The Ahmedabad bench of the Income Tax Appellate Tribunal (ITAT) upheld the Commissioner of Income Tax (Appeals) [CIT(A)]’s decision to delete the addition of Rs. 11.6 lakhs pertaining to sales tax refund, which was made by the Assessing Officer (AO) under section 43B of the Income Tax Act, 1961.
The CIT(A) erred in law and on facts by deleting the disallowance of Rs. 11,68,847/- without appreciating the provisions of Section 43B of the Income Tax Act.
The AO stated that as per the provisions of Section 43B of the Income Tax Act, any duty, taxes, cess, or fees by whatever name called, shall be allowed only in the previous year in which such sum is actually paid. Custom duty is paid in the earlier year, hence cannot be allowed as expenditure under Section 43B of the Act.
The AO observed that as the appellant is following the mercantile system of accounting, the expenditure claimed is prior period expenditure, hence it is not allowable as a deduction under Section 37 of the Income Tax Act, 1961. Accordingly, he made a disallowance of Rs. 11,68,847/-.
The CIT(A) agreed with the assessee that the provisions of section 43B of the Income Tax Act are not attracted since the claim of the assessee pertains to the waiver/write-off of sales tax refund by the assessee, the payments having already been made by the assessee in the earlier years.
Further noted that Section 43B of the Income Tax Act does not stipulate that expenditure is allowable only in the year of payment and he held that if payment has preceded the year of claiming such expenditure, disallowance cannot be made.
Alok Kumar representing the revenue relied on the order of the AO contending that in terms of section 43B of the Income Tax Act, statutory dues were to be allowed only in the year of actual payment and since payment pertaining to service tax claimed by the assessee in the impugned case was made in earlier years, the same was not allowable as expenditure of the impugned year.
The bench was not in agreement with the DR and found that CIT(A) has appreciated the correct context of the issue while holding in favor of the assessee that the impugned claim of service tax was not covered under Section 43B of the Income Tax Act, thus negating the basis of the AO for making the disallowance.
ITAT agreed with the CIT(A) that the provisions of section 43B of the Income Tax Act apply only in circumstances where the assessee claims expenditure of statutory dues on incurring the same, which as per the section is to be allowed only when the payment is actually made.
It was added that Section 43B of the Income Tax Act does not envisage or apply to the situation where the payment precedes the claim of the expenditure as in the present case. It only applies to the situation where the claim precedes the incurrence of the expenditure and holds the allowability of the claim only on payment of the due.
The Coram of T.R.Senthil Kumar (Judicial member) and Annapurna Gupta (Accountant member) do not see any reason to interfere with the order of the CIT(A) holding the assessee’s claim of sales tax refund waived during the year amounting to Rs. 11,68,847/- as allowable expenditure. Accordingly, the appeal raised by the Revenue was dismissed.
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