2017 (8) TMI 1288 - AT - Income Tax

Absence of proper genuineness of creditors - Additions to profit of the assessee u/s 41(1) - Held that - The assessee has submitted the chart before us which shows that out of total outstanding sundry creditors 1,26,99,643/- are added back to income u/s 41(1) of the Act and some of the amounts was returned back. The Ld. A.R. has also submitted before us that same parties are there in the year under consideration and their liability was existing up to A.Y.2013-14. Therefore, we restore this matter back to the file of the AO to verify the same and decide the issue afresh in light of the above chart. In the result, appeal of the assessee is allowed for statistical purposes. Additions invoking the provisions of section 43B and disallowance of unpaid service tax liability - CIT(A) has deleted the addition on the ground that section 43B would attract only to a case where an item is allowable as deduction but because of failure to make payment such deduction would not be allowed - Held that - The section 43B is applicable in the case of sales tax and excise duty but same could not be in case of service tax. The Ld. CIT(A) held that the assessee s service provider is merely acting as an agent of the government, he is not entitled to claim deduction on account of service tax, therefore, no disallowance can be made on analogy of service tax . - department appeal is dismissed. Disallowance of bad debts - Held that - Issue in disallowance of bad debt is covered by the Hon ble Supreme Court in the case of TRF Ltd. (2010 (2) TMI 211 - SUPREME COURT) that it is not necessary for assessee to establish that the debt in fact has become irrecoverable. When a bad debt occurs it leads to closing of customer account therefore, our interference is not required.- Assessee s appeal is allowed for statistical purposes and department appeal is dismissed.

Summary

Issues Involved
1. Deletion of addition made under Section 43B of the Income Tax Act, 1961, on account of unpaid service tax.
2. Applicability of Section 43B to service tax.
3. Restriction of addition made by AO regarding sundry creditors.
4. Deletion of addition on account of sundry balances written off.
5. Verification of computation of income regarding business and profession.

Issue-wise Detailed Analysis

1. Deletion of Addition under Section 43B on Account of Unpaid Service Tax:
The Department contended that the CIT(A) erred in deleting the addition of ?88,92,081/- made by invoking Section 43B of the Income Tax Act, 1961, for unpaid service tax. The CIT(A) found that the service tax liability was not routed through the profit and loss account and thus, Section 43B was not applicable. The Tribunal upheld the CIT(A)’s decision, noting that service tax is not an allowable deduction but a liability collected on behalf of the government, hence Section 43B does not apply.

2. Applicability of Section 43B to Service Tax:
The CIT(A) held that Section 43B is applicable to cases where an item is allowable as a deduction but not paid. Since service tax is collected on behalf of the government and not claimed as a deduction, Section 43B does not apply. The Tribunal referenced the decision in ACIT vs. Real Image Media Technologies (P) Ltd., which supported this view, confirming that the service provider acts as an agent of the government.

3. Restriction of Addition Made by AO Regarding Sundry Creditors:
The AO added ?1,56,47,978/- under Section 41(1)(a), treating it as ceased liability since many creditors were untraceable or did not respond. The CIT(A) restricted this addition to ?29,48,389/- after verifying that some payments were made by cheque and some liabilities were genuine. The Tribunal dismissed the Department's appeal and upheld the CIT(A)’s decision, noting that the payments were made by cheque and thus, Section 41(1) was not applicable.

4. Deletion of Addition on Account of Sundry Balances Written Off:
The AO added ?1,73,289/- as the assessee failed to provide details of debtors. The CIT(A) deleted this addition, citing the Supreme Court decision in TRF Limited vs. CIT, which held that it is sufficient if the bad debt is written off in the books of accounts. The Tribunal confirmed the CIT(A)’s decision, stating that the bad debt account was properly debited and the customer's account credited, thus closing the customer’s account.

5. Verification of Computation of Income Regarding Business and Profession:
The AO disallowed the outstanding service tax liability under Section 43B in the computation of income. The CIT(A) allowed the claim, noting that the service tax was not debited to the profit and loss account. The Tribunal upheld the CIT(A)’s decision, referencing the same rationale that Section 43B does not apply to service tax as it is not an allowable deduction but a liability collected on behalf of the government.

Conclusion:
The Tribunal dismissed the Department's appeal and allowed the assessee's appeal for statistical purposes, confirming the CIT(A)’s decisions on all issues. The Tribunal emphasized that service tax liability is not an allowable deduction under Section 43B, and the genuineness of sundry creditors and bad debts were adequately verified and justified by the CIT(A).