If service tax is collected but not remitted to the government, it is disallowable.

Facts and Issue of the case

This appeal at the instance of the assessee is directed against CIT(A)’s order dated 06.11.2017. The relevant assessment year is 2010-2011.
Two issues are raised in this appeal –

whether the CIT(A) is justified in confirming the disallowance of Rs.1,75,91,805 on account of non- deduction of TDS on hire charges paid;
whether the CIT(A) is justified in confirming the disallowance of service tax amounting to Rs.10,82,023 u/s 43B of the I.T.Act, which was not debited to the profit and loss account while computing the income of the assessee.

The assessee is an individual engaged in the business of travel agency and car rental services. For the assessment year 2010-2011, the return of income was filed on 14.10.2010 declaring total income of Rs.8,56,261. The return was selected for scrutiny by issuance of notice u/s 143(2) of the I.T.Act. During the course of assessment proceedings, the A.O. noted that the assessee had paid hire charges exceeding Rs.50,000 in each case as many as 89 persons amounting to Rs.1,75,91,805. The A.O. held that the assessee was under the obligation to deduct tax at source as per the provisions of section 194C of the I.T.Act while making payment to these parties and having failed to deduct tax at source, the expenditure claimed is to be disallowed in view of the provisions of section 40(a)(ia) of the I.T.Act. Aggrieved, the assessee raised this issue before the first appellate authority. The CIT(A) confirmed the view taken by the A.O

Aggrieved by the order of the CIT(A), the assessee has raised this issue before the ITAT. The learned AR has filed a paper book comprising of 74 pages enclosing therein the case laws relied on, the financial statement of the assessee for the relevant assessment year, acknowledgement of the Income- tax return filed, etc. The learned AR submitted that on identical facts the Bangalore Bench of the Tribunal in the case of Sri Singonahalli Chikkarevanna Gangadharaiah v. ACIT in ITA No.785/Bang/2018 (order dated 24.02.2020) has restored the matter to the A.O. for de novo consideration. It was submitted that a similar view may be taken by the Tribunal in the instant case. Further, the learned AR has filed a petition for admission of additional evidence.

Observation of the court

Court has heard rival submissions and perused the material on record. The assessee has filed additional evidence, which goes to the root of the issue. For substantial cause and justice, the additional evidence filed is taken on record. Since the additional evidence is taken on record, the matter necessarily needs to be examined by the A.O. Accordingly, the issue is restored to the files of the A.O. The A.O. is directed to examine the additional evidence now produced before the Tribunal and also consider the dictum laid down by the order of the Tribunal in the case of Sri Singonahalli Chikkarevanna Gangadharaiah v. ACIT (supra) and take a decision in accordance with law. The Assessing Officer had disallowed a sum of Rs.10,82,023 under the provisions of section 43B of the I.T.Act. Aggrieved, the assessee raised this issue before the first appellate authority. The CIT(A) confirmed the view taken by the A.O. The learned AR relied on the order of the Bangalore Bench of the Tribunal in the case of ITO v. M/s.Speed Trans Cargo Private Limited in ITA No.1969/Bang/2019 (order dated 31.03.2021). The learned DR strongly supported the orders of the Income-tax Authorities. Further, the learned DR relied on the order of the ITAT in the case of Boraiah Shivananjaiah v. ACIT in ITA No.680/Bang/2020 (order dated 11.04.2022).

Court has heard rival submissions and perused the material on record. It is not clear whether the assessee has collected service tax and has not paid the same within the due date to the Government account. The Bangalore Bench of the Tribunal in the case of Boraiah Shivananjaiah v. ACIT (supra) had held that when assessee collects the service tax from its customers and has not remitted the Government Exchequer, the same has to be disallowed u/s 43B of the I.T.Act.

In view of the referred order of the Tribunal, we restore the issue to the A.O. The A.O. is directed to examine whether the assessee has actually collected the service tax from its customers and not remitted to the Government Exchequer. In such an event, the disallowance u/s 43B of the I.T.Act will have to be upheld. On the contrary, if the assessee has not collected the service tax from its customers, then the same would not be subjected to disallowance u/s 43B of the I.T.Act. It is ordered accordingly.