Section 43B Cannot Disallow Unpaid Tax If It Was Not Claimed As An Expense in P&L.

The Dispute: The “Not Claimed, Not Disallowed” Principle

The Conflict: The assessee had an unpaid service tax liability at the end of the financial year.

The Revenue’s Stand: The Assessing Officer (AO) invoked Section 43B, which states that certain statutory dues (like taxes, duties, cess) are only allowed as a deduction in the year they are actually paid. Since the service tax was unpaid, the AO added the amount back to the assessee’s income.
The Assessee’s Stand: The assessee argued that they never routed the service tax through the Profit & Loss (P&L) Account. It was collected from customers and kept in a balance sheet liability account. Since they never claimed it as a “deduction” or “expenditure,” the question of “disallowing” it under Section 43B does not arise.

The Judicial Verdict: DRP and Tribunal Concur

The Court upheld the decision of the Dispute Resolution Panel (DRP) and the Tribunal in favour of the Assessee:

1. Scope of Section 43B

The Court reiterated that Section 43B (now Section 37 of the 2025 Act) is intended to prevent taxpayers from claiming a deduction on an “accrual basis” without actually paying the government.

Key Finding: If a taxpayer treats a tax (like Service Tax or GST) as a pass-through item in the Balance Sheet and does not claim it as a business expense in the P&L, Section 43B cannot be triggered. You cannot disallow a deduction that was never sought.

2. Consistency in Own Case

The Tribunal noted that this exact issue had been decided in favor of the same assessee in previous years. Following the principle of judicial consistency, the court held that the Department cannot take a contrary view unless the facts have changed.

Strategic Takeaways for Taxpayers in 2026

Accounting Treatment Matters: If you want to avoid Section 43B complications for unpaid GST or other statutory dues, keep these amounts in a Liability Account on the Balance Sheet. Do not include them in your “Gross Turnover” and then claim them as “Expenses” in the P&L.
The “Net” vs. “Gross” Method: * Gross Method: Include tax in sales and claim it as an expense. (Section 43B applies strictly here).
- Net Method: Exclude tax from sales and expenses. (Section 43B generally does not apply, as confirmed by this ruling).
New Act Alignment: Under the Income-tax Act, 2025, the provisions regarding “actual payment” for statutory dues remain robust. Ensure that any tax actually claimed as an expense is paid before the Due Date of filing the Return to qualify for the deduction.
DRP as an Effective Forum: This case highlights that the DRP (Dispute Resolution Panel) can be a faster and more effective route for foreign companies and large taxpayers to resolve “legal-accounting” disputes compared to traditional appeals.

IN THE ITAT DEHRADUN BENCH ‘DB-FRIDAY’

Schlumberger Solutions (P.) Ltd.

ACIT^*

SATBEER SINGH GODARA, Judicial Member
and Manish Agarwal, Accountant Member

M.A.No. 2 (DDN) OF 2022
IT APPEAL No. 3266 (Delhi) of 2017
[Assessment year 2010-11]

MARCH 30, 2026

Nikhil Tiwari, CA for the Appellant. A.S. Rana, Sr. DR for the Respondent.

ORDER

Manish Agarwal, Accountant Member.- The captioned Miscellaneous Application [“M.A”] is filed by the assessee against the order passed by the Co-ordinate Bench of ITAT in ITA No.3266/Del/2017 dated 29.11.2021 for the Assessment Years 2010-11 wherein the Co-ordinate Bench has held that the amount of service tax received, do not form part of the gross receipt for computing the income u/s 44BB of the Act and accordingly, the appeal of the Revenue is dismissed.

2. In the M.A. filed, the assessee claimed that the AO/TPO has disallowed the amount of unpaid service tax of liability amounting to INR 1,65,73,768/- which was deleted by Ld. DRP by observing that the said amount was since not transacted through the Profit & Loss Account and thus, no expenditure was claimed. Therefore, the same could not be disallowed u/s 43B of the Act.

3. Against the said observation of Ld. DRP, the Revenue has filed the appeal before the tribunal. However, as observed above, the Coordinate Bench while deciding the appeal of the revenue has misunderstood the issue and held that the service taxes do not form part of the gross receipt for computation of income u/s 44BB of the Act. The assessee therefore, prayed that order of the coordinate bench suffered error of fact and be recalled and decided in terms of the grounds of appeal taken by the revenue.

4. On the other hand, Ld. Sr. DR for the Revenue supported the MA filed by the assessee.

5. Heard the contentions of both the parties and perused the material available on record. From the facts and grounds of appeal taken by the Revenue, it is observed that Revenue has challenged the action of Ld. DRP in deleting the disallowance made u/s 43B towards unpaid service tax liability. However, the Co-ordinate Bench while deciding the appeal in para 2 of the order, has misunderstood the issue and observed as under:-

2. “The only issue involved in this case whether service tax is negligible in the course of Revenue for computing the profits under presumptive basis of provision of section 44BB of Income Tax Act, 1961 or not.”

6. Since the issue decided by the Co-ordinate Bench is contrary to the Grounds of appeal taken by the Revenue and therefore, the order of Co-ordinate Bench is hereby, recalled.

7. In the result, the M.A. filed by the assessee is allowed.

ITA No. 3266/DEL/2017 [Assessment Year : 2010-11]

8. Now coming to the merits of appeal, it is observed that during the course of hearing, judgment of the Co-ordinate Bench in ITA No.5834/Del/2016 dated 31.05.2021 for AY 2012-13 was placed on record wherein this issue has been decided by the Co-ordinate Bench in favour of assessee vide para 9 of the order which reads as under:-

9. “With respect to the third ground the learned dispute resolution panel has categorically held that assessee has not claimed deduction of the service tax expenditure and therefore there is no question of making any disallowance on that account. The learned department representative could not show was any reason to differ from the direction of the learned dispute resolution panel. In view of this we dismiss ground number 3 of the appeal of the learned assessing officer.”

9. Since the issue under appeal is identical, therefore, by respectfully following the order of the Co-ordinate Bench, all the Grounds of appeal taken by the Revenue are dismissed.

10. In the result, appeal of the revenue is dismissed.

11. In the final result, M.A. filed by the assessee in M.A. No.2/DDN/2022 [Assessment Year : 2010-11] is allowed and appeal of the Revenue in ITA No. 3266/DEL/2017 [Assessment Year : 2010-11] is dismissed.