2017 (4) TMI 1613 - HC - Income Tax

Court rules unpaid VAT deductible; assessee prevails. Section 43-B not applicable. Importance of chosen accounting system highlighted.

Assistant Commissioner of Income Tax-I, Bhilai, District Durg (C.G.) ; Joint Commissioner of Income Tax, Bhilai Range, Bhilai, District Durg (C.G.) Versus M/s Ganapati Motors, G.E. Road, Supela, Bhilai, District Durg (C.G.)

The court ruled against the revenue and in favor of the assessee, holding that the unpaid VAT should not be disallowed as a deduction since it was not ... Addition u/s 43-B - unpaid VAT - 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 u/s 139(1) - HELD THAT:- The transaction dealt with in Chowringhee's case [1972 (10) TMI 4 - SUPREME COURT] 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 Noble & Hewitt (India) (P) Ltd. [2007 (9) TMI 238 - DELHI HIGH COURT], 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. 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 - it is not necessary for the authorities to consider, whether Section 43-B is to be relied on by the assessee to claim any deduction. 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. Issues:- Interpretation of Section 43-B of the Income Tax Act, 1961 regarding unpaid VAT- Treatment of VAT in the Books of Accounts- Applicability of Section 139(1) of the Income Tax Act on VAT payment- Distinction between Chowringhee Sales Bureau case and other casesInterpretation of Section 43-B of the Income Tax Act, 1961 regarding unpaid VAT:The main issue in this case revolves around the interpretation of Section 43-B of the Income Tax Act, specifically in relation to the treatment of unpaid Value Added Tax (VAT) by the assessee. The question raised is whether the ITAT was justified in upholding the deletion of an addition made by the Assessing Officer (AO) concerning unpaid VAT. The contention is based on whether VAT should be included as part of the assessee's receipts and if Section 43-B should apply. The court considered the Supreme Court's decision in Chowringhee Sales Bureau case and the relevance of unpaid sales tax liability in the present case.Treatment of VAT in the Books of Accounts:The Assessing Authority verified the treatment of VAT in the Books of Accounts and found it to be in order. It was noted that VAT was separately accounted for in the Books. However, the Assessing Authority disallowed the exclusion of VAT from the profit of the business because it was not paid before the due date for filing the return under Section 139(1) of the Income Tax Act. The First Appellate Authority observed that even though VAT was not charged to the Profit and Loss account, the liability could still be unpaid but should not be disallowed as a deduction since it was not claimed in the Books of Accounts.Applicability of Section 139(1) of the Income Tax Act on VAT payment:The issue of whether VAT needed to be actually paid by the assessee before filing the return under the Income Tax Act was crucial. The court considered whether Section 43-B would be attracted even if the assessee did not claim any deduction based on that provision. The authorities did not doubt the accounting system adopted by the assessee, which favored the assessee's position.Distinction between Chowringhee Sales Bureau case and other cases:The court discussed the Chowringhee Sales Bureau case, which dealt with the treatment of tax collected in the Profit and Loss account. It compared this case to instances where Profit and Loss accounts and Service Tax accounts are maintained separately. The court highlighted the importance of the mercantile system of accounting chosen by the assessee and emphasized that the correctness of this system is not the concern of the Income Tax department. The court concluded that in the present case, the authorities did not need to consider the reliance on Section 43-B for claiming deductions due to the favorable accounting system adopted by the assessee.In conclusion, the court answered the formulated question in the negative, ruling against the revenue and in favor of the assessee based on the facts and circumstances of the case.