2011 (4) TMI 1436 - AT - Income Tax

Summary

Issues Involved:
1. Whether the unpaid service tax liability amounting to Rs. 311,613/- can be treated as income.
2. Whether the unpaid service tax liability should be included as part of 'Current Liabilities' in accordance with the method of accounting.
3. Whether the unpaid service tax liability not paid before the due date of filing the return u/s 43B can be disallowed.

Summary:

Issue 1: Treatment of Unpaid Service Tax Liability as Income
The assessee challenged the addition of Rs. 311,613/- on the grounds that unpaid service tax liability cannot be treated as income. The Tribunal referred to the decision in ACIT vs. Real Image Media Technologies Pvt. Ltd. 114 ITD 573 (Chennai), which held that disallowance u/s 43B could not be applied to service tax billed but not received. It was observed that service tax billed but not received had not become payable to the credit of the Central Government by virtue of Section 68 of the Finance Act, 1994, read with Rule 6 of the Service Tax Rules 1994. Therefore, the addition of unpaid service tax as income was not justified.

Issue 2: Inclusion of Unpaid Service Tax Liability in Current Liabilities
The assessee argued that the unpaid service tax liability was disclosed as part of 'Current Liabilities' in accordance with the method of accounting for another Central Government Department. The Tribunal noted that the service provider acts merely as an agent of the Government and is not entitled to claim deduction on account of service tax. Hence, the unpaid service tax liability should be included in current liabilities and not treated as income.

Issue 3: Disallowance of Unpaid Service Tax Liability u/s 43B
The assessee contended that the unpaid service tax liability was not a statutory liability u/s 43B. The Tribunal referred to the decision of the Hon'ble Delhi High Court in CIT vs. Noble & Hewitt (India) (P) Ltd. 305 ITR 324 (Del), which observed that Section 43B was not to be applied in respect of service tax collected by the assessee which was not debited to the Profit & Loss Account as an expenditure. The Tribunal concluded that since the service tax was not payable by the assessee due to non-receipt of payments, the rigour of section 43B could not be applied. Therefore, the disallowance upheld by the CIT (A) was deleted.

Conclusion:
The Tribunal allowed the appeal filed by the assessee, deleting the disallowance of Rs. 311,613/- on account of unpaid service tax liability. The order was pronounced in the open court on 29.04.2011.