The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Allahabad, has set aside a service tax demand of ₹49.38 lakh against a security services company, holding that figures appearing in Form 26AS and profit and loss accounts cannot, by themselves, establish suppression of facts or justify invoking the extended period of limitation.

The bench of P.K. Choudhary (Judicial Member) held that remuneration paid to company directors in the form of salary could not be treated as consideration for a taxable service. It found that the department had also relied upon inconsistent sources of turnover for different financial years without undertaking the necessary reconciliation.

The appellant was engaged in providing security agency and manpower supply services to various clients. It was registered with the Service Tax Department and maintained books of account and statutory records under the Income Tax Act, 1961 and the Companies Act, 2013.

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Proceedings were initiated after the Service Tax Department received the appellant’s Form 26AS data through a third-party data exchange mechanism. On comparing the tax information, the department formed the view that the appellant had failed to deposit service tax on the entire amount received between October 2014 and June 2017.

A show cause notice was issued on September 29, 2020, proposing service tax on gross receipts of ₹3.25 crore.

The adjudicating authority subsequently confirmed a service tax demand of ₹49.38 lakh, including applicable cesses, under the extended limitation provision contained in the proviso to Section 73(1) of the Finance Act, 1994. Interest under Section 75 and an equivalent penalty of ₹49.38 lakh under Section 78 were also imposed.

Separate penalties of ₹10,000 each were imposed for the alleged failure to supply documents and maintain prescribed records. The authority additionally confirmed a late fee demand of ₹1.20 lakh for the alleged delay in filing service tax returns.

The company’s first appeal was initially dismissed by the Commissioner (Appeals) on the ground of limitation. CESTAT, however, remanded the matter to the appellate authority through an order dated January 5, 2026.

Following the remand, the Commissioner (Appeals) rejected the company’s appeal on merits and upheld the adjudication order. The company then approached CESTAT for a second time.

The appellant argued that the monthly remuneration paid to its directors represented salary for their involvement in the company’s day-to-day affairs.

The amounts were recorded as salary in the company’s accounts, while tax was deducted under the salary provisions of the Income Tax Act and reported through Form 16. The directors had also declared the remuneration under the head “Salary” in their respective income-tax returns.

The company therefore submitted that the employer-employee relationship was clearly established. Services provided by an employee to an employer in the course of employment were excluded from the definition of “service” under Section 65B(44)(b) of the Finance Act, 1994.

Accordingly, the director remuneration could not be included in the taxable value for determining the company’s service tax liability.

The appellant also challenged the demand as time-barred. It pointed out that the disputed period extended from October 2014 to June 2017, whereas the show cause notice was issued only on September 29, 2020, after the normal limitation period had expired.

The department defended the demand by contending that the appellant had not filed its ST-3 returns. According to the department, the failure to file the prescribed returns justified invoking the extended period of limitation.

It therefore urged the Tribunal to uphold the order passed by the Commissioner (Appeals).

Rejecting the department’s position, CESTAT observed that the extended limitation period had been invoked solely on the basis of differences noticed in the appellant’s balance sheet, profit and loss account and Form 26AS.

The Tribunal held that such an approach was legally unsustainable. The relevant information formed part of the company’s statutory records and was always available to the department for verification and scrutiny.

More importantly, the revenue authorities had failed to produce any corroborative evidence demonstrating that the company had suppressed material facts with the intention of evading service tax.

The extended limitation period cannot be invoked merely because a taxpayer did not disclose certain receipts in a service tax return, the Tribunal observed. There must be material showing a deliberate and wilful attempt to evade payment of tax.

CESTAT relied on its earlier decision in International Air Charter v. Commissioner of Central Tax, which had examined the requirements for invoking the extended limitation period under Section 73(1) of the Finance Act.

Referring to Supreme Court rulings in Pushpam Pharmaceutical Company, Anand Nishikawa Company Ltd. and Uniworth Textile Ltd., the Tribunal reiterated that suppression does not include every omission or failure to disclose information.

For an omission to constitute suppression, it must be deliberate and accompanied by an intention to evade tax. Mere non-disclosure of receipts or non-filing of returns, without evidence of such intent, is insufficient to invoke the longer limitation period.

In the present case, the department did not identify any positive act by the appellant showing a deliberate attempt to conceal taxable receipts or evade payment of service tax.

The Tribunal also found a fundamental defect in the computation of the service tax demand.

For the financial year 2016-17, the adjudicating authority had adopted the turnover disclosed in the company’s balance sheet. However, for the period from October 2014 to March 2015, financial year 2015-16 and financial year 2017-18, the authority relied upon turnover reported in Form 26AS.

CESTAT held that the taxable value for the entire disputed period should have been determined from a consistent source. No reconciliation was prepared to explain the differences between the turnover appearing in the company’s financial statements and the receipts reflected in Form 26AS.

In the absence of such reconciliation, the demand computed by selectively adopting figures from different records was held to be legally unsustainable.

On the issue of directors’ remuneration, the Tribunal accepted the appellant’s contention that the payments were made in the nature of salary.

The directors had disclosed the remuneration under the salary head in their individual income-tax returns and discharged the applicable income-tax liability. These records supported the existence of an employer-employee relationship between the company and its directors.

Consequently, CESTAT held that salary paid by the company to its directors could not be treated as consideration for a taxable service under the Finance Act, 1994.

Pvt. Ltd. v. Principal Commissioner of Service Tax, Chennai and CESTAT’s decision in Sigma Trade Wings v. Commissioner of Central Excise, Lucknow.

Those decisions recognised that entries in a profit and loss account could not, without further investigation and supporting evidence, form the sole basis for confirming a service tax demand.

Since the revenue’s entire case was founded on the profit and loss account read with Form 26AS, and the demand was raised by invoking the extended limitation period without evidence of intentional suppression, the Tribunal concluded that the Commissioner (Appeals)’ order could not be sustained.

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