Section 43B: Unpaid Service Tax Cannot Be Disallowed When No Deduction Was Claimed
ITAT Dehradun | Schlumberger Solutions (P.) Ltd. v. ACIT | [2026] 185 taxmann.com 786 | Order dated 30 March 2026
Can the Assessing Officer invoke Section 43B merely because an assessee has an outstanding service tax liability, even though the liability was never debited to the Profit & Loss Account and no deduction was claimed?
The ITAT Dehradun has answered this question in the negative.
In Schlumberger Solutions (P.) Ltd. v. ACIT, the Tribunal held that where unpaid service tax was not routed through the Profit & Loss Account and no deduction of the service-tax expenditure was claimed, there was no question of making a disallowance under Section 43B.
The decision is important because it highlights a basic but sometimes overlooked principle:
> A provision dealing with disallowance of an expenditure cannot be used to disallow an amount which was never claimed as expenditure in the first place.
The Facts of the Case
The assessee had an unpaid service tax liability appearing in its accounts.
During the assessment proceedings, the Assessing Officer invoked Section 43B and made a disallowance in respect of the unpaid service tax.
The matter went before the Dispute Resolution Panel (DRP).
The DRP, however, deleted the proposed disallowance.
The reason was straightforward: the amount had not been routed through the Profit & Loss Account, and the assessee had not claimed any deduction in respect of the service tax liability.
The Revenue challenged the position.
What Is the Purpose of Section 43B?
Section 43B is essentially a timing provision.
It provides that certain specified deductions are allowable only upon actual payment, notwithstanding anything contained in other provisions of the Income-tax Act.
The provision covers specified statutory liabilities and other specified expenditures.
But there is an important preliminary question:
Was there any deduction claimed at all?
If the assessee has not claimed an expenditure as a deduction, there may be nothing to disallow under Section 43B.
That distinction became decisive in the present case.
The Tribunal’s Earlier Decision in the Assessee’s Own Case
An important aspect of the case was that the Tribunal had already considered the issue in the assessee’s own case.
The Tribunal had held that since the assessee had not claimed any deduction of the service-tax expenditure, there was no question of making a disallowance on that account.
Following its earlier view, the Tribunal in the present proceedings deleted the disallowance relating to the unpaid service-tax liability.
The Core Principle
The reasoning can be understood through a simple example.
Suppose a company has:
Service tax payable: ₹10 lakh
But:
Service tax debited to P&L: Nil
Deduction claimed in computation: Nil
If the assessee has not claimed the ₹10 lakh as an expenditure, there is no deduction of ₹10 lakh which can subsequently be postponed or disallowed under Section 43B.
Section 43B determines when an otherwise allowable deduction can be claimed.
It does not, in itself, create an expenditure or a deduction where none has been claimed.
What If the Service Tax Had Been Debited to the P&L?
The situation would be different if the assessee had actually claimed the service-tax liability as expenditure.
For example:
Particulars Amount
Service tax liability ₹10 lakh
Debited to P&L ₹10 lakh
Deduction claimed ₹10 lakh
Amount unpaid at year-end ₹10 lakh
In such a situation, Section 43B could become relevant because an expenditure has actually been claimed and the question would then be whether the statutory requirement of actual payment has been satisfied.
The present ruling turns on the fact that no such deduction was claimed.
A Very Important Distinction
This decision should not be read as saying that unpaid service tax is always allowable.
That would be an incorrect interpretation.
The correct proposition is narrower:
> Where unpaid service tax has not been claimed as expenditure, Section 43B cannot be invoked merely to make a disallowance of that liability.
The tax treatment of the underlying service-tax liability and the question of deductibility must be separately examined.
Why This Matters in Tax Audits and Assessments
The ruling has practical significance because statutory liabilities frequently appear in the balance sheet without necessarily having been claimed as expenditure.
An outstanding liability appearing under:
– statutory dues;
– service tax;
– GST-related liabilities;
– cess;
– duties; or
– other statutory payments
does not automatically mean that an equivalent deduction has been claimed in the Profit & Loss Account.
Therefore, before making a Section 43B disallowance, it is important to examine the actual accounting treatment and tax computation.
The three questions to ask are:
1. Was the liability debited to the P&L?
2. Was a deduction claimed in the computation of income?
3. If a deduction was claimed, was the amount actually paid within the statutory framework?
Only after answering these questions can the applicability of Section 43B be properly determined.
What Should Taxpayers Check?
Where a Section 43B disallowance is proposed in respect of an unpaid statutory liability, the taxpayer should reconcile:
Accounting records
Check the relevant ledger and Profit & Loss Account.
Tax computation
Verify whether the amount was actually claimed as a deduction.
Return disclosures
Examine the relevant tax audit report and return schedules, wherever applicable.
Nature of liability
Identify precisely whether the liability falls within the specified categories covered by Section 43B.
Payment records
Where a deduction has actually been claimed, verify the date and evidence of payment.
This exercise can sometimes reveal that an apparent Section 43B issue is actually not a disallowance issue at all.
Section 37 and the New Income-tax Act
The reported decision concerns Assessment Year 2010-11 and therefore the Income-tax Act, 1961.
The corresponding provisions under the Income-tax Act, 2025 should be examined separately for transactions governed by the new law.
The underlying accounting principle remains relevant for analysis: a provision dealing with the allowability of an expenditure must be applied with reference to whether an expenditure/deduction has actually been claimed and the specific statutory conditions applicable to it.
The Larger Lesson
Tax litigation often focuses on the question:
“Was the liability paid?”
But there is an earlier question which should not be overlooked:
“Was the liability claimed as a deduction?”
If the answer to the second question is No, a disallowance under Section 43B may have no foundation.
The ITAT Dehradun decision reinforces this distinction and prevents Section 43B from being applied mechanically merely because an unpaid statutory liability appears in the accounts.
The TAX Talk Takeaway
Section 43B is a disallowance provision concerning specified deductions subject to actual-payment conditions. It cannot be used to disallow an expenditure which was never claimed.
So, whenever an Assessing Officer proposes a Section 43B disallowance, don’t stop at the balance sheet.
Follow the trail from the ledger → P&L Account → tax computation → return.
If the amount never entered the deduction column, there may be nothing for Section 43B to take out!
Case at a Glance
Particular Details
Case Schlumberger Solutions (P.) Ltd. v. ACIT
Citation [2026] 185 taxmann.com 786
Forum ITAT Dehradun
Order date 30 March 2026
Assessment Year AY 2010-11
Issue Unpaid service tax and Section 43B
Tribunal’s conclusion No disallowance where no deduction was claimed
This article is for general tax awareness. The precise facts, accounting treatment and complete Tribunal order should be examined before relying upon the ruling in a particular assessment or appellate proceeding.
The copy of the order is as under:
