43b

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Querist : Anonymous

Querist : Anonymous (Querist)

21 September 2010 Hi
in case of service tax provided in book / collected but un paid on or before due date or filing of income tax return is 43B applicable on this ? is there is any requirement to add beck to income that much of amount ?

Aditya Maheshwari

Aditya Maheshwari (Expert)
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21 September 2010 Why service tax not collected can not be disallowed u/s 43B ?

There is a fundamental difference between Sales tax and Service tax. In case of Sales tax , the seller is responsible to deposit the sales tax even if he has not collected that from the customer but in case of service tax the liability of service provider arises only when he has received the value of taxable service from the customer.

Section 68 read with Rule 6 of Service Tax Rules show that service provider becomes liable to make the payment of service tax by the 5th of the month immediately following the calendar month in which the payments are received towards the value of taxable service.

If there is no liability to make the payment to the credit of Central Government because of non receipt of payments from the receiver of the services, then it cannot be said that such service tax has become payable in terms of Clause (a) of Section 43B because that clause specifically mentions “sum payable by the Assessee“. So, in such case , disallowance u/s 43B of such service tax amount which is yet to be collected is bad in law.

Supporting decisions

Two case laws are referred in this regard

ACIT vs Real Image Media Technologies (P) Ltd 306 ITR 106
CIT vs Noble and Hewitt India (P) Ltd. 305 ITR 324
ITAT , Chennai’s order in case of ACIT vs Real Image Media Technologies (P) Ltd 306 ITR 106

The brief facts of the case are that the Assessee company is engaged in the business of running a recording and dubbing studio, production of advertisement film and TV serials, manufacturing of specialised computers, trading in technical solutions, production of distribution of feature film and software development. During the Assessment proceedings the Assessing Officer noticed that service tax was not being routed through profit and loss accounts and the Assessee had shown liability towards service tax at Rs. 5,72,374/- as on 31.3.2002 in its balance she

Decision by Tribunal

The decision of Tribunal was based on the decision of the Hon’ble Andhra Pradesh High Court in the case of Srikakollu Subba Rao and Co. and Ors. v. Union of India and Ors. Which while deciding the issue of application of section 43B on the liability of payment of sales tax in last month of the financial year , has made the following observations:

“ In order to apply the provisions of Section 43B, it seems to us that not only should the liability to pay the tax or duty be incurred in the accounting year but the amount also should be statutorily “payable” in the accounting year.

Section 43B itself is clear to this extent. It refers to the “sum payable” in cl. (a) as well as in cl. (b). If the Legislature intended, it should have so provided that any sum for the payment of which liability was incurred but the Assessee would not be allowed unless such sum is actually paid.

Keeping in mind the object for which Section 43B was enacted, it is difficult to subscribe to the view that a routine application of that provision is called for in cases where the “taxes and duties” for the payment of which liability was incurred in the accounting year, were not statutorily payable in that accounting year.

If, under the provisions of any statute, a tax or duty is payable after the close of the accounting year, different consideration would prevail and it may not be open to the ITO to disallow tax or duty which is statutorily payable after the accounting year. In fact, the amendment brought about, which is coming into force on 1st April 1988, permitting the deduction of taxes and duties paid before the filing of the 77″ returns clearly supports the view that “taxes and duties” not statutorily payable during the accounting year do not fall to be disallowed under Section 43B.”

The second decision on the same issue is that of Delhi High court in case of CIT vs Noble and Hewitt India (P) Ltd. 305 ITR 324 .

Facts of the case

The Assessee maintains a mercantile system of accounting. Out of the service tax so collected Rs. 14.40 lakhs was not deposited by the Assessee with the concerned authorities. The Assessee neither claimed any deduction nor did it debit the amount as an expenditure in the Profit and Loss Account.

The Assessing Officer as well as the Commissioner of Income Tax (Appeals) ['CIT(A)'] nevertheless disallowed the amount and added it back to the income of the Assessee.

The Tribunal allowed relief to assessee on the ground since the Assessee had not claimed a deduction there was no question of disallowing the deduction which was not even claimed.

The decision of High Court

Learned counsel for the Revenue urges that the decision of the Calcutta High Court in Chowringhee Sales Bureau covers the point in its favour. We are unable to agree. In that case it was held that the liability to pay sales tax arose the moment a sale or purchase was effected and if an Assessee was maintaining accounts on the mercantile system it would be entitled to deduction of the estimated liability of sales tax, even though such sales tax had not been paid to the sales tax authorities. The question there concerned was the entitlement of the assessee to deduction under Sections 10(1) and 10(2)(xv) of the Income Tax Act, 1922. The decision is clearly distinguishable in its application to the present case. Here we are concerned with an Assessee who has not even claimed any deduction on the ground of service tax and has not debited the amount to its Profit and Loss Account. Moreover the provisions of Section 43B of the Act are quite clear in this regard. The decision of the Calcutta High Court in Chowringhee Sales Bureau was not in the context of the applicability of Section 43B of the Act.

In our opinion since the Assessee did not debit the amount to the 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.

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Querist : Anonymous

Querist : Anonymous (Querist)

21 September 2010 Thanks for the reply.

In my case service tax collected from the client. and not deposited till date of filing return . what is the effect ??

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Aditya Maheshwari

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21 September 2010 Where the assessee maintaining mercantile system of accounting collected service tax but did not deposit a portion thereof to Government account, but had neither debited the amount to the profit and loss account as an expenditure nor had claimed any deduction in respect of the amount, the question of disallowing any amount under section 43B would not arise - CIT v. Noble & Hewitt (I) (P.) Ltd. [2008] 166 Taxman 48 (Delhi).

Querist : Anonymous

Querist : Anonymous (Querist)

21 September 2010 Thanks

Aditya Maheshwari

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21 September 2010 U can also thank by using thank user icon.