Notice 143(1) for GST/Other refund reported under Clause 16 of Tax Audit

From the FY 21-22, Form 3CD is required to be filed prior to ITR. After introducing this mechanism, there are many instances where 143(1) notices are received immediately after filing of return for mismatch between form 3CD & ITR. One such instance is non-disclosure of GST refunds as income u/s 26 of Income tax act.

Reporting GST Refund in Tax Audit report –

GST refunds are to be reported under 3 clauses in Tax audit report –

Clause 16 (b) – Amounts not credited to the profit and loss account, being, – the proforma credits, drawbacks, refunds of duty of customs or excise or service tax or refunds of sales tax or value added tax or Goods & Services Tax, where such credits, drawbacks or refunds are admitted as due by the authorities concerned;

Clause 27 –Amount of Central Value Added Tax Credits/ Input Tax Credit(ITC) availed of or utilised

during the previous year and its treatment in profit and loss account and treatment of outstanding Central Value Added Tax Credits/Input Tax Credit(ITC) in accounts.

Clause 41 –

Please furnish the details of demand raised or refund issued during the previous year under any tax laws other than Income-tax Act, 1961 and Wealth-tax Act, 1957 alongwith details of relevant proceedings

Clause 16 (b) requires reporting where the refunds are admitted as due by the respective department whereas clause 41 required reporting in case the refund are issued during the year. Reporting under clause is as part of the reconciliation of input tax credit.

Notice under Sec 143(1) for not reporting amounts stated under Clause 16 in ITR-

On combined reading of Clause 16(a) & 16(b), there can be an interpretation stating that those amounts which are  to be offered to income under Sec 28 but not credited to P&L are to be reported under Sec 16(b). GST refunds are only taxable in current year if they are claimed as an expense/capitalised to asset in any of the Previous year. And hence if it is not taxable, it is not required to be reported under Clause 16. On the contrary, as per guidance note of ICAI, refunds needs to be disclosed under this clause irrespective of its taxability.

Below extract of Guidance Note on Tax Audit with respect to clause 16(b) on reporting of refund amounts not credited to Profit and Loss.

Extract –

“ The details of the following claims, if admitted as due by the concerned authorities but not credited to the profit and loss account, are to be stated under sub-clause (b).

(i) Pro forma credits

(ii) Drawback

(iii) Refund of duty of customs

(iv) Refund of excise duty

(v) Refund of service tax

(vi) Refund of sales tax or value added

(vii) Refund of Goods and Services Tax

(viii) Others

In respect of items falling under sub-clause (b), the tax auditor should examine all relevant correspondence, records, assessee’s particulars on portal of the departments and evidence in order to determine whether any

particular refund/claim has been admitted as due and accepted during the relevant financial year. 

The words ‘admitted by the concerned authorities’ would mean  ‘admitted by the authorities within the relevant previous year’. 

28.7 The system of accounting followed in respect of these particular items  may also be brought out in appropriate cases. If the assessee is following  cash basis of accounting, it should be clearly brought out, since the

admittance of claims during the relevant previous year without actual receipt  has no significance in cases where cash method of accounting is followed.

Credits/claims which have been admitted as due after the relevant previous year need not be reported here. 

Where such amounts have not been credited in the profit and loss account but netted against the relevant expenditure/income heads, such fact should be clearly brought out.   “

Conclusion

If reported under Clause 16 –

In case notice under 143(1) is received, Assesse has to reply to the department stating the facts of the case that the refund is not taxable as the same is not claimed as an expense in any of the PY. (or)

Amend the ITR by including refund under Sec 28 and claim expense under Sec 37 as other expenses.

Going forward, The Assesse can include a clarificatory note as part of the Form 3CD to clarify the nature of the transaction as an annexure to Form 3CD or consider the option of not disclosing the refunds under Clause 16 and only report them under Clause 41.