2025 (6) TMI 1927 - AT - Income Tax

Tax rate applicable to the assessee @ 25% or 30% - Turnover determination - Computation sheet prepared by CPC ITD portal - turnover declared by the assessee whether it should be inclusive of excise duty are not so as to find the rate of tax in pursuance to the First Schedule of Finance Act 2018 - HELD THAT - The controversy is fully settled that the meaning of turnover as provided u/s. 145A of the Act cannot be adopted while determining the rate of tax in pursuance to Finance Act 2018 based on turnover. Respectfully following the case of Kluber Lubrication India (P.) Ltd. 2024 (7) TMI 1374 - ITAT BANGALORE the order passed by the CIT(A) is hereby set-aside and direct the Assessing Officer to compute the rate of tax at 25% and pass appropriate orders in accordance with law.

Summary

The core legal questions considered by the Tribunal are:

1. Whether the turnover of the assessee for the relevant financial year should include excise duty and other taxes for the purpose of determining the applicable tax rate under the Income Tax Act, 1961, specifically pursuant to the First Schedule of the Finance (No. 2) Act, 2019.

2. Whether the tax rate applicable to the assessee for Assessment Year 2018-19 should be 25% or 30%, based on the turnover threshold prescribed under the Finance Act, 2018.

3. The correctness and effect of rectification orders passed under section 154 of the Income Tax Act concerning the applicable tax rate and turnover computation.

4. The applicability and interpretation of section 145A of the Income Tax Act regarding inclusion of excise duty in turnover and its relevance to the determination of tax rate.

5. The legal effect of judicial precedents, including the Supreme Court decision in McDowell & Co. Ltd. and other relevant tribunal and Supreme Court rulings, on the inclusion of excise duty in turnover for tax rate determination.

Issue-wise Detailed Analysis

Issue 1 & 4: Inclusion of Excise Duty in Turnover for Tax Rate Determination and Interpretation of Section 145A

The legal framework involves section 145A of the Income Tax Act, which mandates that for computing income under the head "Profits and gains of business or profession," valuation of purchase, sale, and inventory shall include any tax, duty, cess, or fee actually paid or incurred by the assessee. The provision was introduced by the Finance (No. 2) Act, 1998, primarily to address valuation of opening and closing inventory and to avoid litigation related to MODVAT credit.

The Tribunal examined the CBDT Circular No. 772 of 1998, which clarified that section 145A was intended to ensure correct valuation of inventory and was not meant to alter the definition of turnover for other purposes such as tax rate determination.

The Tribunal also considered the guidance note issued by the Institute of Chartered Accountants of India (ICAI) on tax audit under section 44AB, which states that if an assessee follows an exclusive method of accounting (i.e., taxes collected on behalf of the government are shown separately), such taxes should be excluded from turnover. The assessee in this case followed the exclusive method, which was undisputed by the Revenue.

The Tribunal further noted the Supreme Court decision in McDowell & Co. Ltd., which held that excise duty is part of the consideration paid by the buyer and is includible in turnover. However, the Tribunal distinguished this decision as it related to the Sales Tax Act and not the Income Tax Act. The Tribunal also referred to the Supreme Court ruling in CIT v. Lakshmi Machine Works, which directed exclusion of excise duty from turnover for certain purposes.

Based on these considerations, the Tribunal concluded that the purpose of section 145A is limited to valuation for income computation and cannot be extended to determine the tax rate under the Finance Act, 2018, which is based on turnover thresholds.

Issue 2 & 3: Applicable Tax Rate and Validity of Rectification Orders

The Finance (No. 2) Act, 2019, stipulates that a domestic company with turnover not exceeding Rs. 250 crores in the previous year (2016-17) shall be taxed at 25%, while others are taxed at 30%. The dispute centered on whether the assessee's turnover exceeded this threshold when excise duty was included.

The Assessing Officer initially computed tax at 30% based on turnover including excise duty. However, rectification orders under section 154 were passed accepting the turnover excluding excise duty, thereby applying the 25% tax rate. The Commissioner of Income Tax (Appeals) reversed this, holding that excise duty must be included as per section 145A and McDowell's case, thus applying 30% tax rate.

The Tribunal reviewed the rectification orders and the appellate order, finding that the rectification orders relied on the assessment order for AY 2016-17 without detailed verification and were therefore erroneous. The Tribunal observed that the appellate authority's reliance on McDowell was misplaced for the reasons stated above.

The Tribunal also took note of a coordinate bench decision in Kluber Lubrication India (P.) Ltd., which held that turnover for tax rate determination should exclude excise duty and that section 145A's definition of turnover is not applicable for this purpose.

The Tribunal found that the assessee's turnover excluding excise duty was below the Rs. 250 crore threshold, entitling it to the 25% tax rate. The rectification orders correctly applied this rate, and the appellate order was set aside accordingly.

Issue 5: Treatment of Competing Arguments and Application of Article 14

The Revenue argued for inclusion of excise duty in turnover based on section 145A and McDowell. The assessee contended that excise duty is collected as an agent and does not constitute income or true turnover, and that inclusion would violate the principle of equality under Article 14 of the Constitution by arbitrarily placing similarly situated companies in different tax brackets due to varying excise duty rates.

The Tribunal acknowledged the assessee's argument regarding Article 14, noting that companies with identical sales but different excise duty rates could be unfairly taxed differently if excise duty were included in turnover. This would be inconsistent with the constitutional mandate of equality.

In balancing these arguments, the Tribunal favored the interpretation consistent with the legislative intent and constitutional principles, holding that excise duty should be excluded for determining tax rate thresholds.

Significant Holdings

"The issue whether to include or exclude the excise from the amount of turnover for determining the rate of tax in pursuance to First schedule of Finance (No. 2) Act 2019 is a debatable issue which cannot be resolved in the intimation processed under section 143(1) of the Act."

"The meaning of the turnover as provided under section 145A of the Act cannot be adopted while determining the rate of tax in pursuance to First schedule of Finance (No. 2) Act 2019 based on turnover."

"The ICAI does not mandate to include the amount of excise duty in the value of sales which has already been observed in this preceding paragraph."

"The assessee is collecting the excise duty from the customers in the capacity of an agent only and does not give any rise to the income to the assessee."

"There can be a situation where both the companies having exact amount of sales but because of different rate of excise duty their turnover can be of different amount and consequentially both the companies may fall under different tax bracket i.e. 25% or 30% as the case may be which does not appear to be in consonance with the intent of Article 14 of Constitution of India."

"The rectification orders passed under section 154 without detailed verification and relying on earlier assessment order are erroneous and cease to have effect."

"The turnover of the assessee excluding excise duty is below the threshold limit; therefore, the tax rate of 25% is applicable for AY 2018-19."

In conclusion, the Tribunal set aside the appellate order and directed the Assessing Officer to compute tax at 25%, consistent with the turnover excluding excise duty, and pass consequential orders in accordance with law.