CESTAT Kolkata Sets Aside ₹6.25 Lakh Service Tax Demand Based Solely On Annual Income Tax Statement

The Kolkata bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has set aside a service tax demand of ₹6.25 lakh raised against an assessee after finding that the Department issued a show cause notice solely on the basis of Form 26AS (an income tax statement reflecting tax deducted at source and certain specified financial transactions) without carrying out any independent verification or investigation.

The tribunal ultimately quashed the demand on the ground of limitation.

A single-member tribunal of Judicial Member R. Muralidhar allowed the appeal filed by Shri Bhalang Singh Phanbuh. The tribunal first held that the appeal before the Commissioner (Appeals) had been filed within the prescribed period. It then proceeded to examine the merits of the dispute.

The tribunal observed,“The High Court and co-ordinate Benches of the Tribunals have been consistently holding that when the SCN is issued solely on the basis of 26AS / Income Tax Returns by invoking the extended period provisions, without any proper verification and investigation, the demand cannot legally survive.”

The Department issued the show cause notice in November 2019. It alleged that the assessee had provided taxable services during the period from 2014-15 to 2017-18.

The service tax demand was quantified entirely on the basis of entries appearing in the assessee's Form 26AS. The adjudicating authority confirmed the demand. The Commissioner (Appeals), however, dismissed the appeal as time-barred.

Before the tribunal, the assessee contended that the Order-in-Original, passed in August 2020 during the COVID-19 pandemic, had not been served on him. He submitted that he became aware of the order only after the Department initiated bank attachment proceedings in 2022.

He then wrote to the jurisdictional authorities seeking a copy of the order. When no copy was supplied, he approached the Meghalaya High Court. He later filed an application under the Right to Information Act. The Department furnished the Order-in-Original in April 2024. The assessee thereafter filed his appeal before the Commissioner (Appeals).

The tribunal found that the assessee had consistently pursued the matter. It noted that he had repeatedly sought a copy of the Order-in-Original from the Department. It also observed that he had approached the High Court and later invoked the RTI mechanism for the same purpose. According to the tribunal, these steps supported his claim that the order had not been served earlier. Since the appeal was filed within one month of receiving the Order-in-Original through the RTI process, it held that the appeal had been filed within the prescribed period.

On merits, the assessee contended that entries reflected under Section 194C of the Income Tax Act represented payments made by him rather than amounts received by him.

The tribunal rejected this contention after examining the Form 26AS records. It held that the entries represented consideration received by the assessee from entities including ABC India Ltd. and HPCL. The tribunal also found that the assessee had not produced sufficient evidence to support his contention that certain receipts related to exempt poultry or dairy leasing activities.

Even so, the tribunal found a fundamental flaw in the Department's case. It noted that the show cause notice rested entirely on Form 26AS entries. No enquiry had been conducted to ascertain the nature of the services allegedly rendered.

The record further showed that the Department had sought information regarding the assessee's service tax payments in 2016 and received a reply. Despite that, it took no further action for nearly three years. Fresh queries were raised only in October 2019, followed by the show cause notice the next month.

Referring to this delay, the tribunal observed,“In the present case, not only the SCN was issued by relying on 26AS, but also Revenue has not been able to explain as to why there is a delay of about 3 years to even make a query from a registered assessee.”

Relying on decisions of the Gujarat High Court and coordinate benches of the tribunal, it held that the extended period of limitation could not be invoked in these circumstances.

The tribunal accordingly set aside the confirmed service tax demand on the ground of limitation. It allowed the appeal with consequential relief

For Appellant: Advocates Pranab Kumar Sikder and Mr. D. Bhattacharyay, 

For Respondent: Suman, Authorised Representative