Service tax liability, for which there was no receipt by assessee by year end, could not be disallowed U/s. 43B

ITAT MUMBAI BENCH ‘F’

Deputy Commissioner of Income-tax

Versus

Ovira Logistics (P.) Ltd.

IT Appeal Nos. 4567 & 4594 (Mum.) of 2011

OCTOBER  31, 2012

ORDER

Dinesh Kumar Agarwal, Judicial Member

These cross appeals by the Revenue and the assessee are directed against the order dtd. 10-2-2011 passed by the ld. CIT(A) – 17, Mumbai for the A.Y. 2007-08. Both these appeals are disposed of by this common order for the sake of convenience.

2. Briefly stated facts of the case are that the assessee company is a subsidiary company of M/s Infrastructure Leasing & Financial Services Ltd. (IL&FS) and during the year it is engaged in the business of providing Management Consultancy, Business Processes Outsourcing, Car Rental and other ancillary activities. The return was filed declaring total income of at Rs. 4,46,46,873/-. However, the assessment was completed at an income of Rs. Nil under the normal provisions of the Act and book profit u/s 115JB of the Income Tax Act, 1961 (the Act) at Rs. 8,97,48,777/- vide order dtd. 29-12-2009 passed u/s 143(3) of the Act. On appeal, the ld. CIT(A) partly allowed the appeal.

3. Being aggrieved by the order of the ld. CIT(A) the Revenue and the assessee both are in appeal before us.

ITA No. 4567/Mum/2011 (By Revenue)

4. Ground No. is against the part relief allowed by the ld. CIT(A) in respect of dis allowance u/s 14A of the Act.

5. Brief facts of the above issue are that the A.O. observed that the assessee had made investment in shares and also carried out trading in shares on which dividend income of Rs. 12,02,765/- has been earned which was claimed exempt u/s 10(34) of the Act. The A.O. further observed that an expenditure of Rs. 1,13,676/- has been allocated against such exempt income. The A.O. further observed that the company cannot earn dividend without its existence and management. He further observed that investment decisions are very complex in nature and require substantial market research, day-to-day analysis or market trends and decisions with regard to acquisition, retention and sale of shares at the most appropriate time and hence not correct to say that dividend income can be earned by incurring no or nominal expenditure. Thus, it was difficult to accept that a company can earn substantial dividend income without incurring any expenses whatsoever including management or administrative expenses as investment decisions are generally taken in the meetings of the Board of Directors for which administrative expenses are incurred. The A.O. further observed that the term “expenditure” occurring in section 14A would take in its sweep not only direct expenditure but also all forms of expenditure regardless of whether they are fixed, variable, direct, indirect, administrative, managerial or financial. With the said observations, the A.O. while applying the provision of section 14A read with Rule 8 D of the Income Tax Rules, 1962 also relied on the decision of the Special Bench of ITAT in the case of ITO v. Daga Capital Management (P.) Ltd. [2009] 117 ITD 169 (Mum.), computed the dis allowance at Rs. 99,56,933/- as per working given at page 5 & 6 of the assessment order. On appeal, the assessee while relying on the decision of the Hon’ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT [2010] 328 ITR 81/194 Taxman 203 (Bom.)submitted that the dis allowance of interest on prorata basis ought to have been made by adopting the value of investment appearing in the balance sheet as under:-

The ld. CIT(A) while relying on the decision of Hon’ble jurisdictional High Court in Godrej & Boyce Mfg. Co. Ltd. (supra) rejected the plea of the assessee that no expenditure had been incurred for earning exempt income and that only direct expenditure can be considered for disallowance observed that the assessee has not established that borrowed funds have not been utilised for making such investments income from which was exempt from tax, however, accepted the calculation given by the assessee and held that the dis allowance u/s 14A should be restricted to Rs. 31,69,778/-.

6. At the time of hearing the ld. D.R. while relying on the order of the A.O. submits that he has no objection if the issue is set aside to the file of the A.O. in the light of the decision of Hon’ble jurisdictional High Court in the case of Godrej & Boyce Mfg. Co. Ltd. (supra).

7. On the other hand the ld. counsel for the assessee, at the outset, submits that the assessee has suomotu disallowed the expenditure of Rs. 1,13,676/- against the exempt income. He further submits that in view of the ratio of the decision in Godrej & Boyce Mfg. Co. Ltd. (supra) the assessee has worked out the dis allowance of Rs. 31,69,778/- as appearing at para 4.3 of the appellate order and the ld. CIT(A) after considering has accepted the same. He, therefore, submits that the order passed by the ld. CIT(A) does not call for any interference.

8. We have carefully considered the submission of the rival parties and perused the material available on record. We find that the facts are not in dispute inasmuch as it is also not in dispute that following the decision of Godrej & Boyce Mfg. Co. Ltd. (supra) some dis allowance is called for on reasonable basis. The A.O. while making the dis allowance u/s 14A has worked out the dis allowance as per Rule 8D of the Income Tax Rules, 1962 which according to the decision in the case of Godrej & Boyce Mfg. Co. Ltd. (supra) is not applicable for the A.Y. 2007-08. However, before the ld. CIT(A) the assessee has filed working of dis allowance u/s 14A amounting to Rs. 31,69,778/-. The ld. CIT(A) in violation to Rule 46-A of the Income Tax Rules, 1962 and without giving any finding on the examination of the working given by the assessee has accepted the working submitted by the assessee. Therefore, in the interest of justice, we consider it fair and reasonable that the matter should go back to the file of the A.O. and accordingly we set aside the order passed by the Revenue authorities on this account and restore the same to the file of the A.O. to examine the same afresh in the light of the decision of the Hon’ble jurisdictional High Court in Godrej & Boyce Mfg. Co. Ltd. (supra) and according to law after providing reasonable opportunity of being heard to the assessee. The ground taken by the Revenue is, therefore, partly allowed for statistical purpose.

9. Ground No. 2 is against the deletion of dis allowance of service tax u/s 43B of the Act.

10. Brief facts of the above issue are that the A.O. observed that the assessee has shown other liability of Rs. 1,17,36,988/-. By letter dated 25-12-2009 the assessee filed details of other liabilities along with proof of payment. On perusal of the details, the A.O. observed that it included service tax payable of Rs. 48,10,998/- and service tax payable on Management Consultancy of Rs. 41,97,663/- for which no documentary evidence for payment was filed. The A.O. presumed that such service tax had not been paid and accordingly disallowed the service tax payable of Rs. 90,08,661/- (Rs. 48,10,998/- plus Rs. 41,97,663/-) u/s 43B of the Act. On appeal it was submitted by the assessee that the sum of Rs. 41,97,663/- had been paid before the due date of filing of return and in support copies of challans were also filed. Regarding service tax payable of Rs. 48,10,998/- it was contended that there was no liability to pay service tax as on 31-3-2007 as the amounts were not received from the parties to whom services were provided, therefore, provisions of section 43B are not applicable. The ld. CIT(A) while deleting the part of the dis allowance on the ground that the said amount was paid before the due date of filing of return, observed in respect of other dis allowance that service tax had not become payable, 43B is not applicable and hence he deleted the entire dis allowance of Rs. 90,08,661/-.

11. At the time of hearing the ld. D.R. supports the order of the A.O.

12. On the other hand the ld. counsel for the assessee while relying on the order of the ld. CIT(A) submits that the assessee has not debited the amount of service tax in its P&L account. He further submits that since the assessee has paid a sum of Rs. 41,97,663/- before the due date of filing of return, therefore, the said amount cannot be disallowed. With regard to other dis allowance of Rs. 48,10,998/- he submits that the service tax cannot be said to be payable and, therefore, the provisions of section 43B could not be invoked and in support the reliance was also placed in Pharma Search v. Asstt. CIT [2012] 53 SOT 1, Asstt.CIT v. Real Image Media Technologies (P.) Ltd. [2008] 114 ITD 573 (Chennai) and Goetze (India) Ltd. v. CIT [2009] 32 SOT 101 (Delhi).

13. We have carefully considered the submission of the rival parties and perused the material available on record. We find that the facts are not in dispute inasmuch as it is also not in dispute that the assessee has paid the amount of service tax of Rs. 41,97,663/- before the due date of filing of return, therefore, the ld. CIT(A) has rightly deleted the said dis allowance. As regards other dis allowance of service tax payable Rs. 48,10,998/- we find merit in the plea of the ld. counsel for the assessee that the issue is covered in favour of the assessee by the decision of the Tribunal in Pharma Search (supra) wherein the Tribunal after considering the decision of Chowringhee Sales Bureau (P.) Ltd. v. CIT [1977] 110 ITR 385 (Cal.), Real Image Media Technologies (P.) Ltd. (supra) and other decisions held as under:-

“……….as far as Service Tax is concerned, as per the law prevailing during the previous year, the liability to pay the same arises only on receipt by the Assessee. Since the liability to pay service tax does not exist in the present case, the service tax cannot be said to be “payable” and therefore provisions of Sec.43-B of the Act could not also be invoked”.

14. In the absence of any distinguishing feature brought on record by the Revenue, we respectfully following the consistent view of the Tribunal decline to interfere with the order of the ld. CIT(A) and accordingly the ground taken by the Revenue is rejected.

15. Ground No. 3 is against the deletion of dis allowance of payment of software charges Rs. 10,68,161/-.

16. Brief facts of the above issue are that the A.O. observed that the assessee has made payment of software charges to its group companies which are (a) IL & FS Info tech Ltd. – Rs. 9,80,825/- and (b) IL & FS Info tech Finvest Ltd. – Rs. 16,89,500/-. He further observed that as the assessee has not submitted any documentary evidence which could substantiate that the above expenditure were revenue in nature, the A.O. treated the entire software expenditure claimed of Rs. 26,70,405/- as capital expenditure after allowing depreciation @ 60% which was worked out to Rs. 16,02,243/-, and accordingly he disallowed a sum of Rs. 10,68,162/-. On appeal it was submitted by the assessee that the expenditure was not incurred for purchase of software but for maintenance of software and technical support services provided by IL & FS Info tech Ltd. and IL & FS Financial Services Ltd., and hence such expenditure being revenue in nature incurred for the purposes of business is allowable and in support copy of invoices were also filed. The ld. CIT(A) after considering the same deleted the dis allowance made by the A.O.

17. At the time of hearing the ld. D.R. supports the order of the A.O.

18. On the other hand the ld. counsel for the assessee relied on the order of the ld. CIT(A).

19. We have carefully considered the submissions of the rival parties and perused the material available on record. We find that the facts are not in dispute inasmuch as it is also not in dispute that before the A.O. it was submitted by the assessee that the assessee has made payment for maintenance of software and technical support services provided by the above two companies and in support, the assessee has also filed purchase details of software expenses along with name and address, amount and TDS deducted etc. However, the A.O. without considering the same has treated the software expenditure as capital in nature and after allowing the depreciation @ 60% made the dis allowance of Rs. 10,68,162/- which was deleted by the ld. CIT(A) on the ground that the payment is not for the purchase of software but for maintenance of software and technical support. In the absence of any contrary material placed on record by the Revenue against the above factual matrix, we are of the view that the A.O. was not justified in treating the maintenance of software expenses as capital expenditure and the ld. CIT(A) has rightly deleted same. However, it has been agreed by the ld. counsel for the assessee that if the said expenditure is treated as revenue expenditure, the depreciation is not allowable and he agreed for the dis allowance of the same and accordingly to this extent the order passed by the ld. CIT(A) is modified. The ground taken by the Revenue is, therefore, partly allowed.

20. Ground No. 4 in Revenue’s appeal reads as under:-

“On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in restricting the dis allowance of Rs. 99,56,933/- made u/s 14A of the Act to Rs. 31,69,778/- for the purpose of computation of book profit u/s 115JB of the I.T. Act”.

21. Ground Nos. 1 to 3 in assessee’s appeal in ITA No. 4594/Mum/2011 read as under:-

“1. On the facts and circumstances of the case the Learned Commr. of Income Tax (Appeals) has erred in confirming that while computing the book profit u/s 115JB the disallowance made u/s 14A amounting to Rs. 31,69,788/- be added to the book profit. The appellant prays that the conclusion reached by the Learned CIT(A) is erroneous and contrary to the provisions of law.

2. The appellant prays that while computing book profit u/s 115JB no addition of the dis allowance computed u/s 14A should be made to the book profit.

3. The appellant prays that the book profit may be computed u/s 115JB without making any additions on account of the dis allowance computed u/s 14A.”

22. Since common issue is involved, the above grounds are disposed of as under.

23. Brief facts of the above issue are that the A.O. while calculating the book profit u/s 115JB of the Act has taken net profit as per P&L account Rs. 7,97,91,844/- and added dis allowance u/s 14A Rs. 99,56,933/- and thus he worked out the total book profit Rs. 8,97,48,777/-. On appeal it was submitted that as per clause (f) of Explanation 1 to section 115JB of the Act only the amount of expenditure relatable to income exempt u/s 10 can be added. The assessee had not earned any exempt income as evident from P&L account. It was further contended that the dis allowance u/s 14A made while computing profit u/s 28 was on a different footing from computing book profit u/s 115JB as the wordings of both sections are different, hence, the addition u/s 14A while working out book profit is not correct. The ld. CIT(A) after considering the assessee’s submission directed the A.O. to restrict addition to the dis allowance u/s 14A i.e. Rs. 31,69,778/-.

24. At the time of hearing the ld. D.R. submits that the ld. CIT(A) was not justified in directing the A.O. restrict the dis allowance to Rs. 31,69,778/- for the purpose of computing of book profit u/s 115JB of the Act. He further submits that in view of the plea taken in ground No. 1 of the Revenue’s appeal, the issue may be set aside to the file of the A.O.

25. On the other hand, the ld. counsel for the assessee while reiterating the same submission as submitted before the ld. CIT(A) further submits that the provision of section 14A cannot be imported into while computing the book profit u/s 115JB of the Act inasmuch as clause (f) of Explanation to sec. 115JB refers to the amount debited to the profit & loss account which can be added back to the book profit while computing book profit u/s 115JB of the Act and, therefore, he has no objection if the addition of the dis allowance u/s 14A Rs. 1,13,676/- is made in place of Rs. 99,56,933/- and for this proposition the reliance was also placed in Quippo Telecom Infrastructure Ltd. v. Asst. CIT in ITA No. 4931/Del/2010 for A.Y. 2007-08 dated 18-2-2011, Essar Teleholdings Ltd. v. Dy. CIT in ITA No. 3850/Mum/2010 for A.Y. 2005-06 dated 29-7-2011 and Goetze (India) Ltd. (supra).

26. We have carefully considered the submissions of the rival parties and perused the material available on record. We find that the facts are not in dispute. We find merit in the plea of the ld. D.R. that in view of the decision of Hon’ble jurisdictional High Court in the case of Godrej & Boyce Mfg. Co. Ltd. (supra) the issue may be set aside to the file of the A.O. Since we have set aside the issue of dis allowance u/s 14A to the file of the A.O., we are of the view that in the interest of justice this issue may also be set aside to the file of the A.O. and accordingly we set aside the matter to the file of the A.O. to decide the same afresh in the light of the direction given in para 8 of this order and according to law including the decisions relied on by the ld. Counsel for the assessee and also the decision in the case of Sonata Information Technology Ltd. v. Dy. CIT [2012] 54 SOT 233 after providing reasonable opportunity of being heard to the assessee. The grounds taken by the Revenue and assessee are, therefore, partly allowed for statistical purpose.

27. In the result, both appeals are partly allowed for statistical purpose.