CESTAT Quashes Service Tax Demand Based Solely on ITR/TDS Data

The Principal Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), New Delhi has set aside a service tax demand raised against a security services provider, holding that the department cannot invoke the extended limitation period merely on the basis of differences noticed in third-party ITR/TDS data without conducting any independent investigation. The bench of Ajay Sharma (Judicial Member) relied extensively on earlier rulings which had consistently held that differences between income reflected in Income Tax returns and service tax returns cannot automatically establish service tax liability. The income reflected in Income Tax records and consideration for taxable services under the Finance Act operate in entirely different statutory frameworks. It noted that not every receipt reflected in income tax records necessarily amounts to taxable service consideration. The appeal was filed by M/s Vikash Security Services against an order of the Commissioner (Appeals), CGST & Central Excise, Bhopal, which had confirmed a service tax demand of ₹7.67 lakh along with interest and equal penalty while setting aside part of the earlier demand. The matter was heard by the bench of Justice Ajay Sharma (Member Judicial). The dispute originated from a departmental verification of third-party ITR/TDS data relating to the financial year 2016-17. Based on such data, the Revenue formed a view that the assessee had received approximately ₹98.97 lakh towards taxable services which had allegedly not been disclosed in ST-3 returns and on which service tax had not been paid. Consequently, a show cause notice dated August 19, 2021 was issued under Section 73 of the Finance Act, 1994 seeking recovery of service tax amounting to ₹14.84 lakh along with interest and penalties. Initially, the adjudicating authority confirmed the demand. However, upon appeal, the matter was remanded for fresh adjudication. Following reconsideration, the demand was reduced to ₹8.99 lakh and later further reduced by the Commissioner (Appeals) to ₹7.67 lakh. The appellant argued that the entire case of the department rested only upon third-party information such as ITR/TDS records and that no independent inquiry had been conducted to establish tax liability. It was further contended that the Revenue failed to establish any fraud, suppression of facts or deliberate concealment necessary for invoking the extended period under Section 73(1) of the Finance Act, 1994. The Tribunal framed the principal question as whether a demand under Section 73 could be sustained by invoking the extended period solely on the basis of third-party TDS and ITR data without any independent material showing non-payment of service tax, fraud or suppression by the assessee. The bench also referred to CBIC instructions cautioning field formations against issuing indiscriminate show cause notices solely based on differences between ITR/TDS data and service tax returns. The circular required officers to first seek reconciliation statements and verify the nature of transactions before initiating demand proceedings. A significant observation made by the Tribunal was that TDS certificates and Form 26AS could only constitute the starting point of an inquiry rather than conclusive proof of tax liability. According to the Tribunal, once the department had access to PAN and TAN details of parties reflected in TDS records, it was incumbent upon authorities to independently verify the transactions from the concerned parties themselves. Such verification, however, was entirely absent in the present case. The Tribunal further observed that invocation of the extended period under Section 73 is not automatic and requires positive evidence of fraud, wilful suppression or deliberate concealment with an intention to evade tax. Mere non-payment of tax cannot by itself justify invoking the extended limitation period. The assessee had also contended that it entertained a bona fide belief that certain services rendered to veterinary centres, educational institutions and election offices were exempt from service tax or related to sovereign functions. The Tribunal accepted that a reasonably held bona fide belief negates the element of wilful intent required for invoking the extended limitation period. It additionally noted that the relevant income had been openly disclosed in books of account and income tax returns, making allegations of suppression unsustainable. The Tribunal also attached significance to the fact that a substantial portion of the original demand had been progressively dropped at different stages of proceedings. According to the bench, such reduction was inconsistent with allegations of deliberate fraud or systematic concealment. Holding that the ingredients necessary for invoking the extended period of limitation were absent, the Tribunal concluded that the show cause notice was time-barred to that extent and consequently set aside the impugned order. The appeal was accordingly allowed with consequential relief. Case Details Case Title: M/s Vikash Security Services Versus Commissioner of CGST & Central Excise Citation: JURISHOUR-1405-CES-2026(DEL) Case No.: Service Tax Appeal No. 51720 OF 2025 Date: 25.05.2026 Counsel For Appellant: Dr. Arvind Singh Chawla, Advocate Counsel For Respondent: Ram Parvesh Prasad, Authorised Representative Click Here To Read Order Read More: SCN Sent Through WhatsApp Not Valid Service: CESTAT

CESTAT Quashes Service Tax Demand Based Solely on ITR/TDS Data

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