10. Business expenditure – Service tax – The Assessee was obliged under the law to pay service tax to the Government and paid when such payment is not forthcoming from the client/customer – Allowable : Section 37 of the Act

CIT vs. Prime Broking Company (I) Ltd. [
Income tax Appeal no 847 of 2014 dt : 14/10/2016 (Bombay High Court)].

[ACIT vs. Prime Broking Company (I) Ltd.
[ITA No. 5632/MUM/2012 ; Bench : C ; dated 31/10/2013 ; A Y: 2009- 2010. MUM.
ITAT ]

The Assessee is engaged in the business of
broking in Government and other securities. The Assessee raises an invoice on
its clients for the transaction done on its behalf in respect of its broking
services. The total amount of bill in the invoice is the aggregate of brokerage
and applicable service taxes thereon. During the subject assessment year, some
of the clients of the Assessee did not pay the service tax as required in terms
of the invoice for onward payment to the Government of India. In these
circumstances, the Assessee paid the service tax payable out of its own
resources and claimed the same as deduction u/s. 37(1).

The AO disallowed the claim for deduction
holding that the obligation to pay the service tax is on the customer /client
and the same cannot be shifted to the Assessee.

The CIT (A) allowed the Assessee’s appeal.
This is on the ground that in terms of section 68 of the Finance Act, 1994, the
obligation to pay the service tax into the treasury is of the service provider,
i.e. the Assessee. The failure of its client/customer to pay service tax to the
Assessee would not absolve the obligation of the Assessee to pay the same to
the Government of India. The CIT (A) held that the deduction of the service tax
paid to the Assessee was a business expenditure incurred on account of
commercial expediency and deductible u/s. 37(1).

Being aggrieved, the Revenue carried the
issue in appeal to the Tribunal. The Tribunal upheld the view of the CIT
(Appeals).

On further appeal, the High Court held that
the Assessee was obliged under the law to pay service tax to the Government
even when such payment is not forthcoming from the client/customer. Therefore,
it would be a deductible business expenditure u/s. 37(1). It is undisputed that
the obligation under the Finance Act, 1994 to pay the service tax is on the
Assessee being the service provider. This obligation has to be fulfilled by the
service provider whether or not it receives the service tax from its
clients/customers. Non-payment of such service tax into the treasury would
normally result in demand and penalty proceedings under the Finance Act, 1994.
Therefore, the payment is on account of expediency, exclusively and wholly
incurred for the purposes of business, therefore, deductible u/s. 37(1).

The High Court dismissed the above appeal on
the ground that the same did not give rise to any substantial question of law.
The appeal is dismissed.