Service Tax paid because Client refused to Pay – Allowed Expenses under Section 37 of Income Tax

By | December 22, 2016
(Last Updated On: December 22, 2016)

Facts of the case

Some of the clients of the Respondent-Assessee did not pay the service tax as required in terms of the invoice for onward payment to the Government of India. In these circumstances, the Respondent- Assessee paid the service tax payable under the Finance Act, 1994 out of its own resources and claimed the same as deduction under Section 37(1) of the Act. The Assessing Officer by Assessment Order dated 3 November 2011 disallowed the claim for deduction on the above account holding that the obligation to pay the service tax is on the customer / client and the same cannot be shifted to the Respondent-Assessee.

Held

It is undisputed that the obligation under the Finance Act, 1994 to pay the service tax is on the Respondent-Assessee being the service provider. This obligation has to be fulfilled by the service provider whether or not it receives the service tax from its clients/customers. Non payment of such service tax into the treasury would normally result in demand and penalty proceedings under the Finance Act, 1994. Therefore, as rightly found by the CIT (Appeals) and the Tribunal, the payment is on account of expediency, exclusively and wholly incurred for the purposes of business, therefore, deductible under Section 37(1) of the Act.

HIGH COURT OF BOMBAY

Commissioner of Income-tax-4, Mumbai

v.

Prime Broking Co. (I) Ltd.

M.S. SANKLECHA AND S.C. GUPTE, JJ.

IT APPEAL NO. 847 OF 2014

OCTOBER  14, 2016

Suresh Kumar and Ms. Samiksha Kanani for the Appellant. Atul Jasani for the Respondent.

ORDER

1. This appeal under Section 260A of the Income Tax Act, 1961 (the Act) challenges the order dated 31 October 2013 passed by the Income Tax Appellate Tribunal (Tribunal). The impugned order relates to assessment for Assessment Year 2009-10

2. The Revenue urges the following questions of law for our consideration :—

“(A)Whether, on the facts and in the circumstances of the case and in law, the Income Tax Appellate Tribunal was justified in upholding the order of Ld. CIT(A) and allowing the claim made by the assessee stating that the amount in question paid by it on account of service tax allowable as business expenses?
(B)Whether on the facts and in the circumstances of the case and in law, the Income Tax Appellate Tribunal was justified in upholding the order of the Ld CIT(A) and deleting the disallowance made by the A.O. inspite of the fact that the assessee is required to deduct TDS on Rent u/s.194I, on salary u/s.192 and watch and ward expenditure u/s.194C as the same is paid in lieu of contractual agreement between a security agency and the assessee has failed to make any such deduction of TDS on the above expenses?”

Regarding Question (A)

3. (a) The Respondent-Assessee is engaged in the business of broking in Government and other securities. The Respondent raises an invoice on its clients for the transaction done on its behalf in respect of its broking services. The total amount of bill in the invoice is the aggregate of brokerage and applicable service taxes thereon. During the subject assessment year, some of the clients of the Respondent-Assessee did not pay the service tax as required in terms of the invoice for onward payment to the Government of India. In these circumstances, the Respondent- Assessee paid the service tax payable under the Finance Act, 1994 out of its own resources and claimed the same as deduction under Section 37(1) of the Act. The Assessing Officer by Assessment Order dated 3 November 2011 disallowed the claim for deduction on the above account holding that the obligation to pay the service tax is on the customer / client and the same cannot be shifted to the Respondent-Assessee.

(b) In Appeal, the Commissioner of Income Tax (Appeals) allowed the Respondent-Assessee’s appeal. This is on the ground that in terms of Section 68 of the Finance Act, 1994, the obligation to pay the service tax into the treasury is of the service provider, i.e. the Respondent-Assessee. The failure of its client / customer to pay service tax to the Respondent- Assessee would not absolve the obligation of the Respondent-Assessee to pay the same to the Government of India. In the above view, the CIT (Appeals) held that the deduction of the service tax paid to the Respondent-Assessee was a business expenditure incurred on account of commercial expediency and deductible under Section 37(1) of the Act.

(c) Being aggrieved, the Respondent carried the issue in appeal to the Tribunal. By the impugned order, the Tribunal upheld the view of the CIT (Appeals). This is on the ground that the Respondent-Assessee was obliged under the law to pay service tax to the Government. This even when such payment is not forthcoming from the client/customer. Therefore, it would be a deductible business expenditure under Section 37(1) of the Act.

(d) It is undisputed that the obligation under the Finance Act, 1994 to pay the service tax is on the Respondent-Assessee being the service provider. This obligation has to be fulfilled by the service provider whether or not it receives the service tax from its clients/customers. Non payment of such service tax into the treasury would normally result in demand and penalty proceedings under the Finance Act, 1994. Therefore, as rightly found by the CIT (Appeals) and the Tribunal, the payment is on account of expediency, exclusively and wholly incurred for the purposes of business, therefore, deductible under Section 37(1) of the Act. As the above position, as held by the CIT (Appeals) and the Tribunal, is self evident from the provisions of law.

(e) In the above view, the question, as proposed, does not give rise to any substantial question of law. Thus, not entertained.

Regarding Question (B)

4. (a) Mr. Suresh Kumar, learned Counsel for the Respondent very fairly states that the impugned order of the Tribunal has followed its order in the Respondent-Assessee’s own case for Assessment Year 2008-09. In fact, being aggrieved by the order of the Tribunal for the Assessment Year 2008-09, the Revenue had preferred an appeal to this Court, being Income Tax Appeal No.1576/2013 (CIT v. Prime Broking Co. (I) Ltd.). This Court on 9th June 2016 dismissed the above appeal on an identical question, as proposed herein, on the ground that the same did not give rise to any substantial question of law.

(b) For the reasons indicated in the order dated 9 June 2016 in ITA No.1576/2013 (supra), Question (2), as proposed, does not give rise to any substantial question of law. Thus, not entertained.

5. The appeal is dismissed. No order as to costs.

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