DCIT CC 5(1), MUMBAI vs. HAZEL MERCANTILE LTD, MUMBAI

ORDER

PER N.K. PRADHAN, AM

raised by the Revenue read as under:

1. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the disallowance made u/s 43B which was done in respect of VAT credit availed by the assessee on the purchases from M/s Parshva and Co., Duralloy Cutters Ltd., Rishabh Chemical Works and M/s Big Trade Agency, the entities having suspicious credentials after holding that the liability to pay VAT to the Government was saddled with the seller and not the purchaser not appreciating the fact that VAT Authorities had asked the assessee (purchaser) to pay VAT in respect of purchases from a suspect entities?

2. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the disallowance made u/s 43B which was done in respect of VAT credit on the purchases made from Parshva and Co., Duralloy Cutters Ltd., Rishabh Chemical Works and M/s Big Trade Agency, the entities having suspect credentials not appreciating that the adjustments made by the Assessing Officer in respect of the transaction claimed with those entities were accepted by the assessee which tantamount to admission of fictitious purchases and to input VAT credit availed by it on those purchases?

3. Without prejudice to Ground No. 1 & 2, whether on the facts and in the circumstances of the case and in law, the Ld. CIT (A) was justified in allowing the deduction for the VAT expenses which was found to be the part of the bogus purchase transactions admitted by the assessee and, therefore, were not incurred wholly and exclusively for' the purpose of business?

3. Briefly stated, the facts of the case are that the assessee filed its return of income for the AY 2009-10 on 17.09.2009 declaring income at M/s Hazel Mercantile 3 ITA Nos. 6381 & 6382/Mum/2016 Rs.2,91,00,205/-. The Assessing Officer (AO) made an assessment u/s 143(3) r.w.s. 148 on 20.03.2015 making the following additions/disallowances:

1. Differential Gross Profit Margin Rs.55,19,098/-

2. Disallowance of MVAT tax on purchases Rs.1,59,52,658/- u/s 43B The issue in the present appeal is the disallowance of Rs.1,59,52,658/- made by the AO u/s 43B in respect of Maharashtra Value Added Tax (MVAT) on purchases. The AO has made an addition of Rs.1,59,52,658/- by disallowing VAT on purchases made from the alleged parties. The AO noted that the profit and loss account of the assessee shows that the assessee was following inclusive method, which means that VAT has to be included both in purchases and sales. As per him, while VAT in sales may be income, the VAT amount in purchases which is an expense cannot be automatically allowed as deduction, as it is not paid. The AO inferred this as the VAT authorities had asked the assessee to pay VAT @ 4% on the purchases made from parties other than M/s Todays Writing Instruments Pvt. Ltd. The AO thus observed that the input VAT credit taken by the assessee was based on incorrect assumption, and in reality such amount of tax included in the purchase amount was not actually paid to the credit of the government. The same was paid by the assessee, much after the date of filing return of income and would only be allowed on payment basis, as provided by section 43B. As per the AO, the assessee has in fact paid the VAT amount in M/s Hazel Mercantile 4 & 6382/Mum/2016 September to November, 2010 and has also claimed additional VAT paid in AY 2011-12, but the same amount has not been offered for in AY 2009-10. In response to a query raised by the AO, the assessee submitted that the assessee would not have any inkling that the seller of goods to them would not pay the VAT and at the time of finalization of return of income, there was reasonable certainty in the mind of the assessee, that VAT input, as claimed will be allowable. Further, the assessee made the following submission before the AO: “that an assessee is expected to have taken a bogus entry, an accounting of purchases, not actually made, only with an intent to reduce taxable income. There seems to be no logic in claiming that asessee has taken bogus purchase with intent to benefit the revenue, or to pay more tax, than was otherwise due. Hence, any claim of bogus purchase has to be analyzed from the point of view of benefit accruing to assessee.” The AO thus arrived at a finding that the benefit accruing to the assessee even if inadvertent is 4% VAT input credit. The total purchases from parties other than Todays Writing Instruments is Rs.41,47,69,106/- which is inclusive of VAT at Rs.4%. The AO, accordingly, computed the VAT credit as under: Value without VAT is Rs.41,47,69,106/1.04 Rs.39,88,16,448 VAT on above Rs.1,59,52,658/- Thus the AO concluded that Rs.1,59,52,658/- is the amount of VAT credit which the assessee has included in the purchase amount, but M/s Hazel Mercantile 5 ITA Nos. 6381 & 6382/Mum/2016 which was not actually paid to the government. The assessee has claimed and has been allowed this expense on the debit side of the P&L account, though, it should have been added to the income u/s 43B of the Act. Therefore, the AO made a disallowance of Rs.1,59,52,658/- u/s 43B of the Act.

4. Aggrieved by the order of the AO, the assessee filed an appeal before the Ld. CIT(A). During the course of appellate proceedings, the assessee submitted before the Ld. CIT(A) the following: "1. The assessee company has purchased goods from the alleged Hawala parties & has paid VAT at the time of purchasing the Materials/Goods from them. The assessee has also resold these commodities & has collected VAT at the time of sale. While discharging the liability of VAT on monthly basis, the assessee Company has claimed benefit of VAT paid on Purchases from the alleged Hawala Party as the same was charged in the bill.

The Profit & Loss A/c of the assessee, during the year has been shown inclusive method of accounting. As the method adopted by the assessee was inclusive, the amount of VAT component was included in Sales & in Purchases on the basis of collection & payment respectively. It means the turnover of Purchases and Sales included the element of VAT.

As per the provision of Section 43B of I.T, Act, certain deductions are allowable under this Act which is only on actual payment. This includes any sum payable by the assessee by the way of tax, duty, cess or fee, by whatever name called, under any law for the time being in force. The said taxes shall be actually paid by the assessee on or before the due date applicable in his case M/s Hazel Mercantile 6 & 6382/Mum/2016 for furnishing the return of income under sub-section (1) of section 139 in Income Tax Act. In case of the assessee Company, the VAT as paid on the purchases has been accounted & paid by the assessee while making the payment to the alleged Hawala party. The payment of the purchase bill also comprises the element of VAT. The copy of ledger account substantiating the payment is submitted in our submission. In fact, as per the general practice adopted in the trade, VAT is separately charged on the bill and the total bill including VAT becomes a contractual liability for payment to the purchaser. There is no provision in the Sales Tax Act wherein on the purchases by the Assessee Company, VAT can be separately paid by the assessee company on its own. In conclusion, we would like to state that VAT becomes inseparable part of the Purchase invoice & the contractual liability of the buyer to make the payment of the Gross amount including VAT. If the seller has not complied with its contractual liability of payment of VAT to Sales Tax Authorities, the assessee company cannot be held responsible or liable for non-payment of tax on its purchases. The VAT tax is paid by the assessee on the purchases during the course of trading business. The effective liability rests on the creditor from whom the company has acquired the goods. The purchases from the dealers were not hawala parties during the year 09/10 and the payment of taxes in the form of payment for purchases were made on time by the assessee and accordingly claimed. In effect the liability of payment of tax is not the liability of the assessee company and hence applicability of Section 43B of the Act, does not arise.” 4.1 The Ld. CIT(A) held that as per provisions of section 43B(a), only sums payable by the assessee by way of tax, duty etc. can be disallowed.

M/s Hazel Mercantile 7 & 6382/Mum/2016 In the assessee’s case, the VAT amount included in the purchases price of traded materials is to be paid to the government by the seller of the materials. There is no obligation whether statutory or otherwise on the part of the purchaser to pay VAT to the government. The Ld. CIT(A) thus deleted the disallowance of Rs.1,59,52,658/- on the following reasons: “The assessing officer was factually incorrect in arriving at the conclusion that the amount disallowed u/s 43B is sales tax payable. The amount in fact represented purchase price of materials. The assessing officer has grossly erred in invoking the provision of section 43B as the liability to pay the purchase price of materials is not covered by section 43B. Here, the liability to pay the VAT to the government is on the seller and only seller is hit it by section 43B of the Act. There is no nexus between the buyer of materials and VAT department as the buyer is paying the purchase price of materials including VAT to the Seller.”

M/s Hazel Mercantile 8 & 6382/Mum/2016 “From the above clause (a), it is clear that only sums payable by the assessee by way of tax, duty etc. can be disallowed u/s. 43B. In the assessee's case, the VAT amount included in the purchase price of raw material is to be paid to the government by the seller of the raw materials. There is no obligation whether statutory or otherwise on the part of the purchaser to pay the VAT to the government. The assessing officer was factually incorrect in arriving at the conclusion that the amount disallowed u/s. 43B is sales tax payable. The amount in fact represented purchase price of raw materials. When the assessee company purchased raw materials at Bangalore and Hyderabad Branches, sales tax (VAT) was charged by the sellers. The assessee company debited the VAT component to sales tax payable account for claiming it as Input Credit. Since the assessee company was making stock transfer of finished goods, it could not claim input credit in respect of the VAT paid on purchase of raw materials. This VAT paid on purchase of raw materials was hence transferred from VAT payable account to other expenses. The assessing officer has grossly erred in invoking the provision of section 43B as the liability to pay the purchase price of raw materials is not covered by section 43B. Had the amount not been debited to VAT payable account, the same would have been debited to Raw Materials account. Here, the liability to pay the VAT to the Government is on the seller and only seller is hit it by section 43B of the Act. There is no nexus between the buyer of raw materials and the VAT department as the buyer is paying the purchase price of raw materials including VAT. Moreover, the assessee has actually paid the purchase price of raw materials.” 6.1 In the instant appeal, the VAT amount included in the purchase price is to be paid by the seller to the government. Facts being identical, we follow the above decision and uphold the order of the Ld. CIT(A).

M/s Hazel Mercantile 9 & 6382/Mum/2016