2019 (2) TMI 634 - AT - Income Tax

Addition u/s 43B - assessee failed to deposit service tax to the Central Govt. Account well before filing of return - Held that - Assessee before us maintains its account on Mercantile basis and had shown a sum of ₹ 1,49,48,482/-, as service tax payable in its annual account for year under consideration. Finance Act,2011 provides that, from 01/04/11 service tax will have to be paid on accrual basis, meaning thereby, till 31/03/11 service tax was payable on collection or receipt basis, i.e. when dues are realised, service tax was payable. The case of assessee is that during relevant financial year, service tax was payable upon realisation of dues and assessee had made a provision in balance sheet for outstanding service tax payable, which was not claimed in profit and loss account as expenditure. As decided in COMMISSIONER OF INCOME TAX VERSUS NOBLE AND HEWITT (I) P. LTD. 2007 (9) TMI 238 - DELHI HIGH COURT since the assessee did not debit the amount of profit and loss account as an expenditure nor did the assessee claim any deduction in respect of the amount and considering that the assessee is following the Mercantile system of accounting, the question of disallowing the deduction not claimed would not arise. - Decided against revenue

Summary

Issues:
1. Disallowance of service tax under section 43B of the Income Tax Act, 1961.
2. Interpretation of provisions of section 43B of the Act and Rule 6 of the service tax rules, 1994.
3. Applicability of the Finance Act, 2011 regarding the payment of service tax on accrual basis.

Analysis:
The case involved an appeal by the Revenue against the order of the Ld.CIT(A) regarding the disallowance of service tax under section 43B of the Income Tax Act, 1961. The Ld.AO disallowed an amount of ?1.49 crores as service tax, as the assessee failed to deposit it before the due date. The Ld.CIT(A) allowed the claim of the assessee, stating that service tax was payable only when the payment for services rendered had been received by the assessee. The Ld.CIT(A) highlighted that service tax was payable on accrual basis from April 1, 2011, as per the Finance Act, 2011. The Ld.CIT(A) observed that the assessee had maintained accounts on a mercantile basis and had made a provision for outstanding service tax payable, which was not claimed as expenditure in the profit and loss account.

The Ld.CIT(A) emphasized that the service tax on unrealized contract receipts had not become payable as per Rule 6 of the Service Tax Rules, 1994, and therefore, the disallowance under section 43B was not justified. The Ld.CIT(A) referred to the amendment by the Finance Act, 2011, which mandated payment of service tax on accrual basis. The Ld.CIT(A) analyzed the details provided by the assessee regarding service tax due but not payable as on the balance sheet date, along with the reconciliation of amounts receivable from debtors and service tax.

The Appellate Tribunal upheld the view of the Ld.CIT(A) and dismissed the appeal filed by the Revenue. The Tribunal noted that the assessee had not claimed any deduction in respect of the outstanding service tax amount and was following the Mercantile system of accounting. The Tribunal relied on a previous decision of the Hon'ble Delhi High Court to support its decision. The Tribunal concluded that the facts of the case were similar to the precedent case, and therefore, the disallowance of the service tax was not warranted.

In conclusion, the Tribunal upheld the decision of the Ld.CIT(A) and dismissed the appeal filed by the Revenue, emphasizing that the service tax was payable on accrual basis as per the Finance Act, 2011, and the assessee had made a provision for the outstanding service tax amount in its accounts without claiming it as expenditure.