The Customs, Excise & Service Tax Appellate Tribunal (CESTAT), Allahabad Bench, has partly allowed an appeal concerning a substantial service tax demand arising from receipts connected with a residential and plot development project and held that ₹30.71 crore received in connection with the sale of plots and subsequently returned to customers could not be subjected to service tax, as the amount was not received towards provision of any taxable service. 

The bench of Justice P. K. Choudhary (Judicial Member) and K. Anpazhakan (Technical Member) has observed that no penalty could be imposed on ₹27 crore received towards construction of residential flats where the applicable service tax and interest had already been paid before issuance of the show cause notice.

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The assessee was engaged in the business of purchasing and selling plots and developing residential and commercial projects. The proceedings related to its project ‘Shalimar Gallant’, which was developed pursuant to a builder development agreement involving the assessee and two other entities. Revenue from the project was shared among the participating entities.

The project contemplated both sale of plots for villas and construction and sale of residential flats. According to the Tribunal’s record, approximately ₹27 crore was collected in relation to residential flats, while ₹30 crore was collected against sale of plots.

The proceedings originated from a search conducted at the premises of two third parties, M/s Gemini Developers and M/s Limelite Tradecom Pvt. Ltd., Gorakhpur, during which documents relating to the Shalimar Gallant project were recovered.

Based on this material, the Department issued a show cause notice dated October 23, 2018, alleging that the assessee had received ₹57,71,62,950 in cash during FY 2013-14 towards construction of flats. The notice proposed service tax of ₹2,14,01,202 along with interest and penalty.

The assessee disputed the allegation and contended that the demand had been constructed largely on the basis of third-party information that was neither part of its books of account nor independently corroborated.

It also argued that the adjudication order was a non-speaking order, as the Commissioner had allegedly confirmed the demand without adequately dealing with the assessee’s detailed defence.

A central issue before the Tribunal concerned ₹30,71,62,950.

The assessee explained that the project had initially contemplated sale of plots for villas as well as residential construction. Subsequently, the project maps were revised because construction of residential towers was found to be non-viable. Consequently, the amounts received against the proposed plot transactions were returned to customers or appropriated with the co-venture.

The assessee therefore maintained that there could be no service tax liability because the disputed amount did not represent consideration for any taxable service. It alternatively contended that, since the money was received as an advance towards sale of plots, the transaction represented sale of immovable property and fell outside the scope of taxable service under Section 65B(44)(a)(i) of the Finance Act, 1994.

The Tribunal accepted this contention.

It noted that the assessee had produced evidence demonstrating that ₹30.71 crore was returned after the residential tower component became non-viable. Significantly, the Tribunal also considered an Income Tax Assessment Order dated November 17, 2021, passed by the DCIT, Central Circle-30, New Delhi, in which the assessee had been allowed deduction of the returned amount while determining its taxable income.

The Tribunal gave an additional reason for rejecting the service tax demand on the ₹30.71 crore amount.

It held that the amount had been received as an advance against sale of plots for villas. Since the receipts were connected with the sale of immovable property rather than the provision of a taxable service, the amount was outside the service tax levy under Section 65B(44)(a)(i) of the Finance Act, 1994.

Accordingly, the Tribunal held that the service tax demand confirmed on ₹30,71,62,950 was legally unsustainable and set it aside.

The operative order specifically records that no service tax was payable on the amount received in connection with the sale of plots because the money had been returned to the buyers.

The second component concerned the ₹27 crore received in relation to construction of residential flats.

Unlike the plot-related receipts, the Tribunal found that service tax was indeed payable on this component because it related to the provision of ‘Construction of Residential Complex Service’. However, the crucial fact was that the assessee had already discharged the applicable service tax and interest before the Department issued the show cause notice.

The assessee had paid ₹1,31,62,646, including interest of ₹19,51,828, through GR-7 challans dated December 28, 2016. The Tribunal noted that the Department itself had admitted this payment in the show cause notice and the adjudication order.

The payment was therefore not a subsequent attempt to settle the dispute after issuance of proceedings. It had been made before the October 23, 2018 show cause notice.

The Tribunal relied on Section 73 of the Finance Act, 1994 in dealing with the ₹27 crore component.

It observed that where the service tax payable, along with interest, had already been paid before issuance of the show cause notice, there was no need to issue a notice to demand that service tax. On this basis, the Tribunal held that the penalty imposed in respect of the ₹27 crore receipt was legally unsustainable.

The Tribunal accordingly confirmed the amount of ₹1,31,62,646, including interest of ₹19,51,828, as having already been paid, but set aside the penalty imposed in relation to it.

The assessee had also challenged the Department’s reliance on third-party documents recovered during a search at the premises of other entities.

It argued that the documents were not part of its regular books and had not been independently corroborated. The assessee relied upon judicial precedents for the proposition that third-party documents, loose papers or statements recorded behind the assessee’s back cannot by themselves establish a tax liability without corroborative evidence linking the material to the assessee.

The assessee also argued that the burden of establishing taxability rested upon the Revenue and could not be discharged merely through presumptions. It contended that the Department had failed to establish that the disputed ₹30.71 crore represented consideration for construction services.

While the Tribunal’s ultimate order rested specifically on its findings concerning the returned plot receipts and the prior payment of service tax on the ₹27 crore component, the evidentiary dispute formed an important part of the assessee’s challenge to the original demand.

The assessee had additionally contested the invocation of the extended limitation period under Section 73 of the Finance Act, 1994.

It argued that the disputed period was FY 2013-14, whereas the show cause notice was issued only on October 23, 2018. According to the assessee, the Department had not established fraud, wilful misstatement or suppression of facts necessary for invoking the extended period.

The assessee relied on Supreme Court decisions holding that mere failure to pay tax, without the necessary elements of fraud, collusion, wilful misstatement or suppression, is insufficient to invoke the extended limitation period.

However, the Tribunal’s operative findings ultimately disposed of the appeal on the basis of the nature of the ₹30.71 crore receipts and the prior discharge of service tax on the ₹27 crore component.

The Allahabad CESTAT consequently disposed of the appeal with two principal findings.

First, it held that ₹30,71,62,950 received in connection with the sale of plots was not liable to service tax, particularly since the amount had been returned to buyers and was not consideration for rendering taxable services.

Second, with respect to the ₹27 crore received for construction of residential complexes, the Tribunal recognised that service tax of ₹1,31,62,646, including interest of ₹19,51,828, had already been paid before issuance of the show cause notice. Consequently, while the paid tax and interest were recognised, the penalty imposed by the adjudicating authority was set aside.

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