Service Tax v/s Section 43B of the Income Tax Act
This query is : Resolved
08 October 2007
Will the service Tax not collected as on date of Balance be disallowed u/s 43B of the income Tax act??
In other words the provsion of Section 43B over rules the provision of Service tax???
Thanks
Purvi
In other words the provsion of Section 43B over rules the provision of Service tax???
Thanks
Purvi
08 October 2007
SEC. 43B APPLIES WHEN THE ASSESSEE MAINTAINS BOOKS ON MERCANTILE SYSTEM.
UNDER SEC 43B, ONLY ON PAYMENT BASIS THE EXP. RELATING TO ANY SUM PAYABLE BY WAY OF TAX,DUTY.,CESS OR FEES BY WHATEVER NAME CALLED WILL BE DEDUCTIBLE.( THE DETAILED LIST OF ALL SUCH EXP. IS NOT PRODUCED HERE).
ON ACCRUAL BASIS SUCH EXP. WILL BE ALLOWED (IN THE YEAR OF INCURRING THE LIABILITY ) FOR DEDUCTION ONLY IF THE FOLLOWING TWO CONDITIONS ARE SATISFIED.
1.PAYMENT IS MADE ON OR BEFORE THE DUE DATE OF SUBMISSION OF RETURN OF INCOME
2.EVIDENCE OF SUCH PAYMENT IS SUBMITTED WITH THE RETURN OF INCOME.
THE QUESTION REFERRED BY YOU REFERS TO SERVICE TAX WHICH IS A STATUTORY PAYMENT .HENCE COVERED UNDER SEC 43B AND CAN BE DEDUCTED ASSUMING THAT THE ABOBE CONDITION 1 AND 2 ARE SATISFIED BY YOU.
COMING TO THE LIABILITY OF THE SERVICE PROVIDER UNDER THE SERVICE TAX ACT,FAILURE TO COLLECT SERVICE TAX DOES NOT ABSOLVE THE SERVICE PROVIDER FROM THE LIABILITY OF DEPOSITING THE SERVICE TAX, IRRESPECTIVE OF HIS ABILITY OR FAILURE TO COLLECT THE SAME FROM THE SERVICE RECEIVER.
R.V.RAO
UNDER SEC 43B, ONLY ON PAYMENT BASIS THE EXP. RELATING TO ANY SUM PAYABLE BY WAY OF TAX,DUTY.,CESS OR FEES BY WHATEVER NAME CALLED WILL BE DEDUCTIBLE.( THE DETAILED LIST OF ALL SUCH EXP. IS NOT PRODUCED HERE).
ON ACCRUAL BASIS SUCH EXP. WILL BE ALLOWED (IN THE YEAR OF INCURRING THE LIABILITY ) FOR DEDUCTION ONLY IF THE FOLLOWING TWO CONDITIONS ARE SATISFIED.
1.PAYMENT IS MADE ON OR BEFORE THE DUE DATE OF SUBMISSION OF RETURN OF INCOME
2.EVIDENCE OF SUCH PAYMENT IS SUBMITTED WITH THE RETURN OF INCOME.
THE QUESTION REFERRED BY YOU REFERS TO SERVICE TAX WHICH IS A STATUTORY PAYMENT .HENCE COVERED UNDER SEC 43B AND CAN BE DEDUCTED ASSUMING THAT THE ABOBE CONDITION 1 AND 2 ARE SATISFIED BY YOU.
COMING TO THE LIABILITY OF THE SERVICE PROVIDER UNDER THE SERVICE TAX ACT,FAILURE TO COLLECT SERVICE TAX DOES NOT ABSOLVE THE SERVICE PROVIDER FROM THE LIABILITY OF DEPOSITING THE SERVICE TAX, IRRESPECTIVE OF HIS ABILITY OR FAILURE TO COLLECT THE SAME FROM THE SERVICE RECEIVER.
R.V.RAO
08 October 2007
Thanks for the reply.Still my Query is unresolved.
As per the service Tax Act Liability arises only when amount recd from client. And section 43B states that the Taxes payable under the respective law in force. When the liabilty has not come into pitcure then why the same should be disallowed?
Secondly service tax in not a P & L item why still the same should be disallowed?
eg the Billing has happened in Mar'07 and the client pays the amount in after the return is filed. Does the service tax amount is disallowed in the computation for 31.03.2007?
You have mentioned Failure to collect Service Tax- Is there any time bar to this??
Purvi
As per the service Tax Act Liability arises only when amount recd from client. And section 43B states that the Taxes payable under the respective law in force. When the liabilty has not come into pitcure then why the same should be disallowed?
Secondly service tax in not a P & L item why still the same should be disallowed?
eg the Billing has happened in Mar'07 and the client pays the amount in after the return is filed. Does the service tax amount is disallowed in the computation for 31.03.2007?
You have mentioned Failure to collect Service Tax- Is there any time bar to this??
Purvi
08 October 2007
The Query is not resolved
09 October 2007
In this situation the two account head should be maintained.
1) Service Tax Charged
2) Service Tax Payable
In this case Service tax Charged which will not come under 43B. But in Auditor's Report and 3CD Reprort the amount should be quanitified as "Amount raised but not yet collected" or like some suitable words. This is fair enough. But service tax payable should be paid within the due date of filing return.
In one case AW Figgis & Co ltd 256 ITR 268 (Cal.) : Sales tax collected by a broker / agent on behalf of the principal is neither a trading receipt nor business receipt. Hence, Sec 43B is not applicable.
In my opinion the same situation can be applied to service tax also.
Wherever the disallownace is not applicable in that situation penalty or prosecution which may be implied.
1) Service Tax Charged
2) Service Tax Payable
In this case Service tax Charged which will not come under 43B. But in Auditor's Report and 3CD Reprort the amount should be quanitified as "Amount raised but not yet collected" or like some suitable words. This is fair enough. But service tax payable should be paid within the due date of filing return.
In one case AW Figgis & Co ltd 256 ITR 268 (Cal.) : Sales tax collected by a broker / agent on behalf of the principal is neither a trading receipt nor business receipt. Hence, Sec 43B is not applicable.
In my opinion the same situation can be applied to service tax also.
Wherever the disallownace is not applicable in that situation penalty or prosecution which may be implied.
09 October 2007
According to Income tax Act the expenses to which the accrual rule does not apply:
Accrual concept does not hold good under the head profits and Gains of Business or Profession in the following circumstances. i.e The following expesnes are allowable only on payment basis irrespective of the time of accrual -
1. Sec 43B
2. Sec 35ABB
3. Sec 35D
4. Sec 35DD
5. Sec 35DDA
Accrual concept does not hold good under the head profits and Gains of Business or Profession in the following circumstances. i.e The following expesnes are allowable only on payment basis irrespective of the time of accrual -
1. Sec 43B
2. Sec 35ABB
3. Sec 35D
4. Sec 35DD
5. Sec 35DDA
09 October 2007
HIGH COURT OF CALCUTTA
Exide Industries Ltd.
v.
Union of India
Section 43B of the Income-tax Act, 1961 - Business disallowance - Certain deductions to be allowed only on actual payment - Whether section 43B(f) is to be struck down being arbitrary, unconscionable and de hors Apex Court decision in case of Bharat Earth Movers v. CIT [2000] 245 ITR 428/112 Taxman 61 - Held, yes
Facts
The assessee-company filed writ contending that section 43B(f) was ultra vires the law of the land in view of the fact that the assessee being a body corporate was entitled to maintain its accounts by mercantile system of accounting which is permissible in law. Hence, the amount payable to its employees as leave encashment was to be shown in the balance sheet as a liability for each and every year and the employer was entitled to have deduction not only in the year in which it was actually paid, but also for the years when provision was made. Single Judge dismissed the writ petition.
On appeal to the Division Bench :
Held
On a perusal of the object and reasons as disclosed by the Finance Act, 1983 for enacting section 43B, it would appear that the Legislature expressed concern about the unreasonable deduction claim on the basis of mercantile accounting method without discharging statutory liabilities. It was observed by the Legislature that there had been a trend to evade statutory liabilities on the one hand, and claim appropriate benefit under the Act, on the other hand. Hence, such enactment was necessary. [Para 12]
The said section had undergone several changes from time to time and on each and every occasion, the Legislature came out with the objects and reasons disclosed therefor. In 1990, deduction on account of unpaid loan and public financial institution or a State financial institution was roped in. By a further amendment in 1996, unpaid loan of scheduled bank was also incorporated. On each such occasion, the objects and reasons were disclosed. While inserting clause (f), no special reasons were disclosed. The Single Judge held that such disclosure was not mandatory. There was no reason for disagreement on such issue, provided the subject amendment could be termed as in furtherance to widen the scope of the original section on the identical objects and reasons as disclosed at the time of enacting the original provision. As the original section was incorporated to plug in deductions claimed by not discharging statutory liabilities, the provision was subsequently made to restrict deductions on account of unpaid loan to the financial institutions. Leave encashment is neither a statutory liability nor a contingent liability. It is a provision to be made for the entitlement of an employee achieved in a particular financial year. An employee earns certain amount by not taking leave which he or she is otherwise entitled to in that particular year. Hence, the employer is obliged to make appropriate provision for the said amount. Once the employee retires, he or she has to be paid such sum on cumulative basis which the employee earns throughout his or her service career, unless he or she avails of the leave earned by him or her. That could not have any nexus with the original enactment. An employer is entitled to deduction for the expenditure he incurs for running his business, which includes payment of salary and other perquisites to his employees. Hence, it is a trading liability. As such, he is otherwise entitled to have deduction of such amount by showing the same as a provisional expenditure in his accounts. The Legislature by way of amendment restricts such deduction in the case of leave encashment unless it is actually paid in that particular financial year. The Legislature is free to do so after it discloses reasons for that and such reasons are not inconsistent with the main object of the enactment. There was no such reason for perusal. The revenue could not enlighten on that score. Such enactment is not consistent with the original provision being section 43B, which was originally inserted to plug in evasion of statutory liability. The Apex Court considered the situation in Bharat Earth Movers v. CIT [2000] 245 ITR 428/112 Taxman 61 when clause (f) was not there. The Apex Court, considering all aspects, rejected the contention of the revenue and granted appropriate deduction to the concerned assessee. The Legislature to get rid of the decision of the Apex Court brought about the amendment which would otherwise nullify the Judge-made law. The Apex Court decisions are Judge-made law and are applicable to all under the Constitution. The Legislature was entitled to bring such amendment, it was within its power to bring such amendment. However, it must disclose reasons which would be consistent with the provisions of the Constitution and the laws of the land and not for the sole object of nullifying the Apex Court decision. [Para 13]
The appeal had to succeed and was to be allowed. Section 43B(f) is to be struck down being arbitrary, unconscionable and de hors the Apex Court decision in Bharat Earth Movers (supra).
Exide Industries Ltd.
v.
Union of India
Section 43B of the Income-tax Act, 1961 - Business disallowance - Certain deductions to be allowed only on actual payment - Whether section 43B(f) is to be struck down being arbitrary, unconscionable and de hors Apex Court decision in case of Bharat Earth Movers v. CIT [2000] 245 ITR 428/112 Taxman 61 - Held, yes
Facts
The assessee-company filed writ contending that section 43B(f) was ultra vires the law of the land in view of the fact that the assessee being a body corporate was entitled to maintain its accounts by mercantile system of accounting which is permissible in law. Hence, the amount payable to its employees as leave encashment was to be shown in the balance sheet as a liability for each and every year and the employer was entitled to have deduction not only in the year in which it was actually paid, but also for the years when provision was made. Single Judge dismissed the writ petition.
On appeal to the Division Bench :
Held
On a perusal of the object and reasons as disclosed by the Finance Act, 1983 for enacting section 43B, it would appear that the Legislature expressed concern about the unreasonable deduction claim on the basis of mercantile accounting method without discharging statutory liabilities. It was observed by the Legislature that there had been a trend to evade statutory liabilities on the one hand, and claim appropriate benefit under the Act, on the other hand. Hence, such enactment was necessary. [Para 12]
The said section had undergone several changes from time to time and on each and every occasion, the Legislature came out with the objects and reasons disclosed therefor. In 1990, deduction on account of unpaid loan and public financial institution or a State financial institution was roped in. By a further amendment in 1996, unpaid loan of scheduled bank was also incorporated. On each such occasion, the objects and reasons were disclosed. While inserting clause (f), no special reasons were disclosed. The Single Judge held that such disclosure was not mandatory. There was no reason for disagreement on such issue, provided the subject amendment could be termed as in furtherance to widen the scope of the original section on the identical objects and reasons as disclosed at the time of enacting the original provision. As the original section was incorporated to plug in deductions claimed by not discharging statutory liabilities, the provision was subsequently made to restrict deductions on account of unpaid loan to the financial institutions. Leave encashment is neither a statutory liability nor a contingent liability. It is a provision to be made for the entitlement of an employee achieved in a particular financial year. An employee earns certain amount by not taking leave which he or she is otherwise entitled to in that particular year. Hence, the employer is obliged to make appropriate provision for the said amount. Once the employee retires, he or she has to be paid such sum on cumulative basis which the employee earns throughout his or her service career, unless he or she avails of the leave earned by him or her. That could not have any nexus with the original enactment. An employer is entitled to deduction for the expenditure he incurs for running his business, which includes payment of salary and other perquisites to his employees. Hence, it is a trading liability. As such, he is otherwise entitled to have deduction of such amount by showing the same as a provisional expenditure in his accounts. The Legislature by way of amendment restricts such deduction in the case of leave encashment unless it is actually paid in that particular financial year. The Legislature is free to do so after it discloses reasons for that and such reasons are not inconsistent with the main object of the enactment. There was no such reason for perusal. The revenue could not enlighten on that score. Such enactment is not consistent with the original provision being section 43B, which was originally inserted to plug in evasion of statutory liability. The Apex Court considered the situation in Bharat Earth Movers v. CIT [2000] 245 ITR 428/112 Taxman 61 when clause (f) was not there. The Apex Court, considering all aspects, rejected the contention of the revenue and granted appropriate deduction to the concerned assessee. The Legislature to get rid of the decision of the Apex Court brought about the amendment which would otherwise nullify the Judge-made law. The Apex Court decisions are Judge-made law and are applicable to all under the Constitution. The Legislature was entitled to bring such amendment, it was within its power to bring such amendment. However, it must disclose reasons which would be consistent with the provisions of the Constitution and the laws of the land and not for the sole object of nullifying the Apex Court decision. [Para 13]
The appeal had to succeed and was to be allowed. Section 43B(f) is to be struck down being arbitrary, unconscionable and de hors the Apex Court decision in Bharat Earth Movers (supra).
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