The Allahabad Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has upheld a service tax demand of Rs. 6.14 lakh, along with interest and penalties, after finding that the assessee had declared substantially lower gross receipts in its ST-3 returns than those disclosed in its Income Tax Return (ITR) for FY 2014-15.
The bench of Sanjiv Srivastava (Technical Member) has observed that a registered assessee is required to correctly disclose the gross amount charged in ST-3 returns before claiming any abatements or deductions, and failure to do so amounts to suppression of facts warranting invocation of the extended limitation period.
The dispute arose after the Service Tax Department compared the appellant’s Income Tax Return with the ST-3 returns filed for the financial year 2014-15. While the Income Tax Return reflected gross receipts of ₹1.03 crore, the ST-3 returns disclosed taxable services worth only ₹55.58 lakh, leading the Department to suspect suppression of taxable turnover. Initially, a service tax demand of ₹11.48 lakh was proposed based on the differential receipts, together with interest and penalties.
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Following adjudication and appellate proceedings, the Commissioner (Appeals) partially accepted the appellant’s explanations regarding certain contracts and reduced the demand to ₹6,14,638, while sustaining interest, an equivalent penalty under Section 78 of the Finance Act, 1994, and a penalty of ₹10,000 under Section 77(2).
The appellant argued that the differential receipts did not automatically represent taxable service income.
It submitted that substantial payments received during FY 2014-15 pertained to works executed in earlier years and included amounts received from Technocraft Construction Pvt. Ltd., where the principal contractor had discharged the entire service tax liability. The appellant also contended that it was entitled to the benefit of Rule 2A of the Service Tax (Determination of Value) Rules, 2006 and Notification No. 30/2012-ST, which governed valuation of works contracts and partial reverse charge liability.
The appellant further argued that Form 26AS and Income Tax data could not be treated as conclusive evidence for determining taxable turnover under service tax law. Relying on earlier Tribunal decisions, particularly Quest Engineers & Consultant Pvt. Ltd., it asserted that service tax liability cannot be raised merely by comparing Income Tax records with ST-3 returns without conducting a proper investigation. It also challenged invocation of the extended limitation period, arguing that there was no wilful suppression or intention to evade tax.
The Department maintained that repeated summons seeking financial records, including Income Tax Returns, balance sheets, Form 26AS and ST-3 returns, were either ignored or inadequately complied with by the appellant.
According to the Department, the discrepancy came to light only through data shared by the Income Tax Department. It argued that the appellant had failed to correctly disclose gross receipts in statutory service tax returns, thereby suppressing taxable value and justifying invocation of the extended limitation period along with penalties under Sections 78 and 77(2) of the Finance Act, 1994.
The bench distinguished the Tribunal’s earlier ruling in Quest Engineers & Consultant Pvt. Ltd. The Tribunal observed that, unlike that case where the demand was based solely on Form 26AS, the present demand was founded primarily on the appellant’s own Income Tax Return, which follows the mercantile or accrual system of accounting and therefore provides a more reliable basis for comparison after the introduction of the Point of Taxation Rules, 2011.
The Tribunal emphasised that the ST-3 return format specifically requires assessees to first disclose the gross amount charged for taxable services and thereafter claim abatements, exemptions or deductions in separate columns. According to the Tribunal, the appellant instead reported only the reduced taxable value without first declaring the gross receipts, contrary to the prescribed statutory format.
Relying upon the settled principle that where a statute prescribes a particular manner for performing an act, it must be followed strictly, the Tribunal held that the appellant deliberately failed to disclose the correct gross receipts in its ST-3 returns. Such conduct amounted to suppression of material facts with intent to evade payment of service tax.
The Tribunal also rejected the argument that no investigation had been conducted. It noted that the Department had issued summons and sought relevant records before issuing the show cause notice, but the appellant failed to furnish the necessary documents. Having not cooperated during the investigation, the appellant could not later contend that the Department had failed to conduct a proper enquiry.
The Tribunal held that the discrepancy between the Income Tax Return and ST-3 returns was not a mere accounting difference. Since the appellant had understated the gross value of taxable services in its statutory returns, the ingredients necessary for invoking the extended limitation period under the proviso to Section 73(1) of the Finance Act, 1994 were satisfied.
The Tribunal further held that once suppression with intent to evade tax stood established, the penalties imposed under Sections 78 and 77(2) were legally sustainable.
Finding no merit in the appeal, the Allahabad Bench of CESTAT dismissed the appeal and upheld the order sustaining the reduced service tax demand of ₹6.14 lakh, together with applicable interest and penalties.
The Tribunal concluded that the appellant had failed to correctly disclose gross service receipts in its ST-3 returns and could not avoid the consequences of suppression by relying on deductions or abatements that should have been claimed only after proper disclosure of the gross amount.
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