Mismatch in ITR and ST-3 Returns: CESTAT Deletes Penalty, Emphasizes Verification Before Raising Service Tax Demands [Read Order]

The Mumbai Bench of the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) deleted a service tax penalty, holding that a mismatch between income declared in Income Tax Returns (ITR) and Service Tax Returns (ST-3) does not, by itself, justify penal action without evidence of suppression or intent to evade tax.

The case arose when Deluxe Industrial Services was issued a show cause notice by the CGST and Central Excise Department alleging short payment of service tax amounting to Rs. 1,04,09,610 for the period April 2015 to March 2017. The demand was based solely on discrepancies found between figures declared in the company’s ITR and those declared in its ST-3 service tax returns. The department imposed penalties under Section 78 of the Finance Act, 1994, alleging suppression of facts.

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On adjudication, the Joint Commissioner confirmed a reduced demand of Rs. 6,27,128 along with an equivalent penalty. In the first appeal, the Commissioner (Appeals) allowed partial relief, further reducing the liability to Rs. 1,82,290 after considering exemptions on services rendered to the Naval Dockyard (an SEZ) and recalculating the applicable tax rates for services to Indian Oil Corporation Ltd. The penalty under Section 78 was upheld, and the appellant approached CESTAT.

The appellant argued that the entire service tax liability had already been discharged with applicable interest and that all transactions had been duly recorded in statutory filings with no intention to evade taxes. The Chartered Accountant representing the appellant pointed to a CBIC instruction dated 26.10.2021, which specifically cautioned against issuing show cause notices solely based on mismatches in ITR-TDS data without factual verification or reconciliation.

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The single-member bench comprising M.M. Parthiban (Technical Member) held that the case lacked the key elements required to invoke Section 78, namely fraud, willful misstatement, or suppression of facts. The tribunal observed that the appellant had made all necessary disclosures and that the tax was paid voluntarily along with interest.

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The tribunal also observed that both adjudicating authorities had substantially reduced the demand during proceedings and accepted most of the explanations and documentary evidence submitted. The tribunal explained the CBIC’s guidance that show cause notices must be issued only after a proper verification of facts and that adjudication must be judicious when SCNs are already issued without such verification.

The tribunal held that in this case, the penalty was unsustainable in law due to the absence of mens rea. The tribunal allowed the appeal and set aside the penalty of Rs. 1,82,290 imposed under Section 78 of the Finance Act, 1994.

To Read the full text of the Order CLICK HERE

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