Facts of the Case

  • The Assessee is a company engaged in providing equipment on hire and manpower for the exploration and production of mineral oil and natural gas.
  • For the Assessment Year 2008-09, the Assessee filed its income declaration under the presumptive taxation provisions of Section 44BB(3) of the Income Tax Act, 1961.
  • While computing its gross receipts, the Assessee excluded a sum of Rs. 2,09,24,553, which represented the service tax collected from its customers.
  • The Assessing Officer (AO) rejected this exclusion and added the service tax amount to the gross receipts for computing taxable income.
  • The Assessee appealed to the Commissioner of Income Tax (Appeals) [CIT(A)], who ruled in favour of the Assessee.
  • The Revenue's subsequent appeal against the CIT(A) order was dismissed by the Income Tax Appellate Tribunal (ITAT).

Issues Involved

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

Petitioner’s (Revenue's) Arguments

  • The Revenue argued that Section 44BB governs the taxation of presumptive income.
  • It was contended that the statutory expressions "paid or payable" in Section 44BB(2)(a) and "received or deemed to be received" in Section 44BB(2)(b) must encompass the service tax component billed to the clients for services provided.
  • The Revenue heavily relied on 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 the inclusion of tax components in turnover.
  • They further argued that the Uttarakhand High Court's decision in DIT v. Schlumberger Asia Services Ltd. was distinguishable on its facts, as it pertained specifically to customs duty rather than service tax.

Respondent’s (Assessee's) Arguments

  • The Assessee argued that CBDT Circular No. 4/2008 and Circular No. 1/2014 clearly established that gross sums for Tax Deducted at Source (TDS) under Sections 194-I and 194J do not include the service tax component.
  • Reliance was placed on the Bombay High Court's ruling in CIT v. Sudarshan Chemical Industries Ltd., which determined that turnover for Section 80HHC does not include sales tax and excise duty.
  • The Assessee cited the Supreme Court decision in CIT v. Lakshmi Machine Works, which concluded that statutory taxes do not possess an element of turnover.
  • Further support was drawn from judgments in DIT v. Schlumberger Asia Services Ltd., Sedco Forex International Inc. v. CIT, and CIT Tax-XI v. M/s DLF Commercial Project Corporation.

Court Order / Findings

  • The Delhi High Court observed that Section 44BB taxes what can be legitimately considered the income of the Assessee from its business.
  • The expressions "amount paid or payable" and "amount received or deemed to be received" under Section 44BB(2) are explicitly qualified by the words "on account of the provision of services and facilities". Only amounts paid for the actual services can form part of the gross receipts.
  • The Court noted that earlier Supreme Court decisions like Chowringhee Sales Bureau and George Oakes were context-specific. The later Supreme Court judgment in CIT v. Lakshmi Machine Works definitively clarified that taxes like sales tax and excise duty do not contain any element of "turnover".
  • The Court held that the service tax collected by the Assessee lacks any element of income and therefore cannot be included in gross receipts for presumptive income computation under Section 44BB.
  • The Assessee merely acts as a collecting agency to pass the service tax on to the government; it is not an amount received for the services rendered by the Assessee.
  • The appeals filed by the Revenue were dismissed.

Important Clarification

  • The High Court emphasized that the Central Board of Direct Taxes (CBDT) itself recognizes this distinction. Circular No. 4/2008 states that service tax paid by a tenant is not "income" of the landlord, who only acts as a collection agency. Similarly, Circular No. 1/2014 clarifies that service tax is excluded from professional/technical fees for TDS purposes under Section 194J.

Sections Involved

  • Section 44BB (1), (2)(a), and (2)(b) of the Income Tax Act, 1961.
  • Section 194-I and Section 194J of the Income Tax Act, 1961.
  • Section 80HHC of the Income Tax Act, 1961

Link to download the order - https://delhihighcourt.nic.in/app/case_number_pdf/2015:DHC:8096-DB/VIB28092015ITA4032013.pdf

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