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2022 (12) TMI 1498 - AT - Income TaxRevision u/s 263 - sustainability of the disallowance of the assessee s claim for deduction of VAT on sale of liquor - CIT holding a conviction that the VAT claimed by the assessee which was liable for disallowance u/s.40(a)(iib) was summarily allowed by the A.O thus vide his order passed u/s.263 had set-aside the order passed by the A.O u/s.143(3) - HELD THAT - We find substance in the claim of the Ld. AR that the issue involved in the present appeal is squarely covered by the judgment of Kerala State Beverages Manufacturing Marketing Corporation Ltd. 2022 (1) TMI 184 - SUPREME COURT . As stated by the Ld. AR and rightly so the Hon ble Apex Court had approved the view taken by the Hon ble High Court of Kerala that 2020 (5) TMI 176 - KERALA HIGH COURT as surcharge on sales tax is a tax and Section 40(a)(iib) does not contemplate tax and surcharge on sales tax is not a fee or a charge therefore no disallowance under the said statutory provision was called for in the hands of the assessee. Considering the aforesaid judgment of the Hon ble Apex Court surpa we are of the considered view that the same in fact supports the claim of the assessee that the provisions of Section 40(a)(iib) would not be applicable to the case of the assessee qua the VAT paid by the assessee company. We thus in terms of our aforesaid observations set18 aside the order passed by the Pr. CIT u/s.263 of the Act dated 28.03.2021 and restore the order of the A.O passed u/s.143(3) to the extent he had allowed the assessee s claim for deduction of VAT . Assessee appeal allowed.
Issues Involved:
1. Validity of initiation of revision proceedings under Section 263 of the Income-tax Act, 1961. 2. Legality of disallowance of VAT expenses under Section 40(a)(iib) of the Income-tax Act, 1961. 3. Jurisdictional validity of the Principal Commissioner of Income Tax (Pr. CIT) in directing disallowance of VAT expenses. 4. Impact of the Hon'ble Supreme Court judgment on the case. Detailed Analysis: 1. Validity of Initiation of Revision Proceedings under Section 263: The assessee contended that the Principal Commissioner of Income Tax (Pr. CIT) erred in initiating revision proceedings under Section 263 of the Income-tax Act, 1961. The assessee argued that the assessment order passed by the Assessing Officer (A.O.) was neither erroneous nor prejudicial to the interests of the Revenue, thereby not satisfying the twin conditions required for invoking Section 263. The Pr. CIT initiated the proceedings without sufficient material to justify the finding that the assessment order was erroneous. The Tribunal found that the A.O. had summarily accepted the assessee's claim for deduction of VAT without proper inquiry, thus justifying the Pr. CIT's action under Section 263. 2. Legality of Disallowance of VAT Expenses under Section 40(a)(iib): The core issue was whether VAT expenses amounting to Rs. 53,65,46,087/- debited by the assessee could be disallowed under Section 40(a)(iib) of the Act. The Pr. CIT held that VAT was levied exclusively on the assessee company, a State Government undertaking, and was not incorporated in the selling rate, thus falling within the realm of disallowance under Section 40(a)(iib). However, the Tribunal found that VAT is a "tax" and not a "fee" or "charge," and thus, following the Supreme Court's judgment in Kerala State Beverages Manufacturing & Marketing Corporation Ltd. Vs. ACIT, VAT could not be disallowed under Section 40(a)(iib). 3. Jurisdictional Validity of the Pr. CIT in Directing Disallowance of VAT Expenses: The assessee argued that the case was selected for "limited scrutiny" and the A.O. did not have the jurisdiction to verify the VAT expenses. The Tribunal noted that the A.O. did not convert the limited scrutiny into full scrutiny, and thus, the Pr. CIT could not hold the order as erroneous for not disallowing the VAT expenses. The Tribunal found that the Pr. CIT's reliance on the judgment of the Kerala High Court was misplaced as the Supreme Court had distinguished between "tax" and "fee" or "charge," and VAT being a tax, could not be disallowed under Section 40(a)(iib). 4. Impact of the Hon'ble Supreme Court Judgment: The Tribunal heavily relied on the Supreme Court's judgment in Kerala State Beverages Manufacturing & Marketing Corporation Ltd. Vs. ACIT, which held that surcharge on sales tax is a tax and not a fee or charge, and thus, not disallowable under Section 40(a)(iib). The Tribunal concluded that VAT, being a tax, could not be disallowed under Section 40(a)(iib), and thus, the Pr. CIT's order directing the A.O. to disallow the VAT expenses was set aside. Conclusion: The Tribunal allowed the appeals of the assessee, setting aside the Pr. CIT's order under Section 263 and restoring the A.O.'s order allowing the VAT expenses. The Tribunal refrained from addressing other contentions regarding the validity of the Pr. CIT's jurisdiction, leaving them open. The judgment was pronounced under rule 34(4) of the Appellate Tribunal Rules, 1963, by placing the details on the notice board.
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