PRASHA SOLUTIONS (P) LTD.,DELHI vs. ITO, NEW DELHI

The assessee is a private limited company and has filed a return declaring an income of Rs.9,26,340/-. The case of the assessee was selected for scrutiny by issuance of notice under section 143(2) of the Act. During the course of assessment, the AO had asked the assessee to give proof of payment of service tax amount of Rs. 19,26,375/- to the Government for the purposes of deduction under section 43B of the Act. Since, no proof of payment of this amount was provided, the AO was of the opinion that the amount ought to have been credited in the P & L account, and therefore, an addition of Rs.19,26,375/- was made in the hands of the assessee vide assessment order dated 18.02.20l6.

Aggrieved by the assessment order, the assessee filed an appeal before the CIT(A) and vide impugned order dated 24.10.2016 the CIT(A) dismissed the appeal of the assessee by following his own order in the case of the assessee itself for A.Y. 2011-12.

The assessee is in appeal before me and has raised the following grounds of appeal:

The Ld. AR assailing the orders passed by the CIT(A) submits that the nature of service tax has been misunderstood by the department and service tax does not form part of the assessable receipts under the income tax. He further submits that the invocation of section 145A by the AO was misconceived. The principal argument of the assessee is that once the assessee has not chosen to include the service tax in the P & L Account and the same being a balance sheet item, the disallowance under section 43B cannot be made.

The Ld. DR, on the other hand, relied upon the order passed by the AO. and the CIT(A).

I have heard the rival submissions and perused the judgments relied upon by the Ld. AR. Grounds No.1 and 2 pertain to the addition of Rs. 19,26,375/- on account of non deposit of service tax under section 43B of the Act. Section 43B of the Act is extracted herein below: “43B. Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of (a) any sum payable by the asse by way of tax, duty, cess or fee, by whatever name called, under any law for the time being in force, or (b) any sum payable by the assessee as an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees [or] (c) any sum referred to in clause (ii) of sub-section (1) of Section 36. [or] (d) any sum payable by the assessee as interest on any loan or borrowing from any public financial institution [or a State financial corporation or a State industrial investment corporation], in accordance with the terms and conditions of the agreement governing such loan or borrowing. [or] (e) any sum payable by the assessee as interest on any [loan or advances] from a scheduled bank in accordance with the terms and conditions of the agreement governing such loan [or advances], [or] (f) any sum payable by the assessee as an employer in lieu of any leave at the credit of his employee. Shall be allowed 9irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him.”

A bare perusal of the aforesaid section makes it evident that deduction of any tax, duty, cess or fee is allowable only when such sum is actually paid by the assessee. Admittedly, in the present case the service tax component of Rs. 19,26,375/- is not included in the P&L Account by the assessee. The same indicates that the assessee has claimed deduction of the said amount. It is not denied by the Ld. AR that the service tax component was not paid to the Government by the assessee during the year. By adopting such a method of accounting, the assessee is able to withhold the service tax component and at the same time claim deduction of the said tax component in its P&L Account. The purpose of introduction of section 43B would be rendered otiose if the argument of the Ld. AR is accepted. The judgment relied upon by the Ld. AR in the case of CIT Vs. Knight Frank (India) Pvt. Ltd., is not on the issue decided above. In view thereof, Grounds no. 2 and 3 raised by the assessee are dismissed.

In the result, the appeal of the assessee is dismissed.