INCOME TAX ACT, 1961

--Accounting method--Applicability of provisions of section 145AService tax--The assessee was a partnership firm engaged in the business of rendering consultation in pharmaceuticals, chemicals and drugs. In the profit and loss account the assessee has shown receipts for rendering consultancy services at Rs. 28,51,034. It is not in dispute that the actual billed amount was Rs. 32 lacs on which service tax at 12.24% was Rs. 3,48,966. The Accountant of the assessee erroneously reduced Rs. 3,91,680 from the consultation charges of Rs. 32 lacs receivable by the assessee and had shown in the P&L Account a sum of Rs. 28,51,034. This sum was arrived at by the formula 32/112.24 x 100, which gives a figure of Rs. 3,48,966. This sum was reduced from Rs. 32 lakhs and a sum of Rs. 28,51,034 was reflected in the P&L Account as receipts from consultation. When this was pointed out by the assessing officer in the course of assessment proceedings the assessee admitted the error and offered a sum of Rs. 3,48,966 as income. Thereafter, the assessing officer was of the view that on the sum of Rs. 32.00 lacs which was consultation fee receivable by the assessee service tax at 12.24% which works out to a sum of Rs. 3,91,680 should be added to the total income. It is not in dispute that the aforesaid sum was included in the invoice raised by the assessee on the person from whom the assessee was to receive service charges. It is also not in dispute that this amount has not been received by the assessee from the person to whom the assessee has rendered services. The assessing officer was of the view that this sum receivable by the assessee ought also to have been shown as receipts in the profit and loss account on the principle laid down by the Supreme Court in the case of Chowringhee Sales Bureau 82 ITR 542 (SC). Further, the assessing officer was of the view that under the provisions of section 43B the assessee ought to have made payment of the service tax to the government because the bills were raised on the customers by the assessee in the month of February and March. The assessing officer was of the view that section 43B will be applicable. The assessing officer also made a reference to provisions of section 145A which says that all receipts should be accounted on inclusive basis. The assessing officer, therefore, made an addition of Rs. 3,91,680 to the total income of the assessee. On appeal by the assessee, the Commissioner (Appeals) confirmed the order of the assessing officer. Held: As per the Service Tax Law, service tax is payable as and when the payment/fees for underlying service provided are realized. As the appellant firm has not received the sum till the end of the financial year, i.e., 2006-07 question of paying the same did not arise at all. As already stated, the fact of non-realization of fees is not disputed by the assessing officer in his order. If for any reason the payment for services rendered is not realized (bad debts), there was no liability as to payment of service tax. Thus service tax law stands on a different footing as compared to other laws like Central Excise or VAT. The assessing officer opined that, as per section 145A, taxes and duties should form part of the Gross Receipts. Application of section 145A is restricted to purchase and sale of goods only, and does not extend to service contracts. Thus, application of said section is completely misplaced in the case under consideration.