Service Tax Demand Based Solely on ITR and Form 26AS Without Independent Verification Unsustainable: CESTAT Quashes Demand [Read Order]

The Allahabad Bench of the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) ruled that a service tax demand raised solely on the basis of figures from the Income Tax Return (ITR) and Form 26AS, without independent verification, is unsustainable in law.

Santosh Pal Contractor, the appellant, is engaged in civil construction work for government authorities. Based on information received from the Income Tax Department for the financial year 2016-17, the Service Tax Department observed that the appellant had received a gross amount of Rs. 18,53,77,658 as reflected in Form 26AS.

The department alleged that the appellant had provided taxable services and had not obtained service tax registration or paid any tax. A show cause notice was issued demanding Rs. 20,92,455 in service tax, along with interest and penalties, invoking the extended period of limitation.

The adjudicating authority confirmed the demand with interest and imposed penalties under Sections 77 and 78 of the Finance Act, 1994. On appeal, the Commissioner (Appeals) partly reduced the demand, granting a 60% abatement for works contract services, but upheld the tax liability of Rs. 8,36,982 with interest and penalties.

Before the Tribunal, the appellant's counsel argued that the demand was unsustainable as it was based entirely on figures from the ITR and Form 26AS, without any verification to establish that the amounts represented consideration for taxable services.

The appellant's counsel further argued that the receipts were related to construction works executed for a local authority, which were exempt under Notification No. 25/2012-ST.

They also argued that the proceedings initiated in 2021 for the financial year 2016-17 were time-barred and without jurisdiction as the Finance Act, 1994 had already been repealed.

The revenue counsel argued that the demand was correctly confirmed based on the data obtained from the Income Tax Department and that the appellant had failed to pay service tax on the receipts shown.

The single-member bench comprising P.K. Choudhary (Judicial Member) observed that the entire demand had been raised merely on the basis of the ITR and Form 26AS figures, without any enquiry or evidence to show that the receipts were for taxable services.

The tribunal further observed that Form 26AS is prepared by the Income Tax Department and may contain errors, and the department had not verified the reasons for the difference between Form 26AS and the Profit and Loss Account.

The tribunal pointed out that relying solely on income tax data without independent investigation cannot justify a service tax demand. The tribunal explained that various judicial precedents such as Madras High Court decision in Firm Foundation and Housing Pvt. Ltd. v. Principal Commissioner of Service Tax, Chennai and the CESTAT ruling in Sigma Trade Wings v. Commissioner of Central Excise, Lucknow, had held that such demands are not sustainable.

Finding the proceedings barred by limitation and unsupported by evidence, the tribunal set aside the order of the Commissioner (Appeals) and quashed the entire demand with consequential relief to the appellant.

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