Facts of the Case

  • The Assessee is a company engaged in the business of providing equipment on hire and manpower for the exploration and production of mineral oil and natural gas.
  • The Assessee filed its income declaring Rs. 49,31,260 under the provisions of Section 44BB (3) of the Income Tax Act, 1961.
  • While computing its gross receipts for taxable income, the Assessee excluded a sum of Rs. 2,09,24,553, which represented the service tax it received from its customers.
  • The Assessing Officer (AO) rejected this computation and included the collected service tax in the gross receipts for computing the taxable income under Section 44BB.
  • The Assessee filed an appeal, which was allowed by the Commissioner of Income Tax (Appeal).
  • The Revenue subsequently appealed against the CIT (A) order, but the appeal was dismissed by the Income Tax Appellate Tribunal (ITAT).

Issues Involved

  • The central question framed by the Court was whether the amount of service tax collected by the Assessee from its clients should be included in the gross receipt while computing its income under the provisions of Section 44BB of the Act.

Petitioner’s Arguments (Revenue)

  • The Revenue argued that Section 44BB is an instance of taxation of a presumptive income.
  • It was contended that the expressions "paid or payable to the assessee" in Section 44BB (2) (a) and "received or deemed to be received" in Section 44BB (2) (b) must encompass the service tax on the sum paid or payable for the provided services.
  • The Revenue heavily relied on the Supreme Court decisions in Chowringhee Sales Bureau Pvt. Ltd. v. Commissioner of Income-tax and George Oakes (P.) Ltd. v. State of Madras to support its stance on trading receipts and turnover.

Respondent’s Arguments (Assessee)

  • The Assessee submitted that CBDT Circular No. 4/2008 and Circular No. 1/2014 explicitly recognize that gross sums subject to tax deduction at source (under Section 194-I or Section 194J) do not include service tax.
  • The Assessee relied on the Bombay High Court's decision in CIT v. Sudarshan Chemical Industries Ltd., which held that 'turnover' for Section 80HHC purposes does not include sales tax and excise duty.
  • Reliance was also placed on the Supreme Court's ruling in CIT v. Lakshmi Machine Works, which concluded that sales tax and excise duty do not have an element of turnover.
  • The Assessee further cited DIT v. Schlumberger Asia Services Ltd. and Sedco Forex International Inc. v. CIT to support its position.

Court Order / Findings

  • The Hon'ble Delhi High Court answered the question of law in favor of the Assessee and against the Revenue, dismissing the appeals.
  • The Court held that the service tax collected by the Assessee does not contain any element of income.
  • Consequently, service tax cannot form part of the gross receipts for the purposes of computing the Assessee's 'presumptive income' under Section 44BB of the Act.
  • The Court reasoned that service tax is not an amount paid, payable, or received for the services rendered; the Assessee merely collects the service tax to pass it on to the government.
  • The Court expressed its concurrence with the Uttarakhand High Court's decision in DIT v. Schlumberger Asia Services Ltd., which similarly excluded customs duty reimbursements from gross receipts under Section 44BB 

Important Clarification

  • The Court noted that the Central Board of Direct Taxes (CBDT) has made this position explicit in its own circulars.
  • Under Circular No. 4/2008, it is clarified that service tax paid by a tenant does not partake the nature of "income" for the landlord, who acts only as a collecting agency for the Government.
  • Under Circular No. 1/2014, it is clarified that service tax is not to be included in fees for professional or technical services, and no TDS is required on the service tax component under Section 194J.

Sections Involved: * Section 44BB of the Income Tax Act, 1961.

  • Section 194-I and Section 194J of the Income Tax Act, 1961.

Link to download the order: https://delhihighcourt.nic.in/app/case_number_pdf/2015:DHC:8095-DB/VIB28092015ITA3842015.pdf

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