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Why service tax is not includes in expense allowable u/s 43b

CA Vanamala Phani Kumar (Proprietor of M/s Vanamala and Co) (972 Points)

03 December 2011

Dear frnds

we are all knowing about that expenses allowable even if it is not paid during the year but paid before due date (30th sep or 31st Jul) as per sec 43B of Income Tax Act,1961

Such section includes tax,cess,duty,fee but it excludes service tax ...!!!!!!

any reason for that ....?????

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Arvind Sharma (ACA) (1432 Points)
Replied 03 December 2011

Refer INCOME TAC ACT, get there when this provision inserted into act., den refer finance act for corespoding Year., n dere u will find memorandum to act.., here u wil get reason... Right now I also dont know.., wil let u know by tuesday.....

Prakash (Chartered Accountant) (560 Points)
Replied 04 December 2011

Dear Mr Phani Kumar V

Your Question requires lot of Interpretation Nd Here we go

As per Sec 145 of IT Act, Method of Accounting means

For Income chargeable under the head “Profits and gains of business or profession” or “Income from other sources” Shall be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee.

So if the accounting is done as per Mercantile system, All expenses would be allowable irrespective whether they were paid or not. But this is Subject to Sec 43B of Income Tax Act. There Certain Specified Exp will be allowed as deduction only upon actual payment only and within said due date (Due date U/s 139(1)).

Your question whether "Service Tax Due" allowable or Not ?

You wrongly confirmed that it was not covered under Sec 43B. No where in Sec 43B provides for Exclusion of Service Tax. In 43B(a) It says

"Any sum payable by the assessee by way of tax , duty, cess or fee, by whatever name called, under any law for the time being in force".

So, Service Tax would also be covered there.

In practice, Accounting for these Indirect Taxes (Excise, Customs, ST, VAT, Etc) are done as capital Items, Through Balance Sheet, they were not presented in Profit and Loss Account". "cause all these Indirect Taxes are not Expenditure of Assessee, He is merely collecting form his Customers or Clients and remitting the same to depatment.

In the above scenario they defend that its not at all an expenditure, how come disallowance occurs.

Suprime Court in some casses held that though taxes like Excise, Sales tax were not shown as revenue items, Sec 43B applicable to them, and any amount of Input adjustment would be treated as if the tax has been paid.

Moreover Sec 145A of IT Act also provides that

The valuation of purchase and sale of goods and inventory for the purposes of determining the income chargeable under the head “Profits and gains of business or profession” shall be

(i) in accordance with the method of accounting regularly employed by the assessee; and

(ii) further adjusted to include the amount of any tax, duty, cess or fee (by whatever name called) actually paid or incurred by the assessee to bring the goods to the place of its location and condition as on the date of valuation.

So, Sales, Purchases and Stock should be presented to include All taxes paid and collected

and whatever amout of tax paid will be shown as expenditure

So, Service Tax also covered under Sec 43B (Implied) (I could not find any case law, will update once I come across any)

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(Guest)

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 Clause (a) of Section 43B because that clause specifically mentions “sum payable by the Assessee“. So, in such case , disallowance u/s 43B of such service tax amount which is yet to be collected is bad in law.

Supporting decisions

Two case laws are referred in this regard

§ ACIT vs Real Image Media Technologies (P) Ltd 306 ITR 106

§ CIT vs Noble and Hewitt India (P) Ltd. 305 ITR 324

https://taxworry.com/why-service-tax-not-collected-can-not-be-disallowed-us-43b/

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