Case summary, Income Tax

ITAT Delhi decides: Can deduction u/s 43 be disallowed for service tax if it is not routed through P&L account?

Issue: Whether CIT(A)’s Order upholding the AO’s Disallowance under Section 43B on account of non-payment of service tax, hold good?

Case name:  Vikon Engineering Pvt. Ltd. v. ACIT


  • The assessee company filed its return of income for the AY 2010-11 on 28.09.2010 declaring total income at INR 3,73,34,500/-. The AO made the following adjustments: 
    • Addition of INR 23,280/- on account of rates and taxes.
    • Disallowance of INR 1,10,300/- u/s 40(a)(ia).
    • Disallowance of INR 49,42,905/- u/s 43B.
    •  Disallowance of INR 6,64,271/- u/s 14A.
    • Disallowance of INR 60,60,633/- on account of proportionate interest.
    • The assessee filed an appeal against the aforementioned adjustments before the CIT(A). The CIT(A) allowed the appeal only partially.
  • The assessee hence filed an appeal against the order of the CIT(A) before the ITAT.
  • The assessee raised the following grounds in its appeal before the ITAT:
    • The addition of INR 49,42,905/- in the computation of business profits due to disallowance of service tax payable under section 43B is not justified. 
    • The disallowance u/s 14A of INR 6,64,271/- is absolutely illegal and unwarranted.
    • No disallowance should have been made u/s 14A as the exempt income is NIL.

Revenue’s Arguments

  • The assessee company has created an account for the service tax in the books of accounts.
  • It is shown as payable and no documentary evidence was submitted as proof of payment of service tax before the Revenue authorities.

Also read: Disallowance under section 14A an Analysis

Assessee’s Arguments

  • The assessee is maintaining its account books on an accrual basis.
  • The assessee is subject to service tax which is payable on the 5th day of every month on an arrear basis. The company has paid the service tax on amounts realized up to 31.03.2010. Hence, no disallowance is warranted on the service tax payable shown on outstanding as on 31.03.2010.
  • Section 43B might be applicable to the case of sales-tax or excise duty, but the same could not be said to be the position in assessee’s case relating to service tax as the assessee did not allow deduction on account of service tax which is collected on behalf of the Government and is paid to the Government.
  • The liability to pay service tax arises only after the service provider has received the payments. If there is no liability to make the payment due to non-receipt of payments from the receiver of the services, then it cannot be said that such service tax has become payable in terms of clause (a) of Section 43B because that clause specifically mentions ‘sum payable by the assessee’. In the instant case, since service tax was not payable by the assessee, the provision of Section 43B could not be applied.
  • The disallowance u/s 14A of the Income Tax Act is not at all warranted because there is no exempt income claimed by the assessee.

Tribunal’s Judgement

  • Assessee never allowed a deduction on account of service tax. The income was from house rent to which Section 43B does not apply.
  • The Tribunal relied upon the decision rendered by Delhi High Court in the case of Noble & Hewitt. It was held in this case that, “..since the assessee did not debit the amount to the Profit & Loss Account as an expenditure nor did the assessee claim any deduction in respect of the amount and considering that the assessee is following the mercantile system of accounting, the question of disallowing the deduction not claimed would not arise..”
  • The assessee has not routed the service tax through the Profit and Loss Account and has not claimed it as a deduction. Hence, the Revenue erred in applying Section 43B to the assessee’s case.
  • There is no exempt income claimed by the assessee as there is only income from house property and no other investment. This is reflected in the profit and loss account, therefore, as per the decision of the Hon’ble Jurisdictional High Court in case of Cheminvest Limited and subsequently that of M/s. Oil Industry Development Board, the disallowance under Section 14A is not justified.
  • The Tribunal allowed the appeal.

Download the entire case here

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