2025 (10) TMI 306 - AT - Income Tax

Disallowance under section 43B not applies to unpaid VAT/GST amounts not debited or claimed as deduction

ITAT (Del-AT) held that disallowance under s.43B for VAT, GST and similar levies not paid before the return-filing due date was not permissible where ... Disallowance of VAT & GST u/s 43B - these amounts were not remitted before due date for filing of return of income - action of the CPC was confirmed by the CIT(A) - whether the VAT, Entry Tax, CST etc. which were neither debited to profit and loss account nor claimed as deduction by the assessee and not paid before the due date for filing of return, whether such amounts can be considered for disallowance by the CPC while processing the return u/s 143(1)? - HELD THAT:- As decided in GRAND MOTORS [2024 (11) TMI 1390 - CHHATTISGARH HIGH COURT] and also Nobel & Havet (I) (P.) Ltd. NOBLE AND HEWITT (I) P. LTD. [2007 (9) TMI 238 - DELHI HIGH COURT] that no such disallowance is warranted as the appellant / assessee did not claim the amount in his profit and loss account as an expenditure / deduction, nor the appellant claim deduction in respect of that account under Section 43B of the IT Act. Also see [2017 (4) TMI 1613 - CHHATTISGARH HIGH COURT] AO the CIT(A) and the ITAT, all three authorities have concurrently erred in holding that the appellant has claimed deduction / expenditure under Section 43B of the IT Act adding to its taxable income. We direct the AO/CPC to delete the disallowance made u/s 43B in respect of VAT and GST. Decided in favour of assessee. ISSUES PRESENTED AND CONSIDERED 1. Whether amounts representing indirect taxes (VAT/GST/Service Tax) that were neither debited to the profit and loss account nor claimed as a deduction by the assessee can be disallowed by the Centralised Processing Centre (CPC) while processing the return under section 143(1) by invoking section 43B. 2. Whether the disallowance made by CPC under section 43B in an intimation under section 143(1) can be sustained where the assessee follows mercantile accounting and has not claimed the relevant sums as expenditure/deduction in the previous year. 3. Ancillary procedural/contentions (jurisdictional/natural justice/requirement of notice) raised in grounds B and D but not adjudicated on merits by the Court. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Applicability of section 43B where the amount was not debited to the profit & loss account or claimed as deduction Legal framework: Section 43B (Certain deductions to be only on actual payment) makes specified deductions allowable only in the previous year in which such sum is actually paid; the provision qualifies deductibility of amounts by reference to actual payment. Precedent Treatment: The Court explicitly followed and applied prior High Court decisions addressing identical factual matrices, notably the decision treating VAT/other indirect taxes separately accounted for in books and not debited to profit & loss as outside the scope for disallowance under section 43B when not claimed as deduction. Interpretation and reasoning: The Court reasoned that section 43B operates as a qualification of an otherwise allowable deduction; it cannot be invoked to disallow an amount which the assessee has not claimed as a deduction in the profit and loss account. Where indirect taxes (VAT/GST/Service Tax) are separately accounted for and not charged as business expenditure, no question of a deduction arises; therefore the protective/conditional mechanism in section 43B has no operative application. The CPC's processing under section 143(1) cannot create a deduction that was not claimed and then disallow it under section 43B. The Court relied on the principle that disallowance under section 43B presupposes a claimed deduction - absent such claim, disallowance is unwarranted. Ratio vs. Obiter: Ratio - The operative legal principle established is that section 43B cannot be invoked to disallow amounts not claimed as expenditure/deduction in the profit & loss account; where an assessee follows mercantile system and has not debited indirect taxes to P&L, CPC cannot disallow those amounts under section 43B in an intimation under section 143(1). This constitutes the binding ratio applied to the facts. Observational/supporting statements about the mechanics of CPC processing and comparisons with other cases are obiter to the extent they comment beyond that core principle. Conclusions: The Court set aside the disallowance of Rs. 45,69,143 made under section 43B in the intimation under section 143(1) and directed recomputation of income excluding that disallowance. Issue 2 - Competence of CPC (processing under section 143(1)) to make disallowances under section 43B in the factual scenario Legal framework: Section 143(1) enables processing of returns and issuance of intimation; the scope of adjustments in such intimation depends on matters presented in the return and the books. Section 43B defines timing of allowable deductions. Precedent Treatment: The Court relied on prior High Court jurisprudence that addressed CPC/processing-stage disallowances when the taxpayer did not claim the deduction - holding that processing-stage adjustments invoking section 43B are improper in such circumstances. Interpretation and reasoning: The Court held that a processing-stage disallowance under section 143(1) must respect the foundational accounting position taken by the assessee in the return and in books. If the assessee has not treated indirect taxes as deductible expenditure (i.e., they are separately accounted for), then CPC cannot, in processing, convert those separately accounted liabilities into claimed deductions and then apply section 43B to disallow them. The reasoning stresses that section 43B is contingent on a deduction being claimed and that mechanical invocation of 43B at the CPC stage is not permissible to create taxable income where no deduction was asserted. Ratio vs. Obiter: Ratio - CPC cannot sustain a section 43B disallowance in an intimation under section 143(1) when the disputed sums were not debited to profit & loss nor claimed as deduction; such processing-stage disallowance is therefore unsustainable. Observations about procedural safeguards or alternative routes (e.g., issuance of notice under section 143(2) for inquiries) are obiter as not necessary to the dispositive outcome. Conclusions: The disallowance effected by CPC under section 143(1) was set aside; AO/CPC directed to delete the section 43B disallowance and recompute taxable income accordingly. Related procedural/contention notes (grounds B and D) Legal framework & reasoning: The assessee raised jurisdictional and natural justice objections (absence of prior show-cause/SCN, subject-matter falling outside section 143(1) purview, or that the correct remedy would have been to issue a notice under section 143(2)). The Court did not adjudicate these grounds on merits, having decided the matter on the principal substantive ground (non-claim of deduction). The record therefore contains no definitive ruling on those procedural issues; they remain unadjudicated. Ratio vs. Obiter: Obiter - Any comments touching on jurisdictional or procedural requirements are non-decisive here because the Court disposed the appeal by applying the substantive legal principle regarding section 43B and non-claimed deductions. Conclusions: Grounds B and D were not adjudicated; the appeal was partly allowed solely by deleting the impugned 43B disallowance (ground C allowed), with directions for recomputation. Cross-reference: see Issue 1 and Issue 2 conclusions which form the basis for non-adjudication of procedural grounds.