A two-judge bench of the Bombay High Court has held that the Service Tax due but not actually collected from customers and not remitted to the Central Government cannot be disallowed under Section 43B of the Income Tax Act, 1961.
The assessee, engaged in the business of providing detection and security services to its clients. During the examination of the Balance Sheet, the Assessing Officer, inter alia, noted that the Company had claimed Rs.5,12,22,734/being unpaid service tax as its liability. Additionally, a sum of Rs.3,47,03,462/was also shown under the same head, but the respondent had disallowed a sum of Rs.95,94,128/. It is stated that the gross receipts include the service tax but whenever it is due and payable, namely, when the amount for the services is realised, it would be remitted.
While completing the assessment proceedings, the Assessing Officer held that under section 43B of the Income Tax Act, service tax can be allowed only when paid and therefore the amount is not liable as the deduction.
The First Appellate Authority held that tax becomes payable only when it is collected from the customer.
On the second appeal, the Tribunal allowed the plea of the assessee and held that though the service tax was included in the bill raised on the customers it was not actually collected from them.
Upholding the ITAT order, Justices SC Dharmadhikari and B P Colabawalla held that “Section 43B does not contemplate liability to pay service tax before actual receipt of the funds in the account of the assessee. Hence the liability to pay service tax into the Treasury will arise only upon the assessee receiving the funds and not otherwise. Thus the consideration has to be actually received and thereupon the liability will arise.”
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