Liability of Service tax paid on receipt basis which was outstanding at the end of the year will not attracts Section 43B disallowance when law does not contemplate liability to pay the service tax before actual receipt of the funds in the account of the assesee.
Brief facts of the case
The Respondent Assessee filed its return for assessment year 2007-08 declaring total income of Rs.4,46,46,873/- and setting off entire business income against the brought forward losses of earlier years. The Book Profit under section 115JB was determined at Rs.8,97,48,777/. While completing the assessment, the Assessing Officer, inter alia, disallowed service tax amounting to Rs.90,08,661/under section 43B of the Act. Aggrieved assessee filed an appeal before the Commissioner of Income Tax (Appeals) who partly allowed the appeal in favour of the assessee deleting the entire disallowance of service tax under section 43B by holding that a sum of Rs.41,97,663/had already been paid before due date of filing return and, therefore, could not be disallowed under section 43B of the Act. As far as the remaining amount of Rs.48,10,998/was concerned, the Commissioner of Income Tax (Appeals) has held that the same could not disallowed under section 43B of the Act since it was not payable as on 31st March, 2007. It was found that the amount on which service tax was payable had not been received from the parties to whom services were rendered. As a result, the provisions of section 43B were not attracted. Revenue filed an appeal before the Tribunal on various grounds including the deletion of disallowance of service tax under section 43B. The ground pertaining to service tax came to be rejected by the Tribunal on 31st October, 2012 while partly allowing the Appeal for statistical purposes. The Revenue being aggrieved by the order raised the questions of law under section 260A of the Income Tax Act, 1961 before the High Court.
Contention of Revenue-
The learned counsel, appearing on behalf of revenue submitted that liability to pay service tax had already accrued and assessee’s case was covered by section 43B. He further contended that the deduction allowable under the Act for any sum payable by the assessee by way of service tax shall be allowed only on the computation of income of the previous year in which the sum is only paid by him.
Contention of Assessee
The learned Senior Counsel, appearing on behalf of the respondent supported the order of the Tribunal and the Commissioner of Income tax (appeals). According to him since the relevant credit had not been received in the assessee’s account. the Commissioner of Income Tax(Appeals) had correctly deleted the disallowance of the amount of Rs.48,10,998-/which had not become payable.
Held by Bombay High Court :
Taking the view expressed by ITAT in the case of Pharma Search V/s. Assistant Commissioner of Income Tax 15(3), Mumbai (2012) 53 SOT 1 (Mum) in which the Assessing Officer had concluded that service tax in the sum of Rs.32 lacs being consultation fees should be added to the income. But that was set aside on the basis that the amount of consultation fees has not been received by the assessee, Hon’ble High Court held that section 43B does not contemplate liability to pay the service tax before actual receipt of the funds in the account of the assesee. Liability to pay service tax into the treasury will arise only upon the assessee receiving the funds and not otherwise. Accordingly, when services are rendered, the liability to pay the service tax in respect of the consideration payable will arise only upon the receipt of such consideration and not otherwise. In the facts and circumstances of the case, no substantial question of law arises. Accordingly, the Appeal was dismissed on the ground of no merit.
Please Note- Above Judgment not applies to cases where Assessee has to pay service tax on accrual basis.