2014 (4) TMI 829 - HC - Income Tax

Allowability of deduction u/s 37(1) of the Act - Amount of service tax included with interest Held that - The Tribunal rightly was of the view that the liability has been crystallized in the year under consideration revenue had not brought on record any material that the service tax including interest had been recovered from the parties for which it had rendered service - The expenses were incidental and arising out of the business of the assessee - The interest payment is compensatory in nature - The expenses have direct nexus with the business operation. Relying upon Commissioner of Income Tax v. Luxmi Devi Sugar Mills P. Limited 1990 (9) TMI 8 - SUPREME Court - the amount was expended by the assessee during the course of business, wholly and exclusively for the purpose of business - If the assessee had taken proper steps and charged service tax to the service recipients and deposited with the Government, there was no question of assessee expending such sum - It is only because the assessee failed to do so, that he had to expend the said amount, though it was not his primary liability - this cannot be stated to be a penalty for infraction of law - payment of interest is compensatory in nature and would not partake the character of penalty Decided against Revenue.

Summary

Issues:
1. Whether the liability to pay Service tax had arisen during the relevant year.
2. Whether the expenses debited as Service-tax and interest were incidental to the business.
3. Whether Service-tax and interest from earlier years are deductible under Section 37(1) of the Income Tax Act.

Analysis:
1. The main issue in this case was whether a sum paid by the assessee towards Service tax and interest would be deductible under Section 37(1) of the Income Tax Act. The assessee had paid Rs. 32,44,004, which included Service tax and interest, after an audit objection was raised for not collecting service tax on certain services provided. The primary liability to pay the tax was on the service recipient, but the assessee failed to collect and deposit it. Both the CIT [A] and the Tribunal allowed the deduction. The Tribunal noted that the expenses were incidental to the business and had a direct nexus with business operations. The payment was compensatory in nature and allowable under Section 37 of the IT Act.

2. The Tribunal found that the assessee had not collected service tax on certain services for several years, leading to a demand for Rs. 23,07,450 and interest of Rs. 9,36,553. The assessee paid this amount from its own pocket after an audit by the Service Tax Department. The Tribunal held that since the service tax was not collected, it could not be routed through the Profit & Loss account. The expenses were debited in the P&L account as business expenses, not specifically as service tax and interest. The Tribunal concluded that the liability crystallized in the relevant year and was allowable under Section 37 of the IT Act.

3. The High Court upheld the decisions of the CIT [A] and the Tribunal, emphasizing that the amount was expended by the assessee for business purposes. The Court distinguished a previous case involving penalty for breach of the law, stating that the present case did not involve a penalty. The Court also noted that payment of interest is compensatory and not penal in nature, citing relevant case law. Therefore, the Court dismissed the Tax Appeal, affirming that the amount paid by the assessee towards Service tax and interest was deductible under Section 37(1) of the Income Tax Act.