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Assistant Commission... v. Real Image Media Te...
Case Summary — Tribunal Order (Per T.R. Sood, Accountant Member)
Factual and Procedural Background
The appeal arises from an order of the CIT (Appeals) dated 1-9-2006 in an assessment for the year ending 31-3-2002. The Assessing Officer (AO) observed that the assessee-company, engaged in various media and technical businesses, had shown service tax liability of Rs. 5,72,374 as at 31-3-2002 in its balance sheet and had not routed service tax through the profit and loss account. The AO requested proof of payment of service tax on or before the due date for filing the income‑tax return. The assessee submitted a note explaining that accounts were maintained on an accrual basis, that service tax was payable on amounts realized and that service tax on amounts realized up to 31-3-2002 was paid in April 2002.
The AO concluded that the service tax shown in the balance sheet had been collected but not paid as on 31-3-2002 and (noting it had not been debited to profit & loss) added Rs. 5,72,374 to the assessee's income as a revenue receipt. Before the CIT (Appeals), the assessee argued that section 43B of the Income‑tax Act applied only where a deduction had been claimed and payment had not been made, and further relied on the scheme of section 68 of the Finance Act, 1994 and Rule 6 of the Service Tax Rules which linked liability to receipt of consideration. The CIT (Appeals) accepted the assessee's submissions and deleted the addition. The revenue appealed to the Tribunal; the Departmental Representative supported the AO's order. The Tribunal dismissed the revenue's appeal and confirmed the CIT (Appeals) order.
Legal Issues Presented
- Whether the rigour of section 43B of the Income‑tax Act could be applied to disallow amounts of service tax not paid before the due date where the service tax had not been debited to profit and loss account (i.e., whether such amounts were "payable" within the meaning of section 43B).
- Whether service tax collected or collectible by the assessee on behalf of the Government constitutes a deemed revenue receipt assessable in the hands of the assessee when not paid to the Government.
- Whether the assessee's choice not to route service tax receipts through the profit & loss account justified treating unpaid service tax as taxable income or subject to disallowance under section 43B.
Arguments of the Parties
Revenue / Assessing Officer
- The AO considered that the showing of service tax payable on the liability side of the balance sheet proved that service tax had been collected and not paid as on 31-3-2002.
- Because the service tax had not been routed through the profit & loss account, AO took the position that no disallowance under section 43B could be made but the collected service tax was a revenue receipt in the hands of the assessee and was therefore assessable; it could be claimed only when actually paid.
- The Departmental Representative supported the AO's order and relied on the grounds of appeal asserting that taxes collected are in the nature of deemed revenue receipts until paid to the Government.
Assessee
- The assessee's counsel argued that section 43B applies only where a deduction has been claimed and the payment thereof has not been made; if no deduction is claimed, section 43B cannot be invoked to disallow anything.
- It was emphasised that service tax, introduced by Chapter V of the Finance Act, 1994, and in particular section 68 (as amended) and Rule 6 of the Service Tax Rules, makes the duty to pay service tax dependent on receipt of consideration; service tax is payable by the service provider in the manner prescribed but linked to receipt of payments.
- The assessee distinguished service tax from other levies (sales tax, excise duty, PF, ESI) which create liability by reference to sale, removal or statutory obligation irrespective of receipt; service tax liability arises on receipt.
- The assessee pointed out that service tax was not debited to profit & loss (therefore no deduction was claimed) and relied on prior authority (Srikaollu Subbarao & Co.) to support the proposition that taxes not statutorily payable in the accounting year are not disallowable under section 43B.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Chowranghee Sales Bureau Ltd. v. CIT [1977] 110 ITR 385 (Calcutta High Court) | Holds that sales‑tax is part of trading receipt (i.e., sales tax can be treated as part of turnover and hence linked to trading income). | The Court noted this principle to explain why section 43B may be applied to sales tax: sales tax is treated as part of trading receipts and the statutory machinery makes sales tax payable on completion of sale independently of receipt. |
| Srikaollu Subbarao & Co. v. Union of India [1988] 173 ITR 708 (AP) | Establishes that section 43B should not be routinely applied where the statute prescribes a date of payment after the accounting year; to apply 43B the sum must be statutorily "payable" in the accounting year. | The Tribunal relied on the Andhra Pradesh High Court's observation to support the proposition that where the relevant statute (here, service tax law and rules) makes liability to pay contingent on receipt or prescribes payment after the accounting year, section 43B cannot be invoked to disallow such amounts in the earlier year. |
Court's Reasoning and Analysis
The Tribunal undertook a textual and contextual analysis of section 43B of the Income‑tax Act and the statutory provisions governing service tax (section 68 of the Finance Act, 1994 and Rule 6 of the Service Tax Rules). The key steps in the Tribunal's reasoning were:
- Interpretation of section 43B:
The Tribunal reproduced the opening words of section 43B and concluded that its rigour applies "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."
- Distinction between service tax and other levies:
The Tribunal accepted the assessee's submission that service tax differs from sales tax, excise duty, PF, and ESI because those levies create a statutory liability by reference to the transaction or statute irrespective of receipt, whereas service tax liability is governed by section 68 and Rule 6 which link payment obligation to receipt of consideration.
- Examination of section 68 and Rule 6:
The Tribunal cited section 68(1) and (2) and Rule 6 which expressly prescribe that service tax shall be paid by the 5th of the month following the calendar month in which payments are received (with special provisos for certain categories). From this, the Tribunal concluded that liability to pay service tax arises only after the service provider has received payment.
- Meaning of "payable":
The Tribunal referenced dictionary definitions (Concise Oxford, Chambers, Black's Law Dictionary) to show that "payable" connotes an obligation to pay that is due or legally enforceable. It held that for disallowance under section 43B, it must be shown that the sum was "payable" (i.e., an obligation to pay had arisen) in the accounting year.
- Application of precedent:
The Tribunal relied on the Andhra Pradesh High Court's reasoning in Srikaollu Subbarao to support the proposition that section 43B cannot be mechanically applied where statutory liability to pay the tax falls due after the accounting year or is contingent upon receipt.
- Conclusion on the AO's approach:
Because the assessee had not claimed deduction for service tax (it was not debited to profit & loss) and because service tax liability under the service tax statute arises on receipt, section 43B could not be invoked to disallow the amount. On that basis, the Tribunal found no error in the CIT (Appeals) deleting the AO's addition and confirmed the CIT (Appeals) order.
Holding and Implications
Final Holding: The appeal filed by the revenue is DISMISSED. The Tribunal confirmed the order of the CIT (Appeals) deleting the addition of Rs. 5,72,374.
Direct Consequence for the Parties: The addition of Rs. 5,72,374 as service tax not paid before the due date was deleted and will not be assessed to income for the assessment year in question; the CIT (Appeals) order is upheld.
Implications beyond the parties: The Tribunal's decision rests on interpretation of section 43B in conjunction with section 68 of the Finance Act and Rule 6 of the Service Tax Rules and on established case law. The opinion does not expressly state the setting of any novel legal precedent; it resolves the appeal by applying statutory text and prior authority to the facts before it. Therefore, the immediate effect is the confirmation of the CIT (Appeals) order in this matter; no distinct new precedent was declared in the operative portion of the order.
Order authored by: T.R. Sood, Accountant Member.
ORDER
Per T.R. Sood, Accountant Member. - This appeal by the revenue is directed against the order of the CIT (Appeals) dated 1-9-2006 for the above assessment year. In this appeal, the revenue has taken the following grounds :—
(1)
The CIT (Appeals) erred in holding that the disallowance was made under section 43B whereas the Assessing Officer has only added as a revenue receipt.
(2)
The CIT (Appeals) erred in not appreciating the fact that any taxes or levies collected or collectible by the assessee on behalf of the Government is in the nature of deemed rev- enue receipt in the hands of the assessee till it is paid to the Government.
(3)
The CIT(Appeals) erred in not appreciating the fact that it is only the discretion exercised by the assessee not to route the receipt of service taxes through the P&L Account.
2. The brief facts of the case are that the assessee-company is engaged in the business of running a recording and dubbing studio, production of advertisement film and TV serials, manufacturing of specialised computers, trading in technical solutions, production and distribution of feature film and software development. During the assessment proceedings, the Assessing Officer noticed that service tax was not being routed through profit and loss accounts and the assessee had shown liability towards service tax at Rs. 5,72,374 as on 31-3-2002 in its balance sheet. Upon enquiry to furnish the proof regarding payment of service tax on or before due date for filing of return of income it was submitted as under :—
"Note on the applicability of section 43B for service tax payable :—
Service tax a Central tax that was introduced by making provisions in Chapter V of the Finance Act, 1994 (section 64 to section 96). The Act provides the method of levy, the circumstances in which the levy would arise, inter alia, the manner of payment etc., section 68 of the Act, prior to its amendment on 16-10-1998 envisaged that the person providing taxable service must collect service tax and then pay it to the Government account. Only when such person failed to collect the tax, person is liable to pay the tax. However, with effect from 16-10-1998, section 68 was amended by omitting the element of 'collection' and it provides that the duty of the paying the service tax is on the person providing the service in the prescribed manner. The manner is prescribed in Rule 6 which prescribes that the service tax is required to be paid only on the value of taxable services received in a particular month or quarter, as the case may be and not on the gross amount charged or billed to the client. The relevant provisions of the service tax regulations are enclosed for your information and records.
The assessee is maintaining its books of account on accrual basis, the service tax payable shows the tax payable on the gross amount billed and not the amount payable as per the gross amount received by the assessee. As the am is also a company, the service tax is payable on the 25th of the month immediately following the said calendar month. The company has paid the service tax on amounts realised up to 31-3-2002 in April 2002, the details of which are enclosed to this note. Hence, it is most humbly and respectfully submitted that no disallowance is warranted on the service tax payable shown on outstanding as on 31-3-2002."
3. After considering the submissions, the Assessing Officer observed as under :—
"(a)
The assessee follows mercantile system of accounting. But service tax has not been routed through profit and loss account. The fact of showing the service tax payable on the liability side of the balance sheet itself proves that the service tax has been collected and has not been paid as on 31-3-2002.
(b)
Since the service tax has not been routed through profit and loss account, the service tax has not been debited and hence it is true that no disallowance can be made under section 43B. But the service tax collected and not paid to the Government account is revenue receipt in the hands of the assessee and is, accordingly, assessable. It can be claimed when it is paid.
(c)
As per the service tax payment details provided by the representatives, it nowhere appears that the service tax payable shown at Rs. 5,72,374 has been remitted on or before the due date of filing the return of income."
4. In the background of these observations, a sum of Rs. 5,72,374 being service tax which was not paid before the due date for filing the return of income was added to the income of the assessee.
5. Before the CIT (Appeals), two fold submissions were made. Firstly it was contended that section 43B starts with the non obstante clause and specifies that the deduction "otherwise allowable" under the Act shall not be allowed unless it is actually paid. This means, that the claim should be first preferred by the assessee and the same could be disallowed under section 43B only for the reason of failure to make actual payment. If an assessee had not preferred any claim towards service tax, there was no question of disallowing the same. Secondly, it was argued that section 67 of the Finance Act which deals with the service tax was amended with effect from 6-10-1998 and provided that the duty of paying service tax is on the person providing the service in the prescribed manner and this manner was prescribed under rule 6 which further provides that service tax is required to be paid only on the value of taxable service received in a particular month or quarter as the case may be and not on the gross amount charged or billed. The CIT (Appeals) found force in the above submission and deleted the addition. Aggrieved, the revenue is in appeal before us on this issue.
6. Before us the ld. Departmental Representative while supporting the order of the Assessing Officer, also relied on the grounds of appeal.
7. On the other hand, the learned counsel for the assessee referred to section 43B of the Act and submitted that any sum of tax, duty, cess or fee etc., can be disallowed if such sum is payable. This means that disallowance under section 43B would be attracted if the assessee has failed to make payment towards any tax, duty, cess or fee etc., which the assessee was obliged to pay. According to him the word 'payable' is important and disallowance cannot be made if such duty or tax is not payable at all. He argued that service tax was a Central tax which was introduced by making provisions in Chapter V of the Finance Act, 1994 and provides for the month of levy, circumstances on which the levy would arise and the manner of payment etc. Service tax was levied under section 67 of the Finance Act, 1994 on the gross or aggregate amount charged by the service provider on the receiver. Prior to amendment on 16-10-1998 it was envisaged that the person providing taxable service must collect service tax and then pay it to the Government. On the failure of such person to collect the service tax, such person becomes liable to pay the same. Lot of representations were made to the Government, that sometimes service providers were not getting the payment and, therefore, it should not be asked to make the payment of service tax and, accordingly, the Act was amended and it was provided by omitting the element of collection.
8. The learned counsel for the assessee further relied on the amended section 68 and invited our attention to the sub-section (2) thereof which clearly provided that service tax shall be paid in the manner prescribed and rate specified in section 68 and all other provisions of Chapter V of Finance Act, 1994. He then referred to Rule 6 of Service Tax Rules, 1994 which clearly provides that service tax shall be paid by the 5th of the month immediately following the calendar month in which the payments are received. Therefore, the incidence of payment of service tax was related to the receipt of payment mentioned on the billing of the service.
9. The learned counsel for the assessee vehemently argued that service tax is basically different from Sales Tax, Provident Fund, ESI, Excise Duty etc., referred to section 43B of the Income-tax Act, because sales tax is payable by a dealer as per Central Sales Tax Act and various State Sales Tax Acts on a specified date of the following month in which the sale is completed irrespective of the fact whether the payment is received by the dealer or not. The liability would arise as soon as the incidence of sale is completed. Similarly, the liability to Excise Duty is attracted the moment the goods are removed from the Warehouse or Godown. In the case PF and ESI, the liability to pay is on the employer irrespective of the fact whether the employer has recovered the same from its employees or not. Whereas in the case of service tax, it becomes payable only when it is received from the client.
10. The learned counsel for the assessee also referred to section 145A of the Income-tax Act and argued that this provision makes it clear that the ST, ED etc., have to be treated as part of the purchase and sale of goods whereas that is not the case with service tax.
11. He vehemently argued that section 43B starts with a non obstante clause and specifies that deduction otherwise allowable under the Act shall not be allowed unless it is actually paid. This means that section 43B would be attracted only in those cases where a deduction has been claimed but payment has not been made. But if no deduction has been claimed at all then there is no question of application of section 43B of the Income-tax Act.
12. In the case before us, service tax was never claimed as deduction because the same was never debited to profit and loss account. Since companies are required to prepare accounts on the accrual basis, service tax had to be shown on accrual basis and reflected as liability directly in the balance sheet. As no deduction was claimed by the assessee there is no question of disallowing the same under section 43B of the Income-tax Act. He also relied on the case of Srikaollu Subbarao & Co. v. Union of India [1988] 173 ITR 708 (AP) .
13. We have considered the rival submissions carefully in the light of the relevant provisions of the Income-tax Act as well as Service Tax Act. We find that relevant portion of section 43B reads as under :—
"43B. Notwithstanding anything contained in any other provisions of this Act a deduction otherwise allowable under this Act in respect of—
(a)
any sum payable by the assessee by way of tax, duty, cess or fee, by whatever name called, under any law for the time being in force, or"
From a plain reading of the above provision it becomes clear 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 [1977] 110 ITR 385 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 under section 43B could not be made and the same has been correctly deleted by the CIT (Appeals).
14. The second aspect of this issue is also important. Section 43B(c) uses the expression 'any sum payable'. For making any disallowance, first of all it has to be established that such sum is payable. The Dictionary meaning of the word 'payable' in Concise Oxford English Dictionary is :—
(1)
required to be paid;
(2)
able to be paid; and
(3)
debts owned by a business
The Chambers Dictionary (New Edition) defines the word 'payable' as "that may or should be paid; due or profitable".
Black's Law Dictionary, Sixth Edition defines the term 'payable' as under :—
"Capable of being paid; suitable to be paid; admitting or demanding payment; justly due; legally enforceable. A sum of money is said to be payable when a person is under obligation to pay it. Payable signifies an obligation to pay at a future time, but when used without qualification, term normally means that the debt is payable at once, as opposed to 'owing'."
The above definition would show that the word 'payable' is used in section 43B, to our understanding, would mean that there is a kind of obligation on the part of payee to make the payment which is already due. For example, when some body purchases goods then the other person has got the liability to pay the price of the goods and it can be said that price of the goods is payable by the customer. If the customer simply looks at the cost it cannot be said that he has become liable to make the payment. This can be further understood by way of an example. For instance, whenever a Chartered Accountant raises a bill for professional services which are subjected to service tax, it is not necessary that the client will accept the bill as such and make payment accordingly. In that situation, the Chartered Accountant cannot be fastened with the liability to pay the service tax. But, in any case the sales-tax situation is different. For example, section 6(1) of Central Sales Tax Act, 1956 provides that :—
"6. Liability to tax on inter-State sales.—[(1)] Subject to the other provisions contained in this Act, every dealer shall, with effect from such date as the Central Government may, by notification in the Official Gazette, appoint, not being earlier than thirty days from the date of such notification, be liable to pay tax under this Act on all sales of goods other than electrical energy, effected by him in the course of inter-State trade or commerce during any year on and from the date so notified :
[Provided that a dealer shall not be liable to pay tax under this Act on any sale of goods which, in accordance with the provisions of sub-section (3) of section 5, is a sale in the course of export of those goods out of the territory of India.]"
The above provision clearly shows that the dealer would become liable to make sales-tax payment the moment he effects the sales in the course of an inter-State trade or commerce. This shows that the liability to make payment of sales-tax is not depending on the fact whether such dealer has received the payment from the customer of the goods or not. The liability is fastened to the transaction in sales and once such sale is effected, the dealer becomes liable to pay.
15. 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 which read as under:—
"68. Payment of service tax.—(1) Every person providing taxable service to any person shall pay service tax at the rate specified in section 66 in such manner and within such period as may be prescribed.
(2) Notwithstanding anything contained in sub-section (1), in re- spect of any taxable service notified by the Central Government in the Official Gazette, the service tax thereon shall be paid by such person and in such manner as may be prescribed at the rate specified in section 66 and all the provisions of this Chapter shall apply to such person as if he is the person liable for paying the service tax in relation to such service."
Rule 6 of Service Tax Rules
"6. Payment of Service Tax.—(1) The service tax shall be paid to the credit of the Central Government by the 5th of the month immediately following the calendar month in which the payments are received, towards the value of taxable service:
Provided that where the assessee is an individual or proprietary firm or partnership firm, the service tax shall be paid to the credit of the Central Government by the 5th of the month immediately following the quarter in which the payments are received, towards the value of taxable services :
Provided further that notwithstanding the time of receipt of payment towards the value of services, no service tax shall be payable for the part or whole of the value of services, which is attributable to services provided during the period when such services were not taxable :
Provided also that the service tax on the value of taxable services received during the month of March, or the quarter ending in March, as the case may be, shall be paid to the credit of the Central Government by the 31st day of March of the calendar year."
From the above section 68 it becomes clear that service tax has to be paid in the manner which may be prescribed and this has been prescribed in 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. The first proviso gives an exception in case of individual or proprietary firms or partnership firms, and in such cases, service tax has to be paid to the credit of Central Government by the 5th of the month immediately following the quarter in which the payments are received. The only difference is that in case of individual or proprietary or partnership firm, payment has to be made on 5th of the following month after the following the quarter whereas in the case of other organisations it has to be paid on the 5th of the month immediately following the calendar month. But in both the cases, the liability arises to make the payment only after the service provider has received the payments.
16. 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. (supra) has made the following observations :—
"17. One other contention addressed to us is that the liability to pay sales-tax for the month of 18-3-1984, was disallowed in terms of section 43B in all the cases before us. Shri Swamy, learned counsel, pointed out that the petitioners filed A2 monthly returns according to which they pay the taxes. Our attention has been invited to rule 17 of the AP Sales-tax Rules, 1957, which in terms, provides that the tax in relation to the return shall be paid before the 25th day of the succeeding month. It is argued that where the statute itself prescribes the date of payment no exception could be taken acting under section 43B, that the amount was not paid rendering justification for its disallowance. It is urged that section 43B can have no application to cases where the statutory liability which was incurred in the accounting year is also not payable according to the statute in the same accounting year. We find considerable force in the contention of Shri Swamy. In order to apply the provisions of section 43B, it seems to us that not only should the liability to pay the tax or duty be incurred in the accounting year but the amount also should be statutorily "payable"in the accounting year. Section 43B itself is clear to this extent. It refers to the "sum payable" in clause (a) as well as in clause (b). If the Legislature intended, it should have so provided that any sum for the payment of which liability was incurred but the assessee would not be allowed unless such sum is actually paid. Keeping in mind the object for which section 43B was enacted, it is difficult to subscribe to the view that a routine application of that provision is called for in cases where the "taxes and duties" for the payment of which liability was incurred in the accounting year, were not statutorily payable in that accounting year. If, under the provisions of any statute, a tax or duty is payable after the close of the accounting year, different consideration would prevail and it may not be open to the ITO to disallow tax or duty which is statutorily payable after the accounting year. In fact, the amendment brought about, which is coming into force on 1-4-1988, permitting the deduction of taxes and duties paid before the filing of the IT returns clearly supports the view that "taxes and duties" not statutorily payable during the accounting year do not fall to be disallowed under section 43B."
17. In view of the above observations, 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. Under these circumstances, we find nothing wrong with the order of the CIT (Appeals) on this issue and the same is confirmed.
18. In the result, the appeal filed by the revenue is dismissed.
113/161
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