The AO disallowed unpaid service tax under s.43B, but I never charged it to my P&L. Is that right?
No. Section 43B regulates the timing of a deduction and operates only on a deduction actually claimed. Where the levy was carried as a liability in the balance sheet and never debited to the profit and loss account, there is nothing to disallow, and following the mercantile system makes no difference.
Decided by the High Court (Delhi High Court - M.B. Lokur and S. Muralidhar, JJ.) on 2007-09-10, reported as [2008] 166 Taxman 48 (Delhi) / [2008] 305 ITR 324 (Delhi). It bears on section 43B, section 43B(a) of the Income Tax Act 1961, in Deductions & Disallowances matters.
This is the standard answer to a CPC or assessment add-back generated by matching an unpaid statutory levy in the audit particulars against the return, without anyone checking whether the amount was ever charged against profits. It has been applied by the Tribunal to service tax collected but not deposited and to a GST amount shown only as a balance sheet liability. The argument is a short one on the accounts and does not need the merits of the levy to be gone into.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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For assessment year 1999-2000 the assessee, which follows the mercantile system of accounting, collected service tax during the previous year. It deposited part of it, but Rs. 14.40 lakhs was not deposited with the authorities. The assessee neither claimed a deduction for that amount nor debited it as an expenditure in its profit and loss account. The Assessing Officer disallowed the sum and added it back to income, and the Commissioner (Appeals) confirmed, taking the view that had the correct accounting procedure been followed the amount would have been debited to the profit and loss account and a deduction claimed; he relied on the Calcutta High Court's decision in Chowringhee Sales Bureau (P.) Ltd. v. CIT [1977] 110 ITR 385. The Tribunal deleted the addition and the Revenue appealed.
The Revenue's appeal was dismissed. Where the assessee has neither debited the amount to the profit and loss account as expenditure nor claimed any deduction for it, the question of disallowing a deduction that was never claimed does not arise, notwithstanding the mercantile system of accounting. The Court added that it is not for the revenue authorities to tell the assessee how to maintain its accounts, and disposed of the appeal on the footing that no substantial question of law arose.
The Court set out s.43B(a) and accepted the Tribunal's view that, the assessee not having claimed a deduction, there was nothing to disallow (para 4). It rejected the Revenue's reliance on Chowringhee Sales Bureau (P.) Ltd. v. CIT [1977] 110 ITR 385 (Cal.), distinguishing it: that case decided that a mercantile-system assessee was entitled to deduct an estimated sales tax liability though unpaid, under ss.10(1) and 10(2)(xv) of the 1922 Act, and was not concerned with the applicability of s.43B at all (para 5). What was decisive here was that the assessee had not claimed any deduction on account of service tax and had not debited the amount to its profit and loss account (paras 5 and 6). To the Revenue's submission that the assessee was seeking to evade tax under the mercantile system, the Court answered that it is not for the revenue authorities to tell the assessee how to maintain its accounts (para 7).
since the assessee did not debit the amount to the Profit & Loss Account as an expenditure nor did the assessee claim any deduction in respect of the amount and considering that the assessee is following the mercantile system of accounting, the question of disallowing the deduction not claimed would not arise
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Handle my notice → Ask a CA on WhatsAppNo. Section 43B regulates the timing of a deduction and operates only on a deduction actually claimed. Where the levy was carried as a liability in the balance sheet and never debited to the profit and loss account, there is nothing to disallow, and following the mercantile system makes no difference. This was decided by the High Court (Delhi High Court - M.B. Lokur and S. Muralidhar, JJ.) and bears on section 43B, section 43B(a) of the Income Tax Act 1961. It is reported as [2008] 166 Taxman 48 (Delhi) / [2008] 305 ITR 324 (Delhi). This is the standard answer to a CPC or assessment add-back generated by matching an unpaid statutory levy in the audit particulars against the return, without anyone checking whether the amount was ever charged against profits. It has been applied by the Tribunal to service tax collected but not deposited and to a GST amount shown only as a balance sheet liability. The argument is a short one on the accounts and does not need the merits of the levy to be gone into. If it applies to you, the first step is this: Put the ledger extract and the balance sheet schedule on record to show the levy sat as a liability and never went through the profit and loss account.
For assessment year 1999-2000 the assessee, which follows the mercantile system of accounting, collected service tax during the previous year. It deposited part of it, but Rs. 14.40 lakhs was not deposited with the authorities. The assessee neither claimed a deduction for that amount nor debited it as an expenditure in its profit and loss account. The Assessing Officer disallowed the sum and added it back to income, and the Commissioner (Appeals) confirmed, taking the view that had the correct accounting procedure been followed the amount would have been debited to the profit and loss account and a deduction claimed; he relied on the Calcutta High Court's decision in Chowringhee Sales Bureau (P.) Ltd. v. CIT [1977] 110 ITR 385. The Tribunal deleted the addition and the Revenue appealed. The matter was decided on 2007-09-10 by the High Court (Delhi High Court - M.B. Lokur and S. Muralidhar, JJ.). On those facts the High Court held as follows. The Revenue's appeal was dismissed. Where the assessee has neither debited the amount to the profit and loss account as expenditure nor claimed any deduction for it, the question of disallowing a deduction that was never claimed does not arise, notwithstanding the mercantile system of accounting. The Court added that it is not for the revenue authorities to tell the assessee how to maintain its accounts, and disposed of the appeal on the footing that no substantial question of law arose.
The Court set out s.43B(a) and accepted the Tribunal's view that, the assessee not having claimed a deduction, there was nothing to disallow (para 4). It rejected the Revenue's reliance on Chowringhee Sales Bureau (P.) Ltd. v. CIT [1977] 110 ITR 385 (Cal.), distinguishing it: that case decided that a mercantile-system assessee was entitled to deduct an estimated sales tax liability though unpaid, under ss.10(1) and 10(2)(xv) of the 1922 Act, and was not concerned with the applicability of s.43B at all (para 5). What was decisive here was that the assessee had not claimed any deduction on account of service tax and had not debited the amount to its profit and loss account (paras 5 and 6). To the Revenue's submission that the assessee was seeking to evade tax under the mercantile system, the Court answered that it is not for the revenue authorities to tell the assessee how to maintain its accounts (para 7). In the words reproduced by the source cited on this page: "since the assessee did not debit the amount to the Profit & Loss Account as an expenditure nor did the assessee claim any deduction in respect of the amount and considering that the assessee is following the mercantile system of accounting, the question of disallowing the deduction not claimed would not arise"
It was decided by the High Court on 2007-09-10 and is reported as [2008] 166 Taxman 48 (Delhi) / [2008] 305 ITR 324 (Delhi). Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 43B, section 43B(a), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The Revenue's appeal was dismissed. Where the assessee has neither debited the amount to the profit and loss account as expenditure nor claimed any deduction for it, the question of disallowing a deduction that was never claimed does not arise, notwithstanding the mercantile system of accounting. The Court added that it is not for the revenue authorities to tell the assessee how to maintain its accounts, and disposed of the appeal on the footing that no substantial question of law arose. It arises in Deductions & Disallowances matters, on section 43B, section 43B(a) of the Income Tax Act 1961, and was decided by Delhi High Court - M.B. Lokur and S. Muralidhar, JJ.. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Ask the officer in writing to identify the deduction claimed that he proposes to disallow, since s.43B needs an antecedent claim. Check the computation and the return before taking the point, in case the amount was claimed indirectly through another head. Do not argue the due date or the reason for non-payment — on this line the payment date is beside the point.
Still good law. Applied by ITAT Delhi in ACIT, Circle 22(2) v. S & A Finman Ltd, ITA No. 2220/Del./2017 (order dated 14 December 2022, AY 2012-13), which deleted a disallowance of Rs.1,79,91,058 of service tax collected but not deposited because the amount had not been routed through the profit and loss account. ITAT Delhi has applied the same reasoning to a GST disallowance of Rs.3.55 crore made by CPC for AY 2020-21. That finding was checked against a published source, which is linked on this page, on 2026-08-25. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The particulars are now settled from the report: Delhi High Court, Madan B. Lokur and Dr. S. Muralidhar, JJ., IT Appeal No. 839 of 2007, decided 10 September 2007, assessment year 1999-2000. Two limits to note before relying on it. The amount was service tax collected from customers and not deposited, not an unpaid liability generally, and the order runs to ten short paragraphs disposed of on the footing that no substantial question of law arises - so it is a brief affirmance of the Tribunal rather than an extended treatment of s.43B. The Revenue's authority, Chowringhee Sales Bureau (P.) Ltd. v. CIT [1977] 110 ITR 385 (Cal.), was distinguished as not being about s.43B at all. The later Tribunal decisions applying this reasoning were not read in full here. The GST application referred to in the validity note is reported as ATS Real Estate Builders (P.) Ltd. v. Dy. CIT [2025] 172 taxmann.com 611 (Delhi - Trib.), order of 27 January 2025, decided in favour of the assessee; verify its particulars before citing it by name. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The Revenue's appeal was dismissed. Where the assessee has neither debited the amount to the profit and loss account as expenditure nor claimed any deduction for it, the question of disallowing a deduction that was never claimed does not arise, notwithstanding the mercantile system of accounting. The Court added that it is not for the revenue authorities to tell the assessee how to maintain its accounts, and disposed of the appeal on the footing that no substantial question of law arose.
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