Legal Notice Alone Can’t Establish Tax Liability: CESTAT

The Principal Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), New Delhi, has set aside a service tax demand, interest, and penalties imposed holding that the burden of proving taxable activity rests on the department and that a mere legal notice cannot be treated as sufficient evidence to establish receipt of additional consideration. The bench of Dr. Rachna Gupta (Judicial Member) and P.V. Subba Rao (Technical Member) has noted that construction of individual houses was admittedly not taxable during the relevant period. Since the department failed to produce evidence demonstrating that the appellant had in fact constructed residential complexes, the confirmation of service tax demand on this count was found to be unsustainable. The appeal arose from an Order-in-Original dated September 29, 2016 passed by the Commissioner of Customs, Central Excise and Service Tax, Dehradun. Through the impugned order, the department had confirmed a service tax demand of ₹33.88 lakh against the construction company under the extended limitation period prescribed under Section 73 of the Finance Act, 1994. Interest under Section 75 and penalties under Sections 77 and 78 were also imposed. The Commissioner had simultaneously dropped another proposed demand of nearly ₹19.98 lakh, against which the Revenue did not file any appeal. The appellant was engaged in providing construction services and was registered with the service tax authorities for taxable construction activities, including commercial and industrial construction services. According to the department, intelligence inputs suggested that the company had failed to discharge service tax on certain taxable services rendered by it, which led to an investigation and eventual issuance of a show cause notice. The dispute before the Tribunal primarily revolved around two issues. The first related to construction of residential properties which, according to the appellant, consisted of individual houses. The department, however, classified them as “residential complexes” and consequently sought to levy service tax. The second issue related to alleged additional payments said to have been received by the company from Hotel Amber Palace, Dehradun, for construction of a commercial complex. While dealing with the issue concerning residential properties, the Tribunal observed that the department had proceeded on the basis that the appellant failed to produce adequate evidence to establish that the structures were individual houses rather than residential complexes. However, the Bench disagreed with this approach and emphasized a fundamental principle of law — “he who asserts has to prove.” The Tribunal stated that if the department alleges that a taxpayer carried out taxable construction of residential complexes, then the responsibility lies on the department to establish that allegation through evidence. The burden cannot be shifted onto the assessee to prove a negative proposition. On the second issue concerning Hotel Amber Palace, the department alleged that the construction company had received additional consideration over and above the amount on which service tax had already been paid. The entire allegation rested on a legal notice issued by Hotel Amber's counsel claiming that extra payments had been made to the appellant. The appellant, however, had responded through a counter-notice asserting that complete services had been rendered but that full payments had not been received from Hotel Amber. The Tribunal noted that neither party subsequently initiated any civil proceedings. The Bench held that a legal notice sent by a client’s advocate cannot, by itself, be regarded as conclusive evidence proving actual receipt of additional consideration for taxable services. In the absence of corroborative material or independent evidence establishing receipt of such amounts, the demand could not survive judicial scrutiny. Accordingly, CESTAT concluded that the service tax demand, along with interest and consequential penalties, was legally unsustainable. The Tribunal set aside the impugned order and allowed the appeal with consequential relief in favour of the assessee. The ruling reinforces two important principles in tax litigation: first, that the department bears the burden of proving taxable conduct alleged in a show cause notice, and second, that unverified claims or legal notices, without supporting evidence, cannot become the sole basis for fastening tax liability. Case Details Case Title: M/s. Gurbani Constructions Versus Commissioner Citation: JURISHOUR-1283-CES-2026(DEL) Case No.: Service Tax Appeal No. 50121 of 2017 Date: 15.05.2026 Counsel For Appellant: Rajesh Chhibber Advocate Counsel For Respondent: Rajeev Kapoor, Authorised Representative Click Here To Read Order Read More: Investment in Mutual Funds Not ‘Trading’, No CENVAT Credit Reversal Required for Redemption of Units: CESTAT

Legal Notice Alone Can’t Establish Tax Liability: CESTAT

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