Unexplained Two-year Delay in Service Tax proceedings: Patna HC Sets Aside Tax Demand and Penalty

The High Court of Patna,allowed the writ application and set aside the tax demand and penalty due to an unexplained two-year delay by the tax authorities in service tax proceedings.

Pankaj Rai,petitioner-assessee,was issued a notice on 11.05.2020 by Respondent No. 3 for non-payment of service tax for FY 2016–17, based on turnover reported under Sections 194C, 194J, and 194H in the income tax return. He was asked to submit documents within 15 days. A reminder was later issued, and he submitted a reply on 06.09.2020, which was allegedly ignored.

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On 11.10.2021, Respondent No. 4 issued a Show Cause Notice demanding ₹13,07,700 in service tax for the period April 2016 to June 2017, alleging suppression of facts and invoking the extended limitation period.

An Order-in-Original dated 13.05.2024 was later passed by Respondent No. 5 confirming the tax demand along with interest and penalty.

The Division Bench of Justice Rajeev Ranjan Prasad and Justice Ashok Kumar Pandey on 28.04.2025, considered the petitioner’s submissions and earlier judgments in similar cases. It asked the Additional Solicitor General(ASG) to produce the case records and explain the delay between 29.10.2021 and 18.12.2023.

It noted that the Show Cause Notice was issued on 11.10.2021 and a reply was submitted on 20.10.2021. However, the Department took no further action for over two years.

When the matter was heard again, the ASG produced the records. The Court found that the draft SCN was approved on 11.10.2021, but there was no movement in the file until the final order on 13.05.2024. Even though the petitioner’s reply was received on 02.11.2021, it was not recorded in the order sheet.

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The bench also observed that the Department failed to explain why a personal hearing notice was issued only on 18.12.2023, after such a long delay.

The High Court referred to the judgment in M/s Kanak Automobiles, where it was held that while the one-year time limit under Section 73(4B)(b) of the Finance Act is not mandatory, authorities are expected to take all possible steps to complete the proceedings within that period. Since no steps were taken in that case, the proceedings were dropped. The Supreme Court later refused to interfere with this decision due to the low tax amount involved.

The bench noted that in M/s Power Spectrum, a similar delay of five years occurred. It relied on Delhi and Gujarat High Court rulings which stated that while the law allows flexibility in completing proceedings, cases should not be kept pending for years without valid reasons. Authorities cannot extend the timeline indefinitely without justification.

The Court also cited its recent decision in Pawan Kumar Upmanyu, where a delayed order was quashed due to an unexplained delay beyond one year and a low tax demand.

In this case, the bench found that the file remained inactive for two years with no explanation as to why the liability could not be determined within one year. It held that the delay was unjustified and the matter was covered by the earlier judgments.

The Court set aside the order dated 13.05.2024 and the related tax demand.

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It also noted with concern that the case was left pending with no action for over two years. The Court asked the Chief Commissioner of CGST and Respondent No.2 to look into the delay and decide what action to take.

In short,the writ application was allowed.

To Read the full text of the Order CLICK HERE

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