TMI Blog2021 (12) TMI 546X X X X Extracts X X X X X X X X Extracts X X X X ..... ly paid by the assessee that the deduction follows. The position which ergo emerges is that an assessee is otherwise eligible for claiming deduction, in law, in the financial year of raising the invoice, even if the service tax is neither received nor deposited in such a year. If however, the assessee suo motu does not claim deduction of service tax in the financial year of raising invoice for not having received and deposited the amount of service tax, he can validly claim deduction u/s 43B in the later year on realizing the amount and paying the service tax. Reverting to the facts of the case, it is seen that the amount of service tax has actually been paid in the year under consideration but no deduction was claimed by the assessee in the earlier financial years when Incentives, impliedly including the amount of service tax, were received. As such, the same has to be allowed as deduction in the year in question in terms of the main provision of section 43B granting deduction at the time of actual payment. When the assessee incurred liability in respect of service tax in earlier years for which deduction was otherwise allowable under this Act, the deduction will be allowe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l is admitted for disposal on merits. 3. Tersely stated, the factual matrix of the case is that the assessee is engaged in the business of sales and service of two wheelers and tractors. A return was filed declaring total income of ₹ 30,48,700/-. During the course of assessment proceedings, the AO observed that a sum of ₹ 12,25,998/- was claimed as deduction by merging it with the expenses booked under the head Rates and Taxes . On examination of the details, it transpired that the sum of ₹ 12,25,998/- was towards payment of service tax under the Service Tax Voluntary Compliance Encouragement Scheme, 2013 (VCES). After going through the break-up of the amount, the AO observed that the said sum was paid for the financial years 2007-08 to 2012-13. Holding such an amount as a Prior period expenditure and the further fact that the assessee itself opted the VCES for paying liability of earlier years, the AO made disallowance of the same. The ld. CIT(A) countenanced the disallowance after noticing that the amount did not pertain to the year under consideration and further that there was no documentary evidence to prove that it was a simple service tax and not a pena ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nderstanding on its taxability at that time. The fact that the assessee availed benefit of the VCES during the year in respect of such Incentives would not bombard against the crystallization of liability in the respective earlier years so as to have the effect of shifting the liability from earlier years to the year under consideration. The liability to pay service tax arose on receiving the amounts consequent to rendering the service during such earlier years. In such circumstances, it is held that the amount of ₹ 12.25 lakh paid by the assessee is not an expenditure for which the liability got crystallized in the year under consideration. 6. The ld. AR raised an alternative argument that the amount of service tax should be allowed in terms of section 43B of the Income-tax Act, 1961 (hereinafter also called `the Act ). Section 43B of the Act, with the caption ` Certain deductions to be only on actual payment , insofar as it is material for the extant appeal, reads as under:- `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, ce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there is a clear cut mandate that incurring of liability to pay tax, duty, cess or fee etc. in a particular previous year is not a relevant criterion for granting deduction. Rather it is only when the amount of such tax etc. is actually paid by the assessee that the deduction follows. 9. A necessary ingredient of section 43B is that a deduction is otherwise allowable under this Act in respect of such tax. Insofar as the timing aspect of service tax deduction is concerned, it would be apposite to take note of rule 6 of the Service Tax Rules, which deals with the `Payment of service-tax . Sub-rule (1) provides that: `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 . Then there are certain provisos, which are not relevant for the purpose. The point worth highlighting is that section 43B triggers to make deduction of `any sum payable by the assessee by way of tax . If the tax is not payable, then the section ceases to apply and deduction comes to be governed by the normal method of accounting consistently followed by a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mount was allowed as deduction in the preceding year on the ground that it had not become payable without receipt, the same cannot be disallowed in the later year on non-payment because the deduction had already been allowed in the preceding year and there is no claim for deduction in such later year. The foregoing discussion boils down that non-payment of service tax can be disallowed u/s 43B of the Act only in one scenario, that is, when it is recovered in the same financial year but not deposited. Au contraire , if service tax is recovered in a later financial year it will not suffer any disallowance, even if not deposited. 11. The position which ergo emerges is that an assessee is otherwise eligible for claiming deduction, in law, in the financial year of raising the invoice, even if the service tax is neither received nor deposited in such a year. If however, the assessee suo motu does not claim deduction of service tax in the financial year of raising invoice for not having received and deposited the amount of service tax, he can validly claim deduction u/s 43B of the Act in the later year on realizing the amount and paying the service tax. Reverting to the facts of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 194I provides for deduction of tax at source on any income by way of rent. The mere fact that tax is not required to be deducted at source on the service tax component paid by the tenant along with the amount of rent, does not otherwise disqualify the inclusion of the amount of service tax in the total income of the landlord. Here, it is relevant to note that the CBDT, vide Circular No. F.No.275/73/2007-IT(B), dated 30-06-2008, after taking note of its earlier Circular No.04/2008 dated 28-04-2008 providing for non deduction of tax at source on the component of service tax along with rent payment, has clarified that tax should be deducted at source on payments covered u/s.194J inclusive of service tax. Service tax is includible in the total income can be better comprehended from the language of section 145A(ii) of the Act, which provides, for the purposes of determining the income chargeable under the head Profits and gains from the business or profession that: `the valuation of purchase and sale of goods or services and of inventory shall be adjusted to include the amount of any tax, duty, cess or fee (by whatever name called) actually paid or incurred by the assessee to bring t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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