2014 (4) TMI 697 - AT - Income Tax

Disallowance of service tax written off which was non recovered from the customers / clients Held that - The assessee has been billing its client towards professional fees which also includes service tax leviable - It is the liability of the assessee to deposit the service tax which is to be collected from the clients - If any of the client has not paid the service tax and the assessee had already taken into consideration the service tax in its gross receipt and also paid the said service tax to the Government account, then the assessee has to recover it from the client - If for some reason, the assessee is unable to recover the service tax, then, either it can write off in this year or can claim as loss by such an amount - Even under the cash system of accounting, the fees which has been received including service tax, the same has to be taken as receipts of the year. If there is any unrealized amount on account of service tax already taken as part of receipts, the same can be claimed as loss in this year - if the unrealized amount is received later, the same would become taxable in the year of receipt and in such situation also, it cannot be disallowed or added in this year - the finding of the CIT(A) cannot be upheld as the amount which has been written-off on account of service tax is allowable because it has already formed part of income and only the unrealized amount has been written off, which has to be allowed as deduction, while computing the income from profession u/s 28 thus, the order of the CIT(A) set aside Decided in favour of Assessee.

Summary

Issues:
Challenge to disallowance of service tax written off during the year by the Commissioner (Appeals) for the assessment year 2007-08.

Analysis:
The appellant, a firm of Chartered Accountants, challenged the disallowance of Rs. 1,09,184 on account of service tax written off during the year. The Assessing Officer disallowed the claim stating that the appellant failed to show efforts to recover the claims from clients. The appellant argued that the service tax was payable by the firm, recoverable from clients, and written off due to non-recovery. The Commissioner (Appeals) upheld the disallowance citing lack of written-off amounts in client accounts. However, the appellant contended that the service tax, already paid to the government, should be allowed as a deduction. The Tribunal noted that the appellant billed clients for professional fees including service tax, paid the tax to the government, and sought to recover it from clients. The Tribunal held that the written-off amount on account of service tax, forming part of income, should be allowed as a deduction under section 28, even under the cash system of accounting. Consequently, the Tribunal set aside the Commissioner (Appeals) order and allowed the appellant's claim.

In summary, the Tribunal allowed the appellant's appeal, emphasizing that the written-off amount of service tax, which had already been part of the income, should be allowed as a deduction under section 28.