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2014 (4) TMI 998 - AT - Income TaxAddition on account of service tax payable Held that - The assessee has been following mercantile system of accounting and service tax collected by it is directly credited to the Service Tax Account from where the payments are deposited with treasury from time to time - No part of receipt of service tax has been taken to the P&L A/c neither any expense on account of deposit of service tax had been debited in the P&L A/c - The AO and CIT(A) had relied upon the provisions of section 43B for making addition Relying upon COMMISSIONER OF INCOME TAX Versus NOBLE AND HEWITT (I) P. LTD 2007 (9) TMI 238 - DELHI HIGH COURT - since the assessee did not debit the amount to the P&L A/c as an expenditure nor claim any deduction in respect of the amount and considering that the assessee was following the mercantile system of accounting, the question of disallowing the deduction not claimed would not arise Decided in favour of Assessee.
Issues involved:
1. Addition of service tax payable confirmed by Ld CIT(A) - whether justified under section 43B. Detailed Analysis: 1. The appeal was filed against the order of Ld CIT(A) dated 3.12.2012, with five grounds of appeals. Grounds 1, 4, and 5 were general in nature and required no adjudication. During the hearing, the Ld AR withdrew ground No.3, leaving the only ground of appeal regarding the addition of Rs. 13,98,408/- on account of service tax payable confirmed by Ld CIT(A) for adjudication. 2. The Ld AR argued that the assessee did not debit the service tax amount in its P&L Account, and therefore, the addition confirmed by Ld CIT(A) was unjustified. The Ld AR referred to the audited accounts and various schedules of expenses, highlighting that no service tax was debited to the P&L Account. It was explained that the unpaid service tax at the year-end was reflected as part of other liabilities. The Ld AR relied on case laws to support the argument that if service tax was not debited to the P&L Account, there should be no disallowance under section 43B. 3. The Tribunal noted that the assessee followed the mercantile system of accounting, where service tax collected was directly credited to the Service Tax Account without being taken to the P&L Account. The Assessing Officer and Ld CIT(A) relied on section 43B for making the addition. Referring to a case decided by the Hon'ble Delhi High Court in a similar context, it was observed that if the assessee did not debit the amount to the P&L Account as an expenditure and did not claim any deduction, the disallowance under section 43B would not arise. 4. Based on the above analysis and the precedent set by the Hon'ble Delhi High Court, the Tribunal allowed ground No.2 of the appeal, concluding that the addition of service tax confirmed by Ld CIT(A) was not justified under section 43B. Consequently, the appeal was partly allowed, with other grounds not pressed being dismissed. This judgment highlights the importance of accounting practices and adherence to statutory provisions when dealing with tax liabilities such as service tax. The decision provides clarity on the treatment of service tax in the P&L Account and the applicability of section 43B in such cases, emphasizing the significance of following the mercantile system of accounting for proper tax compliance.
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