Service Tax Demand Raised Solely on Income Declared in Income Tax Survey is Not Sustainable: CESTAT [Read Order]

The Delhi bench of Customs, Excise & Service Tax Appellate Tribunal ( CESTAT ) ruled that service tax demands cannot be sustained solely on the basis of income declared by an assessee during an Income Tax survey without corroborating evidence linking such income to the provision of taxable services.

The appellants, Agrawal Builders and Colonizers is a partnership firm, engaged in construction and sale of residential complexes, were subjected to audit during which the department noticed that income of ₹1.25 crore was shown in their profit and loss account and later disclosed before the Income Tax Department.

Based on statements recorded from the partner and finance manager, a show cause notice was issued demanding service tax of ₹1.31 crore. The adjudicating authority partially allowed abatement and confirmed a demand of ₹32.83 lakh with interest and penalties, which was later upheld by the Commissioner (Appeals).

On further appeal, the Tribunal observed that the demand was raised only on the strength of the assessee’s disclosure before the Income Tax Department. No independent evidence was produced by the Revenue to establish that the income so declared was consideration for taxable construction services.

The bench of Binu Tamta and Hemmabika R Priya observed that statements alone cannot be treated as conclusive evidence without corroboration. The department failed to identify any specific taxable service or service recipient connected with the disclosed income.

In addition, the Tribunal referred to precedents including Shree Kankeshwari Enterprise v. CCE, Goyal & Co. Construction Pvt. Ltd. v. CCE, Lotus Cons Build Technocrate Pvt. Ltd. and the Supreme Court ruling in K.T.M.S. Mohd. v. Union of India, which held that tax liability under one statute cannot be mechanically imposed based on disclosures made under another law without independent verification.

In the case of K.T.M.S. Mohd. & Others Vs. Union of India, the apex court observed that “Determination of tax under the Income-tax Act cannot be made, as it not incumbent on the income-tax authorities to take into consideration only the materials made available by the Central Excise Department, but the authorities are bound to make an independent enquiry, before passing any order…”

It was also noted by the tribunal that unidentified income in income tax returns cannot be presumed to represent consideration for taxable services under the Finance Act, 1994.

Accordingly, the appellate tribunal set aside the impugned order, holding that the demand of service tax raised solely on the basis of income tax disclosures is unsustainable in law, and allowed the appeals in favour of the appellant.

Ms. J. Kainaat, Advocate appeared for the Appellant and Aejaz Ahmad, Authorized Representative appeared for the Respondent

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates