IGST deduction disallowed under section 43B for failing to route through P&L Account as required

The ITAT Kolkata upheld the CIT(A)'s decision to disallow IGST payable on import of goods under section 43B. The assessee failed to route the IGST through the P&L Account, showing identical GST components in opening stock and purchases versus consumption and closing stock, with no impact on P&L. The tribunal held that routing tax through P&L Account is mandatory under sections 145 and 145A, not discretionary. The assessee's method of depicting GST components without including them in sales figures prevented proper P&L impact assessment. The appeal was decided against the assessee.

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The core legal issue considered in this appeal concerns the applicability of section 43B of the Income Tax Act, 1961 ("the Act") regarding the disallowance of Integrated Goods and Services Tax (IGST) payable on import of goods which was not routed through the Profit & Loss (P&L) Account of the assessee company for the Assessment Year 2019-20. Specifically, the Tribunal examined whether the addition made under section 43B for the outstanding IGST liability at the end of the year, which was unpaid before the due date of filing the return of income, was justified despite the IGST amount not being claimed as an expenditure in the P&L Account.

In addition, the Tribunal scrutinized the interplay of sections 145, 145A, and 43B of the Act, and the impact of the Income Computation and Disclosure Standards (ICDS), particularly ICDS-2, on the valuation of inventory and the accounting treatment of taxes such as IGST for income computation purposes.

Issue-wise detailed analysis is as follows:

1. Applicability of Section 43B on IGST Payable Not Routed Through P&L Account

Relevant Legal Framework and Precedents: Section 43B of the Act mandates that certain deductions, including taxes, duties, cess, or fees payable under any law, shall only be allowed if such amounts are actually paid on or before the due date of filing the return of income. Section 145(1) prescribes the method of accounting, generally mercantile, while section 145A provides specific rules for valuation of inventory and adjustment of purchase and sale values to include taxes, duties, cess, or fees actually paid or incurred.

Precedents cited include the decision of the ITAT Varanasi in Husna Parveen vs. NFAC, which held that GST payable must be routed through the P&L Account and cannot be credited directly to a separate liability account to avoid disallowance under section 43B. Conversely, decisions such as CIT vs. Noble and Hewitt (Delhi High Court) were noted but distinguished as relating to earlier assessment years prior to amendments in sections 145 and 145A and the introduction of ICDS.

Court's Interpretation and Reasoning: The Tribunal emphasized that the assessee, being a Private Limited Company, is required to maintain accounts on the mercantile system and compute income as per the Act's provisions. Section 145A mandates that valuation of purchase, sale, and inventory must include any tax, duty, cess, or fee actually paid or incurred to bring goods or services to their location and condition. This implies that tax liabilities such as IGST must be reflected in the P&L Account for income computation.

The Tribunal rejected the assessee's contention that since IGST was not routed through the P&L Account and no deduction was claimed, section 43B could not be invoked. It held that the statutory provisions leave no discretion to the assessee in this regard. The Tribunal reasoned that if the assessee were allowed to avoid routing taxes through the P&L Account, it would effectively circumvent the rigors of section 43B, rendering the provision redundant.

Key Evidence and Findings: The tax audit report dated 30.11.2019, which coincides with the due date for filing the return, explicitly stated that IGST of Rs. 1,25,65,813/- on import of goods was outstanding and unpaid. The assessee did not dispute the existence of this liability but argued solely on the accounting treatment.

The Tribunal examined the assessee's financial statements and computations, noting that the GST component in opening stock and purchases equalled that in consumption and closing stock, resulting in no impact on the P&L Account. The Tribunal found this method of accounting flawed, as the assessee did not include GST in the sales figure, thereby masking the true impact on profits and the outstanding liability.

Application of Law to Facts: Applying the statutory provisions and accounting standards, the Tribunal concluded that the IGST liability had to be routed through the P&L Account for income computation. Since the liability remained unpaid as of the due date, section 43B mandated disallowance of the corresponding amount.

Treatment of Competing Arguments: The Tribunal considered the extensive case law and submissions by the assessee but found them either inapplicable due to changes in law or unpersuasive given the clear statutory mandate. The Tribunal also rejected the assessee's calculation purporting no impact on net profit, noting that such calculation was inconsistent with the accounting and tax treatment required under the Act.

Conclusion: The Tribunal upheld the addition under section 43B, confirming that the IGST payable not routed through the P&L Account and unpaid before the due date must be disallowed.

2. Interpretation and Impact of Sections 145 and 145A and ICDS-2 on Accounting of Taxes

Relevant Legal Framework and Precedents: Section 145(1) prescribes the method of accounting for computing income, generally mercantile, unless otherwise prescribed. Section 145A, introduced to align accounting with ICDS, requires that valuation of inventory and purchase/sale of goods or services be adjusted to include taxes, duties, cess, or fees actually paid or incurred. ICDS-2 specifically addresses valuation of inventories and mandates inclusion of such taxes in the valuation.

Court's Interpretation and Reasoning: The Tribunal analyzed section 145A in detail, highlighting clause (ii), which requires adjustment of purchase and sale values and inventory valuation to include taxes actually paid or incurred. The Tribunal observed that these provisions clearly mandate routing taxes such as IGST through the P&L Account for income computation purposes.

The Tribunal emphasized that the assessee cannot selectively exclude taxes from the P&L Account or treat them solely as a balance sheet liability. The statutory framework and accounting standards collectively ensure that the tax impact is reflected accurately in the profit and loss computation.

Key Evidence and Findings: The Tribunal noted that the assessee's accounting treatment, which excluded IGST from sales figures and only included it in opening stock and purchases, was inconsistent with the requirements of section 145A and ICDS-2. This method artificially neutralized the impact of IGST on profits and liabilities.

Application of Law to Facts: The Tribunal applied the statutory provisions to conclude that the assessee was obliged to include IGST in the valuation of inventory and in purchase and sales figures, thereby routing the tax through the P&L Account. Non-compliance with this requirement triggered the applicability of section 43B for disallowance of unpaid tax liabilities.

Treatment of Competing Arguments: The Tribunal acknowledged the assessee's submissions and case laws but found that the legal provisions enacted after 2017, including section 145A and ICDS, superseded earlier precedents. The Tribunal declined to engage in an academic debate over conflicting case law, emphasizing the clarity of the statutory provisions.

Conclusion: The Tribunal held that sections 145 and 145A, read with ICDS-2, mandate the inclusion of taxes such as IGST in the P&L Account, and failure to do so results in the operation of section 43B disallowance.

Significant Holdings

The Tribunal succinctly encapsulated the legal reasoning as follows:

"In view of the cumulative provisions of sections 145A and 43B of the Act, the appellant 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 appellant for the relevant year."

Further, the Tribunal observed:

"Once the Act mandates that for the purpose of calculating profit and gains of business or profession accounting system has to be followed as per sec. 145 and 145A of the Act, there remains no option available with the assessee for not routing the tax liabilities through its P&L Account. Assessee may maintain its account in other manner either by including the tax or not but for the purpose of arriving at the profits and gains for business and profession for the income tax purpose it has to route the taxes through its Trading & P&L Account, and once the tax liabilities are routed through P&L Account, section 43B of the Act would automatically come into operation."

Core principles established include:

• The mandatory nature of routing tax liabilities such as IGST through the P&L Account for income computation under sections 145 and 145A of the Act and ICDS-2.
• The operation of section 43B disallowance on unpaid tax liabilities as of the due date of filing the return, regardless of whether the tax amount was claimed as expenditure in the P&L Account.
• The rejection of accounting methods that exclude tax liabilities from sales figures or P&L Account to circumvent tax disallowance provisions.

Final determination was the dismissal of the assessee's appeal and confirmation of the addition of Rs. 1,25,65,813/- under section 43B for unpaid IGST liability at the end of the year.

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