Section 43B Disallowance Invalid if Tax Was Never Claimed as an Expense.

Issue

Can a disallowance be made under Section 43B for unpaid statutory dues (like VAT/GST) if the assessee never claimed these dues as a deduction in its Profit and Loss account in the first place?

Facts

For the Assessment Year 2018-19, the Assessing Officer (AO) made a disallowance under Section 43B.
The reason for the disallowance was that the assessee had not remitted certain VAT/GST amounts before the due date for filing the income tax return.
The assessee argued that it had never debited these tax amounts to its Profit and Loss account. Since no deduction was ever claimed for these taxes, there was nothing to disallow.
The case relied on a High Court precedent which held that Section 43B does not apply when the statutory liability is not claimed as an expenditure.

Decision

The court ruled in favour of the assessee and deleted the disallowance.
It held that the purpose of Section 43B is to restrict the allowance of certain deductions that are claimed as an expense but not actually paid.
If an assessee accounts for GST/VAT by directly crediting the collected tax to a liability account (without routing it through the Profit and Loss account), it never claims it as an expense.
Since no deduction was ever claimed, the question of disallowing that deduction under Section 43B does not arise, regardless of when the tax was ultimately paid.

Key Takeaways

No Claim, No Disallowance: Section 43B can only be invoked to disallow a deduction that has been claimed by the assessee. It cannot be used to create a new source of income.
Accounting Treatment is Crucial: The manner in which a company accounts for indirect taxes is critical. If GST/VAT collected is treated purely as a balance sheet liability and not as part of the revenue/expense calculation, Section 43B has no application.
Purpose of Section 43B: The section is designed to ensure that businesses do not claim deductions for statutory liabilities on an accrual basis and then indefinitely delay the actual payment to the government. It does not penalize taxpayers who have not claimed the deduction at all.

IN THE ITAT DELHI BENCH ‘G’

Dalip Singh Rathore

Income-tax Officer

Challa Nagendra Prasad, Judicial Member
and M. BALAGANESH, Accountant Member

IT Appeal No.1717 (Delhi) of 2025
[Assessment year 2018-19]

SEPTEMBER 30, 2025

Kapil Goel, Adv. for the Appellant. Manish Gupta, Sr. DR for the Respondent.

ORDER

C.N. Prasad, Judicial Member.- This appeal is filed by the Assessee against the order of the Ld. Addl./JCIT(Appeals)-2, Vishakhapatnam dated 27.01.2025 for the AY 2018-19. Assessee in his appeal raised the following grounds:

“That Ld. CIT(A) vide impugned order passed u/s 250 dated 27.01.2025 erred in not quashing the impugned INTIMATION passed/processed u/s 143(1) of 1961 Act dated 13.12.2019, which is totally invalid and unlawful/illegal on face of it.

That Ld.CIT(A) vide impugned order passed u/s 250 dated 27.01.2025 erred in not quashing the impugned INTIMATION passed/processed u/s 143(1) of 1961 Act dated 13.12.2019, on jurisdictional ground of (a) being contrary to mandate of 1961 Act and (b) being totally is in violation of principle of natural justice (illustratively it is passed without issue of any valid/requisite prior show cause notice/SCN) and (c) subject matter is not falling in statutory purview of sec. 143(1) and in worst case only available option was to issue notice u/s 143(2) of 1961 Act.

That Ld. CIT(A) vide impugned order passed u/s 250 dated 27.01.2025 erred in not deleting the impugned adjustment made in impugned INTIMATION passed/processed u/s 143(1) of 1961 Act dated 13.12.2019 amounting to Rs.45,69,143/- u/s 43B which is ex facie contrary to mandate of 1961 Act and is sustained on totally different reasoning never part of intimation u/s 143(1) of 1961 Act.

That Ld.CIT(A) vide impugned order passed u/s 250 dated 27.01.2025 erred in not deleting the impugned adjustment made in impugned INTIMATION passed/processed u/s 143(1) of1961 Act dated 13.12.2019 amounting to Rs.2,78,395/- made without any sort of application of mind.”

2. Ld. Counsel for the assessee, at the outset, submitted that the CPC while processing the return made disallowance u/s 43B in respect of GST and Service Tax amounting to Rs.45,69,143/- on the ground that the same is not paid before due date of filing the return. Ld. Counsel submitted that the said amount representing GST and Service Tax were neither rooted through profit and loss account nor did the liability from service tax belong to the assessment year under consideration. Ld. Counsel further placing reliance on the decision of the Hon’ble Chattisgarh High Court in the case of Grand Motors v. ITO (Chhattisgarh)/Tax(c) No.207/2024 dated 25.11.2024 submitted that on identical facts where the CPC disallowed VAT, Entry Tax, CST while processing the return u/s 143(1), for not remitting into Government account before due date of filing of return of income made disallowance invoking the provisions of section 43B, the Hon’ble High Court referring to the decision of the Hon’ble Delhi High Court in the case of CIT v. Noble & Hewitt (I) (P.) Ltd.48 (Delhi) held that since assessee did not claim the amount in his profit and loss account as his expenditure/deduction u/s 43B, the disallowance made by CPC while processing return u/s 143(1) was deleted.

3. Ld. DR strongly supported the orders of the authorities below.

4. Heard rival submissions, perused the orders of the authorities below. The CPC while processing the return disallowed VAT & GST as these amounts were not remitted before due date for filing of return of income. The action of the CPC was confirmed by the Ld. CIT(A). The issue of whether the VAT, Entry Tax, CST etc. which were neither debited to profit and loss account nor claimed as deduction by the assessee and not paid before the due date for filing of return, whether such amounts can be considered for disallowance by the CPC while processing the return u/s 143(1), came up for consideration before the Hon’ble Chattisgarh High Court and the Hon’ble Chattisgarh High Court referring to its decision in the case of ACIT v. M/s Ganpati Motors and also the decision of the Hon’ble Delhi High Court in the case of Nobel & Havet (I) (P.) Ltd. (supra) held that no such disallowance is warranted observing as under:

2. The appeal was heard on the question of admission and was admitted for final hearing by formulating the following substantial question of law: –

“Whether the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal are concurrently justified in upholding the disallowance of Rs.62,32,262/- made under sub-clause (iv) of clause (a) of sub-section (1) of Section 143 of the Income Tax Act, 1961 by wrongly invoking the provisions contained in Section 43B of the IT Act and thereby recorded a finding perverse to the record?”

3. The aforesaid substantial question of law arises on the following factual backdrop: –

4. The appellant assessee is a partnership firm engaged in trading of motor cars, etc. and filed return of income for the assessment year 2018-19 on 31-3-2019 declaring total income of Rs.9,42,610/-. The Assessing Officer, Centralised Processing Centre (CPC) processed the return of the assessee and issued intimation under Section 143(1) of the IT Act making certain disallowances and enhancing total taxable income of the assessee at Rs.2,61,28,820/-. The specific disallowances are made under Section 43B of the IT Act on account of nonpayment of liabilities such as VAT, Entry Tax, CST before the prescribed date of filing the return of income under Section 139(1) of the IT Act.

5. Feeling aggrieved against the order of the Assessing Officer, the appellant assessee preferred appeal before the first appellate authority i.e. the Commissioner of Income Tax (Appeals) under Section 246A(l)(a) of the IT Act and the CIT(A), by its order dated 15-3-2024, partly allowed the appeal of the appellant assessee to the extent of Rs.1,79,97,376/- pertaining to opening balance for the assessment year 2018-19 deleting the same, but the balance disallowance of Rs.62,32,262/- shown as payable in the balance sheet was confirmed against which the appellant assessee preferred further appeal before the ITAT which was also, in turn, dismissed finding no substance against which this appeal has been preferred.

6. Mr. S. Rajeswara Rao, learned counsel appearing for the appellant / assessee, would submit that the appellant did not claim any deduction of indirect taxes including VAT / other taxes in computing the income for the previous year and the appellant is following the exclusive method of accounting for indirect taxes as in the past. He would further submit that Section 43B of the IT Act mandates that a deduction otherwise allowable under the Act shall be allowed only in computing the income referred in Section 28 of that previous year in which such sum is actually paid by the assessee and since the appellant did not claim any deduction of indirect taxes in computing the income for the previous year i.e. the profit and loss account as expenditure, therefore, the CIT(A) and the ITAT, both, have concurrently erred in dismissing the appeal of the appellant assessee. He would rely upon the decision of this Court in the matter of Assistant Commissioner of Income Tax-I v. M/s Ganapati Motors1 to buttress his submission.

7. Mr. Amit Chaudhari, learned Standing Counsel for the Income Tax Department / Revenue, would submit that the appellant did not claim the said amount of Rs.62,32,262/- in his profit and loss account as expenditure and the case is covered by the decision rendered by this Court in M/s Ganapati Motors’s case (supra).

8. We have heard learned counsel for the parties and considered their rival submissions made herein-above and also went through the record with utmost circumspection.

9. In order to consider the plea raised at the Bar, it would be appropriate to notice Section 43B(a) of the IT Act, which states as under: –

“43B. Certain deductions to b e only on actual payment.

—Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of—

(a) any 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, or

xxx xxx xxx”

10. In this regard, decision of this Court in M/s Ganapati Motors’s case (supra) would be more relevant in which the issue before the Court was, whether Section 43B of the IT Act is attracted even when the assessee does not claim any deduction on the strength of that provision and considering the said question, this Court held in paragraph 3 as under: –

“3. The Assessing Authority, on the instant issue, noticed that the assessee’s claim regarding the treatment of VAT in the Books of Accounts has been verified from the Books and that has been found to be in order. The Assessing Authority also found that VAT has been found separately accounted for in the Books of Accounts. The only ground on which the Assessing Authority refused to exclude the VAT collected by the dealer from the profit of business is on the basis that the VAT component was not paid off on or before the due date for furnishing the return in relation to the previous year under Section 139(1) of the Income Tax Act. The First Appellate Authority also noticed that it is an undisputed fact that-the Appellant did not charge VAT to the Profit and Loss account. It was therefore noted by the First Appellate Authority that in such circumstances, the liability may still be unpaid, but it cannot be disallowed being not claimed as deduction in the Books of Accounts.”

11. Similarly, the Delhi High Court in the matter of Commissioner of Income-tax v. Noble & Hewitt (I) (P.) Ltd. held in paragraph 6 as under: –

“6. In our opinion since the assessee did not debit the amount to the Profit & Loss Account as an expenditure nor did the assessee claim any deduction in respect of the amount and considering that the assessee is following the mercantile system of accounting, the question of disallowing the deduction not claimed would not arise.”

12. Reverting to the facts of the case, it is admitted position on record that the appellant / assessee did not claim the amount of Rs.62,32,262/- in his profit and loss account as an expenditure / deduction, nor the appellant claim deduction in respect of that account under Section 43B of the IT Act. In that view of the matter, the Assessing Officer, the CIT(A) and the ITAT, all three authorities have concurrently erred in holding that the appellant has claimed deduction / expenditure under Section 43B of the IT Act adding to its taxable income. Accordingly, the impugned order passed by the ITAT holding that the appellant is liable to pay tax on Rs.62,32,262/-, is liable to be and is hereby set aside. The substantial question of law is answered in favour of the assessee and against the Revenue.

5. This decision squarely applies to the facts of the assessee’s case. Thus, respectfully following the said decision, we set aside the order of the Ld. CIT(Appeals) and direct the AO/CPC to delete the disallowance of Rs.45,69,143/- made u/s 43B in respect of VAT and GST and re-compute the income accordingly. Ground No. (C) of grounds of appeal is allowed.

6. The assessee made no other arguments except the above and accordingly ground nos. (B) and (D) of grounds of appeal are not adjudicated.

7. In the result, appeal of the Assessee is partly allowed as indicated above.