ITAT Rules GST Refund Is Not Taxable Income; Deletes Rs 2.34 Crore Addition on Recovery-of-Asset Principle

The ITAT Bangalore deleted the Rs 2.34 crore addition, holding it non-taxable since GST was not debited to the profit and loss account. It ruled a refund is a recovery of an asset, not income.

The Central Processing Centre (CPC) had proposed an addition amounting to Rs 2.34 crore to LKQ India Private Limited‘s income through a communication dated May 18, 2022, based on the amount reported in clause 16(B) of Form 3CD. The assessee argued that it follows the exclusive accounting method under which “GST paid on purchases or expenses is not debited to the profit and loss account but is recorded separately as GST refund receivable as a loan and advance.”

Consequently, the GST refund of Rs 2.34 crore was neither credited to the profit-and-loss account nor required to be offered to tax. However, the CPC did not consider the assessee’s explanation and confirmed the proposed addition of Rs 2.34 crore, vide an intimation dated October 25, 2022.

The assessee, aggrieved with the aforementioned addition, filed an appeal before the Commissioner of Income Tax (Appeals) [CIT(A)] challenging the same. The CIT(A) held that “the refund of GST, sales tax and service tax was a revenue receipt arising in the ordinary course of business. He further held that the assessee had received a tangible benefit by way of remission of a trading liability, taxable under section 41(1) or section 28(iv) of the Act.” Hence, the impugned addition was confirmed, and the assessee’s appeal was dismissed.

Thereafter, the assessee approached the Income Tax Appellate Tribunal (ITAT) Bangalore. When the tribunal analysed the case, it agreed with the assessee’s view and noted that since the GST component was not debited to the profit and loss account, its refund merely represents a recovery of an asset already recorded in the books. The Tribunal held that such a refund does not constitute taxable income unless the tax amount was earlier claimed as an expense. Accordingly, the impugned addition made by the CPC and confirmed by the CIT(A) was deleted, and the assessee’s appeal was partly allowed.