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2012 (5) TMI 90 - AT - Income TaxApplicability of section 43B on payment of service tax - Non-inclusion of service tax in gross receipts Held that - As per the Service Tax Law, Service Tax is payable only when the payment/fees for underlying service provided are realized - as the appellant firm has not received the sum till the end of the financial year i.e. 2006-07 question of paying the same did not arise at all - Since the liability to pay service tax does not exist in the present case, the service tax cannot be said to be payable and therefore provisions of Sec.43-B of the Act could not also be invoked in favour of assessee. Dis -allowing the insurance premium to the extent half out of an entire premium amount paid on the life of the partners Held that - The maturity proceeds of the Key Man Insurance Policy is taxable and premium paid on such policies is deductible - the CBDT Circular No. 762 dated February 18, 1998 has confirmed it - It is not necessary that a key man insurance policy should be only in the name of the employees and not partners - Sec. 10(1OD) recognize the existence of other types of relationship apart from employer-employee relationship for claiming deduction on account of premium paid on Keyman Insurance Policy as business expenditure - in favour of assessee.
Issues Involved:
1. Addition of Rs. 7,40,646/- to total income due to discrepancy in gross receipts. 2. Disallowance of insurance premium as non-business expenditure. Issue-wise Detailed Analysis: 1. Addition of Rs. 7,40,646/- to Total Income: The assessee, a partnership firm engaged in consultancy services, reported consultancy receipts of Rs. 28,51,034/-. However, the actual billed amount was Rs. 32,00,000/- plus service tax of Rs. 3,48,966/-. The discrepancy arose due to an erroneous reduction of Rs. 3,91,680/- from the consultation charges. The AO added Rs. 3,91,680/- to the total income, citing section 43B and section 145A of the Income-tax Act, 1961. The CIT(A) upheld the AO's decision, noting suppression of consultation charges and non-inclusion of service tax in gross receipts. The Tribunal observed that under Service Tax Law, service tax is payable upon realization of payment for services. Since the payment was not realized by the end of the financial year, the liability to pay service tax did not arise. Section 145A applies to the valuation of purchase and sale of goods, not service contracts. The Tribunal found that the service tax liability arose in the subsequent financial year and was duly discharged. The provisions of section 43B were deemed inapplicable as the liability to pay service tax had not crystallized due to non-receipt of payment. The Tribunal directed the deletion of the addition of Rs. 3,91,680/- sustained by the CIT(A). 2. Disallowance of Insurance Premium: The assessee claimed a deduction for insurance premiums paid on the lives of two key partners, totaling Rs. 42,00,000/-. The AO disallowed the entire amount, treating it as a non-business expenditure. The CIT(A) partially allowed the claim, restricting the deduction to Rs. 3,60,000/- and disallowing Rs. 38,40,000/- due to a decrease in gross receipts. The Tribunal noted that the Key Man Insurance Policy was taken to safeguard the firm against potential losses due to the premature death of key partners. It cited CBDT Circular No. 762, which clarifies that premiums paid on Key Man Insurance Policies are deductible. The Tribunal referenced various judgments, including the Bombay High Court's decision in B. N. Exports, which held that premiums paid on policies for partners are allowable as business expenditure. The Tribunal emphasized that business expediency should be viewed from a businessman's perspective and that the insurance was a period contract, necessitating continuity even in loss situations. The Tribunal found that the CIT(A) erred in partially disallowing the premium and directed the deletion of the disallowance of Rs. 3,840,000/-. Conclusion: The appeal by the assessee was allowed in full. The Tribunal directed the deletion of the addition of Rs. 3,91,680/- to the total income and the disallowance of Rs. 3,840,000/- on account of insurance premiums, recognizing the business necessity and compliance with relevant legal provisions.
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