2017 (12) TMI 1811 - AT - Income Tax

Deduction under the Service Tax claim written off - Whether assessee had relinquished the impugned claim which therefore, cannot be termed as normal business loss or a bad debt? - CIT-A deleted the addition as noted that the service tax paid on various export related services such as GTA Transport Services, technical testing and analysis service, port services etc. paid during the Financial Year 2006-07 to 2010-11 were reflected in the Balance Sheet under the head Service Tax Refundable Account - HELD THAT - AO has not allowed the claim of the assessee on the reasoning that the appeal was not filed by the assessee against the order passed by the Service Tax Officer. We do not accept the argument of the Assessing Officer, due to the reason that orders passed by the Service Tax Officer are quasi-judicial orders as equivalent to an order of a Court and it is the duty of the assessee to follow the same. Filing of appeal is only a prerogative which is optional and which may or may not be exercised. We also note that if the government does not refund the service tax, which is refundable to the assessee, then it would be a business loss to the assessee. That is, the assessee has entitlement on such amount and if the government does not refund him then it would be a loss in the hands of the assessee and in that situation the assessee write it off in the books and claims as bad debts. In the assessment year under consideration, the assessee came to know that the government would not refund him, therefore he written off and claimed as bad debts in the books of accounts. We note that the Assessing Officer has not allowed the claim of the assessee on the reasoning that the appeal was not filed by the assessee against the order passed by the Service Tax Officer. We are of the view that the argument of the Assessing Officer is not tenable and cannot be accepted due to the reason that order passed by the Service Tax Officer are quasi judicial orders as equivalent to an order of a Court and it is the duty for the assessee to follow the same. Filing of appeal is only a prerogative which is optional and which may or may not be exercised. Since the Service Tax officer denied the payment by his order therefore assessee has written it off as bad debts. Therefore, we are of the view that assessee may write it off by debiting the said amount in profit and loss account as bad debts. Hence, we do not find any infirmity in the order passed by the ld. CIT(A) - Decided against revenue.

Summary

Issues:
Appeal against disallowance of service tax claim written off for Assessment Year 2011-12.

Analysis:
1. Grounds of Appeal: The Revenue challenged the deletion of deduction of ?96,78,546 under the Service Tax claim written off, arguing that it cannot be considered a normal business loss or bad debt. The Assessing Officer disallowed the claim as prior period expenses, stating the loss was not incurred in the current year.

2. Assessing Officer's Observation: The Assessing Officer found that the service tax claimed written off by the assessee was not a legitimate business loss or bad debt. The claim pertained to service tax areas from previous years, which the assessee surrendered without appealing, leading to the disallowance of ?96,78,546.

3. CIT(A) Decision: The CIT(A) allowed the claim, noting that the service tax payments made by the assessee were reflected in the Balance Sheet under Service Tax Refundable Account. The CIT(A) considered such claims allowable under Section 37 of the Income Tax Act.

4. ITAT Decision: The ITAT upheld the CIT(A) decision, emphasizing that the assessee followed the mercantile system of accounting. The ITAT rejected the Assessing Officer's argument that non-filing of an appeal against the Service Tax Officer's order should disallow the claim. The ITAT concluded that if the government does not refund the service tax, it constitutes a business loss, allowing the assessee to write it off as bad debts.

5. Legal Perspective: The ITAT highlighted that under the Income Tax Act, expenses are allowed under both mercantile and cash systems of accounting. The ITAT supported the assessee's action of writing off the unrefunded service tax as bad debts, considering the quasi-judicial nature of the Service Tax Officer's orders.

6. Conclusion: The ITAT dismissed the Revenue's appeal, confirming the CIT(A) decision to allow the deduction of ?96,78,546 as a legitimate business loss. The ITAT emphasized the assessee's adherence to the mercantile accounting system and the entitlement to claim bad debts for unrefunded service tax amounts.

This detailed analysis of the judgment showcases the legal reasoning behind the decision to allow the deduction claimed by the assessee, providing a comprehensive understanding of the issues involved and the application of relevant legal principles.