The Kolkata Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has held that a service tax demand raised solely on the basis of Form 26AS and Income Tax data, without any independent investigation or corroborative evidence, cannot survive in law.
The bench of R. Muralidhar (Judicial Member) ruled that the extended period of limitation under Section 73 of the Finance Act, 1994 cannot be invoked merely on the basis of Form 26AS discrepancies, particularly where the Department failed to conduct proper verification before issuing the show cause notice.
The Department issued a show cause notice on November 8, 2019, alleging that the appellant had provided taxable services during the period from 2014-15 to 2017-18. The entire demand of ₹6,25,966 was computed exclusively on the basis of entries appearing in Form 26AS obtained from the Income Tax Department. The Department invoked the extended limitation period while raising the demand. Following adjudication, the demand was confirmed.
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The assessee challenged the adjudication order before the Commissioner (Appeals). However, the appellate authority rejected the appeal on the ground that it had been filed beyond the statutory period of limitation of 60 days along with the additional condonable period of 30 days.
Before the Tribunal, the appellant argued that the adjudication order dated August 14, 2020 had been passed during the COVID-19 pandemic and had never been served. The appellant stated that he became aware of the existence of the adjudication order only after his bank account was attached in September 2022.
The appellant thereafter repeatedly requested the jurisdictional authorities for a copy of the order, approached the Meghalaya High Court, and eventually sought the order through the Right to Information Act. Only after receiving the adjudication order pursuant to the RTI proceedings did the appellant file the appeal before the Commissioner (Appeals).
The Tribunal observed that the appellant had consistently pursued the matter by writing letters to the Department, approaching the High Court, and filing an RTI application to obtain a copy of the adjudication order.
The Bench held that if the appellant had already received the order in 2020, there would have been no necessity to initiate such proceedings merely to secure a copy of it. Since the appeal had been filed within one month of receiving the adjudication order through RTI, the Tribunal concluded that the appeal before the Commissioner (Appeals) was within the prescribed limitation period.
Accordingly, the order dismissing the appeal on limitation was set aside.
Instead of remanding the matter to the Commissioner (Appeals), the Tribunal proceeded to decide the appeal on merits, observing that the controversy was narrow and the entire record was already available before it.
The Tribunal noted that the Department had built its entire case exclusively on Form 26AS entries reflecting payments made by entities such as ABC India Ltd., HPCL and Amrit Hatcheries Pvt. Ltd.
The appellant argued that certain entries reflected payments made by him rather than amounts received. After examining the relevant provisions of Sections 194C and 194-IB of the Income Tax Act along with the Form 26AS entries, the Tribunal rejected this contention and held that the entries under Section 194C indeed reflected consideration received by the appellant.
Similarly, regarding amounts appearing under Section 194-IB relating to lease rentals, the Tribunal found that the appellant had failed to produce sufficient evidence to establish exemption from service tax. Consequently, the Tribunal held that the appellant did not succeed on the merits of the taxability arguments.
Although the Tribunal did not accept the appellant’s submissions on the substantive merits, it found the demand legally unsustainable because of the manner in which it had been initiated.
The Bench observed that the show cause notice had been issued solely on the basis of Form 26AS without conducting any independent enquiry into the nature of services allegedly rendered by the appellant.
The Tribunal also noted that the Department had already sought turnover details from the appellant in 2016 and received a response regarding service tax payments. Despite having this information, the Department remained inactive for nearly three years before issuing the show cause notice in 2019 solely on the basis of Income Tax data. The Revenue failed to explain this delay or justify invocation of the extended period of limitation.
The Tribunal relied upon several earlier decisions, including Homeopathic Medical Publishers, Tabassum Enterprises, Rishu Enterprise, Quest Engineers & Consultant Pvt. Ltd., and the Gujarat High Court judgment in Nimeshbhai Gunvantbhai Patel, which consistently held that: Form 26AS is not by itself sufficient evidence of taxable services. Income Tax data requires proper reconciliation and verification before issuance of a service tax demand. Show cause notices cannot be issued mechanically on the basis of discrepancies between Income Tax returns and Service Tax returns. Invocation of the extended limitation period without establishing suppression or conducting proper investigation is unsustainable.
The Tribunal also referred to CBIC’s instructions directing field formations not to issue indiscriminate show cause notices merely because of differences reflected in Income Tax data without first obtaining reconciliation from taxpayers and verifying the underlying facts.
Holding that the Department had failed to undertake proper verification before invoking the extended period and issuing the demand solely on the basis of Form 26AS, the Tribunal set aside the confirmed service tax demand on limitation itself.
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