Service Tax Demand Based Solely on ITR–ST-3 Mismatch Quashed: CESTAT

The Mumbai Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has set aside a service tax demand of over ₹1.39 lakh, holding that confirmation of tax liability merely on the basis of mismatch between Income Tax Return (ITR) data and ST-3 returns, without proper verification and valid service of show cause notice, violates principles of natural justice. The bench of M.M. Parthiban (Technical Member) observed that although the SCN in the present case was issued prior to these instructions, adjudication and appellate proceedings took place subsequently, making the instructions fully applicable. It found that the authorities had failed to verify whether the income reflected in the ITR was fully taxable or whether it included non-taxable components, and had mechanically confirmed the demand. The case arose from departmental scrutiny comparing ST-3 service tax returns with ITR and Form 26AS data. The department concluded that the assessee had declared taxable service value of ₹4.20 lakh in ST-3 returns, while the ITR reflected receipts of ₹14.40 lakh from renting of immovable property services. Treating the difference as suppressed turnover, the department issued a show cause notice (SCN) in December 2020 demanding service tax at the rate of 14.5% along with penalties under Sections 77 and 78 of the Finance Act, 1994. The adjudicating authority passed an ex parte order confirming the demand, interest, and penalties, citing non-appearance by the assessee during personal hearings. The Commissioner (Appeals) condoned the delay in filing the appeal but dismissed it on merits, holding that the demand had not been contested substantively. At the threshold, the Tribunal held that the statutory monetary limit of ₹2 lakh for maintainability of appeals would not apply in the present case, as the matter involved a pure question of law relating to legality of proceedings initiated without proper service of the show cause notice. The Tribunal observed that issues concerning denial of natural justice warrant adjudication irrespective of the tax quantum involved. A key issue before the Tribunal was whether the SCN had been validly served as required under Section 37C of the Central Excise Act, 1944 (made applicable to service tax matters). The Tribunal noted that there was no proof of delivery of the SCN on record. It further took serious note of the fact that two separate SCNs had been issued on the same day for the same period, one of which was later withdrawn by the department itself as a duplicate. Relying on earlier judicial precedents, including decisions of the Tribunal and the Gujarat High Court, CESTAT held that valid service of a show cause notice is a sine qua non for adjudication. Any ex parte order passed without ensuring lawful service of notice is a nullity in the eyes of law. The Tribunal also referred to CBIC instructions dated 26 October 2021, which caution field formations against issuing indiscriminate show cause notices solely on the basis of ITR-TDS data without proper verification. The instructions mandate reconciliation, examination of exemptions, and determination of actual taxability before raising demands. The Tribunal further noted that penalties under Sections 77 and 78 were imposed mechanically without establishing suppression, wilful misstatement, or intent to evade tax. It held that once the foundational demand itself was unsustainable due to procedural lapses and lack of evidence, the consequential penalties could not survive. While setting aside the order, the Tribunal recorded that the assessee had voluntarily deposited the entire service tax amount during the pendency of proceedings. Taking this into account, the Tribunal allowed the appeal and closed the matter without sustaining any further liability. Case Details Case Title: Varkha Deepak Melwani Versus Commissioner of CGST & Central Excise Mumbai South Commissionerate Case No.: Service Tax Appeal No. 85984 Of 2024 Date: 20.01.2026 Counsel For Appellant: Mayur Makadia, Chartered Accountant Counsel For Respondent: S.B.P. Sinha, Authorized Representative Click Here To Read Order Read More: UPS Imports Qualify as ‘Static Converters’ Eligible for Basic Customs Duty Exemption: CESTAT

Service Tax Demand Based Solely on ITR–ST-3 Mismatch Quashed: CESTAT

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