Case Note & Summary
The present appeal was filed by the Revenue under Section 260A of the Income Tax Act, 1961 against the order of the Income Tax Appellate Tribunal (ITAT) which had upheld the deletion of disallowance of unpaid service tax under Section 43B. The Respondent-Assessee, Ovira Logistics Pvt. Ltd., filed its return for assessment year 2007-08 declaring total income of Rs.4,46,46,873/-. The Assessing Officer disallowed service tax amounting to Rs.90,08,661/- under Section 43B. On appeal, the Commissioner of Income Tax (Appeals) deleted the entire disallowance, holding that Rs.41,97,663/- had been paid before the due date of filing return and the remaining Rs.48,10,998/- was not payable as on 31st March 2007 since the amount on which service tax was payable had not been received from clients. The Revenue appealed to the Tribunal, which confirmed the CIT(A)'s order. The Revenue then filed the present appeal before the High Court, proposing two substantial questions of law: (a) whether the Tribunal was justified in deleting the disallowance under Section 43B, and (b) whether the Tribunal was justified in holding that unpaid service tax would not be disallowable under Section 43B as the liability had not arisen, despite the assessee showing the amount as a liability in its balance sheet. The High Court, after hearing both sides, dismissed the appeal, holding that no substantial question of law arose. The court reasoned that Section 43B applies only to liabilities that have actually accrued and are payable. Since the assessee had not received the service charges from its clients, the liability to pay service tax had not arisen. The mere fact that the amount was shown as a liability in the balance sheet did not attract Section 43B. The court found that the Tribunal's decision was based on correct appreciation of facts and law, and therefore, the appeal was dismissed.
Headnote
A) Income Tax - Section 43B Disallowance - Service Tax Liability - The issue was whether unpaid service tax shown as liability in balance sheet is disallowable under Section 43B of the Income Tax Act, 1961 when the corresponding service charges had not been received from clients. The court held that since the liability to pay service tax had not arisen due to non-receipt of payment, Section 43B was not attracted. The Tribunal's deletion of disallowance was upheld. (Paras 2-4) B) Income Tax - Section 43B - Accrual of Liability - The court considered the principle that Section 43B applies only to liabilities that have actually accrued and are payable. Where the assessee had not received the amount from clients, the service tax liability was not incurred, and mere entry in balance sheet does not create a disallowable liability. (Paras 3-4)
Issue of Consideration
Whether unpaid service tax can be disallowed under Section 43B of the Income Tax Act when the amount on which service tax is payable has not been received from the parties to whom services were rendered.
Final Decision
The appeal is dismissed. No substantial question of law arises. The Tribunal's order deleting the disallowance of service tax under Section 43B is upheld.
Law Points
- Section 43B of Income Tax Act applies only to liabilities that have accrued
- not contingent liabilities
- Service tax liability arises only upon receipt of payment from clients
- Notional liability cannot be disallowed under Section 43B
