M/S TCG LIFESCIENCES PVT. LTD.,KOLKATA vs. A.O. CIR. 11(1), KOLKATA

This appeal filed by the assessee pertaining to the Assessment Year (in short “AY”) 2019-20 is directed against the order passed u/s 250 of the Income Tax Act, 1961 in short the “Act”) by ld. Commissioner of Income-tax (Appeal), Addl./JCIT(A)- 2, Mumbai [in short Ld. “CIT(A)”] dated 28.11.2023 arising out of A Y: 2019-20, TCG Lifesciences P. Ltd. the intimation framed u/s 143(1) of the Act by Asst. Director of Income Tax, CPC dated 18.03.2021.

The sole grievance of the assessee is that Ld. CIT(A) erred in confirming the addition u/s. 43B of the Act at Rs.1,25,65,813/- made by the AO disallowing IGST payable on import of goods not routed through P&L Account.

Facts in brief are that the assessee a Private Limited Company has an outstanding liability of IGST payable on 31.03.2019 at Rs.1,25,65,813/-. Admittedly, this amount has not been paid before the due date of filing the return of income and in the Tax Audit Report it has been reflected that the alleged sum has not been paid. Based on the observation of the tax auditor, disallowance made in the assessment order framed u/s. 143(1)(a) of the Act and the same was challenged before the Ld. CIT(A). It was contended that IGST has not been routed through P&L Account and, therefore, since no deduction of IGST has been claimed as an expenditure, disallowance u/s. 43B of the Act is uncalled for. Reliance was placed on various decisions. However, Ld. CIT(A) failed to find any merit in this ground and he after referring to section 145 and 145A of the Act stated that the assessee was required to route the IGST through its P&L Account failing which sec. 145A and ICDS-2 on valuation of inventories comes into play and the appellant cannot shift disallowance of IGST payable u/s. 43B of the Act. Relevant finding of the Ld. CIT(A) is reproduced as under: “Now, coming to the issue, where the appellant had not recognized the amount of VAT/GST payable/paid in its Profit & Los s Account and had Page 2 of 10 A Y: 2019-20, TCG Lifesciences P. Ltd. only made entries in the Balance Sheet, are the provisions of section 43B of the Act attracted in the case? 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. Thus, where the appellant collects the amount on account of VAT/GST, but does not deposit the same within the accounting period or before due date of filing the return of income, as required under section 43B of the Act, the liability to pay arises and once that liability has not been discharged, even if the amount has not routed through the Profit & Loss Account, the same is to be disallowed in the hands of appellant, as the provisions of section 145A of the Act (and mandatory ICDS-2) come into play and the consequences thereto follow. [See: Munaf Ibrahim Memon v. ITO -ITA No. 1806/Pun/2013 (PUNE)] Recently, Hon'ble ITAT Varanasi in case of Husna Parveen vs. NFAC [2022] 142 taxmann.com 2 [Varanasi] clearly held that, in view of the provisions of section 145A requiring adjustment by inclusion of GST on sales in sales/turnover, appellant cannot escape disallowance of GST payable u/s 438 by crediting GST to separate liability account and taking it direct to balance sheet (exclusive method) instead of routing it through profit and loss account by crediting GST to sales account (inclusive method of accounting). 6.4 There are contrary judgments in favour of appellant like Delhi High Court in the case of CIT v. Noble and Hewitt (I) P. Ltd., [2008] 166 Taxman 48 (Del.), etc. However the same are relating to assessment years prior to amendment in section 145 w.e.f. 01.04.1997 /S. 145A w.e.f. 01.04.2017/introduction of ICDS. In view of the above the disallowance of VAT u/s 438 of the IT Act 1961 is confirmed.”

Before us, ld. Counsel for the assessee has referred to plethora of decisions in support of the contention that when the sales tax/service tax/GST had not routed through P&L Account and no deduction of tax is claimed then provisions of section 43B of the Act cannot be invoked. He also placed written note stating that even if the IGST is routed through P&L Account, there is no impact on the net profit/loss of the assessee company. The Page 3 of 10 A Y: 2019-20, TCG Lifesciences P. Ltd. details filed by the Ld. Counsel for the assessee and the decision referred therein both favourable and against the assessee are mentioned in the Index of the paper book and the same is extracted below:

We have given our thoughtful consideration to the details filed by the assessee as well as the findings of the Ld. CIT(A). Admittedly, there is a liability of IGST payable at the end and the same has not been paid up to the due date in filing the return of income. The tax audit report is dated 30.11.2019 and also the due date of fling of return is also 30.11.2019 and in the tax audit report at column 26(i)(B)(b) at Sl. No. 29 states that IGST on import of goods at Rs.1,25,65,813/- has not been paid before the date of audit and since the date of audit and filing return of income is same the said liability has not been paid. The thrust of the Ld. Counsel for the assessee is only on the plea that the assessee has not routed the IGST through its P&L Account and since it is not claimed any deduction in the P&L Account, section 43B of the Act cannot be invoked. Now, section 43B(a) refers to the sum payable by the assessee by way of tax, duty, cess or fee by whatever name called, under any law for the time being in force for the same and if such amount not paid before the due date of filing return of income, it needs to be added to the income of the assessee. Section 43B of the Act states notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of - 6. Assessee being a Private Limited Company is required to maintain its accounts on mercantile system and for the income tax purpose has to compute the income as per the provisions of the Income Tax Act. Section 145(1) provides the method of accounting but section 145A provides for the method of accounting in certain cases and the said provision is for the Page 5 of 10 A Y: 2019-20, TCG Lifesciences P. Ltd. purpose of determining of income chargeable under the head profits and gains or business or profession. For better understanding, we would like to go through the provisions of section 145A of the Act, which reads as under: “145A. Method of accounting in certain cases.—For the purpose of determining the income chargeable under the head “Profits and gains of business or profession”,–– (i) the valuation of inventory shall be made at lower of actual cost or net realisable value computed in accordance with the income computation and disclosure standards notified under sub-section (2) of section 145; (ii) the valuation of purchase and sale of goods or services and of inventory shall be adjusted to include the amount of any tax, duty, cess or fee (by whatever name called) actually paid or incurred by the assessee to bring the goods or services to the place of its location and condition as on the date of valuation; (iii) the inventory being securities not listed on a recognised stock exchange, or listed but not quoted on a recognised stock exchange with regularity from time to time, shall be valued at actual cost initially recognised in accordance with the income computation and disclosure standards notified under sub-section (2) of section 145; (iv) the inventory being securities other than those referred to in clause (iii), shall be valued at lower of actual cost or net realisable value in accordance with the income computation and disclosure standards notified under sub-section (2) of section 145: Provided that the inventory being securities held by a scheduled bank or public financial institution shall be valued in accordance with the income computation and disclosure standards notified under sub-section (2) of section 145 after taking into account the extant guidelines issued by the Reserve Bank of India in this regard: Provided further that the comparison of actual cost and net realisable value of securities shall be category wise. Explanation 1.—For the purposes of this section, any tax, duty, cess or fee (by whatever name called) under any law for the time being in force, shall include all such payment notwithstanding any right arising as a consequence to such payment. Explanation 2.—For the purposes of this section,— (a) “public financial institution” shall have the meaning assigned to it in clause (72) of section 2 of the Companies Act, 2013 (18 of 2013); (b) “recognised stock exchange” shall have the meaning assigned to it in clause (ii) of Explanation 1 to clause (5) of section 43; (c) “scheduled bank” shall have the meaning assigned to it in clause (ii) of the Explanation to clause (viia) of sub-section (1) of section 36.”

From going through the above provision we note that clause (ii) provides that the valuation of purchase and sale of goods or services and of inventory shall be adjusted to include the amount of any tax, duty, cess or fee (by whatever name called) actually paid or incurred by the assessee to bring the goods or services to the place of its location and condition as on the date of valuation. For the purpose of accounting this clause provides that in the P&L Account where there is element of opening stock, purchase, sales and closing stock the value of all these items should include the tax, duty, cess or fee levied thereon. In other words, the gross turnover includes the VAT/IGST/any other service tax liability etc. charged and similarly on the debit side i.e. the purchases, taxes paid should be added. So far as the closing stock is concerned, the same also includes the element of tax paid for bringing such goods to the place or location.

Now provisions of section 145A are very clear and unambiguous and leave no room for any doubt or even a second thought. Before us, ld. Counsel for the assessee has referred to plethora of decisions and judgments but we do not find it necessary to deal with the same as it may be merely an academic exercise since the provisions of the Act are very clear and there can be no second opinion. 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

In case, if liberty is given to the assessee then they would never route the taxes through their Trading and P&L Account and would always escape from the addition and rigors of section 43B of the Act and applicability of sec. 43B of the Act to the alleged situation would become redundant. Though the assessee has filed a calculation that even after routing the GST through P&L Account there is no impact but then such calculation itself placed before us becomes questionable as to how can that is a GST liability outstanding at the year end in the Balance Sheet.

We have gone through the details filed by the assessee and do not find them in order because the total of GST component in the opening stock and purchase of raw material is exactly same i.e. Rs.7,53,20,110/- to that of the GST component in consumption of raw material and closing stock. There has been no impact on the P&L Account because assessee has not mentioned the details of GST component in the sales figure and has merely added the opening stock and purchase and whatever goods was consumed has shown the GST on that amount and the remaining amount is only closing stock. So by following this method of depicting the GST component there will never be any impact on P&L Account. Had the assessee mentioned the details

We, therefore, under the given facts and circumstances of the case are of the considered view that it is not on the discretion of the assessee to route the tax, duties or cess through its P&L Account but it is mandatory as per sec. 145 and sec. 145A of the Act which provides has that for the purpose of computing the income under the Income Tax Act, tax duty, cess etc. has to be routed through the P&L Account and the provisions of section 43B of the Act would be invoked if necessary conditions are not fulfilled. We accordingly, fail to find any infirmity in the finding of the Ld. CIT(A) confirming the alleged disallowance made u/s. 43B of the Act. The grounds of appeal