Assessing officer cannot add back unrecorded sales-tax under Section 43B when taxpayer made no deduction or claim

HC held that where a taxpayer following the mercantile system neither debited a sales-tax amount to the profit-and-loss account nor claimed any deduction, the assessing officer could not disallow or add back that amount to income under Section 43B. Because no expenditure was recorded or claimed, there was nothing properly disallowable; the AO's addition was set aside.

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Issues:
1. Disallowance of service tax not deposited by the assessee.
2. Interpretation of Section 43B of the Income Tax Act.
3. Applicability of accounting procedures in claiming deductions.

Issue 1: Disallowance of service tax not deposited by the assessee
The assessee, following a mercantile system of accounting, had collected service tax but failed to deposit a portion of it with the authorities. Despite not claiming any deduction or debiting the amount in the Profit and Loss Account, the Assessing Officer and the Commissioner of Income Tax disallowed the amount, adding it back to the assessee's income. The Commissioner cited a decision by the Calcutta High Court to support the disallowance.

Issue 2: Interpretation of Section 43B of the Income Tax Act
The Tribunal, considering Section 43B of the Income Tax Act, held that since the assessee did not claim a deduction, there was no basis for disallowing a deduction that was not even claimed. Section 43B specifies that deductions for certain payments are allowed only when the sum is actually paid, regardless of when the liability was incurred. The Tribunal disagreed with the Commissioner's reliance on the Calcutta High Court decision, emphasizing the distinction in the present case.

Issue 3: Applicability of accounting procedures in claiming deductions
The High Court, in its judgment, noted that the assessee, by not debiting the amount in the Profit and Loss Account or claiming any deduction, did not warrant the disallowance of an unclaimed deduction. The Court emphasized that the assessee's adherence to the mercantile system of accounting did not necessitate disallowing a deduction that was not even sought. It was also highlighted that it is not within the Revenue authorities' purview to dictate how an assessee maintains its accounts.

In conclusion, the High Court dismissed the appeal, finding no fault in the Tribunal's decision and stating that no substantial question of law arose in the case.

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