CA Manoj Nahata 
Service tax audit by the departmental officers is nowadays a common phenomenon for all the assessee. Often the departmental officers raise service tax demand which the assessee needs to pay in spite of the fact that the same was never collected from the service receiver. After making the demanded payment of service tax the assessee gets immunity from service tax penal proceedings. But here one new battle starts between the assessee and the Income tax dept. The Income Tax dept. tends to deny the service tax payment claim of the assessee as business expenditure. This situation creates litigation between the assessee and the dept.. Recently the Hon’ble Gujrat High Court in case of Commissioner of Income Tax-III Vs. Kaypee Mechanical India (P.) Ltd. [(2014) 45 taxmann.com 363 (Gujarat)] had an occasion to deal one such issue wherein the Court dismissed the Revenue’s appeal and held that where assessee had not collected and deposited service tax but on being pointed out, deposited same, amount being expended by assessee in course of business was allowable as business expenditure.
Seeing the tax audit season the author deems it fit to share the said judgment with the fellow chartered accountant members so that one can get a clear idea and perception on this matter.
Facts of the case:
The Service Tax Department conducted an audit of records of Kaypee Mechanical India (P.) Ltd. for the Financial Year 2003-04 to 2006-07. During the audit, the authorities raised an audit objection pointing out that the assessee had not collected the service tax on mechanical erection and installation of plant and machinery, structure work, piping work, etc., for the period from financial year 2003-04 to 2006-07. Therefore, a demand of service tax of Rs. 23,07,450 along with interest of Rs. 9,36,353 was raised on the assessee. The assessee deposited the amount of Rs. 32,44,004 towards the demand raised by the Department out of its own pocket. Further, they claimed the deduction of Service tax paid along with interest as business expenditure u /s 37(1) of the Income tax act, 1961.
However the Income Tax Authorities contended that the assessee should not be allowed to claim deduction of the Service tax paid along with interest as expenditure since the amount has been paid by assessee was on account of infraction of law.
The Commissioner (A) and the Hon’ble Tribunal accepted the contention of the assessee.
Being aggrieved, the Revenue filed an appeal against the order of the Hon’ble Tribunal with the Hon’ble Gujarat High Court.
Detailed Judgment:
In Para 5 of its judgment the Hon’ble High Court touched upon the judgment rendered by the Hon’ble Tribunal wherein the Tribunal held that when there is no collection of the service tax, it is impossible to route through P&L account. As per Service Tax Act, the appellant is an agent of the Government of India, collecting the service tax and remitting it to the Government Exchequer. The appellant had debited these expenses which have nature of service tax and interest thereon as expenses in the P&L account not as service tax and interest thereon. The liability has been crystallized in the year under consideration. The learned A.O had not brought on record any material that this service tax including interest had been recovered from the parties for which it had rendered service. These expenses were incidental and arising out of the business of the appellant. The interest payment is compensatory in nature. The expenses have direct nexus with the business operation. Therefore, it is allowable u/s. 37 of the IT Act as incurred wholly and exclusively for business purposes. Thus there is not any reason to intervene in the order of the CIT (A). Accordingly, the Revenue’s appeal was dismissed.
The Hon’ble High Court concurred with the judgment of the Tribunal and had no hesitation in upholding the view of the CIT (A) as well as Tribunal. The Court observed that the amount was expended by the assessee during the course of business, wholly and exclusively for the purpose of business. If the assessee had taken proper steps and charged service tax to the service recipients and deposited with the Government, there was no question of assessee expending such sum. It is only because the assessee failed to do so, that he had to expend the said amount, though it was not his primary liability. Be that as it may, this cannot be stated to be a penalty for infraction of law.
The revenue on the other hand placed reliance upon the judgment of the Apex Court in case of Haji Aziz & Abdul Shakoor Bros. v. CIT [1961] 41 ITR 350. It was a case in which the assessee had imported dates from Iraq, at a time when such import was prohibited. Due to this, the dates imported by the assessee by steamers were confiscated by the customs authorities. The assessee was given an option to pay redemption fine and have the dates released. The assessee having accepted such an option claimed the redemption fine as a deduction in computing its profit as allowable expenditure. In this background, the Supreme Court held that no expense which was paid by way of penalty for a breach of the law, even though it might involve no personal liability, could be said to be an amount wholly and exclusively laid for the purpose of the business of the assessee. However the Hon’ble Gujrat High Court held that in the present case, the amount involved is not by way of penalty. The decision in case of Haji Aziz & Abdul Shakoor Bros. (supra) is thus distinguishable.
In respect of allowability of interest payment the Court took the view that it is equally well settled that payment of interest is compensatory in nature and would not partake the character of penalty. Reference in this respect can be had to the decision of Supreme Court in case of CIT v. Luxmi Devi Sugar Mills (P.) Ltd. [1991] 188 ITR 41 and in case of Mahalakshmi Sugar Mills Co. v. CIT [1980] 123 ITR 429 (SC).
Accordingly, it was held that Service tax and interest paid by the Assessee were rightly claimed as deductible business expenditure under Section 37 of the IT Act. Therefore, the contention of the Revenue was rejected and the case was decided in favour of the Assessee.
Author’s comments:
The allowability of payment of service tax under the Income Tax Act is not challenged for the first time. Prior to this, there was a debate on the allowability of service tax liability on unrealized portion of services u/s 43B of the Income Tax Act, 1961. It was first the Chennai Tribunal which in case of ACIT vs. Real Image Media Technologies (P) Ltd. 116 TTJ (Chennai) 964 took the view that the Section 43B(a) uses the expression ‘ any sum payable ’. For making any disallowance, first of all it has to be established that such sum is payable. The liability arises to make the payment only after the service provider has received the payments. If there is no liability to make the payment to the credit of Central Government because of non-receipt of payments from the receiver of the services, then it cannot be said that such service-tax has become payable in terms of cl. (a) of section 43B because that clause specifically mentions “sum payable by the assessee”. Since service-tax was not payable by the assessee, the rigour of section 43B could not have been applied to the case of the assessee. Further, the same issue u/s 43B is also considered by the Hon’ble Delhi High Court in the case of Commissioner of Income Tax Vs. Noble and Hewitt (I) P. Ltd. 305 ITR 324.
Now, the instant judgment of Gujrat High Court on allowability of service tax as a business expenditure u/s 37(1) of the Income Tax Act, 1961 is going to have a far reaching impact. Nowadays, assesses are very prompt in making payment of the demanded amount in order to get relief from the mandatory penalty under the service tax law. Thus this judgment will certainly encourage assesses to make the payment of legitimate demand raised by the service tax dept. because the fear of disallowance under Income Tax law of such payment is no more exists now. This will surely minimize litigations.
*The author is a practicing chartered accountant at Guwahati can be reached at: manoj_nahata2003@yahoo.co.in
