S. 43B of Income Tax Act is not applicable in Cases where the assesse has not claimed statutory liability as business expenditure; ITAT Hyderabad [Read Order]

The Hyderabad bench of Income Tax Appellate Tribunal(ITAT), has recently held that in cases where the assesse has not claimed statutory liability as business expenditure, the claim in respect of amount paid for statutory dues cannot be disallowed by the Assessing Officer since section 43B of the Income Tax Act does not applicable to such cases. The Tribunal was considering an appeal filed by the assesse-company challenging the assessment order. The brief facts of the case are discussed below.

M/s Envision Enterprise Solutions Pvt. Ltd, is engaged in the business of software development, filed returns claiming deduction in respect of the amount paid as statutory dues including Service Tax, Central Sales Act and VAT. The Assessing Officer, while completing assessment, rejected the claim by invoking section 43B of the Act on ground that the above statutory due were filed by the assesse after the due date.

On appeal, the Commissioner of Income Tax(Appeals) rejected the contentions of the assesse by holding that “it is unusual in any business to have a separate sales tax, VAT and CST accounts showing collection and payments of these taxes and passing entry in the balance sheet without passing the same in the P&L Account.”

Before the Appellate Tribunal, the assesse admitted that there was liability appearing on the liabilities side of the balance sheet. But, these expenses were not claimed by them in the P&L A/c. according to them, AO had accepted the contentions of the assessee that service tax, sales tax and VAT are not routed through P& L A/c as such the same are not to be disallowable under the provisions of section 43B of the Act. They furthersubmitted that as per the method of accounting consistently following by them, only liabilities of the statutory dues like service tax, VAT and sales tax are created without charging to P&L A/c.

The Tribunal found that the assessee is following the method of accounting consistently that statutory dues are collected from the customers and the collection of statutory dues are treated as statutory liability and shown as liability in the balance sheet without charging into P&L A/c.  In the opinion of the Tribunal, such method of accounting is an accepted one.

The Tribunal noted that the Delhi High Court in the case of CIT Vs. Noble and Hewitt (I) P. Ltd., [2008] 305 ITR 324 (Del.) observed that “In our opinion, since the assessee did not debit the amount to the profit & loss account as an expenditure nor did the assessee claim any deduction in respect of the amount and considering that the assessee is following the mercantile system of accounting, the question of disallowing the deduction not claimed would not arise.”

The Tribunal further noted the decision in CIT Vs. Everest Litho Press, [2006] 285 ITR 297 (Mad.), in which the Madras High Court held that “the amount collected as sales tax was never claimed as deduction by the assessee. Section. 43B of the Act is not attracted at all when the assessee has not claimed any deduction of the amount collected by it.”

In the light of the above judicial pronouncements, the Tribunal accepted the plea of the assesse and observed that “we are not in agreement with the CIT(A) as the assesse has not claimed statutory liability as business expenditure as laid down in the above decisions that the business expenditure are not claimed in the P&L account, provisions of section 43B will not be applicable. Accordingly, we set aside the order of the CIT(A) and direct the AO to delete the disallowance made u/s 43B of the Income Tax Act.”

Read the full text of the order below.