IN THE ITAT MUMBAI BENCH ‘E’
Euro RSCG Advertising (P.) Ltd.
V/s.
Assistant Commissioner of Income-tax, Circle-6(2)
IT Appeal NO. 4306 (MUM.) of 2011
[ASSESSMENT YEAR 2007-08]
JULY 11, 2012
ORDER
Amit Shukla, Judicial Member
This appeal has been filed by the assessee against order dated 25-3-2011, passed by the CIT(A)-12, Mumbai for the quantum of assessment passed under Section 143(3) for the assessment year 2007-08.
2. The assessee has raised two grounds of appeal with various sub grounds. In ground No. 1, the assessee has challenged the disallowance of Rs. 81,39,000/- on account of service tax and interest paid, which was disallowed on the ground that liability on account of service tax has not crystallized during the year under consideration. In ground No. 2, the assessee has challenged the computation of short term and long term capital gain as done by the Assessing Officer on the ground that cost of acquisition has been reduced substantially and the sale price has been taken as average sales price.
3. Brief facts for adjudication of ground No.1 are that the assessee in the profit loss account had shown a debit of Rs. 81.30 lakhs on account of services tax of Rs. 55.06 lacs paid along with the interest of Rs. 25.12 lacs. The background for such a payment is that the assessee company which is engaged in rendering range of communications services including advertising, sales promotion, direct marketing, corporate communications and public relations. It undertakes advertising and media planning for its clients and composite bills are raised for the services and expenses involved in the assignment. It receives creative fee for the creation of advertisement and commission for placement of advertisement in media from customers and has got registered itself for payment of service tax under the category “advertising agency services”. It had paid service tax only on the income from creation of advertisement and commission received from customers for placement of advertisements in media. However, it had not paid service tax on the renegotiated prices and also on discounts/incentives received as the assessee was of the belief that these incomes are not liable for service tax. A survey was carried out by the service tax authorities on 11-8-2006 and in pursuance of which a show cause notice was issued to the assessee on 19-10-2006, firstly, as to why the service tax was not paid on a difference and liabilities written back under “advertisement agency services” and secondly, on annual volume discount under “business auxiliary services” categories and why outstanding service tax liability along with interest and penalty should not be levied. After carrying out various discussions with the service tax authorities, the assessee decided to pay the service tax liability along with interest to avoid further litigation and to buy peace of mind. The assessee deposited service tax liability along with the interest for the financial year 2001-2002, 2002-2003, 2003-2004, 2005-2006 and 2006-2007. In the tax audit report, the payment was duly reported and was claimed as a revenue deduction under section 37(1). The Assessing Officer held that the amount of service tax and interest paid was a liability which was not crystallized during the year as there was no formal written order, but was paid in response to show cause notice only and further that whole matter was in dispute. He, therefore, held that same cannot be allowed as deduction in the current year either under section 37 or under section 43B.
4. In the first appeal, learned counsel submitted a copy of the show cause notice issued by the service tax authorities and also copies of challans which records the payments made by the assessee. It was also submitted that the payment was made to buy peace of mind and to avoid litigation. Learned CIT(A) also did not agree with the assessee’s contention that same is allowable under Section 43B in this year and agreed with the reasoning given by the Assessing Officer that the liability was still under dispute and a disputed liability always crystallizes on the passing of a formal order by the authorities concerned. Mere payment on the basis of show cause notice does not mean that there was a liability to pay in this year. He, therefore, held that the payment can be termed as an advance deposited with the service tax authorities, till the pendency of the proceedings and can be allowed only in the year when the litigated contingent liability crystallizes and is paid. He, therefore, confirmed the findings of the Assessing Officer.
5. The learned AR appearing on behalf of the assessee submitted that the payment of service tax was a statutory liability and there was no element of any penalty or fine. Since it is a statutory liability which have been paid during this year, the same is allowable under Section 43B. In support of his contention, he has relied upon the following case laws :-
(i) CIT v. C.L. Gupta & Sons [2003] 259 ITR 513 (All.);
(ii) CIT v. Dharampal Satyapal Sons Pvt. Ltd. [2011] 50 DTR 287 (Delhi);
(iii) Dy. CIT v. Glaxo Smithkline Consumer Healthcare Ltd. [2007] 110 TTJ 183 (Chd.)(SB);
(iv) Commercial Motors v. Dy. CIT [2007] 110 TTJ 596 (Delhi); and
(v) ACIT v. Claridges Investment & Finances (P.) Ltd. [2007] 18 SOT 390 (Mum.).
Relying on these case laws, he submitted that the same is allowable under section 43B.
6. On the other hand, learned CIT DR relying on the findings of the Assessing Officer as well as CIT(A) submitted that mere payment of service tax on the basis of show cause notice cannot be held to be a liability as the same has been paid by the assessee under protest and the matter was subjudiced before the service tax authorities. Until and unless a formal order is passed, it cannot be held that there was a statutory liability for payment of service tax.
7. We have carefully heard the rival submissions and also gone through the findings of the CIT(A) as well as Assessing Officer. It is not disputed that the assessee has paid service tax along with interest in this year which also included the amounts pertaining to the earlier assessment years. The only issue is whether liability can be said to have been crystallized without any formal order being passed by the service tax authorities. Once the payment of service tax has been made during the year, it does not make any difference whether the same is under dispute before the service tax authorities. This issue is no more res integra as the Hon’ble Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. v. Commissioner of Income-tax, reported in [1971] 82 ITR 363, has decided this very question in the context of provision of Section 43B of the Act. Before the Apex Court the issue related to payment of sales tax as per the demand raised by the sales tax department and the assessee had deposited the liability of sale tax under dispute. The Hon’ble Apex Court held that merely because the assessee was disputing the liability would not mean that the liability had not accrued. Section 43B is non obstante clause which provides that :-
“Certain deductions to be only on actual payment.
43B. Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of—
[(a) any sum payable by the assessee by way of tax, duty, cess or fee, by whatever name called, under any law for the time being in force, or]
