ITC under VAT cannot be Considered as Income Unless Claimed as Expenditure in P&L Account: ITAT [Read Order]

The Mumbai bench of the Income Tax Appellate Tribunal ( ITAT ) upheld the deletion of the VAT ( Value Added Tax ) input tax credit addition of ₹96.21 lakh, ruling that it does not constitute income as it was not claimed as an expenditure in the Profit & Loss account.

The Tribunal dismissed the revenue’s appeal against the order of the Commissioner of Income Tax (Appeals) [CIT(A)] dated 9th May 2025, of the assessment year 2007-08.

The appeal primarily concerned additions made by the AO relating to VAT input credit, alleged commission on bogus purchases, and notional interest on advances.

During the assessment proceedings following a search conducted on 26th July 2011, the AO made the following additions: disallowance of VAT input credit of ₹96,21,568, ad hoc commission expenses of ₹48,10,940 for alleged accommodation entries, and notional interest of ₹6,63,300 on advances given to M/s Akruti Metals & Alloys Pvt. Ltd.

The assessee, Jyoti Structures Limited, filing a return of income of ₹1,29,75,48,528, challenged these additions before the CIT(A).

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Regarding the VAT input credit, the CIT(A) observed that the assessee maintained its accounts on the mercantile/exclusive basis, meaning that the VAT credit was recorded only in the balance sheet as a current asset and not claimed as an expenditure in the Profit & Loss account.

Since the VAT credit had not reduced the assessee’s taxable profit or been claimed as an expense, it could not constitute income.

The tribunal agreed with this reasoning, noting that VAT input credit is a statutory mechanism allowing registered dealers to offset output tax liability and does not result in any income or benefit to the assessee.

The appellate tribunal opined that “the input tax credit under VAT regime is not in the nature of income until and unless the same has been claimed as an expenditure in the profit and loss account. The VAT credit is a statutory mechanism that enables registered dealers to offset input tax against their output tax liability.” Consequently, the Tribunal upheld the deletion of ₹96.21 lakh.

On the issue of commission disallowance, the AO had estimated 2% commission for accommodation entries based on third-party statements. The CIT(A) reduced this estimate to 1% of the purchase value, recognising that the AO’s reliance on presumption alone was not fully justified. The ITAT confirmed this partial relief, declining to interfere with the CIT(A)’s order.

Accordingly, the two-member bench comprising Saktijit Dey (Vice President) and Narendra Kumar Billaiya (Accountant Member) dismissed the revenue’s appeal, confirming the deletion of the VAT input credit addition and notional interest, while maintaining the restricted 1% ad hoc commission disallowance.

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