No. MCS/149/2022-24 / R.N.I. No.

MAHENG/2012/47041 - Total Pages: 152

Chamber's
CADRE

Vol. XI | No. 12 | September 2023

GST and
INCOME
TAX
Divergence
& Analysis
CONTENTS Vol. XI | No. 12 | September 2023

Editorial — Vipul Choksi .................................................................................................................. 5

From the President — Haresh Kenia ............................................................................................... 7

Convergence and Divergence of GST

SPECIAL STORY —
and Income Tax for Employer-Employee
GST AND INCOME TAX – Transactions — Gyanendra Tripathi
DIVERGENCE AND ANALYSIS & Mihir Gandhi .................................................. 75

Chargeable Event – Supply vs. Taxable THE DASTUR ESSAY COMPETITION 2023
Income — Rajkamal Shah & — Neha Maria Antony .................................. 84
Janak Vaghani ..................................................... 11
Valuation Provisions - Interplay between DIRECT TAXES
GST & Income Tax Legislation
— Sriram Sridharan........................................... 19 Supreme Court — Keshav Bhujle .................... 97

Navigating the Divergence and Convergence: High Court — Jitendra Singh,

A Comparative Analysis of Tax Provisions Radha Halbe & Harsh Shah ..................................100
under the Income-tax Act and GST Laws Tribunal — Viraj Mehta &
— Ruchi Bhat ................................................... 26 Kinjal Bhuta ..................................................... 106
Business Expenditure – Similarity and
Divergence between Income Tax & GST laws INDIRECT TAXES
— Rohit Jain & Arihant Tater ........................... 34
GST – Recent Judgments & Advance
Place of Supply vs. Cross Border Rulings — Naresh Sheth & Jinesh Shah........ 113
Transactions under Income Tax
Service Tax – Case Law Update —
— K. Vaitheeswaran ........................................... 40
Rajiv Luthia & Keval Shah .............................. 121
Distinct and related persons under GST
and related party transactions under IT CORPORATE LAWS
— Jatin Christopher ........................................... 47
Case Law Update — Makarand Joshi ............ 125
Business Reorganization – Goods and Service
Tax (‘GST’) & Income-tax (‘IT’) Treatment
OTHER LAWS
— Sneha JP, Suvrata Maheshwari
& Rajath Bharadwaj ........................................... 54 FEMA Update & Analysis
— Hardik Mehta & Tanvi Vora ....................... 135
“Fake Invoices” and “Penalties”
under GST and Income Tax Best of The Rest
— Bharat Raichandani & Jatan Mudgal ........... 62 — Rahul Hakani & Niyati Mankad................. 139
Cross Charge v. Input Service Distributor The Chamber News
(‘ISD’) v. Internally Generated Services (‘IGS’) — Neha Gada & Vitang Shah ......................... 147
– the interminable predicament
Ritesh Kanodia & Meetika Baghel .................... 69

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September 2023 The Chamber's Journal 3
 Special Story — Business Expenditure – Similarity and Divergence between Income Tax & GST laws

Business Expenditure –
Similarity and Divergence
between Income Tax & GST laws
CA Rohit Jain CA Arihant Tater

Overview
The article attempts to analyse the similarities and divergences in the provisions of the
Income Tax and GST laws pertaining to business expenditure. On first flush, it may appear
that both the taxing provisions are similar in nature. However, a deeper analysis would
reflect that there are certain nuanced differences. The disallowances under both statutes are
distinct and unrelated. The authors also highlight certain industry specific issues and point
out that it has been recently observed that investigation by one wing of the Tax Department
has also eventually invited scrutiny from the other Department.

In the modern economy, the power to levy incurred by the business for earning such
taxes has been recognized as an essential income.
attribute to sovereignty. The levy of tax by
any sovereign nation is premised on three GST is levied concurrently by both the Central
basic considerations – to raise revenue, carry and State Governments under Article 246A of
out certain economic and social changes and the Constitution of India. Recently, the Hon’ble
discourage consumption of articles which the Supreme Court (speaking through Chief Justice
State regards as undesirable. Consistent with D Y Chandrachud) in the case of Union of
this objective, our direct and indirect tax laws India vs. Mohit Minerals [Civil Appeal No.
have been framed by the legislature. 1390 of 2022 (SC)] remarked that GST is a
symbol of “co-operative federalism” as both
The Income Tax Act, 1961, which has been the Union and the State legislatures have
in vogue for more than sixty years, is a “equal, simultaneous and unique” powers to
comprehensive direct tax levy on “income” make laws on GST. The idea of GST was born
earned by a person. The younger brother out of the desire to have “one nation, one tax”
- GST, which was introduced in 2017, is and ensure that every rupee discharged as tax
a comprehensive indirect tax levy on the on procurement is correspondingly available
“supply” of goods and services. as credit.
Income Tax is levied on “income” and
collected by the Central Government under Common principle governing both levies
Entry 82 of List I in the Seventh Schedule of Section 37 of the Income Tax Act is the
the Constitution of India. The term “income” general provision which deals with grant of
pre-supposes that it should be computed after deduction qua items of business expenditure.
providing deduction for all the expenditure Any expenditure which is incurred wholly and
exclusively for the purposes of the business
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 Special Story — Business Expenditure – Similarity and Divergence between Income Tax & GST laws

shall be allowed as deduction for computing b. The expenditure should be incurred

business income. exclusively and wholly for the purpose
of business which was carried on by the
On the other hand, section 16 of the Central assessee;
Goods and Services Tax Act, 2017 (‘CGST Act’)
deals with availment of input tax credit (‘ITC’) c. The expenditure should not be in the
on goods and services used or intended to be nature of personal expenses of the
used in the course or furtherance of business. assessee;
On first flush, on a comparison of section 37 d. The expenditure should not be in the
vis-à-vis section 16, it may appear that the nature of capital expenditure.
Income Tax and GST provisions are similar
in nature – they allow seamless claim of Once an assessee satisfies the above
expenditure/ITC which are in relation to conditions, the claim of expenditure must
business and disallow personal expenses. If be allowed. Courts have consistently held
the true intent of both the taxing provisions that the Tax Department “cannot step into the
is gauged, a business should ordinarily be shoes of the businessman” to decide whether
allowed deduction of all expenditures which a particular expense is necessary or not. It is
are incurred in the course of business. also not open for the Department to prescribe
what expenditure an assessee should incur
However, a deeper analysis would reflect that and in what circumstances he should incur
there are certain nuanced differences in both that expenditure [Ref: Phaltan Sugar Works
the provisions. The article attempts to analyse Ltd. vs. CIT reported in 1995 215 ITR 377
some of these divergences. (Bom HC)]

Allowability of expenditure under the Income Allowability of ITC under the CGST Act
Tax Act Under the erstwhile indirect tax regime,
The Income Tax Act provides detailed no set-off of central levies (such as excise
provisions to claim deduction of expenses duty, service tax) with state levies (such as
incurred for earning business income. Sections VAT, entry tax) and vice-versa was permitted.
30 to 36 of the Act deals with specified Furthermore, no set-off was available in
deductions for computing profits and gains respect of certain specified levies such as CST,
of business or profession and also prescribe Entertainment Tax, Swachh Bharat Cess etc.
certain conditions to avail such deductions.
Therefore, one of the primary reasons for
Section 37 is a residuary section under the introduction of GST was to remove the
Income Tax Act extending the allowance cascading impact caused by multiplicity
to items of business expenditure which are of indirect taxes and ensure seamless flow
not specifically covered under any of the of credit across the chain. This underlying
preceding provisions. In terms of settled objective ought to be kept in mind at the time
judicial precedents, the following conditions of analyzing the GST provisions.
must be fulfilled for a particular item of
Under section 16 of the CGST Act, the
expenditure to be allowed as deduction
important conditions that must be fulfilled for
in computation of business income under
availment of ITC are, inter alia:
section 37:
a. The expenditure must be used or
a. The expenditure should have been
intended to be used in the course or
incurred in the accounting year;
furtherance of his business.

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 Special Story — Business Expenditure – Similarity and Divergence between Income Tax & GST laws

b. The registered person must have • Remuneration and interest on capital to

received the goods or services; partner beyond specified limit;
c. The registered person must be in • Excessive on unreasonable payments to
possession of valid tax invoice. related parties;

d. The expenditure should not be personal • Cash payments exceeding INR 10,000.
in nature. On the other hand, the negative list
It is a well settled position in law that that the of disallowances under GST is provided
right to input tax credit accrues consequent to in section 17(5) of the CGST Act. These
the payment of tax, subject to the applicable disallowances largely borrow inspiration
provisions of law as on the date of accrual. from the erstwhile CENVAT regime as well
as past litigation under erstwhile indirect tax
Once the right to the credit so accrues, the
regime. They also stem from the intent to
same is in the nature of a vested right which
disallow credits which do not have any link
is “indefeasible”, as upheld in the landmark
with a taxable outward supply. In case, for
ruling of the Hon’ble Supreme Court in CCE any reason, ITC is not eligible under section
vs. Dai Ichi Karkaria Ltd. [1999 (112) ELT 17(5), the taxpayer must explore the option of
353 (SC)]. claiming the said amount as deduction under
Income Tax.
Divergence in the negative list of
disallowances under the respective statutes The key disallowances under section 17(5) are,
inter alia:
A bare perusal of the statutory provisions
would indicate that the negative list of • Motor vehicles except when they are
disallowances under the Income Tax and GST used for specified taxable supplies;
law are distinct and separate - in scope as well
• Food and beverages, outdoor catering,
as objective. Both statutes have drawn their
beauty treatment, health services,
respective negative list of disallowances.
cosmetic and plastic surgery, travel
Under the Income Tax Act, the objective benefits extended to employees on
behind the negative list of disallowances vacation;
appears to be to (a) ensure compliance with • Goods and services received for
TDS provisions, (b) curb tax evasion, and construction of immovable property;
(c) identify unaccounted and cash transactions
etc. The disallowances under the Income • Goods or services on which tax has been
Tax are provided in section 40 & 40A of the paid under composition scheme;
Income Tax Act, inter alia: • Personal consumption;
• Disallowance on account of default • Goods lost/stolen/destroyed as well as
in deduction of TDS/equalization levy gifts & free samples;
on specified payments made to non-
residents; • Any tax paid u/s 74, 129 & 130 [viz.
fraud, suppression cases]
• Disallowances on account of default
in deduction of TDS in respect of Distinction between capital and revenue
payments to residents [30% of the expenditure
expense is disallowed];
Deduction under section 37 is available only
• Income tax payments; in respect of revenue expenditure. Under the

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 Special Story — Business Expenditure – Similarity and Divergence between Income Tax & GST laws

Income Tax Act, capital expenditure is allowed Requirement of one-to-one matching

as a deduction only when the statute expressly At the time of introduction of GST, it was
so provides. contemplated by the legislature that a robust
matching system would be tech-enabled on
On the other hand, the GST law does not
the GST portal, which would provide the
make a specific distinction between revenue
purchasers and the suppliers the ability to
and capital expenditure inasmuch as credit on
reconcile invoices. The matching requirement
inputs, input services and capital goods can be
has also been introduced in the statute book
availed in full in the year of purchase. This is
by insertion of section 16(2)(aa) with effect
also a welcome departure from the provisions
from 1 January 2022.
of the erstwhile CENVAT regime where credit
on capital goods was required to be availed in Therefore, input tax credit will only be
two instalments – 50% in the first year and allowed if credit claimed by the recipient
the balance 50% in the subsequent year. in its monthly GST return (Form GSTR 3B)
matches with the corresponding disclosure by
However, it must be noted that where
the supplier in its Form GSTR 1 and is auto-
depreciation under income tax has been
populated in the recipient’s Form GSTR 2A.
claimed on the tax component of capital
goods, ITC would not be available to the While the vires of the matching provision is
taxpayer. This is to ensure that double benefit currently the subject matter of Writ Petition
is not taken by taxpayers. before various High Courts, the provision
exists in the statute book today and the
Requirement of making payment to the taxpayer is debarred from claiming credit
supplier without fulfilling the matching condition. It
Under the Income Tax Act, deduction is would be pertinent to mention that recently
available in respect of those expenses which the Hon’ble Calcutta High Court in the case
are incurred in the accounting year. Therefore, of Suncraft Energy Private Limited vs
when the books of accounts are maintained Asst. Commissioner, State Tax [MAT No.
on mercantile basis, expenditure would be 1218 of 2023 (Cal HC)] held that in cases
allowed in the year when the expenditure is of mismatch, ITC cannot be denied to the
incurred irrespective of whether disbursement recipient without due investigation at the
has been made or not. The claim of supplier’s end.
expenditure is not contingent on payment Unlike the GST law, there is no such matching
except in certain cases as specified in section condition under the Income Tax Act. The
43B (viz. provident fund contributions, interest claim of expenditure is largely on self-
on loan, MSME payments etc.). assessment basis. However, in case of scrutiny
However, under the GST law, in order to assessment, the onus of proving that the
claim credit, it is mandatory that: (a) the expenditure has been incurred lies on the
tax in respect of the supply has been paid assessee.
to the Government and (b) the payment is
made to the supplier within 180 days from Expenditure prohibited by law
the date of invoice. The GST law puts an In terms of Explanation 1 & 3 to section
onerous requirement on the recipient to pay 37 of the Income Tax Act, any expenditure
the supplier within the specified time limit, which is an offence or is prohibited by law is
failing which the corresponding ITC is liable specifically disallowed.
to be reversed alongwith interest.

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 Special Story — Business Expenditure – Similarity and Divergence between Income Tax & GST laws

Recently, the Hon’ble Supreme Court passed expenditure incurred by a Company is in

a landmark judgment in the case of Apex furtherance of its statutory obligations under
Laboratories Pvt. Ltd. vs. DCIT [Civil the Companies Act. The CSR expenditure has
Appeal No. 23207 of 2019 (SC)]. The issue been incurred in the course of the business
before the Supreme Court was with respect and must be allowed as deduction.
to deductibility of expenses incurred by
the taxpayer for providing freebies (such However, in order to override these rulings,
as conference fees, gold coins, gifts etc.) to the legislature has made amendments under
medical practitioners to promote sales of the Income Tax Act and the CGST Act to
healthcare supplements. The Hon’ble Supreme specifically disallow CSR expenditure.
Court emphatically upheld the disallowance Explanation 2 to section 37 was inserted
on the ground that acceptance of freebies by Finance Act, 2014 to provide that any
by medical practitioners is in violation of expenditure incurred in relation to CSR would
Indian Medical Council Regulations of 2002. not be deemed to be an expenditure incurred
If accepting freebies is prohibited by law for by the assessee for the purpose of business or
the recipient, giving freebies is also impliedly profession. Recently, the Hon’ble Delhi High
prohibited by law. The Hon’ble Supreme Court Court in the case of Principal Commissioner
also held that one arm of the law cannot be of Income Tax vs. Steel Authority of India
utilised to defeat the other arm of law and Limited [2023/DHC/000307 in ITA No. 3 of
doing so would be opposed to “public policy.” 2023] held that the amendment even though
Under the GST law, there is no specific inserted through an Explanation would be
provision which disallows credit in respect prospective in nature and only apply with
of an expenditure which is prohibited effect from 1 April 2015.
by law. In the erstwhile regime, the High Recently, amendment has also been made in
Court & Tribunal have held that when tax section 17(5) of the CGST Act [with effect
has been collected from the supplier by the from 1 October 2023] to disallow ITC on CSR
Government, the corresponding input tax expenditure. If the ratio of the judgment of
credit cannot be denied at the recipient’s end. the Hon’ble Delhi High Court is followed, the
However, recently the Directorate General amendment must be interpreted as prospective
of Goods and Services Tax Intelligence in nature. Hence, ITC for CSR expenditure for
(DGGI) has issued GST show cause notices the period prior to 1 October 2023 may be
against the Insurance companies for illegally available to businesses, subject to fulfilment
paying excess commission to agents. It has of other conditions.
been alleged that the payment of excess
As clearly evident, under both statutes,
commission is in violation of the regulations
the legislature has sought to overrule the
formulated by the Insurance Regulatory and
judgments and specifically disallow CSR
Development Authority of India (IRDAI). The
expenditure.
DGGI has sought to deny ITC in respect of
such transactions and the matter is currently
pending adjudication. The issue is likely to Specific sectors not eligible for input tax
be strongly litigated by both the Insurance credit under GST
Company and the GST Department. Under GST, certain specific sectors such as the
real estate and the restaurant sector are not
CSR expenditure & legislative overruling eligible to avail input tax credit. The benefit
Under both direct and indirect tax regime, of input tax credit has been denied in toto to
Courts have consistently held that any CSR these sectors in lieu of grant of concessional

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 Special Story — Business Expenditure – Similarity and Divergence between Income Tax & GST laws

rate of tax of 5% on the outward supply. Government was to ensure seamless flow of
Similarly, a non-resident taxable person is credits. GST was touted as a good and simple
not eligible to claim ITC except on import of tax. However, on account of the numerous
goods. legislative amendments as well as procedural
bottlenecks, the idea of a good and simple tax
However, there is no such sector specific and seamless flow of credit appears to be a
expense disallowance under the Income Tax far-fetched dream.
Act.
There are also certain other procedural Conclusion
bottlenecks in GST which bar claim of ITC. As analysed hereinabove, the disallowances
Some of these scenarios are illustrated below: under the Income Tax and GST law are
distinct in both nature and objective. It cannot
a. Under GST, each state GST registration therefore be assumed that an expenditure
is considered to be a “distinct person”. which is allowable as deduction under the
Credit pertaining to one state GST Income Tax Act would also be eligible for ITC
registration (say State X) cannot under GST and vice versa.
be claimed by another state GST
registration (say State Y) even if the Similarly, the Department cannot also assume
expenses have been incurred by the that an expenditure which is not allowable
Company in the course of business. under Income Tax would also not be eligible
as ITC under GST. A taxing statute needs to
b. Similarly, liability of one state be interpreted strictly and there is no room
registration (State X) cannot be for intendment.
discharged through ITC availed by
another state registration (State Y) qua At the time of assessment, the taxpayer is
the same Company. There is also no required to demonstrate compliance to both
mechanism for inter-state transfer of authorities separately and fulfil the procedural
credit within the same company. conditions specified in the statute.
c. Unlike income tax, ITC would not Before parting, it would also be important
be available if the expense has been to note that there has been wide facilitation
incurred but goods/services are yet to be and sharing of data between income tax
received. and GST authorities. It has been recently
observed that investigation by one wing
d. A duty paying document (invoice/bill of of the Tax Department has eventually also
entry) is sine qua non for availment of invited scrutiny from the other Department.
credit. By way of illustration, reference may be
e. ITC is also not available if the place of drawn to recent investigation initiated against
supply of goods or services is different pharma companies qua payments made to
from the state where the entity is medical practitioners, bogus purchase and fake
registered. invoicing investigation etc.

It is universally recognised that the greatest It is therefore the need of the hour that
virtue of a value added tax system is that a taxpayers revisit their tax position with a
full and free flow of credits ensures that only view to ensure compliance and alignment with
the value addition in each leg of a transaction both laws.
is subjected to tax. At the time of introduction 
of GST, one of the avowed objectives of the

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