The Income Tax Appellate Tribunal (ITAT) Chennai this week held that input tax credit is deductible under section 37(1) of the Act Income Tax Act, 1961, when such input tax credit is reversed or written off in the books of account.

The assessee, FIH India Pvt. Ltd. (previously known as Foxconn India) is engaged in the business of manufacturing, assembling and trading of parts and accessories for mobile phones. The company operates from two units, one unit located in the Nokia Special Economic Zone (SEZ) and the other unit located in the Foxconn SEZ. They had filed its return of income for assessment year 2010-11 declaring ‘nil’ income after setting off brought forward business losses and unabsorbed depreciation under normal provisions of the Income Tax Act, and book profit of Rs.80,25,61,835/- under the provisions of Section 115JB. The case was taken up for scrutiny and during the course of assessment proceedings, the Assessing Officer noticed that the assessee has debited an amount of Rs.51,65,869/- towards Service Tax written off account and called upon the assessee to explain as to why Service Tax written off cannot be disallowed under section 37(1).

In response, the assessee submitted that the assessee has availed various input services during the financial year relevant to assessment years 2008-09 & 2009-10 and has followed an accounting method whereby expenses have been debited to profit & loss account excluding Service Tax. The assessee further submitted that the Service Tax component paid against services has been accounted as input tax credit adjustable against output service tax payable on services rendered by the assessee. But, because output services rendered by the assessee are exempt from tax on account of SEZ benefits, the assessee has carried forward unutilized input tax credit to subsequent years and made a claim before the Service Tax Department for refund. The assessee also claimed that when the Service Tax Department had rejected refund claim made, they had reversed input tax credit and debited into profit & loss account and claimed as expenditure deductible u/s.37(1) of the Act. Judicial member Duvvuru RL Reddy and Accountant Member G. Manjunatha relied on the decisions of Gujarat High Court in CIT vs. Kaypee Mechanical India (P) Ltd., (2014) 223 and held , “we are of the considered view that input service tax credit is deductible u/s.37(1) of the Act when such input tax credit is written off in the books of account. But, facts with regard to refund claim made by the assessee and rejection of such refund claim by the concerned authorities for the impugned assessment year was not on record. Therefore, to ascertain the fact with regard to the claim of the assessee with regard to rejection of refund claimed, we set aside the issue to the file of the AO for the limited purpose of verification of claim of the assessee regarding rejection of refund claim.”