Exclusive Accounting Method | GST Refunds Excluded from Taxable Income Under Consistent Practice : ITAT Bangalore

The Income Tax Appellate Tribunal, Bangalore, has clarified a critical principle in indirect tax accounting: refunds of GST, sales tax, and service tax are not taxable income if the assessee consistently follows the exclusion method of accounting, wherein such taxes are never routed through the profit and loss account. This decision resolves long-standing ambiguity for businesses that treat statutory taxes as balance sheet liabilities rather than revenue items.

Background & Facts

The Dispute

The dispute centered on whether refunds of Goods and Services Tax (GST), sales tax, and service tax received by Dell International Services India Pvt. Ltd. constituted taxable income under the Income Tax Act, 1961. The assessee, a company engaged in manufacturing and trading computer systems and providing maintenance services, followed an exclusive accounting method where GST collected from customers and GST paid on inputs were recorded as separate liability and asset accounts, respectively, and never debited or credited to the profit and loss account.

Key Facts

• The assessee filed its return of income for AY 2023-24 on 28.11.2023, declaring total income of Rs. 2,006,57,49,679/- and claiming a refund of Rs. 342,93,210/- with interest under Section 244A.
• The Centralized Processing Centre (CPC) issued a notice under Section 143(1)(a) dated 05.12.2023 proposing three major additions:
  • Rs. 345,28,51,548/- for GST, sales tax, and service tax refunds not credited to profit & loss account
  • Rs. 14,37,29,950/- for margin on finished goods converted to capital assets
  • Rs. 31,13,91,117/- for bad debts recovered
• The CPC’s final intimation under Section 143(1) increased the total income to Rs. 2,315,88,80,990/-, raised a demand of Rs. 223,40,75,392/-, and levied interest under Sections 234B and 234C.
• The assessee’s audited financial statements for AY 2023-24 disclosed in Notes 9 and 14 that GST was accounted for on an exclusive basis: sales were recorded net of GST, purchases were valued exclusive of input tax credits, and GST amounts were shown as current liabilities or assets on the balance sheet.
• The tax audit report (Form 3CD) under Section 44AB, prepared by the statutory auditor, confirmed in Clause 16(a) that the margin of Rs. 14,37,29,950/- on conversion of stock to capital assets was not credited to the profit & loss account.
• For AY 2024-25, a similar addition of Rs. 274,31,61,059/- was made on account of GST refunds.

Procedural History

• 28.11.2023: Assessee filed return for AY 2023-24
• 05.12.2023: CPC issued notice under Section 143(1)(a)
• Undated (late 2023): CPC passed intimation under Section 143(1)
• 11.11.2025: CIT(A)-2, Mumbai passed order upholding additions on GST refunds and margin on capital assets, but allowing relief on bad debts recovered and TDS credit
• 22.12.2025: Assessee filed appeal before ITAT Bangalore (ITA No. 2889/Bang/2025 for AY 2023-24)
• 22.12.2025: Assessee filed appeal before ITAT Bangalore (ITA No. 2890/Bang/2025 for AY 2024-25)
• 05.02.2026: Hearing held before ITAT Bangalore
• 20.04.2026: ITAT pronounced order disposing of both appeals

The Parties' Positions

For the Appellant (Assessee)

• Argued that it consistently followed the "exclusive method" of accounting for GST, wherein tax components are excluded from profit & loss accounts and treated as balance sheet items.
• Contended that since GST was never claimed as an expense, its refund could not be treated as income under Section 41(1) or Section 28(i).
• Submitted that the tax auditor had confirmed in Form 3CD that the accounting method complied with ICAI Guidance Note and had no impact on taxable profit.
• Asserted that adding the margin on stock converted to capital assets again would result in double taxation, as the amount had already been voluntarily offered to tax under Schedule BP.

For the Respondent (Revenue)

• Relied on Section 145A of the Act, arguing that valuation of inventory must include taxes paid, and therefore refunds must be included in income.
• Contended that any remission of liability (GST paid) constitutes a benefit under Section 41(1).
• Argued that disclosure in tax audit report under Clause 16(a) justified the CPC’s adjustment under Section 143(1)(a)(vi).

Relief Sought

The assessee sought:

• Disallowance of the addition of Rs. 345,28,51,548/- for AY 2023-24 and Rs. 274,31,61,059/- for AY 2024-25 on GST refunds
• Removal of the addition of Rs. 14,37,29,950/- on margin of stock converted to capital assets
• Recomputation of interest under Sections 234B and 234C

The Legal Issue

Is the refund of GST, sales tax, and service tax taxable under Section 41(1) or Section 28(i) of the Income Tax Act, 1961, when the assessee consistently follows the exclusive method of accounting, wherein such taxes are neither debited to the profit & loss account nor claimed as deductions?

Arguments Presented

For the Appellant/Petitioner

The assessee relied on its consistent accounting policy, supported by ICAI Guidance Note on Tax Audit, to argue that GST is a pass-through liability. Since the tax component was never included in the computation of business income, its refund could not constitute income. The counsel cited CIT v. M/s. Sree Sankara Cements Ltd. and CIT v. M/s. Sree Ramakrishna Spinning & Weaving Mills Ltd. to establish that accounting method, if consistently followed, governs tax treatment unless expressly overridden by statute. The assessee emphasized that Section 145A pertains to valuation of inventory, not to the recognition of refunds as income.

For the Respondent/State

The Revenue contended that Section 145A mandates inclusion of taxes in inventory valuation, implying that any subsequent refund must be treated as income. It argued that Section 41(1) applies to any remission or cessation of liability, regardless of accounting treatment. The Revenue also relied on the disclosure in Clause 16(a) of Form 3CD to justify the CPC’s adjustment under Section 143(1)(a)(vi), asserting that inconsistency between audit report and return triggers automatic adjustment.

The Court's Analysis

The Tribunal undertook a detailed examination of the assessee’s accounting policy, the tax audit report, and the statutory framework under Sections 143(1), 145A, 41(1), and 28(i). It observed that the assessee had not claimed GST as an expense in any previous year, nor had it ever included GST collections in its profit & loss account. The auditor’s report explicitly confirmed that the exclusion method did not affect the computation of taxable profit.

"We are of the considered opinion that if the GST element is not routed through the profit & loss account by consistently following the exclusion method, then the question of taxing the GST refunds does not arise in the case of the assessee."

The Tribunal rejected the Revenue’s reliance on Section 41(1), noting that this provision applies only where a deduction previously allowed is subsequently recovered. Since no deduction was ever claimed, there could be no remission of liability within the meaning of Section 41(1). Similarly, Section 28(i) applies to business receipts, but the Tribunal held that GST collected is not a business receipt - it is a fiduciary collection on behalf of the government.

Regarding the margin on stock converted to capital assets, the Tribunal found that the amount of Rs. 14,37,29,950/- had been voluntarily disclosed in Schedule BP of the return and accounted for in the computation of business income. The CPC’s addition based solely on Clause 16(a) of the tax audit report constituted double taxation, which is impermissible under the Act.

The Tribunal further noted that the CIT(A) had misapplied the law by conflating valuation principles under Section 145A with income recognition principles. Section 145A governs how inventory is valued for cost of goods sold, not whether refunds of taxes are income. The Tribunal emphasized that accounting method, if consistent and compliant with accounting standards, must be respected unless the statute explicitly overrides it.

The Verdict

The appeals of the assessee were allowed for statistical purposes. The Tribunal set aside the additions of Rs. 345,28,51,548/- for AY 2023-24 and Rs. 274,31,61,059/- for AY 2024-25 on GST refunds. The addition of Rs. 14,37,29,950/- on margin of stock converted to capital assets was also deleted. The Assessing Officer was directed to recompute interest under Sections 234B and 234C based on the revised income, taking into account the returned income as filed by the assessee.

What This Means For Similar Cases

Exclusive Accounting Method Is Legally Recognized

• Practitioners can now confidently argue that GST refunds are not taxable if the assessee consistently follows the exclusion method, provided the method is disclosed in financial statements and audit reports.
• The burden shifts to the Revenue to prove that the accounting method is not genuine or is being used to evade tax.

Double Taxation Is Prohibited Even on Audit Disclosures

• Disclosure in Clause 16(a) of Form 3CD does not automatically justify an addition under Section 143(1)(a)(vi) if the amount has already been offered to tax in the return.
• Practitioners must cross-verify whether the amount in the tax audit report has been included in the computation of income in the return before challenging an addition.

Section 145A Does Not Override Accounting Policy for Refunds

• Section 145A governs inventory valuation for cost of goods sold, not the recognition of tax refunds as income.

• Refunds of taxes not claimed as expenses cannot be taxed under Section 41(1) or Section 28(i), regardless of the nature of the tax.

• Always maintain contemporaneous documentation of accounting policies for indirect taxes

• Ensure disclosure of exclusion method in Notes to Accounts and tax audit report

• Avoid treating GST collections as revenue - keep them strictly as balance sheet liabilities

• Challenge any addition based on audit disclosure if the same amount is already included in the return