Business expenditure – Disallowance u/s 43B of ITA, 1961 – Deduction only on actual payment – Service tax – Liability to pay service tax into treasury arises only upon receipt of consideration by assessee – Service tax debited to profit and loss account – Cannot be disallowed

Business expenditure – Disallowance u/s 43B
of ITA, 1961 – Deduction only on actual payment – Service tax – Liability to
pay service tax into treasury arises only upon receipt of consideration by
assessee – Service tax debited to profit and loss account – Cannot be
disallowed

The assessee
provided detection and security services to its clients. The AO found from the
balance sheet that the assessee had claimed the amount of unpaid service tax as
its liability. The AO held that according to section 43B of the Income-tax Act,
1961 the service tax could be allowed only when paid and that the amount was
not allowable as deduction. The assessee submitted that the gross receipts
included the service tax but whenever it was due and payable, namely, when the
amount for the services was realised, it would be remitted.

The Commissioner
(Appeals) held that the tax became payable only when it was collected from the
customer. The Tribunal found that though the service tax was included in the
bill raised on the customers, it was not actually collected from them and
confirmed the order of the Commissioner (Appeals).

On appeal by the
Revenue, the Bombay High Court upheld the decision of the Tribunal and held as
under:

‘(i)   The Tribunal was justified in holding that
the service tax debited to the profit and loss account but not credited to the
Central Government by the assessee could not be disallowed u/s 43B.

(ii)   The liability to pay service tax into the
treasury arose only when the assessee had received the funds and not otherwise.
The consideration has to be actually received and thereupon the liability to
pay tax would arise. No question of law arose.’