CESTAT Quashes Service Tax Demand Based Solely on Income Tax Disclosure

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Delhi Bench, has quashed a service tax demand of Rs. 32.83 lakh against Bhopal-based construction firms Agrawal Builders & Colonizers and Agrawal Builders. 

The Binu Tamta, Member (Judicial) and Hemambika R. Priya, Member (Technical) has observed that the income declared during an Income Tax survey cannot form the sole basis for levying service tax without corroborating evidence of taxable services provided.

The dispute arose from a service tax demand following the disclosure of ₹1.25 crore in the firms’ profit and loss account during the financial year 2011–12. Based on statements recorded during the investigation and disclosures made to the Income Tax Department, a show cause notice was issued in September 2016, demanding ₹1.31 crore in service tax. The adjudicating authority, however, granted abatement benefits and reduced the demand to ₹32.83 lakh.

The firms’ appeal against the Commissioner (Appeals), who upheld the original demand, was heard by a two-member CESTAT bench comprising Judicial Member Binu Tamta and Technical Member Hemambika R. Priya.

The Tribunal found that there was no documentary evidence to establish that the disclosed income was consideration for taxable services. Citing earlier CESTAT rulings and the Supreme Court’s judgment in K.T.M.S. Mohd. & Others vs. Union of India, the bench emphasized that taxation under separate statutes like the Income Tax Act and Finance Act cannot be conflated without independent verification.

Quoting the Tribunal’s decision in Deltax Enterprises, the order noted, “No service tax liability can be fastened on unidentified service for unidentified service recipient… the income tax return alone is not sufficient for invoking Section 72 of the Finance Act, 1994.”

The Tribunal concluded that in the absence of concrete evidence linking the declared income to taxable services, the demand was unsustainable and accordingly set aside the impugned orders, allowing both appeals.

Case Details

Case Title: Agrawal Builders and Colonizers  Versus Commissioner of Central Goods, Service Tax, Central Excise and Customs, Bhopal

Case No.: Service Tax Appeal No. 51736 Of 2018

Date:  26.05.2025

Counsel For  Appellant:  J. Kainaat, Advocate 

Counsel For Respondent: Aejaz Ahmad, Authorized Representative

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Mariya Paliwala

Mariya is the Senior Editor at Juris Hour. She has 5+ years of experience on covering tax litigation stories from the Supreme Court, High Courts and various tribunals including CESTAT, ITAT, NCLAT, NCLT, etc. Mariya graduated from MLSU Law College, Udaipur (Raj.) with B.A.LL.B. and also holds an LL.M. She started as a freelance tax reporter in the leading online legal news companies like LiveLaw & Taxscan.

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