department, the permission to withdraw ground no. 8 has been granted, accordingly, said ground of assessee’s appeal, stands dismissed as withdrawn.

8. Coming to ground no. 1 to ground no. 7 of the present appeal of the assessee, assailing the sole controversy involved in the present case, qua the addition / disallowances of Rs.62,32,262/- on account of nonpayment of VAT before the prescribed date for filing of return u/s 139(1) of the Act. It was the submission of Ld AR, that the amount of VAT was not debited to the profit and loss account, as exclusive method of accounting was followed by the assessee. Ld. AR further added that under similar facts and circumstances additions were vacated by the ITAT, Raipur, which was further approved by the Hon’ble Jurisdictional High Court, thus, the assessee has the support of settled jurisprudence in its favour which the Ld. CIT(A) had not accepted. Ld. AR on this aspect had placed reliance and averred that the issue in present case is squarely covered by the order of Hon’ble Jurisdictional High Court in the case of Ganapati Motors vs State of Chhattisgarh in Tax Case (Income Tax Appeal) No. 30 of 2016 dated 25.04.2017. Ld. AR further adduced the decision of “SMC” bench, ITAT, Raipur passed in the case of Ganeshan Purushottaman Achari VS DCIT in ITA No. 146 to 148/RPR/2022 CPC dated 27.03.2023, wherein similar issue was discussed and decided in positive for assessee, following the analogy drawn from the order of Hon’ble High Court of Chhattisgarh. Referring to such decisions and its applicability on the facts and circumstances of the present case, it was the argument of Ld. AR that as the assessee had maintained its books of account on exclusive basis, therefore, decision of Hon’ble High Court and ITAT, Raipur, in the aforesaid cases has a strong bearing on the present case. To strengthen the contentions further on facts, Ld. AR drew our attention to page no. 27 and 28 of the assessee’s PB consisting of Audited Profit and Loss account and Trading Account of the assessee for the year ending 31.03.2018, wherein taxes like VAT, CST etc. are not debited by the assessee in P&L A/c or in Trading A/c, however, it is observed that Entry Tax amounting to Rs.2,92,902/- was debited in Trading Account, for which assessee has not challenged the finding and decision of Ld CIT(A) in sustaining the said disallowance. The relevant finding in the aforesaid cases relied upon by the assessee are extracted hereunder for the sake of clarity:

M/s Ganapati Motors vs. JCIT, Bhilai Range, in TAX CASE (INCOME TAX APPEAL) NO. 8 OF 2017

1. The Appeals under Section 260-A of the Income Tax Act, 1961, are admitted on the following formulated substantial question of laws:

“Whether in law on facts and circumstances of the case, the ITAT was justified in upholding the order of CIT(A) in deleting the addition of Rs. 1,36,72,297/- made by the AO applying the provision of Section 43-B of the Income Tax Act, 1961, on account of unpaid VAT when particularly, the Supreme Court in the Chowringhee Sales Bureau (P) Ltd. Vs. CIT, (1973) 87 ITR 542, has held that unpaid sales tax liability has to be included as part of receipts of the assessee and thereby in the present case, the provision of Section 43-B are attracted”

2. Heard learned Counsel for the revenue and learned Counsel for the respondent-assessee. The fundamental issue that arises for decision is, as to whether a particular amount which is subject matter of the appeal is to be treated as relatable to Value Added Tax (VAT) payable by the assessee and, if so, whether it has to be actually paid by him before filing of the return under the Income Tax Act. This question is relevant, having regard to the manner in which the question of law has been framed. The issue as to whether Section 43-B of the Income Tax is attracted even when the assessee does not claim any deduction on the strength of that provision may also be relevant.

3. The Assessing Authority, on the instant issue, noticed that the assessee’s claim regarding the treatment of VAT in the Books of Accounts has been verified from the Books and that has been found to be in order. The Assessing Authority also found that VAT has been found separately accounted for in the Books of Accounts. The only ground on which the Assessing Authority refused to exclude the VAT collected by the dealer from the profit of business is on the basis that the VAT component was not paid off on or before the due date for furnishing the return in relation to the previous year under Section 139(1) of the Income Tax Act. The First Appellate Authority also noticed that it is an undisputed fact that the Appellant did not charge VAT to the Profit and Loss account. It was therefore noted by the First Appellate Authority that in such circumstances, the liability may still be unpaid, but it cannot be disallowed being not claimed as deduction in the Books of Accounts.

4. With the aforesaid fact situation, we are unable to hold that the Tribunal was in error in law in dismissing the revenue’s appeal making a reference to the decisions referred to by it.

5. The decision of the Apex Court in Chowringhee Sales Bureau (P) Ltd. vs. CIT, AIR 1973 SC 376 (1973) 87 ITR 542, dealt with a case where the contents of the Profit and Loss account apparently showed that though the assessee had attempted to show that there is a separate account for tax collected, the collection would have been only of a composite amount. The transaction dealt with in Chowringhee’s case (supra) related to auction and the nature of the income derived by an auctioneer in the process of auction. In contradistinction thereto, are the decisions of the High Court of Delhi in Commissioner of Income Tax v. Noble & Hewitt (India) (P) Ltd., 2008 305 ITR 0324, which make a nice distinction between Chowringhee’s case and instances where Profit and Loss accounts and Service Tax accounts are maintained separately following mercantile system of accounting. As rightly noticed therein, it is not for the Income Tax department to make out a case relating to the correctness or otherwise of the mercantile system of accounting, resorted to and maintained by an assessee. The acceptability or otherwise of the accounts in a mercantile system would obviously be a matter of concern for other taxation authorities.

6. In the case in hand, as already noted, the fact situation that the Assessing Authority and the First Appellate Authority did not doubt the modality of the accounting system adopted by the assessee is an outstanding phenomenon which goes in favour of the assessee. Under such circumstances, it is not necessary for the authorities to consider, whether Section 43-B of the Income Tax is to be relied on by the assessee to claim any deduction.

7. For the aforesaid reasons, on the facts and circumstances of the case in hand, we answer to the question formulated in these appeals in the negative, that is to say, against the revenue and in favour of the assessee.

Ganeshan Puroshothaman Achari Vs. The Deputy Commissioner of Income Tax CPC, Bengaluru in ITA Nos. 146 to 148/RPR/2022 for the AY 2017-18 to 2019-20

11. I have given a thoughtful consideration to the issue in hand in the backdrop of the contentions advanced by the Ld. authorized representatives of both the parties. I may herein observe that the Hon’ble High Court of Chhattisgarh in the case of Assistant Commissioner of Income Tax-1, Bhilai, Dist. Durg (C.G.) Vs. M/s. Ganapati Motors, Tax Case (Income Tax Appeal) No.30 of 2016 dated 25.04.2017 had held that in a case where the assessee had not charged VAT to its profit and loss account, then, despite the fact that the liability may still be unpaid it could not have been added u/s.43B of the Act as the same was not claimed as a deduction in the books of accounts. For the sake of clarity, the relevant observations of the Hon’ble High Court are culled out as under:

“2. Heard learned Counsel for the revenue and learned Counsel for the respondent-assessee. The fundamental issue that arises for decision is, as to whether a particular amount which is subject matter of the appeal is to be treated as relatable to Value Added Tax (VAT) payable by the assessee and, if so, whether it has to be actually paid by him before filing of the return under the Income Tax Act. This question is relevant, having regard to the manner in which the question of law has been framed. The issue as to whether Section 43-B of the Income Tax is attracted even when the assessee does not claim any deduction on the strength of that provision may also be relevant.

3. The Assessing Authority, on the instant issue, noticed that the assessee’s claim regarding the treatment of VAT in the Books of Accounts has been verified from the Books and that has been found to be in order. The Assessing Authority also found that VAT has been found separately accounted for in the Books of Accounts. The only ground on which the Assessing Authority refused to exclude the VAT collected by the dealer from the profit of business is on the basis that the VAT component was not paid off on or before the due date for furnishing the return in relation to the previous year under Section 139(1) of the Income Tax Act. The First Appellate Authority also noticed that it is an undisputed fact that the Appellant did not charge VAT to the profit and Loss account. It was therefore noted by the First Appellate Authority that in such circumstances, the liability may still be unpaid, but it cannot be disallowed being not claimed as deduction in the Books of Accounts.

4. With the aforesaid fact situation, we are unable to hold that the Tribunal was in error in law in dismissing the revenue’s appeal making a reference to the decisions referred to by it.

5. The decision of the Apex Court in Chowringhee Sales Bureau (P) Ltd. Vs. CIT, AIR 1973 SC 376 (1973) 87 ITR 542, dealt with a case where the contents of the Profit and Loss account apparently showed that though the assessee had attempted to show that there is a separate account for tax collected, the collection would have been only of a composite amount. The transaction dealt with in Chowringhee’s case (supra) related to auction and the nature of the income derived by an auctioneer in the process of auction. In contradistinction thereto, are the decisions of the High Court of Delhi in Commissioner of Income Tax v. Noble & Hewitt (India) (P) Ltd., 2008 305 ITR 0324, which make a nice distinction between Chowringhee’s case and instances where Profit and Loss accounts and Service Tax accounts are maintained separately following mercantile system of accounting. As rightly noticed therein, it is not for the Income Tax department to make out a case relating to the correctness or otherwise of the mercantile system of accounting, resorted to and maintained by an assessee. The acceptability or otherwise of the accounts in a mercantile system would obviously be a matter of concern for other taxation authorities.

6. In the case in hand, as already noted, the fact situation that the Assessing Authority and the First Appellate Authority did not doubt the modality of the accounting system adopted by the assessee is an outstanding phenomenon which goes in favour of the assessee. Under such circumstances, it is not necessary for the authorities to consider, whether Section 43-B of the Income Tax is to be relied on by the assessee to claim any deduction.

7. For the aforesaid reasons, on the facts and circumstances of the case in hand, we answer to the question formulated in these appeals in the negative, that is to say, against the revenue and in favour of the assessee.”

12. Considering the aforesaid judgment of the Hon’ble Jurisdictional High Court as per which, no addition can be made of an assessee’s unpaid VAT tax liability that was not charged to the profit and loss account, there is substance in the claim of the Ld. AR that there was no justification for the A.O. to have made an addition u/s.43B of the amount of VAT payable of Rs.5,33,962/- as the same was not charged to the latters profit and loss account. I, say so, for the reason that as the aforesaid claim of the assessee was in conformity with the aforesaid judgment of the Hon’ble Jurisdictional High Court in the case of M/s. Ganapati Motors (supra), therefore, the same by no means could have been dubbed as an incorrect claim and brought within the realm of the adjustments contemplated in clause (a) of Section 143(1) of the Act. Accordingly, the order of the CIT(Appeals) is set-aside and the addition made by the A.O. of VAT payable of Rs.5,33,962/- is vacated. Thus, the Ground of appeal No.1 raised by the assessee is allowed in terms of my aforesaid observations.

9. Backed by aforesaid submission, Ld. AR claimed that, since the issue in the present case is squarely covered by the order of Hon’ble Jurisdictional High Court in Ganapati Motors (supra), therefore the addition made by Ld. AO and sustained by Ld. CIT(A) on account of non-payment of VAT before filing of the return us 139(1) is totally uncalled for, unjustified, arbitrary and is liable to be vacated.

10. Sr. DR on the other hand vehemently supported the orders of revenue authorities stating that the assessee itself has declared the amounts as not paid on or before date of filing of return u/s 139(1) in its Tax Audit Report in Form 3CB prepared under the provisions of section 44AB Income Tax Act, prompting the provisions of section 43B(a), thus, there was no occasion for the CPC to infer it otherwise. It was, therefore, the prayer of the revenue that the additions made by CPC and the order of the Ld. CIT(A) are justified, in accordance with the provisions of law, thus, deserves to be upheld.

11. We have considered the rival submission, perused the material available on record and the judicial pronouncements relied upon by the Ld. AR on behalf of the assessee. On a thoughtful consideration of the facts in present case in light of the observations emanating from the decision of Hon’ble Jurisdictional High Court in the case of Ganapati Motors (supra), wherein Hon’ble High Court has categorically answered the question of law raised by the revenue, against the revenue and in favour of the assessee, but under specific circumstances, observing as under:

“6. In the case in hand, as already noted, the fact situation that the Assessing Authority and the First Appellate Authority did not doubt the modality of the accounting system adopted by the assessee is an outstanding phenomenon which goes in favour of the assessee. Under such circumstances, it is not necessary for the authorities to consider, whether Section 43-B of the Income Tax is to be relied on by the assessee to claim any deduction.”

(emphasis supplied by us)

12. Adverting to the analogy drawn by the Hon’ble Jurisdictional High Court that in aforesaid case, wherein the modality of the accounting system adopted by the assessee are not doubted by the revenue authorities below, then in that case the question to invoke provisions of section 43B does not arise or necessitate, as answered in favour of the assessee, with a precise remark that, under such circumstances it is not necessary for the authorities to consider, whether Section 43-B of the Income Tax is to be relied on by the assessee to claim any deduction. Coming to the order of Ld. CIT(A) in the present case, wherein he categorically offered his comments qua defect in accounting of the assessee and that the method of accounting adopted by the assessee, rendering the same as inconsistent with the statutory requirements. To interpret the categorical findings of Ld. CIT(A) in cognizance with the conditional directions of the Hon’ble Jurisdictional High Court, the relevant observations of Ld. CIT(A) are extracted again as under:

5.4 VAT: The appellant argues that the VAT liability of Rs. 2,42,29,739/-comprises an opening balance of Rs. 1,79,97,376/-, current year credit balance of Rs. 62,65,068/-, and a debit balance of Rs.32,706/-. Thus, the closing VAT balance as of 31.3.2018 stands at Rs. 2,42,29,739/-. The appellant contests that the opening balance should not be subject to disallowance under section 43B, as only the current year payable of Rs. 62,32,362/- is relevant. The appellant argued that the VAT payable has not been routed through the profit and loss account, citing an exclusive accounting method and referring to various case laws.

5.4.1 The appellant’s contention is perused, however, it is noted that the VAT payable of Rs. 62,32,362/- was not paid within the prescribed time limit as per section 43B, evident from its outstanding status in the Balance Sheet. The appellant’s assertion of not debiting this amount in the profit and loss account is deemed untenable, as VAT is integral to sales and turnover, requiring proper accounting treatment. Statutory provisions and accounting standards necessitate the inclusion of VAT in turnover, rendering the appellant’s attempt to avoid section 43B through alternative accounting methods impermissible.

5.4.2 Additionally, the implementation of Income Computation and Disclosure Standards (ICDS) and Section 145 Of the Income Tax Act mandates the inclusion of VAT in total turnover, rendering the appellant’s exclusive method inconsistent with statutory requirements.

13. Considering the aforesaid observations of Ld. CIT(A), wherein he specifically dislodged the contentions of assessee qua its reliance on the case laws which are pressed before us, so as to place the present case on a different pedestal, wherein the decision of Hon’ble Jurisdictional High Court in the case of Ganapati Motors (supra) cannot be of any support to rescue the contentions of the assessee. We may herein again observe that, the question of law framed in the case of Ganapati Motors (supra) was answered against the revenue under specific circumstances, observing that, the revenue authorities have not raised any doubt regarding modality of accounting system adopted by the assessee, then the revenue is not supposed to look into the claim of assessee qua deduction u/s 43B. Contrary to the circumstance, under which the judgment in the case of Ganapati Motors (supra) was accorded, in the present case, Ld. CIT(A) had specifically taken a note of infirmities in the accounting system of the assessee, stating in loud and clear words that, the assertions of the assessee that it was following the exclusive accounting method by not debiting the amount of taxes to its profit and loss account, is untenable. It was further observed by him (Ld. CIT(A)) that, such accounting treatment is not tenable under the statutory provisions and accounting standards, necessitating the assessee to include the amount of VAT in turnover, which the assessee has not followed in an attempt to avoid disallowance u/s 43B, through alternative accounting methods which are impermissible. Ld. CIT(A) further rejected the claim of assessee, referring to “Implementation of Income Computation and Disclosure Standards” (ICDS) and section 145 of the Income Tax Act, which mandates the inclusion of VAT in total turnover, thus, the exclusive method of accounting adopted by the assessee was rendered as inconsistent with the statutory requirements.

14. To understand the applicability of section 145A(ii) in terms of the controversy raised by the assessee in present case, the relevant provision of the Act, as amended by Finance(No.2) Act, 2018 w.r.e.f. 01.04.2017 applicable in instant case, are culled out as under:

[Method of accounting in certain cases]

145A. For the purpose of determining the income chargeable under the head “Profits and gains of business or profession”,—

(i) the valuation of inventory shall be made at lower of actual cost or net realisable value computed in accordance with the income computation and disclosure standards notified under sub-section (2) of section 145;

(ii) 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;

(iii) the inventory being securities not listed on a recognised stock exchange, or listed but not quoted on a recognised stock exchange with regularity from time to time, shall be valued at actual cost initially recognised in accordance with the income computation and disclosure standards notified under sub-section (2) of section 145;

(iv) the inventory being securities other than those referred to in clause (iii), shall be valued at lower of actual cost or net realisable value in accordance with the income computation and disclosure standards notified under sub-section (2) of section 145:

Provided that the inventory being securities held by a scheduled bank or public financial institution shall be valued in accordance with the income computation and disclosure standards notified under sub-section (2) of section 145 after taking into account the extant guidelines issued by the Reserve Bank of India in this regard:

Provided further that the comparison of actual cost and net realisable value of securities shall be made category-wise.

Explanation 1.—For the purposes of this section, any tax, duty, cess or fee (by whatever name called) under any law for the time being in force, shall include all such payment notwithstanding any right arising as a consequence to such payment.

Explanation 2.—For the purposes of this section,—

(a) “public financial institution” shall have the meaning assigned to it in clause (72) of section 2 of the Companies Act, 2013 (18 of 2013);

(b) “recognised stock exchange” shall have the meaning assigned to it in clause (ii) of Explanation 1 to clause (5) of section 43;

(c) “scheduled bank” shall have the meaning assigned to it in clause (ii) of the Explanation to clause (viia) of sub-section (1) of section 36.

(c) interest received by an assessee on compensation or on enhanced compensation, as the case may be, shall be deemed to be the income of the year in which it is received.

15. The aforesaid provisions of Section 145A(ii) are self-explanatory, that any tax, duty, cess or fee paid or incurred has to be taken into account for valuation of goods. Accordingly, it was not at the option for the assessee to adopt a method of accounting wherein valuation of the goods or service can be accountant for without including 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. Our aforesaid view on this aspect is further fortified by judgment of the Hon’ble Bombay High Court, in the case of CIT vs. Knight Frank (India) Pvt. Ltd., in Income Tax Appeal No. 247 of 2014, dated 16.08.2016, wherein, Hon’ble Court has touched the issue regarding applicability of provisions of section 145A(ii) and opined to include any tax, duty, cess or fee for valuation of sales and purchase by a business entity. Relevant observations are extracted hereunder:

“6(e) The Explanation to Section 145A(a) of the Act does not expand its scope. An Explanation normally does not widen the scope of the main section. It merely helps clarifying an ambiguity. (See Zakiyr Begam v/s. Shanaz Ali & Ors., 2010 (9) SCC 280). The main part of the Section specifically restrict its ambit only to valuation of purchase and sale of goods and inventory. Rendering of service is not goods or inventory. Goods would mean movables and inventory would mean stock of goods. Therefore, the Explanation would only apply for valuation of sales and purchase of goods and stock of goods as provided in the main part. The Explanation in this case clarifies/ explains that any tax, duty, cess or fee paid or incurred will have to be taken into account for valuation of goods even if such payment results in any benefit/ right to the person making the payment. This Explanation was necessary as otherwise in terms of Accounting Standard – (AS-2) issued by the Institute of Chartered Accountants of India provides that cost of goods would include the duties and taxes paid, other then the duties and taxes which give a right to recover the same from the taxing authorities – to illustrate duty draw back etc. Thus, the Explanation only seeks to clarify the fact that notwithstanding any right acquired on payment of taxes to recover the same from the government, for the purpose of Section 145A of the Act, the same cannot be excluded even though the AS-2 provides otherwise. It does not even remotely deal with the issue of service tax.

(emphasis supplied by us…)

16. In view of aforesaid interpretation of section 145A(ii) by the Hon’ble Bombay High Court and on perusal of observations of the Ld. CIT(A), it can be safely gathered and construed that the First Appellate Authority has rightly recorded his dissatisfaction and doubt on the exclusive method of accounting by the assessee, much less, Ld CIT(A) had categorically rejected the method / modality of accounting system adopted by the assessee, whereas such observations of the authorities below were missing in the case of Ganapati Motors (supra), as observed by Hon’ble High Court. It is apparent that, such missing observations was the circumstance / basis wherein Hon’ble Jurisdictional High Court had decided the issue against the revenue. In view of such facts and circumstances, the contention of assessee that the issue in the present case is totally covered by the order of Hon’ble Jurisdictional High Court is found to be devoid and bereft of substance, as the facts of the present case are distinguishable from the facts in the case of Ganapati Motors (supra). Herein, it is pertinent to mention that the decision of Hon’ble Jurisdictional High Court is binding on the tribunal, the tribunal is under abundant duty to adopt the same by ritually following each and every word emanating from the said judgment, therefore, going by the Judicial discipline, respectfully adhering to the ratio of law laid down by Hon’ble Jurisdictional High Court, wherein the question of law was answered in favour of the assessee, conditionally, directing the revenue not to invoke the provisions of section 43B de hors any adverse inference regarding accounting modalities of the assessee, however, in the present case the very condition / inferences / doubt on accounting system is discernible in the order of Ld. CIT(A), moreover specifying the reasons for such adverse inference, absence of which was the foundation of the judgment in favour of the assessee in the case of Ganapati Motors (supra).

17. We, therefore, under the peculiar facts and circumstances in the instant case, after taking into consideration the aforesaid observations, are unbale to concur with the contention of the Ld. AR that the issue raised in the present appeal regarding disallowance of VAT u/s 43B is covered by the decision of Hon’ble Jurisdictional High Court, as in the admitted facts of present case, Ld. CIT(A) had not only doubted but also pointed out infirmity in the accounting system of the assessee which were not in accordance with the mandate of law and the ratio of judgment of Hon’ble Bombay High Court in the case of CIT vs. Knight Frank (supra). Therefore, the arguments of the Ld. AR are incomprehensible, on account of factual differences in the present case as against the case Ganapati Motors (supra). In sum and substance, we observe that the Ld. CIT(A) had rightly discarded the modality of exclusive accounting system adopted by the assessee, which was not the case of the revenue, while the judgment in the case of Ganapati Motors (supra) was accorded, and the error on the part of revenue committed in the case of Ganapati Motors (supra) has now been rectified / cured in the present case.

18. In view of aforesaid observations, we do not find any infirmity in the order of Ld. CIT(A), while confirming the disallowance made under intimation by CPC u/s 143(1) in the present case, consequently, we do not have any fair basis to interfere with the order of Ld. CIT(A), thus, the same stands upheld. Resultantly ground no. 1 to 7 of the present appeal assailing the sole controversy regarding disallowance of VAT payment which was not paid before the prescribed date of filing of return u/s 139(1) as the assessee was following exclusive method of accounting and the amount of VAT was not debited to P/L Account, stands dismissed.

19. Ground no.9 of the present appeal of assessee is general and academic in nature, therefore, the same is dismissed as not pressed.

20. ITA No. 208/RPR/2024 by the revenue:

Under common facts as described hereinabove, since the addition made through intimation u/s 143(1) by the CPC, Bangaluru were partly deleted by the Ld. CIT(A), therefore, the department is in appeal against the decision of Ld. CIT(A) qua the reliefs extended to the assessee. The grounds of appeal assailed by the department, reads as under:

1. “Whether on the facts and in the circumstance of the case, and in law, the Id. JCIT(A) was justified in deleting the disallowance of Rs.1,79,97,376/-on account of unpaid VAT?”

2. “Whether on the facts and in the circumstance of the case, and in law, the Id. CIT(A) was justified in deleting the disallowances of Rs.1,32,168/- on account of CST payable?”

2. Any other ground which may be adduced at the time of hearing.

21. Referring to the grounds of the appeal of the revenue wherein the controversy raised by the revenue regarding justification of part deletion by Ld. CIT(A), of disallowance made u/s 43B in intimation u/s 143(1) by CPC, which considering the fact of the case includes opening balance i.e. amounts pertaining to earlier year. Herein, we may observe that the disallowance so vacated by the Ld. CIT(A) was under correct appreciation of facts and law, since as per the provisions of law and under the settled principle of law, any addition / disallowance of expenditure incurred, which pertains to a different year other than the year under consideration (relevant year), cannot be made in the relevant year, therefore, we concur with the decision of Ld. CIT(A), which in our considered opinion is not suffering with any infirmity, that calls for our interference. We, thus, approve the decision of Ld. CIT(A) qua the deletion of addition for amounts pertaining to earlier year and reject the contentions raised by the revenue being bereft of merits. Resultantly, ground no. 1 and 2 raised by the revenue stands dismissed.

22. Ground no.3 of the present appeal of revenue is general and academic in nature, therefore, the same is dismissed as not pressed.

23. In combined result, appeal of the assessee in ITA No. 195/RPR/2024 and appeal of the revenue in ITA No. 208/RPR/2024, both stands dismissed in terms of our aforesaid observations.

Order pronounced in the open court on 09/07/2024.