2025 (3) TMI 1544 - AT - Income Tax

Assessee's consistent accounting excluded VAT/GST from profit and loss; tax adjustment disallowed and addition set aside

ITAT MUMBAI - AT allowed the appeal, finding the assessee's exclusive accounting method consistently excluded VAT/GST payments and refunds from the profit ... Refund of Value Added Tax (VAT)/ Goods and Service Tax (GST) - intimation u/s 143(1) - HELD THAT:- Refund amount received out of such VAT/GST payment was also not routed through the profit and loss account. The assessee also explained that information pertaining to VAT/GST was reflected in the tax audit report under clause 16(b) only for the purpose of disclosure of information pertaining to VAT/GST. We find that ld. CIT(A) has not disproved the claim of the assessee that it had neither debited the expenditure pertaining to VAT/GST to the profit and loss account and nor credited the corresponding refund amount as per the accounting policy followed by the assessee company consistently over the number of years. Assessee is following exclusive method of accounting therefore the decision of ld. CIT(A) in sustaining the impugned adjustment made by the CPC without disproving the corresponding material referred by the assessee is not justified. Accordingly, the appeal of the assessee is allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether a VAT/GST refund, not routed through profit and loss account because the assessee follows an exclusive method of accounting, is includible in total income when processed under section 143(1) by the CPC on the basis of tax-audit disclosure. 2. Whether an adjustment proposed/confirmed under section 143(1)(a)(ii) - reflecting an apparent incorrect claim from the return - was correctly applied to add VAT/GST refund to taxable income where the assessee asserts the refund was not accounted for in profit & loss. 3. Whether levy of interest under sections 234B and 234C is justified where the assessed income was increased by the CPC by inclusion of VAT/GST refund that the assessee contends was not part of returned income due to its exclusive accounting method. ISSUE-WISE DETAILED ANALYSIS Issue 1: Inclusion of VAT/GST refund in total income where refund and corresponding VAT/GST payments were not routed through profit & loss account (exclusive method of accounting). Legal framework: The assessment intimation under section 143(1) permits the CPC to make adjustments apparent from the return or from information in the tax-audit report; computation of total income depends on amounts reflected in the return/accounting treatment adopted by the assessee. Precedent Treatment: The Tribunal's order does not rely on or distinguish any judicial precedents; no prior decisions were cited or overruled. Interpretation and reasoning: The assessee consistently followed an exclusive method of accounting whereby VAT/GST payments were not debited to profit & loss and corresponding refunds were not credited to profit & loss; such treatment was asserted and supported by evidences and tax-audit disclosure under clause 16(b). The CPC's adjustment was made on the basis of reporting in the tax-audit report but without disproving the assessee's primary assertion that the amounts were not part of the profit & loss account and therefore not offered to tax. The Tribunal examined the record and found that the CIT(A) did not rebut or disprove the documentary material establishing the accounting policy and consistent application over years. Given that the refunds were not part of the income as per the accounting treatment adopted and documented, the Tribunal concluded that the CPC's unilateral inclusion was incorrect. Ratio vs. Obiter: Ratio - where an assessee follows an exclusive method of accounting and neither the VAT/GST payments nor the refunds are routed through the profit & loss account, a refund of such VAT/GST is not includible in total income merely because it appears in the tax-audit report; the revenue must disprove the asserted accounting treatment before making an addition under section 143(1). Conclusion: The Tribunal allowed the appeal and held that the addition of the VAT/GST refund to total income under section 143(1) was not justified because the assessee consistently followed an exclusive method of accounting and the revenue did not rebut the evidential material showing the refund was not reflected in profit & loss. Issue 2: Validity of adjustment under section 143(1)(a)(ii) which deals with incorrect claims apparent from the return. Legal framework: Section 143(1)(a)(ii) allows the CPC to make adjustments where an incorrect claim is apparent from the return of income; the scope of this provision is limited to matters apparent from the return or accompanying documents. Precedent Treatment: No precedents were cited; the Tribunal applied statutory interpretation to the facts before it. Interpretation and reasoning: The Tribunal noted that the CPC's adjustment relied on tax-audit reporting but failed to appreciate the distinction between a matter apparent from the return and matters disclosed in accompanying documents that explain the return (i.e., accounting policy showing exclusive treatment). The assessee's return did not include the refund in profit & loss, and the tax-audit disclosure explained that omission as consistent accounting policy rather than an incorrect claim. Since the adjustment was not shown to be an incorrect claim apparent from the return itself, making an addition under section 143(1)(a)(ii) was procedurally and substantively inappropriate without demonstrating that the refund was in fact included or should have been included in the return. Ratio vs. Obiter: Ratio - an adjustment under section 143(1)(a)(ii) requires the matter to be incorrect and apparent from the return; where accompanying audit disclosures show that an item was intentionally excluded from profit & loss under a consistent accounting policy, the CPC cannot treat that exclusion as an incorrect claim apparent from the return absent disproving evidence. Conclusion: The Tribunal found the CPC erred in making the adjustment under section 143(1)(a)(ii) because the adjustment did not address an incorrect claim apparent from the return but relied instead on tax-audit disclosure which the revenue failed to disprove. Issue 3: Levy of interest under sections 234B and 234C consequent to CPC's inclusion of VAT/GST refund in assessed income. Legal framework: Sections 234B and 234C impose interest for defaults in payment of advance tax and deferment of advance tax installments, tied to the amount of tax payable on returned income or assessed income as applicable. Precedent Treatment: No judicial authorities were referenced with respect to interest provisions; the Tribunal applied the statutory scheme to the factual conclusion on taxable income. Interpretation and reasoning: Because the Tribunal concluded that the VAT/GST refund should not have been included in total income, the increased taxable income computed by the CPC (and sustained by the CIT(A)) was not justified. Interest computed under sections 234B and 234C was premised on the CPC's enhanced tax liability derived from the erroneous inclusion. The Tribunal implicitly treated the correctness of interest levy as dependent on correctness of the underlying assessment adjustment; since the underlying addition was vacated, associated interest charges lacked foundation. Ratio vs. Obiter: Ratio - interest under sections 234B and 234C calculated on an incorrectly increased taxable income (because of an unjustified inclusion) cannot stand; liability to such interest depends on correctness of the underlying tax computation. Conclusion: By allowing the appeal on the primary issue (non-inclusion of VAT/GST refund), the Tribunal necessarily disallowed the consequential interest levies under sections 234B and 234C to the extent they arose from the incorrect inclusion. Cross-references and Inter-issue Connections The Tribunal's findings on Issues 1 and 2 are interdependent: the determination that the assessee followed an exclusive method of accounting (Issue 1) informs the conclusion that an adjustment under section 143(1)(a)(ii) was not permissible (Issue 2). The conclusion on Issue 3 (interest under sections 234B/234C) follows from the vacating of the underlying addition. Disposition (Ratio of the Decision) The Tribunal allowed the appeal, holding that (a) where VAT/GST payments and refunds are not routed through profit & loss pursuant to a consistent exclusive accounting method, such refunds are not includible in total income merely on the basis of tax-audit disclosure; (b) an adjustment under section 143(1)(a)(ii) must be genuinely apparent from the return and cannot be made where accompanying disclosures explain an intentional exclusion; and (c) consequential interest under sections 234B and 234C based on the erroneous addition cannot be sustained.