GST, Interest & Penalty paid during Search

[Bhavesh Patel]

A XYZ Pvt Ltd face a GST search in its premises on 22/07/2024. The GST department raised a demand for the previous year(FY 2020-21, 2021-22 & 2022-23). Is it allowable as an expense under the Income Tax Act in FY 2024-25, or is the principal payment of GST disallowed as Deferred revenue expenditure?

[Padmanathan KV]

What was the basis of the demand? was it tax on suppressed turnover?

[Bhavesh Patel]

Partial demand for suppressed turnover and partial demand for availing ineligible credit u/s 17(5)

AI Summary

GST demand treatment may be non-deductible deferred revenue expenditure when tied to suppressed turnover and disallowed input tax. Whether a GST demand and associated interest and penalty raised during a search and relating to prior periods is deductible in the year of payment depends on whether the liability arises from suppressed turnover or reversal of ineligible input tax credit under section 17(5); amounts representing principal tax liability for earlier periods are to be characterised as deferred revenue or capital in nature rather than current deductible expenditure, while interest and penalty components require separate deductibility analysis under the Income Tax Act.