MARCH 13, 2024

By Vijay Kumar

HOW to include GST while computing Income Tax?

Let's see a real case.

The assessee filed his return of income on 12.3.2022 declaring total income at Rs. 10,31,45,840/- under the normal provisions of the Income Tax Act. Return of the assessee was processed vide intimation dated 13.11.2022 in which an amount of Rs. 8,07,66,818/- towards Goods and Services Tax (GST) collected from customers was added back. For this proposed adjustment, assessee was informed vide notice dated 18.5.2022. The same was replied to by the assessee vide letter dated 19.5.2022. As the response of the assessee was not considered while passing the original intimation dated 13.11.2022, assessee filed an application u/s. 154 of the Act dated 30.11.2022 (order against the same is still awaited). Section 154 is for Rectification of Mistake. Assessee being aggrieved with this intimation, processed u/s. 143 (1) (A) and preferred an appeal before the Commissioner of Income Tax (Appeals), who in turn confirmed the action of the lower authority, CPC, Bengaluru. Assessee being further aggrieved preferred an appeal before the Income Tax Appellate Tribunal. [ITA No. 3235/MUM/2023 (A.Y. 2021-22) in ITAT MUMBAI BENCH "C"] - 2024-TIOL-383-ITAT-MUM

As per Section - 145A, Income Tax Act, 1961,

145A. For the purpose of determining the income chargeable under the head "Profits and gains of business or profession", -

(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.

As per Section - 145, Income-tax Act, 1961,

(2) The Central Government may notify in the Official Gazette from time to time income computation and disclosure standards to be followed by any class of assessees or in respect of any class of income.

Notification No. SO 3079(E), dated 29-9-2016 for Income Computation and Disclosure Standards and Circular No. 10/2017, dated 23-3-2017, [Clarifications on Income Computation and Disclosure Standards (ICDS) were issued. Relevant extract:

Question 25: ICDS-I requires disclosure of significant accounting policies and other ICDS requires specific disclosures. Where is the taxpayer required to make such disclosures specified in ICDS?

Answer: Net effect on the income due to application of ICDS is to be disclosed in the Return of income. The disclosures required under ICDS shall be made in the tax audit report in Form 3CD. However, there shall not be any separate disclosure requirements for persons who are not liable to tax audit.

The ITAT observed,

5. Now, considering the provision of section 145A of the Act and Notification No. SO 3079(E), dated 29-9-2016 for Income Computation and Disclosure Standards and Circular No. 10/2017, dated 23-3-2017 [Clarifications on Income Computation and Disclosure Standards (ICDS) issued under section 145 of the Act, it is established position 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 and by virtue of ICDS-I (As enumerated above, FAQ-25), Tax Auditor is simply required to report the factual position.

6. We note that the assessee has been recording its transactions of purchase, sales, and valuation of inventories, net of Goods and Service Tax (GST) consistently. Thus, if the sales are enhanced by the amount of GST attributable to it, then the amount of corresponding purchases should also be increased by the said amount which will result in tax neutral exercise. Thus, in our considered view, the CPC, Bengaluru erred in enhancing the value of the closing stock without giving effect to the purchases. Considering GST in sales will work as contra entry and has to be considered in opening stock, purchase and closing stock also, which ultimately result in tax neutral exercise.

7. It is observed that when the opening and closing stock of business are both undervalued (exclusive of any tax, duty, cess, or fee) and consequently same treatment is being given to sales and purchase also, it is perfectly plain that profits which is brought forward and transactions of current year also are tax neutral until unless proved by the revenue. As per the facts of this case, enhancing the value of sales without giving corresponding effect to the valuation of opening stock/closing stock and purchase is not proper. In view of the above, we are of the firm view that adjustment made by the CPC, Bengaluru is unwarranted and in violation of section 145A of the Act, hence the same is not sustainable. In the result ground raised by the assessee is allowed.

8. In the result, appeal of the assessee is allowed.

The Tribunal stated,

Thus, if the sales are enhanced by the amount of GST attributable to it, then the amount of corresponding purchases should also be increased by the said amount which will result in tax neutral exercise.

Perhaps it is assumed that GST paid on purchases and GST paid on sales are equal, which is not exactly correct. Normally the GST on sales will be higher than the GST on purchases; so, increasing the GST on purchases will not make it a tax neutral exercise. Well, that is not the issue here.

Should GST collected on sales be included in the income?

The GST collected has to be credited to the government and it is certainly not income for the assessee. If GST is collected and not paid to the Government, it could be income, but the GST Department will use all its powers to collect that unpaid tax. What has Income Tax to do with it?

But all these issues were long ago settled in the excise and service tax regime. Do we have to invent the wheel again in the GST era? Is the confusion in GST spreading to Income Tax?

In Laksmi Machine Works - 2007-TIOL-72-SC-IT, the Supreme Could held,

It is important to bear in mind that excise duty and sales tax are indirect taxes. They are recovered by the assessee on behalf of the Government. excise duty and sales tax also cannot form part of the "turnover".

Will it not apply to GST?

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SBI deja vu

The recent story of SBI not able to submit details of electoral bonds brought to memory an incident that happened to me nine years ago. I wrote in TIOL-DDT 2600 - 19 05 2015 - Tuesday.

Education Cess - the RTI Trail

ON 7th March, I asked the Revenue Secretary

Sir,

I would like to have the following information under the Right to Information Act.

1. Amount of Education Cess collected under Direct Taxes from 2004-05 to 2014-15, each year separately.

2. Amount of Education Cess collected under Indirect Taxes from 2004-05 to 2014-15, each year separately.

3. Amount of Secondary and Higher Education Cess collected under Direct Taxes from 2006-07 to 2014-15.

4. Amount of Secondary and Higher Education Cess collected under Indirect Taxes from 2006-07 to 2014-15.

5. Details of how the amounts collected were spent/distributed/allocated year wise.

As you are the Revenue Secretary, I assume that the information must be readily available with you.

On 16th March, I was informed that my request has been transferred to CBDT and CBEC.

On 17.03.2015, an Under Secretary in CBEC informed me that they do not have the information and my request has been transferred to the Director of Data Management (DDM).

On 31st March, DDM informed me the education cess on Customs and Central Excise collected from 2006-07. They informed me that separate figures are not maintained for Service Tax.

On 13.04.2015, the CBEC Under Secretary again informed me that information in points 2 & 4 is not held by him and the Director of Data Management might have it.

On 15.04.2015, he again informed that with respect to point No. 8, Central Excise, Customs and Service Tax are the three taxes administered by CBEC and they don't have information on other taxes and he doesn't have information on Points 10 & 12. [Please note that my query did not have points 8, 10 and 12]

On 07.05.2015, the Deputy Director of Income Tax (Systems) informed that the data required as per point 1 & 3 is not available in the format asked for i.e year wise and collation of the same would require to disproportionately divert the resources of the Public Authority concerned.

I didn't want to further waste the nation's money in these babus working overtime to ensure that information is not provided. So, I didn't appeal.

They don't know how much they collected and they don't know where the money went…

Until next week