Telangana High Court Holds Deferred Sales Tax Benefit Cannot Be Denied, Remands Krebs Biochemicals Case

The Telangana High Court on 19 June held that tax authorities cannot deny a taxpayer the benefit of a sales tax deferment scheme merely because statutory adjustment orders supporting the claim were not available during the original assessment proceedings, and directed the Assessing Officer to reconsider the claim after examining the subsequent orders.

A Division Bench of Justices P. Sam Koshy and Suddala Chalapathi Rao partly allowed the appeals filed by Krebs Biochemicals & Industries Limited and directed the Assessing Officer to examine the Form VAT-205 adjustment orders issued by the Commercial Tax Officer and decide the company's entitlement to the benefit under Section 43B of the Income Tax Act (which allows deduction for certain statutory liabilities subject to prescribed conditions). The judges held:

“It is equally undisputed that the Commercial Tax Officer subsequently issued Form VAT 205 adjustment orders in the years 2016, 2017 and 2022, for the respective assessment years, which were admittedly not available when the Assessing Officer completed the assessments. They were also not in existence when the appeals were heard by the learned ITAT or even when the present appeals were instituted before this Court.”

The Assessing Officer and the Income Tax Appellate Tribunal had rejected Krebs Biochemicals & Industries Limited's claim on the ground that the company failed to produce evidence showing that the deferred sales tax liability had been converted into a Government loan.

The High Court observed that the Commercial Tax Officer later issued Form VAT-205 adjustment orders in 2016, 2017 and 2022, which directly addressed the reason for rejecting the claim. It held that the authorities could not deny the benefit merely because these statutory documents did not exist during the earlier proceedings. It observed:

“Since these statutory orders were not available at the time when the assessment proceedings or the appellate proceedings were concluded, the appellant cannot be denied such benefit for their non-production. In these circumstances, in the interests of justice the Assessing Authority is required to afford an opportunity to the assessee to examine the effect of the said adjustment orders.”

The Bench directed the Assessing Officer to reconsider the claim after providing an opportunity of hearing to Krebs Biochemicals & Industries Limited and determine the effect of the Form VAT-205 adjustment orders on the company's entitlement under Section 43B of the Income Tax Act.

It also allowed the company's challenge on a separate issue relating to deductions under Sections 80IB and 80HHC of the Income Tax Act. Relying on the Supreme Court's decision in CIT v. Shital Fibers Ltd., the Bench held that a deduction allowed under Section 80IB cannot be reduced while computing deduction under Section 80HHC.

It clarified that taxpayers must compute deductions under different provisions of Chapter VI-A independently, subject only to the overall ceiling that the total deductions cannot exceed the eligible business profits.

Accordingly, the High Court partly allowed the appeals, set aside the contrary findings of the lower authorities to the extent indicated, remitted the matter to the Assessing Officer for fresh consideration, and directed completion of the exercise preferably within three months.

For Appellant: Karan Talwar, Advocate

For Respondent: J.Sunitha, Senior Standing Counsel