Relief to Axis Bank: ITAT Allows Deduction for Service Tax Expenses u/s 37 [Read Order]

The Ahmedabad Bench of Income Tax Appellate Tribunal (ITAT) allowed Axis Bank's appeal, permitting the deduction of service tax expenses under Section 37 of the Income Tax Act,1961.

Axis Bank Ltd., appellant-assessee, acted as a corporate agent for Max Life Insurance Company, earning commissions for marketing its insurance policies. During the assessment, the Assessing Officer (AO) found that Max Life had shared a service tax liability of ₹5,82,60,619 with the assessee under an agreement.

As per the Finance Act, 1994, Max Life was responsible for this tax under the reverse charge mechanism but failed to deposit it with the government, which was considered an offense. The assessee claimed its share of the liability as an expense under Section 37 of the Act. However, the AO held that this expense was not related to business and was disallowed under Explanation 1 to Section 37. The amount was then added to the assessee’s income in the assessment order.

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The assessee appealed against the Commissioner of Income Tax (Appeals) [CIT(A)]’s order, which upheld the addition made by the AO. The CIT(A) noted that Max Life Insurance Company was responsible for the service tax but failed to deposit it, making it an offense under the Finance Act, 1994. Since Max Life had not paid the tax, the assessee’s claim of its share as an expense was not justified.

Citing Section 37 of the Act, the CIT(A) held that the expense was not incurred for business purposes and disallowed it. The addition of ₹5,82,60,619 was sustained, and the appeal was dismissed. The assessee then took the matter to the tribunal.

Read More: Interest paid on Belated Payments of Service Tax is allowable for deduction u/s 37(1) Income Tax Act: ITAT

The two member bench comprising Dr.BRR Kumar (Vice President) and Siddhartha Nautiyal (Judicial Member) reviewed the case and noted that the assessee earned commission from Max Life Insurance Company and shared 50% of the service tax liability under a contractual agreement. Max Life deducted this amount before paying the commission. The AO disallowed the claim under Section 37 of the Income Tax Act.

The appellate tribunal observed that the service tax liability was legally on Max Life under the reverse charge mechanism. The fact that Max Life did not deposit the tax was its offense and did not impact the assessee’s claim. The agreement was made to secure commission income, and no law prohibited such an arrangement.

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Since the payment was a business expense and not a tax liability of the assessee, the ITAT held that it should be allowed under Section 37 of the Act.

In short,the appeal filed by the assessee was allowed.

To Read the full text of the Order CLICK HERE

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