Mere ITR Disclosure Cannot Trigger Service Tax Levy without Identifying Service & Recipient: CESTAT [Read Order]

The Mumbai bench of Customs, Excise & Service Tax Appellate Tribunal (CESTAT), held that mere disclosure of turnover/income in an Income Tax Return ( ITR ) cannot automatically lead to Service Tax liability without identifying the nature of taxable service and recipient.

‘The taxable event, measure and incidence under the two statutes are fundamentally different. Mere disclosure of income in ITR cannot, by itself, lead to an automatic inference that such income is exigible to Service Tax’ said the tribunal in its final order.

The appellant, Qaidjohar Husaini Jawadwala submitted that the Service Tax demand for FY 2015-16 was raised based on the information received from third-party data from the Income Tax Department.

In the ITR, the appellant declared a turnover of ₹21.20 lakh while the corresponding ST-3 returns showed nil turnover. Based on this mismatch, the Department alleged suppression and proposed a Service Tax demand of ₹3,07,401 along with interest and penalties.

The order was challenged by the appellant through this appeal.

The appellant’s counsel, S B Jhunjhunwala, Advocate, argued that the Department had failed to identify the category/classification of service allegedly provided and had also not identified the recipient of service. Therefore the demand is unsustainable.

The department did not submit anything revenue to establish that the appellant had intentionally suppressed facts from the department with intention to evade payment of service tax.

The bench of Ajay Sharma, Judicial member, observed that Income Tax and Service Tax operate under distinct statutes with different taxable events. Thus, mere ITR disclosure cannot trigger the service tax liability.

‘Mere non-reflection of income in ST-3 returns, without establishing taxability, cannot be equated with deliberate suppression’ stated the appellate tribunal.

Before issuing or confirming the service tax demand, it is the duty of the department to establish (i) the existence of a taxable service; (ii) the nature and classification of such service; and (iii) the identity of service recipient, said the bench.

However, according to the tribunal, in the instant matter, the show-cause notice is conspicuously silent on all these aspects.

The tribunal stated that it neither specifies the taxable service provided by the appellant nor identifies the recipient of such service. In the absence of these fundamental aspects, the demand is not sustainable.

It also referred to the matter of the same tribunal in Sarosh Homi Forbes v. Commissioner of CGST, Mumbai, in which the demand raised on the basis of Income Tax Returns was set aside by holding that a demand raised on the basis of third-party data without identifying the taxable service and its recipient, is unsustainable in law.

Therefore, the appellate tribunal set aside the impugned order and allowed the appeal.

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