2007 (12) TMI 263 - AT - Income Tax

Tribunal Upholds Deletion of Section 43B Addition, Rules Service Tax Liability Arises Only Upon Payment Receipt.

Assistant Commissioner Of Income-tax, Media Circle -Ii, Chennai. Versus Real Image Media Technologies (P.) Limited.

The Tribunal dismissed the Revenue's appeal, affirming that the Commissioner of Income-tax (Appeals) correctly deleted the addition under section 43B. The ... Applicability of section 43B for Service tax payable - Deemed to be revenue receipt? - Receipt of service taxes not to route through the P&L Account - Payments in respect of taxes and Government dues - non-receipt of payments from the receiver of the services there is liable to pay services tax ? - Payment of service tax on or before due date for filing of return of income - HELD THAT:- It is clear from sec 43B, that the rigour of this provision would be attracted only in a case where an item is allowable as deduction but because of the failure to make payment such deduction will not be allowed. It can be argued that in the case of ST also the assessee does not claim deduction since it has been held that non-payment of sales-tax would attract provisions of section 43B, but that is being done on the basis of the principles laid down by the Calcutta High Court in the case of Chowranghee Sales Bureau Ltd. v. CIT [1974 (6) TMI 5 - CALCUTTA HIGH COURT] that sales-tax is part of the trading receipt. Further, section 145A clearly provides that for the purpose of determining income under the head 'Profits and gains of business or profession', the amount of purchase and sales i.e., turnover would include any tax, duty, cess or fee. Therefore, the rigour of section 43B may be applicable in the case of sales-tax or Excise Duty but the same cannot be said to be the position in case of service tax because of two reasons. Firstly, the assessee is never allowed deduction on account of service tax which is collected on behalf of the Government, and paid to the Government accordingly. Therefore, a service provider is merely acting as an agent of the Government, and is not entitled to claim deduction on account of service tax. Hence, on this account alone addition u/s 43B could not be made and the same has been correctly deleted by the CIT (Appeals). Now, in the case of service tax, when and how the amount becomes payable has been provided in section 68 of Finance Act, 1994 as well as Rule 6 of Service Tax Rules - A plain reading of Rule 6 would show that service provider becomes liable to make the payment of service tax by the 5th of the month immediately following the calendar month in which the payments are received towards the value of taxable service. If there is no liability to make the payment to the credit of Central Government because of 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 this regard, the Hon'ble Andhra Pradesh High Court in the case of Srikaollu Subba Rao & Co.[1988 (3) TMI 46 - ANDHRA PRADESH HIGH COURT]. Thus, we are of the view that since service tax was not payable by the assessee, the rigour of section 43B could not have been applied to the case of the assessee. Hence, we find nothing wrong with the order of the CIT (Appeals) on this issue and the same is confirmed. In the result, the appeal filed by the revenue is dismissed. Issues Involved:1. Whether the Commissioner of Income-tax (Appeals) erred in holding that the disallowance was made under section 43B.2. Whether the Commissioner of Income-tax (Appeals) erred in not appreciating that taxes or levies collected by the assessee are deemed revenue receipts.3. Whether the Commissioner of Income-tax (Appeals) erred in not appreciating the discretion exercised by the assessee in routing service tax receipts.Issue-wise Detailed Analysis:1. Disallowance Under Section 43B:The Revenue's appeal contends that the Commissioner of Income-tax (Appeals) erred in holding that the disallowance was made under section 43B. The Assessing Officer observed that the assessee follows the mercantile system of accounting but did not route the service tax through the profit and loss account. The service tax collected but not paid to the Government account was considered a revenue receipt and was added to the income of the assessee. The Commissioner of Income-tax (Appeals) found that section 43B, which starts with a non-obstante clause, specifies that a deduction 'otherwise allowable' under the Act shall not be allowed unless it is actually paid. Since the assessee did not claim any deduction for the service tax, there was no question of disallowing it under section 43B. The Tribunal upheld this view, stating that section 43B would be attracted only if a deduction has been claimed but payment has not been made. Since no deduction was claimed, section 43B was not applicable.2. Taxes or Levies as Deemed Revenue Receipts:The Revenue argued that any taxes or levies collected by the assessee on behalf of the Government should be considered deemed revenue receipts until paid to the Government. The Tribunal noted that service tax is different from sales tax, provident fund, ESI, and excise duty, as it becomes payable only when received from the client. The Tribunal emphasized that service tax collected is not an allowable deduction for the assessee, as it is collected on behalf of the Government and paid accordingly. Therefore, the addition under section 43B could not be made, and the Commissioner of Income-tax (Appeals) correctly deleted the addition.3. Discretion in Routing Service Tax Receipts:The Revenue contended that the Commissioner of Income-tax (Appeals) erred in not appreciating the discretion exercised by the assessee in routing service tax receipts. The Tribunal examined the relevant provisions of the Income-tax Act and the Service Tax Act, noting that service tax is payable based on the value of taxable services received and not on the gross amount billed. The Tribunal highlighted that service tax liability arises only after the service provider has received the payments. Since the assessee did not claim any deduction for the service tax, there was no question of disallowing it under section 43B. The Tribunal supported the view that service tax collected is not an allowable deduction and upheld the order of the Commissioner of Income-tax (Appeals).Conclusion:The Tribunal dismissed the Revenue's appeal, confirming that the Commissioner of Income-tax (Appeals) correctly deleted the addition under section 43B. The Tribunal emphasized that service tax collected by the assessee is not an allowable deduction, and section 43B is not applicable as no deduction was claimed by the assessee. The Tribunal also highlighted the distinction between service tax and other taxes like sales tax, provident fund, ESI, and excise duty, noting that service tax liability arises only upon receipt of payment from the client.