CESTAT Remands Case, Slams Authority for Blindly Trusting Income Tax Return Over Evidence [Read Order]

The Mumbai Bench of The Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) has set aside a service tax demand that was based solely on a discrepancy in an Income TaxReturn, criticizing the adjudicating authority for failing to examine concrete evidence. The tribunal ordered the matter to be sent back for a fresh decision, directing the authority to properly consider documents provided by the assessee.

The case involved MX Systems International Private Limited, a company that sells and installs fire extinguishers. The dispute arose from a ₹4.72 crore service tax demand for the financial year 2015-16. The demand was based on a massive difference between the company’s service turnover as reported in its service tax return (₹9.34 crore) and its Income Tax Return (₹41.93 crore). The company argued this was a clerical error in the ITR classification, where income from the sale of goods was mistakenly declared under ‘income from services.’

The appellant provided a detailed reconciliation, along with VAT payment documents, to prove that over ₹38 crore of the declared amount was actually from the sale of goods, which is not taxable under service tax. However, the Principal Commissioner confirmed the demand, stating that the company should have revised its ITR and that the statutory ITR document held more weight.

The CESTAT bench found this reasoning flawed. It held that the adjudicating authority’s job was not to blindly trust one statutory filing over another but to actively examine the evidence presented. The tribunal slammed the authority for its failure to verify the details of the goods sold, which constituted ‘trading’ and were excluded from service tax. It noted that simply citing a discrepancy between two returns, without investigating the underlying facts, was insufficient to confirm a demand, especially for invoking the extended period.

The bench referenced the principle established in the Dinesh Chandra R Agarwal V. Commissioner of CGST (2023) case, which held that a mere mismatch between returns filed with different agencies cannot be the sole basis for extending the limitation period without specific findings of intent to evade tax.

The final order was pronounced by a bench comprising. Ajay Sharma, Member (Judicial), and Mathew, Member (Technical). The tribunal allowed the appeal by remanding the case back to the original authority for a fresh decision, with instructions to properly examine all evidence of the sale of goods submitted by the company.

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