2025 (2) TMI 763 - AT - Income Tax

Disallowance u/s 37 in respect of an expense which has not at all been claimed in the Profit Loss a/c - HELD THAT - Underlying amount paid by the assessee qualifies as an expenses incurred by the assessee in order to secure the business of earning commission income from Max Life and such amount does not partake the character of service tax liability since such service tax liability was under law never that of the assessee. Such service tax liability was essentially that of Max Life under reverse charge mechanism. We also note that there is no specific provision which prohibits entering into such contractual agreement for sharing service tax liability and hence such agreement cannot be held to be an offence and hence prohibited by Explanation to Section 37. AO s contention that the amount in question was collected by Max Life from assessee but was not deposited to with the Government and was kept for itself whereas the assessee had booked the same as an expenses we observe that as per the provision of Section 2(1)(d) of the Service Tax Rules 1994 such service tax liability was that of Max Life and not that of the assessee. Therefore underlying amount of service tax which was agreed to be borne by the assessee does not partake the character of service tax liability but is a contractual arrangement entered into between Max Life Insurance with a view to secure the business of Insurance Auxiliary Services from Max Life. Such expenses should be allowed to the assessee u/s 37 - Assessee s appeal is allowed.

Summary

The issues presented and considered in this legal judgment involve the disallowance of expenses claimed by the Assessee under Section 37 of the Income Tax Act for the assessment years 2011-12 and 2012-13. The core legal questions revolve around whether the expenses incurred by the Assessee in bearing 50% of the service tax liability of Max Life Insurance Company are allowable deductions under Section 37, considering the contractual arrangement between the parties and the legal obligations regarding service tax liability.In the detailed analysis, the relevant legal framework includes Section 37 of the Income Tax Act and the Finance Act, 1994, particularly Section 2(1)(d) and Section 73A. The Court's interpretation and reasoning focused on the contractual agreement between the Assessee and Max Life Insurance Company, the nature of the expenses claimed, and the legal liability for service tax payment. Key evidence and findings highlighted the contractual arrangement for sharing service tax liability and the Assessing Officer's disallowance of the expenses under Section 37.The Court applied the law to the facts by considering the contractual nature of the expenses, the legal obligations regarding service tax liability, and the business necessity of the expenditure. Competing arguments were presented by the Assessee's Counsel, emphasizing the contractual arrangement and business necessity, while the Departmental Representative relied on the Assessing Officer and CIT(A)'s findings.Significant holdings include the Court's determination that the expenses incurred by the Assessee in bearing 50% of the service tax liability of Max Life Insurance Company are allowable deductions under Section 37 of the Income Tax Act. The Court emphasized that the payment was made under a contractual obligation, not as a service tax liability of the Assessee, and that the arrangement was essential for securing commission income from Max Life. The Court concluded that the expenses should be allowed as deductions under Section 37 for both assessment years.In conclusion, the legal judgment resolved the issue of disallowance of expenses under Section 37 in favor of the Assessee, highlighting the contractual nature of the expenses and the business necessity for incurring them. The Court's interpretation focused on the legal framework and the specific circumstances of the case, ultimately allowing the Assessee's appeal for both assessment years.