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Facts
The assessee, a partnership firm, filed its return of income for AY 2017-18. The AO processed the return under Section 143(1) and made additions/disallowances for non-deduction of TDS and non-payment of Service Tax and Professional Tax. The assessee challenged the disallowance of Service Tax and Professional Tax.
Held
The Tribunal found that the issue of whether disallowance under Section 43B is attracted when service tax is not debited to the P&L account is debatable. The Tribunal also noted that there was a lack of evidence regarding compliance with the first and second provisos to Section 143(1) regarding intimation and response to the assessee. Therefore, the issue was remanded to the AO for fresh adjudication.
Key Issues
Whether disallowance under Section 43B is attracted for non-payment of service tax if it was not debited to the Profit and Loss account. Whether the AO's action under Section 143(1) was without jurisdiction.
Sections Cited
143(1), 139, 40(a)(ia), 43B, 145A
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, INDORE BENCH, INDORE
आदेश/ O R D E R
Per B.M. Biyani, AM:
Feeling aggrieved by order of first-appeal dated 06.02.2024 passed by learned Commissioner of Income-tax (Appeals)-Adl/JCIT(A)-4, Bengaluru [“CIT(A)”], which in turn arises out of intimation of assessment dated 05.12.2018 passed by CPC, Bengaluru [“AO”] u/s 143(1) of the Income-tax Act, 1961 [“the Act”] for Assessment-Year [“AY”] 2017-18, the assessee has filed this appeal.
2. The brief facts of case are such that the assessee, a partnership firm, filed its return of income of AY 2017-18 under consideration on 25.10.2017 u/s 139 declaring a total income of Rs. 9,59,160/- which was assessed by Page 1 of 12 AO by way of processing u/s 143(1) vide intimation dated 05.12.2018 at a total income of Rs. 40,78,610/- after making a total addition of Rs. 31,19,456/- on two counts, namely (i) Disallowance of Rs. 5,94,157/- u/s 40(a)(ia) for non-deduction of tax at source [30% of payment of Rs. 19,80,524/-] and (ii) Disallowance of Rs. 25,25,299/- u/s 43B for non- payment of Service-tax of Rs. 25,10,511/- and Professional tax of Rs. 14,788/- by due date for filing of return u/s 139(1). Aggrieved, the assessee
2nd carried matter in first-appeal for item of disallowance of Rs.
25,25,299/- u/s 43B but did not get any success. Now, the assessee has come in next appeal before us.
3. The assessee has raised following grounds:
“1. That, on the facts and in the circumstances of the case, the Ld. CIT(A) was not justified in confirming the order of Assessing Officer, which was bad-in-law.
2. That, on the facts and in the circumstances of the case, the Ld. CIT(A) was not justified in confirming the additions/disallowances made by CPC u/s 43B as these were without jurisdiction and beyond the purview of section 143(1).
3. That, on the facts and circumstances of the case, the Ld. CIT(A) was not justified in confirming the additions of Rs. 25,10,511/- made by CPC towards Service Tax and Rs. 14,788/- towards Professional u/s 43B.
That, on the facts and circumstances of the case, the Ld. CIT(A) was not justified in confirming the disallowance u/s 43B made by CPC of Rs. 25,10,511/- towards Service Tax and Rs. 14,788/- towards Professional Tax as the same were neither claimed in Profit and Loss A/c nor routed through P&L A/c and were directly shown in the Balance-Sheet in the liabilities side.
5. That, on the facts and in the circumstances of the case and without prejudice to the above, either the disallowance ought to be deleted or the same should be allowed in subsequent years in the year of payment.
6. That the appellant craves your leave to add or amend any ground of appeal
on or before the date of hearing.”
4. Ld. AR for assessee has filed a Written-Synopsis which is held on record and also made Oral submissions during hearing. It is submitted that the Ground No. 1 & 6 are general and do not require any adjudication. So far other Ground Nos. 2 to 5 are concerned, it is submitted that the assessee is not agitating the issue of disallowance of Professional-tax of Rs.
14,788/-made by AO. Therefore, we are required to adjudicate Ground Nos. 2 to 5 for disallowance of Rs. 25,10,511/- of Service-tax only. Ground No. 2:
This is a legal ground in which the assessee claims that the AO’s action of making disallowance of service-tax of Rs. 25,10,511/- was ‘without jurisdiction and beyond the purview of section 143(1)’.
Ld. AR for assessee submitted that that the AO has made impugned disallowance by invoking section 43B of the Act on account of non-payment of service-tax by due date for filing of return u/s 139(1). However, the facts of assessee’s case are such that the assessee has not debited service-tax in P&L A/c and directly shown the service-tax collected from customers as a ‘liability’ in Balance-Sheet. He submitted that in a situation where the assessee has not debited service-tax in P&L A/c, whether the disallowance u/s 43B shall get attracted or not is a ‘debatable’ issue. He admitted that there are decisions against assessee (i.e. in favour of revenue) on the basis of Page 3 of 12 provision of section 145A but at the same time there are decisions favouring assessee as well. He relied upon a recent development in ITAT, Raipur Bench. He submitted that the ITAT, Raipur Bench initially decided Grand Motors Vs. ITO (2024) 166 taxmann.com 192 (Raipur – Trib.) order dated 09.07.2024 against assessee. But on further appeal by assessee, the Hon’ble Chhattisgarh High Court in Grand Motors Vs. ITO (2024) 169 taxmann.com 241 (Chattisgarh) order dated 25.11.2024 reversed ITAT’s view and held in favour of assessee. Subsequently, in another case of DCIT- 1(1) Vs. Vishal Automobiles (2025) 177 taxmann.com 74 (Raipur – Trib.) order dated 30.07.2025, the ITAT Raipur has decided in favour of assessee by following the above decision of Hon’ble Chattisgarh High Court. To a query raised by bench as to whether the provision of section 145A was presented before and discussed by Hon’ble Chattisgarh High Court, Ld. AR submitted that the order of Hon’ble High Court does not show this point but, however, he would rely on following passage recorded by ITAT, Raipur bench in Vishal Automobiles:
“5.1 The appellant in his submission stated that the sum for disallowance was picked up from figure in balance sheet showing the closing balance outstanding in the balance sheet. The appellant had submitted a manual tax audit report which has a different data than shown online in column 26(i)(B)(b). However, the appellant submitted the complete details of accounts consisting opening balance, transaction during the year and closing balance. The appellant submitted that the sales tax and service tax amounts were not routed through the P&L account hence these cannot be added u/s 43B as the amounts were not claimed as expenses. The appellant also relied on following judicial decisions -
1. CIT(A) order no. 'Appeal No: CIT(A)/BSP/A.No. 111/17-18/20-21 dated 14.07.2020' in the case of appellant for AY 2017-18
ITAT, Raipur order dated 31.01.2019 and High Court of Chhattisgarh order in Ganapati Motors.
High Court of Chhattisgarh decision in the case of Grand Motors vs ITO, TAXC No. 207 of 2024 dated 25.11.2024.
The case laws cited by appellant are carefully examined. In the case of Grand Motors, the Issue was identical for AY 2018-19. The 1st appellate authority and ITAT confirmed the disallowance considering the amendment in section 145A. However, the Hon'ble High Court Chhattisgarh decided the issue as under -
"12. Reverting to the facts of the case, it is admitted position on record that the appellant /assessee did not claim the amount of 62,32,262/- in his profit and loss account as an expenditure/deduction, nor the appellant claim deduction in respect of that account under Section 43B of the IT Act. In that view of the matter, the Assessing Officer, the CIT(A) and the ITAT, all three authorities have concurrently erred in holding that the appellant has claimed deduction/expenditure under Section 43B of the IT Act adding to its taxable income. Accordingly, the impugned order passed by the ITAT holding that the appellant is liable to pay tax on 62,32,262/-, is liable to be and is hereby set aside. The substantial question of law is answered in favour of the assessee and against the Revenue."
Ultimately, Ld. AR insisted that the issue involved is certainly ‘debatable’ in view of the fact that it has travelled before several benches of ITAT and High Courts. Hence, the upward adjustment (disallowance) made by AO qua ‘debatable’ issue is outside the purview of section 143(1). He relied upon following passage of ATS Real Estate Builders (P) Ltd. Vs. DCIT (2025) 172 taxmann.com 611 (Delhi – Trib.) order dated 27.01.2025:
“3.1 The Ld. Counsel for the assessee further submitted that no adjustment can be made u/s 143(1) of the Act when issue is debatable. The disallowance made u/s 43B of the Act on account of GST payable is not a prima facie adjustment; rather the same is a debatable issue since said amount was never routed through P&L account. One of the possible view is that since said amount was never routed through P&L account, therefore, how can same be added back in taxable income.”
Per contra, Ld. DR for revenue firstly relied upon following decisions in favour of revenue wherein, having regard to section 145A of the act, it has been vehemently held that the disallowance is attracted u/s 43B even if the assessee has not passed service-tax through P&L A/c:
(i) CIT, Agra Vs. Chhata Sugar Co. Ltd. (2019) 104 taxmann.com 206 (Allahabad) (ii) Smt. Husna Parveen Vs. CIT, NFAC, Delhi (2022) 142 taxmann.com 2 (Varanasi – Trib)
(iii) Munaf Ibrahim Memon Vs. ITO, Ward-3, Dhule (2017) 85 taxmann.com 236 (Pune – Trib.)
(iv) Hemkunt Infratech (P) Ltd. Vs. DCIT, Gurgaon (2018) 93 taxmann.com 13 (Delhi – Trib.)
Thereafter, Ld. DR made a strong submission that the provision of section 145A is nowhere discussed in the order of Hon’ble Chattisgadh High Court relied by Ld. AR. Further, the issue of disallowance of unpaid service- tax liability u/s 43B is no more ‘debatable’ in view of section 145A in Income-tax Act, 1961. He submitted that the decisions cited by him are very elaborate; have taken into account the provision of section 145A and thereafter held that the disallowance is attracted. Therefore, he prayed to uphold the disallowance made by AO.
We have considered rival submissions of both sides and carefully perused the case record including the impugned order of first-appeal passed by CIT(A) as also the judicial rulings cited before us.
At first, we re-produce the order passed by Ld. CIT(A) on this issue:
“6.1 Regarding the jurisdiction of the CPC and adjustment to be made to the return of income, the provisions of section 143(1) is reproduced as under: “Assessment 143.(1) Where a return has been made under section 139, or in response to a notice under sub-section (1) of section 142, such return shall be processed in the following manner, namely:- (a) the total income or loss shall be computed after making the following adjustments, namely:-
1. 1. any arithmetical error in the return; 2. an incorrect claim, if such incorrect claim is apparent from any information in the return; 3. …….
4. Disallowance of expenditure indicated in the audit report but not taken into account in computing the total income in the return; 5. …….. 6. ……. Provided that no such adjustments shall be made unless an intimation is given to the assessee of such adjustment either in writing or in electronic mode In view of the above, it evident that the provisions of section 143(1) of the Income-tax Act. 1961 permits the AO (the CPC in this case) to make adjustments as specified in Sl. Nos. (i) to (vi) to the income admitted by the assessee. Further, the CPC is required to send an intimation u/s 143(1) to the assessee about the adjustments proposed to be made to the income admitted and call for to the explanation / objection to the said adjustments. The assessee is bound furnish / submit explanations / clarification in respect of the said adjustments. If the explanation /
Page 7 of 12 clarification furnished by the assessee is found to be correct and acceptable, the said adjustment would not be made. If not acceptable, the adjustment would be made. The assessee is given an opportunity to explain its case. 6.3 In view of the above, the appellant's grounds (1), (2) & (3) on the jurisdiction of the provisions of section 143(1) are without any basis and the same is Dismissed.” [emphasis supplied] 12. Thus, the CIT(A) has re-produced the provision of section 143(1) which prescribes that the return filed by assessee shall be processed after making adjustment of “disallowances of expenditure indicated in the audit report but not taken into account in computing the total income in the return”
[item (iv) in clause (a) of section 143(1) – wrongly typed as “4” in place of “iv” in CIT(A)’s order]. The facts of present case show that the AO made two types of disallowances indicated by auditors in audit report. The first disallowance of Rs. 5,94,157/- u/s 40(a)(ia) for non-deduction of tax at source [30% of payments of Rs. 19,80,524/-] has been made by taking into account the reporting in Clause No. 21(b)(ii)(A) of Form No. 3CD (tax audit report). The second disallowance of Rs. 25,25,299/- u/s 43B for non-payment of Service-tax of Rs. 25,10,511/- and Professional tax of Rs. 14,788/- by due date for filing of return u/s 139(1) has been made by taking into account the reporting in Clause No. 26(i)(B)(b) of Form No. 3CD (tax audit report). Thus, the AO has made both disallowances by picking reportings from audit report.
However, the assessee has accepted the first disallowance by not contesting same before CIT(A) or before us. Further, out of second disallowance, the assessee is against the part disallowance of Rs. 25,10,511/- on account of Page 8 of 12 service-tax; the assessee is not agitating the element of professional tax of Rs. 14,788/-. Thus, the assessee has a peculiar approach to contest only ‘service-tax’ disallowance by advancing an argument that it was outside the purview of section 143(1) whereas the AO has invoked the provision of section 143(1)(a)(iv) and made multiple adjustments/disallowances by taking into account the reportings made by auditors in audit report. The provision of law i.e. section 143(1)(a)(iv) is no different qua the disallowance of ‘service-tax’ being agitated by assessee from other disallowances made by AO for which the assessee is not having any grievance. In this situation, the observation made by CIT(A) becomes much relevant according to which the CPC/AO is required to send an intimation to assessee before making proposed adjustment/disallowance and only after considering assessee’s explanation/response, the adjustment would be made (or would not be made). We re-produce below the legal provisions of First Proviso and Second Proviso to section 143(1) which provide such a mechanism narrated by Ld. CIT(A):
“Provided that no such adjustments shall be made unless an intimation is given to the assessee of such adjustments either in writing or in electronic mode. Provided further that the response received from the assessee, if any, shall be considered before making any adjustment, and in a case where no response is received within thirty days of the issue of such intimation, such adjustments shall be made:” The CIT(A) has further mentioned in impugned order “The assessee is given an opportunity to explain its case.” However, from the records available
Page 9 of 12 before us, it is not discernible as to whether or not the CPC/AO really served an intimation upon assessee as required by First Proviso and whether or not the assessee filed any response to same in terms of Second Proviso and if filed, what was the response given by assessee. Therefore, although the CIT(A) has rejected assessee’s ground stating that “the assessee is given an opportunity to explain its case” but in absence of any evidence on record to verify the compliances of First Proviso and Second Proviso to section 143(1) as noted above, we remand this issue back to the file of AO who will check the departmental record and thereafter re-decide the assessee’s claim of jurisdiction deficit. Accordingly, this issue is allowed for statistical purpose.
Ground No. 3 to 5:
In these grounds, the assessee challenges the merit of disallowance.
The claim of assessee is such that when the assessee has not passed service-tax to P&L A/c, no disallowance can be made u/s 43B.
For these grounds also, the Ld. AR for assessee relied upon very same decisions of Hon’ble Chattisgarh High Court in Grand Motors (supra) and ITAT, Raipur bench in Vishal Automobiles (supra).
Per contra, Ld. DR for revenue reiterated the very same arguments as narrated earlier. He also relied upon the observations and conclusions made by CIT(A) in Para 7 of impugned order.
We have considered rival submissions of both sides and perused the impugned order of CIT(A) as also the legal precedents cited before us. On a careful consideration, we find that the CIT(A) has noted following observation in impugned order:
7.6 It is observed that the appellant’s submissions in Annexure-3 that the appellant had been disputing its service-tax liability right from F.Y. 2014-15. It had pad its service tax liability for F.Yrs. 2014-15, 2015-16 & 2016-17 on various dates. In connection with abatement of its Service Tax disputes for the period 01-04- 2014 to 30-06-2014 [appeal was pending before Service Tax Commissioner (Appeals)], the appellant filed a declaration under “Sabka Viswas (Legacy Dispute Resolution Scheme, 2019 on 31.12.2019 before GST authorities. It paid a sum of Rs. 60,42,613/- as full and final settlement of disputed dues relating to above mentioned period. The GST authorities issued a Discharge Certificate on 30.07.2020. Considering the above, it is observed that the appellant had been a habitual defaulter in respect of Service-tax.”
The above noting in CIT(A)’s order demonstrates that the assessee has not paid service-tax till 30.07.2020 and there was some litigation between assessee and service-tax authorities for years which the assessee ultimately settled under Dispute Resolution Scheme. When it is so, it becomes imperative to look into the nature of service-tax collected by assessee from customers as part of sale price which was not paid and shown as liability in Balance-Sheet. Therefore, the compliances of First Proviso and Second Proviso to section 143(1) would enable the AO to take a decision whether any adjustment (disallowance) was warranted or not in the case of assessee.
Since we have already remanded jurisdictional issue as raised in Ground No. 2 to AO, we also remand this issue to the file of AO for making a fresh
Page 11 of 12 adjudication. Accordingly, this issue is also allowed for statistical purpose.
Before parting we may make it clear that while deciding the issue of service-tax afresh the AO shall give a fresh opportunity to assessee and consider assessee’s submissions including the legal decisions as may be cited by assessee and pass a judicious order in accordance with law without being influenced by previous orders.
Resultantly, this appeal is allowed for statistical purpose.
Order pronounced in open court on 29/08/2025