Case Law Details
Col. D. Pradeep Kumar Vs DCIT (ITAT Chennai)
Introduction: The appeal of Col. D. Pradeep Kumar against the order of the Commissioner of Income Tax (Appeals)-2, Chennai, for AY 2012-13 revolves around the disallowance of Service Tax payable under section 43B of the Income Tax Act. The ITAT Chennai scrutinized the exclusive method employed by the assessee to account for Service Tax liabilities and directed the Assessing Officer (AO) to verify the extent of the liability at year-end.
Detailed Analysis: The primary issue in this case pertains to the disallowance of Service Tax payable by the assessee under section 43B. The AO disallowed a sum of Rs. 89.18 Lacs, as the assessee had only paid a portion of the Service Tax before the due date of filing the income tax return.
During the appellant proceedings, the assessee contended that since the Service Tax amount was not routed through the Profit & Loss Account, no disallowance under section 43B could be made. The assessee relied on the decision of the Hon’ble Delhi High Court in Noble & Hewitt (I) (P) Ltd (2008; 166 taxman 48).
The ITAT Chennai considered the exclusive method employed by the assessee to account for Service Tax liabilities. However, it also acknowledged that as per the extant Service Tax Rules, the liabilities arise on a receipt basis. Service Tax is payable only when the consideration is received. Therefore, the liability to pay Service Tax at year-end might not have actually arisen.
In light of this, the ITAT directed the AO to verify the factual position and restrict the disallowance to the extent the liability to pay Service Tax had arisen in the hands of the assessee at year-end.
Conclusion: The ITAT Chennai ruling in Col. D. Pradeep Kumar vs. DCIT provides clarity on the disallowance of Service Tax under section 43B. The exclusive method used by the assessee does not exempt it from the provisions of section 43B. However, the ITAT emphasized that the disallowance should be limited to the extent the liability to pay Service Tax had actually arisen in the hands of the assessee at year-end. This decision highlights the importance of aligning accounting methods with statutory provisions and ensuring that disallowances are proportionate to the liabilities incurred.
The case serves as a reminder for taxpayers to be vigilant in assessing the timing of liabilities, especially when they are contingent on specific events such as the receipt of consideration. It underscores the significance of a nuanced approach to tax compliance, considering both accounting practices and legal requirements.
ITAT find that the assessee is following exclusive method to account Service Tax liability in the Books of Accounts and therefore, the argument that the Service Tax was not routed through profit & Loss Account would not hold good. At the same time, we find that as per extant Service Tax Rules, the Service Tax liabilities arise in the hands of the assessee on receipt basis. Until the consideration is received, Service Tax is not payable. Therefore, the liability to pay Service Tax, at year-end, may not have actually arisen in the hands of the assessee. Therefore, the disallowance has to be made only to the extent the liability to pay Service Tax Liability had arisen in the hands of the assessee at year-end. The Ld. AO is directed to verify this fact and restrict the disallowance to that extent only.
FULL TEXT OF THE ORDER OF ITAT CHENNAI
1. Aforesaid appeal by assessee for Assessment Year (AY) 2012-13 arises out of the order of learned Commissioner of Income Tax (Appeals)-2, Chennai [CIT(A)] dated 29.07.2016 in the matter of assessment framed by Ld. Assessing Officer [AO] u/s. 143(3) of the Act on 10.11.2014.
2. The only issue in the appeal is disallowance of Service Tax payable by the assessee u/s. 43B of the Act for Rs. 89.18 Lacs. During hearing, none has appeared for assessee. Left with no option, we proceed to dispose-off the appeal after hearing Ld. Sr. DR since the appeal has been listed as old appeal. The Ld. Sr. DR pleaded for dismissal of the appeal since the assessee did not pay the service tax by due date of filing of return of income.
3. The material on record would show that a sum of Rs.94,17,953/-representing Service Tax was shown to be payable by the assessee at year-end. The assessee had only paid an amount of Rs.4,99,795/-before due date of filing of return of income. Therefore, the balance amount of Rs.89,18,158/- was disallowed u/s 43B.
4. During appellant proceedings, the assessee, inter-alia, submitted that the Service Tax amount was not routed through Profit & Loss Account and therefore, no such disallowance u/s. 43B could be made. The assessee relied on the decision of Hon’ble Delhi High Court in Noble & Hewitt (I) (P) Ltd (2008; 166 taxman 48) to support the argument. However, the disallowance was confirmed against which the assessee is in further appeal before us.
5. Upon careful consideration of factual matrix, we find that the assessee is following exclusive method to account Service Tax liability in the Books of Accounts and therefore, the argument that the Service Tax was not routed through profit & Loss Account would not hold good. At the same time, we find that as per extant Service Tax Rules, the Service Tax liabilities arise in the hands of the assessee on receipt basis. Until the consideration is received, Service Tax is not payable. Therefore, the liability to pay Service Tax, at year-end, may not have actually arisen in the hands of the assessee. Therefore, the disallowance has to be made only to the extent the liability to pay Service Tax Liability had arisen in the hands of the assessee at year-end. The Ld. AO is directed to verify this fact and restrict the disallowance to that extent only.
6. The appeal stand allowed for statistical purposes.
Order pronounced on 08th June, 2022
