Tribunal allows appeal on service tax deduction under VCES 2013, ruling in favor of Section 43B deduction.

The tribunal allowed the appeal, condoning the delay in filing and admitting it for disposal on merits. It held that the service tax paid under the VCES, 2013, was solely towards service tax and education cess, allowing its deduction. The tribunal also ruled that the service tax payment qualified for deduction under Section 43B, as it was included in the total income in earlier years. Consequently, the appeal was allowed, and the sum paid as service tax for earlier years was allowed as a deduction in the current year.

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Issues Involved:
1. Condonation of delay in filing the appeal.
2. Deductibility of service tax paid under the Service Tax Voluntary Compliance Encouragement Scheme (VCES), 2013.
3. Applicability of Section 43B of the Income-tax Act, 1961.
4. Inclusion of service tax in total income and its subsequent deduction.

Detailed Analysis:

1. Condonation of Delay in Filing the Appeal:
The appeal was time-barred by 729 days. The assessee filed a condonation application with an affidavit explaining the reasons for the delay. The tribunal was satisfied with the reasons provided and condoned the delay, admitting the appeal for disposal on merits.

2. Deductibility of Service Tax Paid Under VCES, 2013:
The assessee, engaged in the business of sales and service of two-wheelers and tractors, claimed a deduction of Rs. 12,25,998/- as a prior period expenditure under the head “Rates and Taxes.” This amount was paid under the VCES, 2013, for service tax liabilities pertaining to financial years 2007-08 to 2012-13. The Assessing Officer (AO) disallowed this deduction, treating it as a prior period expense and noting the lack of documentary evidence proving it was not a penal payment. The CIT(A) upheld this disallowance. The tribunal examined the details and concluded that the amount paid by the assessee was solely towards service tax and education cess, without any penalty component.

3. Applicability of Section 43B of the Income-tax Act, 1961:
The assessee argued that the service tax paid should be deductible under Section 43B, which allows deductions for sums payable by way of tax, duty, cess, or fee only in the year they are actually paid. The tribunal noted that Section 43B opens with a non obstante clause and mandates that deductions for taxes are allowable in the year of actual payment, irrespective of the year in which the liability was incurred. The tribunal held that since the service tax was paid in the year under consideration and no deduction was claimed in earlier years, the deduction should be allowed in the current year.

4. Inclusion of Service Tax in Total Income and Its Subsequent Deduction:
The Revenue contended that service tax included in the incentives did not constitute income when received, and thus, no deduction could be allowed upon its subsequent payment. The tribunal rejected this argument, clarifying that while Circular No. 4/2008 exempts TDS on service tax for rent, it does not exclude service tax from total income. Section 145A(ii) mandates the inclusion of taxes in the valuation of services, implying that service tax is part of the total income. Consequently, the service tax paid during the year qualifies for deduction under Section 43B, as it was included in the total income in earlier years.

Conclusion:
The tribunal concluded that the sum of Rs. 12.25 lakh paid by the assessee as service tax for earlier years should be allowed as a deduction in the year under consideration. The impugned order was overturned, and the appeal was allowed.

Order Pronounced:
The order was pronounced in the Open Court on 18th November, 2021.

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