Service Tax Paid by Contractor for Value of Work is not Part of Gross Receipts for Purpose of Computing Presumptive Tax u/s 44AD of Income Tax Act: ITAT [Read Order]

The service tax paid by the contractor for the value of the work is not included in gross receipts for the purposes of computing the assessee’s presumptive tax under Section 44AD of the Income Tax Act of 1961, according to the Kolkata bench of the Income Tax Appellate Tribunal (ITAT).

The assessee Sagarkumar Ishwarbhai Bhavani is a civil contractor, filed the return as per the provisions of Section 44AD of the Income Tax Act.

The Assessing Officer (AO) stated that presumptive taxation under Section 44AD of the Income Tax Act is not applicable to the assessee and estimated the tax at 15% of Rs. 1,26,89,625 in light of the service tax collected by the assessee to the tune of Rs. 13,19,494 and Tax Deduction at Source deducted. If the assessee’s income exceeds Rs. 1 crore, an audit under Section 44AB of the Income Tax Act is required.

Aggrieved by the order, the assessee filed an appeal before the Commissioner of Income Tax (Appeals), who dismissed the appeal of the assessee. Thus, the assessee filed a second appeal before the tribunal.

Rakesh Joshi, the counsel for the assessee submitted that as per the CBDT Circular No.04/2008 dated 08.04.2008 which clarified that service tax paid by the tenant does not partake the nature of income of the landlord. And the landlord only acts as a collecting agency of Service Tax on behalf of the Government.

Thus, the service tax collected by the assessee did not have an element of income and therefore could not from the part of gross receipts for the purpose of computing the presumptive tax of the assessee under Section 44AD of the Income Tax Act.

 Anil Gupta, counsel for the revenue, supported the decision of the lower authorities.

After considering the facts the Single Member Bench of Aby T. Varkey, (Judicial Member) observed that “service tax collected by assessee from its customers is on behalf of the Government and it needs to be deposited by the assessee in the relevant account of the Government. Therefore ‘service tax’ collected by assessee does not partake the character of income as referred to in section 5 of the Income Tax Act; and therefore, cannot be included in the gross receipt of assessee for the purpose of computing the presumptive taxation under Section 44AD of Income Tax Act.”

Therefore, the bench allowed the appeal filed by the assessee.

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