Facts of the Case

The assessee, an individual engaged in providing security guard and manpower services, followed the mercantile system of accounting and was registered under service tax laws. During scrutiny assessment under Section 143(3), the Assessing Officer noticed unpaid service tax liability of ₹10,92,548 reflected in the balance sheet and disallowed the same under Section 43B on the ground that it was not deposited before filing the return.

The assessee contended that the service tax pertaining to the current year had been fully deposited and that the outstanding amount related to earlier years and had not been claimed as a deduction. The CIT(A) confirmed the disallowance. The assessee also challenged various disallowances relating to business promotion, conveyance, and travelling expenses.

Issues Involved

  1. Whether unpaid service tax liability shown in the balance sheet can be disallowed under Section 43B when no deduction has been claimed.
  2. Whether disallowances of business promotion and conveyance expenses due to lack of supporting evidence were justified.
  3. Whether ad-hoc disallowance of travelling expenses without rejection of books of account was sustainable.

Petitioner’s Arguments (Assessee)

  • Service tax collected during the year was fully deposited with the Government.
  • The outstanding liability pertained to earlier years and was not part of current year expenditure.
  • No deduction for the said amount was claimed in the profit and loss account.
  • As per judicial precedent, Section 43B cannot be invoked where no deduction is claimed.
  • Disallowances of expenses were arbitrary, particularly since accounts were audited and books were not rejected.

 Respondent’s Arguments (Revenue)

  • The assessee did not properly explain the outstanding liability during assessment proceedings.
  • The amount was shown as payable in the balance sheet and therefore disallowance under Section 43B was justified.
  • Expenses claimed without proper bills and vouchers could not be allowed.
  • Ad-hoc disallowances were reasonable in absence of verifiable supporting evidence.

 Court Order / Findings (ITAT Allahabad)

The Tribunal held that the disallowance under Section 43B was unsustainable because:

  • The assessee had not debited the outstanding service tax to the profit and loss account as an expenditure.
  • No deduction had been claimed in respect of the said amount.
  • Section 43B applies only to deductions otherwise allowable.
  • The Delhi High Court decision in CIT v. Noble & Hewitt (I) Pvt. Ltd. squarely applied.

Accordingly, the Tribunal directed deletion of the disallowance of ₹10,92,548.

Regarding other expenses:

  • Business Promotion Expenses: Disallowance upheld due to absence of supporting evidence.
  • Conveyance Expenses: Disallowance confirmed for lack of bills and vouchers.
  • Travelling Expenses: Ad-hoc disallowance reduced; Tribunal restricted disallowance to 5% considering audited accounts and non-rejection of books.

 Important Clarification

  • Section 43B cannot be invoked where the assessee has not claimed the liability as a deduction.
  • Merely showing an amount as payable in the balance sheet does not attract disallowance.
  • Tax authorities may disallow expenses lacking documentary support.
  • However, ad-hoc disallowances should be reasonable, especially where accounts are audited and books are not rejected.

Link to download the order -  https://itat.gov.in/public/files/upload/1694578346-18%20of%202023%20Anil%20Kumar%20Gupta(Assessee%20Appeal)%20uder%20section%20143(3)%20of%20the%20Act%20SMC%20(Corrected).pdf

Disclaimer

This content is shared strictly for general information and knowledge purposes only. Readers should independently verify the information from reliable sources. It is not intended to provide legal, professional, or advisory guidance. The author and the organisation disclaim all liability arising from the use of this content. The material has been prepared with the assistance of AI tools.