Disallowance of expenditure is inadmissible as it is not claimed in P&L: ITAT Surat

Mohmed Hasib Tejamul Shaikh vs ITO (ITAT Surat)

ITAT Surat held that where no expenditure is claimed, no disallowance is allowed. Accordingly, disallowance u/s. 43B on account of unpaid service tax not justified as it is not claimed as a deduction in the income statement.

facts- In the present appeal, the appellant challenged the dismissal u/s. 43B of the Income Tax Act, 1961 on account of unpaid service tax. The assessee submits that in computing the income, the assessee has not claimed the deduction of unpaid service tax of Rs. 14,43,922/- therefore there is no doubt about this disallowance by the Assessing Officer. The Assessing Officer and the ld. CIT(A) failed to appreciate the fact that where no expenditure is claimed, such disallowance is not allowed.

Conclusion- Held that the CPC/Assessing Officer while processing the return of income, disallowed the liability of unpaid service tax on the basis of reference to the audit report/Form-3CD. The ld. CIT(A) upheld the action of the CPC/Assessing Officer holding that the assessee claimed to be following the mercantile system of accounting and was following the exclusive method for the purpose of service tax accounting but not no evidence was presented to him, even in the audit report there is no such reference. Before me, the ld. The RA of the assessee vehemently argued that the assessee does not claim this deduction in its income statement. In view of the fact that the assessee has not claimed such deduction in its P&L account, therefore, no disallowance is warranted.

FULL TEXT OF THE JUDGMENT ORDER

This appeal of the assessee is against the order of the learned Commissioner of Income-tax (Appeals), Addl/JCIT (A)-1, Nashik (in short, the ld. CIT( A)) dated 31/03/2024 for the assessment year (AY) 2017-18. The assessee raised the following grounds of appeal:

“A lot for the addition of Rs. 14,43,922/- u/s 43B

1. The learned Commissioner of Income Tax (Appeals) NFAC has erred in fact and in law in failing to appreciate the fact that the assessee had not claimed a deduction of Rs. 14,43,922/- being service tax not paid or charged to the “Profit and Loss Account, so it is not a question of disallowing the deduction which was not even claimed.

2. The learned Commissioner of Income Tax (Appeals) NFAC has erred in fact and in law in concluding that the service tax of Rs. 14,43,922/- did not go through profits and losses, etc., while what is provided in article 43B applies to those expenses that are requested, but that have not been paid before the submission of the return of income, may be dismissed. .

3. Notwithstanding the foregoing, the learned Commissioner of Income-tax (Appeals) NFAC has committed an error of law and in fact that the addition of the liability of income tax unpaid services is confirmed in AY 2017-18, at least the deduction of the same service tax liability should be allowed as deduction, when actually paid in immediately succeeding years as per the provisions of section 43B.

4. It was held in a similar case of Ramesh Kumar Lalan Tiwari Vs. ITO ward 2(3)(5) ITA no. 434/SRT/2023 (AY 2018-19) by ITAT, Surat Bench that,” no disallowance of unpaid The service tax liability can be incurred when this deduction is not claimed by the taxpayer in his profit and loss account. Therefore, we request the Assessing Officer to verify the fact and allow full relief to the assessee”.

Reason for addition of Rs. 2,74,781 u/s 36(1)(va)

5. The learned Commissioner of Income-tax (Appeals) NFAC committed a serious error of law and in fact the impugned provision of Section 36 (1) (va) is completely arbitrary and of little reasonable as the right to claim deduction of employees’ share of provident fund is permanently lost , if there is delay of even one day on the part of the assessee employer.

6. The learned Commissioner of Income Tax (Appeals) NFAC has failed to understand that there is no separate provision in the EPF Act, for depositing the employer’s share of the contribution and the employees’ share of the contribution separately. Because of this, whenever there is crisis of working capital, the assessee even if he is ready to fulfill his liability of contribution of employee is unable to do so. Therefore, this is treated unequally in law, hence violation of Article 14 of the IOC.

7. The learned Commissioner of Income-tax (Appeals) NFAC committed grave error of law that the impugned provision of section 36(1)(va) is against the principles of natural justice according to the Doctrine of double incrimination, since the same adjudicator is being brutally taxed by the Income Tax Act and the EPF Act. Article 20 (2) of the Constitution of India is violated as the assessee is prosecuted and punished for the same offense more than once.

8. The learned Commissioner of Income Tax (Appeals) NFAC committed grave error of law in striking down the impugned provision of section 36(1)(va) as section 19(1)(g) ).

9. Notwithstanding the above, the learned Commissioner of Income Tax (Appeals) NFAC has erred in law and in fact there is a continuous flow of credit on the part of the employees of PF/ ESIC i.e. no loss occurs to the employee due to this. delay in payment by the employer. Therefore, the assessee should not be punished so cruelly when interpolated for non / delayed / slow payments from the recipient of service (contracted company) and timely payment to the workmen.

10. The learned Commissioner of Income-tax (Appeals) NFAG has erred in law and in fact the addition u/s 36(1)(va) cannot be made by CPC u/ s 143(1)(a).

11. The appellant requests authorization to add/delete/alter/modify the reasons that would be necessary for the resolution of the case.”

2. The rival contentions of both the parties have been carefully heard and examined. At the commencement of the hearing, the counsel/authorised representative (ld. AR) for the assessee submits that there is a very short issue in the present appeal. Reason no. 1 of the appeal relating to disallowance under section 43B of the Income-tax Act, 1961 (in short, the Act) on account of unpaid service tax. The ld. AR of the assessee states that in computing the income, the assessee has not claimed the deduction of unpaid service tax of Rs. 14,43,922/- therefore there is no doubt about this disallowance by the Assessing Officer. The Assessing Officer and the ld. CIT(A) failed to appreciate the fact that where no expenditure is claimed, such disallowance is not allowed. In support of this submission, the ld. AR of the assessee relied upon the decision of Surat Bench in the case of Rameshkumar Lalan Tiwari vs ITO in ITA no. 484/Srt/2023. Against ground number 2, the ld. AR of the assessee submits that the Assessing Officer disallowed despite the fact that there was only one day delay in depositing the employees’ contribution to PF and ESI by the assessee. The ld. The assessee’s AR submits that the delay in depositing this contribution can be accepted and the assessee can be allowed relief in this disallowance. CPC cannot make these disallowances while the return is being processed. There is no loss to the employee in depositing this contribution one day late. These denials are unreasonable and violative of Article 14, 19(1)(g) and 20(2) of the Constitution of India.

3. On the other hand, the learned Senior Departmental Representative (ld. Mr. DR) for the revenue supported the orders of the lower authorities. The ld. Mr. DR for income from reason no. 1 of the appeal states that the assessee has not provided evidence that this deduction is not claimed by the assessee in its income statement. The assessee stated that they are following the mercantile system of accounting and following the exclusive method for the purpose of accounting for service tax. No evidence was produced before the ld CIT(A), even in the audit report there is no such reference. Against reason no. 2 which pertains to the delay in depositing the employee’s PF & ESI contribution, the ld. Mr. DR for the revenue submits that this issue is covered against the assessee by the decision of the Hon’ble Apex Court in the case of Checkmate Services Pvt. Ltd. vs CIT in civil appeal no. 2833 of 2016.

4. I have considered the submissions of both the parties and carefully followed the orders of the lower authorities. I find that the CPC/Assessing Officer while processing the return of income, disallowed the liability of unpaid service tax on the basis of reference to the audit report/Form-3CD. The ld. CIT(A) upheld the action of the CPC/Assessing Officer holding that the assessee claimed to be following the mercantile system of accounting and was following the exclusive method for the purpose of service tax accounting but not no evidence was presented to him, even in the audit report there is no such reference. Before me, the ld. AR of the assessee vehemently argued that the assessee does not claim such deduction in its P&L account and relied upon the decision of the Division Bench of this Court in Rameshkumar Lalan Tiwari vs ITO (supra). Considering that the assessee has not claimed such deduction in its P&L account, therefore, no disallowance is warranted, therefore, I agree with the contention of the ld. AR of the assessee. Thus, the Assessing Officer is tasked with verifying the fact that the assessee follows the mercantile system of accounting and follows the exclusive method for the purpose of accounting for service tax and, in case there is no such deduction, if the assessee claims it in his P&L account, he will allow the relief. to the assessee. The assessee is also requested to furnish all the required details to the Assessing Officer. Accordingly, ground of appeal number 1 is allowed.

5. So far as the disallowance under Section 36(1)(va) of the Act is concerned, I find that this ground of appeal is covered against the assessee by the decision of the Hon’ble Apex Court in the case of Checkmate Services Pvt. Ltd. vs CIT (supra) where it has been held that no deduction is allowed for delay in depositing employees’ contribution on account of ESIC and PF. It is true that there is delay in depositing the employees’ contribution by the assessee, so I do not find any force in the submissions of ld AR of the assessee. Accordingly, this ground of appeal is dismissed.

6. Accordingly, the assessee’s appeal is partially allowed.

Order announced in public hearing on 01^St October, 2024.