2014 (9) TMI 1131 - AT - Income Tax

Disallowance of claim of deduction u/s.10B in respect of sales tax refund - AO disallowed claim on the plea that the CST refund is not on account of profits and gains derived from EOU export of articles or things - Held that - In the instant case as per contention of Ld. AR it appears that assessee has already debited the amount paid under sales tax as its expenses forming part of cost of goods purchased for export however subsequently part of such sales tax was refunded which go to reduce the cost of purchases. The corresponding increase in profit due to such refund is eligible for claim of deduction u/s.10B. The sales tax refund is not a separate source of income nor it is the due to any Government policy for paying any incentive. Neither it is export incentive nor any payment under scheme of Government. Therefore the source of receipt cannot be attributed to such scheme. It is simply refund of excess sales tax paid which has already formed part of cost of purchases. We accordingly direct the AO to verify as to whether the sales tax refund received by the assessee already formed part of its cost of purchases either during the year under consideration or in earlier years. Accordingly assessee is directed to furnish details of such payment of sales tax and the year in which it has formed part of its cost of purchase in trading/P&L account. If the AO finds that such sales tax have already been debited in the trading/profit and loss account as a cost of purchases assessee should be given benefit of deduction u/s.10B with respect to such amount of sales tax refund. Appeal of the assessee is allowed for statistical purposes.

Summary

Issues:
Disallowance of claim of deduction u/s.10B for sales tax refund.

Analysis:
The appeal was filed by the Revenue against the order of the CIT(A) for the assessment year 2008-09 regarding the disallowance of the claim of deduction u/s.10B in relation to a sales tax refund. The Assessing Officer (AO) disallowed the claim stating that the Central Sales Tax (CST) refund did not pertain to profits derived from Export Oriented Unit (EOU) activities. The assessee contended that the sales tax refund should be considered as part of the cost of goods purchased for export, thus increasing the corresponding profit eligible for deduction u/s.10B. The Tribunal examined the arguments, referring to the decision of the ITAT Special Bench and the Karnataka High Court, and concluded that the sales tax refund was not a separate source of income but a refund of excess sales tax paid, which had already been included in the cost of purchases. Therefore, the Tribunal directed the AO to verify if the sales tax refund was part of the cost of purchases in the relevant years and allowed the appeal for statistical purposes.

In summary, the Tribunal held that the sales tax refund, being a reimbursement of excess sales tax paid, which formed part of the cost of purchases, should be considered for deduction u/s.10B. The decision was based on the principle that such refunds directly impact the profit and loss account by reducing the cost of purchases, leading to an increase in profit eligible for deduction. The Tribunal emphasized that the sales tax refund was not a separate income source or an export incentive but a mere reimbursement of overpaid tax, hence qualifying for deduction u/s.10B.