2020 (5) TMI 576 - AT - Income Tax

Disallowance of unpaid service tax u/s 43B - credit balance of service tax payable - HELD THAT - As considered by the co-ordinate Bench of the ITAT, Hyderabad Benches in the case of M/s. Bartronics India Ltd. v. ACIT 2012 (6) TMI 61 - ITAT HYDERABAD that when the assessee has not paid the service tax as required under the provisions of section 43B, which is also very much covered u/s 43B. The provisions of section 43B of the Act is very clear and it states that any sum payable by the assessee by way of tax, duty, cess or fee, by whatever name called, under any law for the time being in force Service tax collected by the assessee and not paid to the Government exchequer before the due date of filing of return, is to be disallowed, though it was not charged to the profit and loss account and it attracts the provisions of section 43B and the present provisions of section 145A of the Act cannot be applied in view of non obstante clause in section 43B of the Act. Thus, this ground of appeals of the Revenue for both the assessment years is allowed. Disallowance of proportionate interest on borrowed funds - HELD THAT - We find that the assessee has not established in the cash flow statements about the availability of enough own funds at the time of making investments in the exempted income yielding assets. Hence, it is appropriate to verify the fact whether enough own funds are available with the assessee as on the date of making investments in the exempted income yielding assets. Being so, the assessee is directed to produce cash flow statements showing availability of enough own funds for making such investments with supporting documents which have to be examined by the AO before making disallowance. Accordingly, we remit this entire issue in dispute to the file of the Assessing Officer for fresh consideration with a direction to the assessee to produce relevant cash flow statements to show that interest free funds were available with the assessee to make such investments. Depreciation on undivided share of land treating them as cost paid towards building - HELD THAT - The assessee has shown the land as undivided share of land separately in the block of assets which is not entitled for depreciation. The CIT(A) is not justified in granting depreciation on the undivided share of land. Accordingly, we vacate the findings of the CIT(A) on this issue. Thus, this ground of appeals of the Revenue for both the assessment years is allowed.

Summary

Issues Involved:
1. Deletion of addition of unpaid service tax under Section 43B of the IT Act.
2. Disallowance of proportionate interest on borrowed funds.
3. Depreciation on undivided share of land.

Detailed Analysis:

1. Deletion of Addition of Unpaid Service Tax under Section 43B of the IT Act:
The primary issue was whether the unpaid service tax, which was not routed through the profit and loss account but shown as a liability in the balance sheet, could be disallowed under Section 43B. The Assessing Officer (AO) added the unpaid service tax to the income of the assessee, invoking Section 43B, which mandates the disallowance of certain unpaid liabilities. The CIT(A) deleted this addition, relying on the Delhi High Court judgment in CIT vs. Noble and Hewitt (I) Pvt. Ltd. and the ITAT Chennai decision in ACIT vs. Real Image Media Technologies (P) Ltd., which held that service tax not claimed as an expense cannot be disallowed under Section 43B. The CIT(A) also referenced the Kerala High Court judgment in Kerala State Electricity Board vs. DCIT, emphasizing that Section 43B applies to amounts payable to the sovereign qua sovereign, not qua principal. The Tribunal upheld the CIT(A)'s decision, noting that the service tax was not claimed as an expense and thus could not be disallowed under Section 43B.

2. Disallowance of Proportionate Interest on Borrowed Funds:
The AO disallowed interest expenses on borrowed funds, alleging that they were diverted as interest-free loans to sister concerns. The CIT(A) deleted the disallowance, noting that the assessee had sufficient reserves and surplus to cover the interest-free advances and that the AO failed to establish a direct linkage between the borrowed funds and the advances. The CIT(A) also recognized the commercial expediency in advancing loans to sister concerns engaged in construction activities. The Tribunal remitted the issue back to the AO, directing the assessee to produce cash flow statements to demonstrate the availability of sufficient own funds at the time of making the advances.

3. Depreciation on Undivided Share of Land:
The AO disallowed depreciation claimed on the undivided share of land, treating it as part of the cost paid towards the building, arguing that land is not a depreciable asset. The CIT(A) deleted the disallowance, reasoning that in the case of flats, the land and building are inseparable, and only the flat is identifiable. The Tribunal reversed the CIT(A)'s decision, holding that land, even if part of a composite purchase, retains its identity and is not eligible for depreciation. The Tribunal cited the Supreme Court judgment in CIT vs. Alps Theatre and the Rajasthan High Court judgment in CIT vs. Vimal Chand Golecha, which clarified that depreciation is allowable only on the building, not on the land.

Conclusion:
The Tribunal allowed the Revenue's appeal regarding the disallowance of unpaid service tax under Section 43B, remitted the issue of disallowance of proportionate interest on borrowed funds for fresh consideration by the AO, and upheld the AO's disallowance of depreciation on the undivided share of land. The appeals were partly allowed for statistical purposes.