TMI Blog2020 (5) TMI 576X X X X Extracts X X X X X X X X Extracts X X X X ..... th the assessment years is allowed. Disallowance of proportionate interest on borrowed funds - HELD THAT:- We find that the assessee has not established in the cash flow statements about the availability of enough own funds at the time of making investments in the exempted income yielding assets. Hence, it is appropriate to verify the fact whether enough own funds are available with the assessee as on the date of making investments in the exempted income yielding assets. Being so, the assessee is directed to produce cash flow statements showing availability of enough own funds for making such investments with supporting documents which have to be examined by the AO before making disallowance. Accordingly, we remit this entire issue in dispute to the file of the Assessing Officer for fresh consideration with a direction to the assessee to produce relevant cash flow statements to show that interest free funds were available with the assessee to make such investments. Depreciation on undivided share of land treating them as cost paid towards building - HELD THAT:- The assessee has shown the land as undivided share of land separately in the block of assets which is not entitl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... half of the principal is purely fiduciary. The nature of the obligation continues to be fiduciary even in a case wherein the relationship of the principal and agent is created by a statute. 6. The CIT(A) failed to consider the facts and circumstances of the case that the decision of the Hon'ble High Court of Kerala in KSEB Vs. DCIT reported in 329 ITR 91 is applicable to statutory bodies such as electricity board where the relationship is that of principal and agent, which cannot have application to entities like the assessee, M/s Kunnel Engineers Contractors P Ltd. 7. The CIT(A) failed to consider the fact that the land is not an asset on which depreciation can be claimed, as the assessee has claimed depreciation on undivided share of land treating them as cost paid towards building. 8. The CIT(A) ought to have considered the fact that the onus to establish the linkage between the borrowed funds and the interest free loans to the sister concerns lies on the assessee. 9. It is prayed that the orders of the learned Commissioner of Income Tax (Appeals)-l, Kochi be reversed and that of the Assessing Officer restored. 10. For these and other grounds that may be urg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s a part of the price for services imposed by statutory provision. Moreover, the service tax collected by the assessee does not belong to it and it is to be paid to the treasury within the time allowed and the principle of diversion by overriding title applies to it. Therefore, when the assessee fails to deposit the same, the principle laid down that it shall form part of the receipt of the assessee cannot be nullified by accounting it without routing through its profit loss account. Hence, the amount of ₹ 3,52,69,463/- being unpaid service tax was added to the income of the assessee by invoking the provisions of section 43B of the I.T. Act. 3.2 On appeal, the CIT(A) observed that assessee was following mercantile system of accounting. The CIT(A) observed that the assessee did not deposit part of Service Tax collection with the concerned authorities and the assessee neither claimed any deduction in this regard nor did it debit said amount as an expenditure in Profit Loss Account. According to the CIT(A), the assessee had credited the Service Tax Recoverable from client to a liability account. Hence, relying on the judgment of the Delhi High Court in the case of CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... government, and that section 43B(a) was enacted for such taxes remaining payable at the year-end and are still not paid before the due date of filing of return. The Tribunal clarified that Sec. 43B sub-sec. (a) . does not have a direct link of the amount of tax to be passed through P L account. Rather it is in the nature of check by the statute to ensure that the assessee makes payment of tax collected to the concerned department and if he is unable to do so the amount is added to its income . The Tribunal distinguished assessee s reliance on the judgment of Bombay High Court in the case of Ovira Logistics (P) Ltd. and held that in the present cae there is no bifurcation of whether service tax payable was in relation to those services on which the amount due from customers was not received. The Ld. DR relied on the judgment of the Supreme Court in the case of Maruti Suzuki India Ltd. vs. CIT (114 taxmann.co, 129). 3.4 The Ld. AR submitted that the assessee had not remitted service tax dues amounting to ₹ 3,52,69,463/- for the assessment year 2012-13 and ₹ 2,42,72,852/- for the assessment year 2014-15 which was recognised as a liability in its books and this amoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ployed 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 3.5 The Ld. AR submitted that from a plain reading of section 43B it is apparent that the deductions are available to an assessee only when it is a deduction otherwise allowable under the Act. In the present case, it was submitted that service tax was not claimed by the assessee as a deduction in the first place for it to be disallowed on account of non-payment. According to the Ld. AR, the correct interpretation of the expression otherwise allowable is that the item claimed as deduction needs to be an expenditure allowable under the provisions of the Income-tax Act in computing the income and the implication of the expression is that those items of expenditure which are not usually deductible in computing the income of an assessee cannot be claimed as deduction even if the assessee has made actual payments of those items. The expression a deduction otherwise allowable is used in a general and permissive manner as explained above. The Ld. AR submitted that the assessee was following mercantile system of accounting and did not deposit any part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act. This was considered by the Hon ble Apex Court in the case of Chowranghee Sales Bureau P. Ltd. v. CIT [(1973) 87 ITR 542 (SC)], in which it was held that the sales tax collected by the assessee is revenue receipt even if it is shown by the assessee under non-revenue head and such treatment by the assessee is not decisive. Further, in the case of M/s. Jain Christopher v. DCIT in ITA No.855/Bang/2012 order dated 12.04.2013, it was held as under: - 7.2 During the course of assessment proceedings, the Assessing Officer observed that a sum of ₹ 29 lakhs representing service tax collected by the assessee had not been paid, but, was shown as outstanding liability . Being queried, it was explained that it had not preferred any claim for deduction and, thus, it was argued, the question of disallowance u/s 43B of the Act does not arise. The AO took a view that even though the assessee had not claimed the same in its P L account as an expenditure and, therefore, section 43B has no application. However, he was of the view that the fact remains that service tax collected by the assessee but not paid to the Government account up-to the end of the financial year or even ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts 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 Govt. and paid to the Govt. accordingly. Therefore, a service provider is merely acting as an agent of the Govt. and is not entitled to claim deduction on account of service tax. Hence, on this account alone addition u/s 43B could not be made and the same has been correctly deleted by the CIT(Appeals) . However, in the instant case, as admitted by the assessee, service tax has been collected but not paid to the Government account either up-to the end of the financial year or even up-to the date of filing of the return of income. Thus, the case law relied on by the assessee is distinguishable and cannot come to the rescue of the assessee. (ii) CIT v. Noble and Hewitt India (P) Ltd (Del) 7.2.2 The Hon ble Delhi High Court was predominantly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the service recipients. The assessee has challenged before us, the disallowance of ₹ 85,26,467/- disallowed u/s. 43B of the Act. We observe that the assessee has recorded his turnover after deducting the service tax received and the service tax has been credited separately. In section 145, of the Act for determining the income chargeable under the head profits and gains of business or profession or income from other sources, the same is to be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. The said provisions were substituted by the Finance Act, 1995 w.e.f. 01.04.1997. Under section 145A of the Act, it is provided that notwithstanding anything to the contrary contained in clause(a) to section 145, the valuation of purchase and sale of goods and inventory, for the purpose of determining the income chargeable under the head profits and gains of business or profession, shall be (i) in accordance with method of accounting regularly employed by the assessee; and (ii) further adjusted to include the amount of any tax, duties, cess or fees, by whatever name called, actually paid or incurred by the assessee, to bring the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervice tax Rules, which is mandatory for the service provider to issue invoice to the service recipient. He has also not produced any evidence regarding payment received from service recipients as to how they have paid - separately or inclusive of service Tax. He has also not produced any evidence regarding whether the TDS has been remitted on payment after excluding the service tax. After going through the paper book filed by the assessee, we observe that the assessee has utilized service tax credit towards payment of duty on capital goods and as per Reverse Charge Mechanism. Therefore, it is necessary to discuss the relevant provisions of the Cenvat Credit Rules, 2004 as well as section 43B of the IT Act. 7. Section 43B(a) is as under : 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 assessee by way of tax, duty, cess or fee, by whatever name called, under any law for the time being in force, or 8. Rule 4 of the CENVAT Credit Rules, 2004 reads as under : Rule 4. Conditions for allowing CENVAT credit.- (1) The CENVAT credit in respect of inputs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ials, moulds and dies and goods falling under heading 6805, grinding wheels and the like, and parts thereof falling under heading 6804 of the First Schedule to the Excise Tariff Act, are in the possession of the manufacturer of final products, or provider of output service in such subsequent years. Illustration. - A manufacturer received machinery on the 16th day of April, 2002 in his factory. CENVAT of two lakh rupees is paid on this machinery. The manufacturer can take credit upto a maximum of one lakh rupees in the financial year 2002-2003, and the balance in subsequent years. (3) The CENVAT credit in respect of the capital goods shall be allowed to a manufacturer, provider of output service even if the capital goods are acquired by him on lease, hire purchase or loan agreement, from a financing company. (4) The CENVAT credit in respect of capital goods shall not be allowed in respect of that part of the value of capital goods which represents the amount of duty on such capital goods, which the manufacturer or provider of output service claims as depreciation under section 32 of the Income-tax Act, 1961( 43 of 1961). (5) (a) The CENVAT credit shall be allowed even if ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the month immediately following the respective month). However, the payment for the month of March is required to be made by 31st of March itself. As per Rule 6(4) of the Service Tax Rules, 1994, the assessee can pay for provisional payment of service tax in case he is not able to correctly estimate the tax liability. In such a situation, he may request in writing to the jurisdictional Assistant/Dy. Commissioner for the same. 10. As per section 73A of the Finance Act, 1994, any person who has collected any sum on account of Service Tax, is under obligation to pay the same to the Government. He cannot retain the sum so collected with him by contending that the service tax is not payable. 11. As per section 173A of the Service Tax Act, in case, the service tax is collected, the provision is as under: 173A. Service Tax collected from any person to be deposited with Central Government: - (1) Any person who is liable to pay service tax under the provisions of this Chapter or the rules made thereunder, and has collected any amount in excess of the service tax assessed or determined and paid on any taxable service under the provisions of this Chapter or the rules made ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce for the service provided or agreed to be provided is issued: Provided that where the invoice is not issued within the time period specified in rule 4A of the Service Tax Rules, 1994, the point of taxation shall be the date of completion of provision of the service. (b) in a case, where the person providing the service, receives a payment before the time specified in clause (a), the time, when he receives such payment, to the extent of such payment: Provided that for the purposes of clauses (a) and (b), - (i) in case of continuous supply of service where the provision of the whole or part of the service is determined periodically on the completion of an event in terms of a contract, which requires the receiver of service to make any payment to service provider, the date of completion of each such event as specified in the contract shall be deemed to be the date of completion of provision of service; (ii) wherever the provider of taxable service receives a payment up to rupees one thousand in excess of the amount indicated in the invoice, the point of taxation to the extent of such excess amount, at the option of the provider of taxable service, shall be determined ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t by the provisions of Section 43B of the Income Tax Act. 1961. Due to the change in the law now those decisions do not help to the assessee. Moreover, the assessee has filed the service tax returns belatedly, i.e., for April to June on 16.04.2015, for July to September and half yearly from October to March, 2013 on 08.07.2015. In view of all these facts, the ld. CIT(A) has rightly dealt with the issue in question by giving elaborate findings in the impugned order regarding confirmation of addition u/s. 43B of the Act, which we do not find fit to be interfered with. Accordingly, the appeal of the assessee deserves to be dismissed. 4.2 In view of the above binding precedents, we are of the view that the service tax collected by the assessee and not paid to the Government exchequer before the due date of filing of return, is to be disallowed, though it was not charged to the profit and loss account and it attracts the provisions of section 43B of the Act and the present provisions of section 145A of the Act cannot be applied in view of non obstante clause in section 43B of the Act. Thus, this ground of appeals of the Revenue for both the assessment years is allowed. 5. The nex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nds on account of commercial expediency. Without examining these facts, the CIT(A) had allowed the claim of the assessee which is bad in law. 5.4 The Ld. AR submitted that the assessee had net reserves of ₹ 16,18,20,075/- which is far in excess of the amounts advanced to the related companies. The cash and bank balances available with the Company also far exceed the amounts advanced. Therefore, the assessee had sufficient amount of interest free funds which was used for advancing to the sister companies. It was submitted that these loans were taken for the purpose of funding specific assets and were paid directly to the supplier of the assets. Thus, it was submitted that there was no question of diversion of funds in the case of term loans. The Ld. AR submitted that creditors alone amount to ₹ 13.26 crores at end of March 2011. If at all the disallowance is to be made, it should be made only after considering the availability of these funds to the assessee. The Ld. AR submitted that Kunnel Projects Private Limited is a sister concern of the assessee with similar shareholding. Further, the assessee is engaged in the constructions activities for the projects executed b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purchased Flats numbered 1A and 1B, Royal Cronet. The payment for undivided share of land was ₹ 6,30,000/- and ₹ 10,10,000/- respectively. The assessee had claimed depreciation on these amounts by treating them as cost paid towards building. The amount of such depreciation works out to ₹ 1,64,000/- and the same is being disallowed and added to the total income as land is not an asset on which depreciation can be allowed. 7.2 On appeal, the CIT(A) observed that in the case of purchase of a flat, the flat and undivided share of land in the society are inseparable. Only the flat is identifiable and not the undivided share in land. Hence, the CIT(A) deleted the disallowance in respect of undivided share of land. 7.3 Against this, the Revenue is in appeal before us. The Ld. DR submitted that Companies purchase commercial property in order to accommodate an expanding workforce and acquire a more permanent physical presence. According to the Ld. DR, such transactions regularly involve the purchase of one or more plots of land together with office building(s), or alternatively, buildings may be constructed on the land by the purchaser subsequently and once the buil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not include the site. 7.5 Thus, in view of the aforementioned judgments, the Ld. DR submitted that it is clear that in a case where the value of building and the value of the land on which it is built is separately identifiable, assessees must determine the depreciation on the value of the building only, at the rates specified as per Rule 5 of the Income Tax Rules, 1962. Depreciation debited to the Profit and Loss Account which pertains to the value of the land is liable to be disallowed by the Assessing Officer. 7.6 However, the Ld. DR submitted that confusion often arises where separate values for land and building cannot be identified e.g. in the case of composite Sale Agreements where purchase of property has been made by businessmen / companies wherein the particulars of the Agreement mention a standalone consideration with no bifurcation made between the amount attributable to the value of the land and that to the value of the building. In such cases, what shall be the basis for charging depreciation? The Ld. DR submitted that the above issue has been a matter of contention between Revenue and assesses and there appear to be two conflicting judgments on the same. The ..... X X X X Extracts X X X X X X X X Extracts X X X X
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