Gujarat High Court
Commissioner Of Income Tax Iii vs Kaypee Mechanical India Pvt. ... on 21 April, 2014
Bench: Akil Kureshi, Sonia Gokani
O/TAXAP/186/2014 ORDER
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
TAX APPEAL No. 186 of 2014
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COMMISSIONER OF INCOME TAX III....Appellant(s)
Versus
KAYPEE MECHANICAL INDIA PVT. LTD.....Opponent(s)
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Appearance:
Mr R KM PARIKH, ADVOCATE for the Appellant
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CORAM: HONOURABLE Mr. JUSTICE AKIL KURESHI
and
HONOURABLE Ms. JUSTICE SONIA GOKANI
21st April 2014
ORAL ORDER (PER : HONOURABLE Mr. JUSTICE AKIL KURESHI)
Revenue is in appeal against the judgment of the Income Tax Appellate Tribunal, Ahmedabad {"Tribunal" for short} dated 5th July 2013, raising following questions for our consideration : {A} "Whether on the facts and in the circumstances of the case and in law, the ITAT was justified in holding that the assessee's liability to pay Service tax had arisen during the previous year relevant to A.Y 200910, without appreciating that the liability had accrued in the F.Ys 2003 04 to 200607, which had merely been discovered by the Service Tax Department in the previous year relevant to Page 1 of 6 O/TAXAP/186/2014 ORDER A.Y 200910."
{B} "Whether on the facts and in the circumstances of the case and in law, the ITAT was justified in holding that the expenses were not debited as Servicetax and interest thereon but these expenses were incidental and arising out of the assessee's business, without appreciating that the assessee had debited the said expenses in the Profit & Loss Account towards Service Tax and Interest on Servicetax and thereby made an error both in law and in facts.
{C} "Whether on the facts and in the circumstances of the case and in law, the ITAT was justified in holding that Servicetax and interest thereon pertaining to the earlier years are allowable as deduction u/s. 37 (1) of the I.T Act, without appreciating that under the Incometax Law payment of Servicetax is deductible u/s. 37 (1) of the Act only when included in the income of the assessee." Though three separate questions are framed, the issue involved is only one viz., whether a sum of Rs. 23,07,450/= paid by the assessee by way of Servicetax and interest thereon of Rs. 9,36,553/= would be deductible from the income of the assessee under Section 37(1) of the Incometax Act, 1961 {"the Act" for short}.
Brief facts are that the said amount of Rs. 32,44,004/= which included the amount of Servicetax with interest, was paid by the assessee and he Page 2 of 6 O/TAXAP/186/2014 ORDER claimed deduction thereof as a business expenditure. Undisputedly, the primary liability to pay such service tax was on the service recipient and not the assessee who was the service provider. Under the Service Tax Act, however, the assessee had onous to collect the same from the customers ie., the service recipients and deposit the same with the Servicetax authorities. The assessee failed in doing so. During the assessment proceedings, the service tax authorities raised an audit objection pointing out that the assessee had not raised and recovered service tax on certain services provided by it. The assessee accepted the audit objection and paid up the said amount which, as noted earlier, included the principal liability of service tax with interest thereon.
The admitted facts, therefore, were that the assessee deposited the said amount of Rs. 32,44,004/= towards service tax and interest on delayed depositing of service tax from his own pocket, though the primary liability to pay such tax was on the service recipient. However, the assessee having failed to discharge his duty of collecting the same from the service recipient and depositing the same with the Government authorities, had to discharge such liability.
The stand of the Revenue before us was that this amount having been expended by the assessee for infraction of law, deduction thereof was not available. We may notice that CIT [A] as well as the Tribunal accepted the claim Page 3 of 6 O/TAXAP/186/2014 ORDER of the assessee, though under a different provision than that claimed. The Tribunal, in particular, after referring to the decision of the CIT {A} at length, held and observed as under : "5. We have heard the rival contentions and perused the material on record. The appellant had not collected the service tax on mechanical erection and installation of plant and machinery, structure work, piping work and work contract works for the period from F.Y 200304 to 200607. There was an audit by the Service Tax Department and a demand of service tax was raised at Rs. 23,07,450/= and interest thereon at Rs. 9,36,553/= which was paid on 16.04.2009 by the appellant. When there is no collection of the service tax, it is impossible to route through P&L account. As per Service Tax Act, the appellant is an agent of the Government of India, collecting the service tax and remitting it to the Government Exchequer. The appellant had debited these expenses which have nature of service tax and interest thereon as expenses in the P&L account not as service tax and interest thereon. The liability has been crystallized in the year under consideration. The learned A.O had not brought on record any material that this service tax including interest had been recovered from the parties for which it had rendered service. These expenses were incidental and arising out of the business of the appellant. The interest payment is compensatory in nature. The expenses have direct nexus with the business operation. Therefore, it is allowable u/s. 37 of the IT Act as incurred wholly and exclusively for business purposes. We, therefore, do not found any reason to intervene in the order of the CIT (A). Accordingly, the Revenue's appeal is dismissed."
We have no hesitation in upholding the view of the CIT {A}, as confirmed by the Tribunal. The amount was expended by the assessee during the course of business, wholly and exclusively for the purpose of business. If the assessee had taken proper steps and charged service tax to the service Page 4 of 6 O/TAXAP/186/2014 ORDER recipients and deposited with the Government, there was no question of assessee expending such sum. It is only because the assessee failed to do so, that he had to expend the said amount, though it was not his primary liability. Be that as it may, this cannot be stated to be a penalty for infraction of law. Reference to the decision of Supreme Court in case of Haji Aziz and Abdul Shakoor Bros. v. Commissioner of Income Tax, Bombay CityII, reported in {1961} 41 ITR 350 therefore is not of any help to the Revenue. It was a case in which the assessee had imported dates from Iraq, at a time when such import was prohibited. Due to this, the dates imported by the assessee by steamers were confiscated by the customs authorities. The assessee was given an option to pay redemption fine and have the dates released. The assessee having accepted such an option, claimed the redemption fine as a deduction in computing its profit as allowable expenditure. In this background, the Supreme Court held that no expenses which was paid by way of penalty for a breach of the law, even though it might involve no personal liability, could be said to be an amount wholly and exclusively laid for the purpose of the business of the assessee. In the present case, the amount involved is not by way of penalty. The decision in case of Haji Aziz & Abdul Shakoor Bros. [Supra] is thus distinguishable.
It is equally well settled that payment of interest is compensatory in Page 5 of 6 O/TAXAP/186/2014 ORDER nature and would not partake the character of penalty. Reference in this respect can be had to the decision of Supreme Court in case of Commissioner of Income Tax v. Luxmi Devi Sugar Mills P. Limited, reported in [1991] 188 ITR 41 and in case of Mahalakshmi Sugar Mills Company v. Commissioner of Incometax, Delhi, reported in (1980) 123 ITR 429.
In the result, Tax Appeal is dismissed.
{Akil Kureshi, J.} {Ms. Sonia Gokani, J.} Prakash* Page 6 of 6