Expenses in respect of Service Tax paid out of Rental Income is deductible from the Business Income: ITAT [Read Order]

TDS on Rent - Taxscan

The Income Tax Appellate Tribunal (ITAT) recently ruled that the expenses in respect of service tax paid out of rental income is deductible under the head ‘Profit and Gains of Business or profession’ under the Income Tax Act, 1961 since the same was a genuine expense incurred by the assessee.

Assessee rented out his immovable property and received income from it. The lease agreements were entered into by the assessee long back and there was no such clause for payment of service tax by the tenants. However, they paid service tax, education cess and interest on delayed payment of service tax out of the rental income received by it. They were also liable to deduct TDS on the payment of rent as per provisions of Section 194-I of the Income Tax Act.

Before the tax authorities, assessee claimed that the amount of service tax and cess is liable to be adjusted either from house property or may be allowed deduction from income under the head ‘profits and gains of business’ as it was paid by the assessee from the gross total income. It was, therefore, requested that proper direction may be issued accordingly.

With regard to the claim of expenditure in respect of interest on delayed payment of tax, the assessee relied on the decision of the Delhi bench of Tribunal in the case of Remfry and Sagar Consultants Pvt. Ltd., wherein it was held that interest paid for the delayed payment of service tax is compensatory in nature and not in the nature of penalty and therefore, no disallowance can be made.

On first appeal, the CIT(A) held that the said amount id deductible from Profits & gains rather that income from house property and directed the department to allow the expenses of Service Tax & Cess amounting to from Profits & gains of the business.

The bench considered the fact that assessee has paid service tax as it was not recovered from the tenant and filed service tax return with the Central Government. “Therefore, it is a genuine expense and must be allowed as deduction.”

Read the full text of the Order below.

taxscan-loader