ITR Alone Insufficient To Confirm Service Tax Demand: CESTAT
Pranav B Prem
The Mumbai Bench of the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) has held that information derived solely from Income Tax Returns (ITR) cannot be the basis to confirm a demand for service tax, particularly when invoking the extended period of limitation. The Tribunal set aside the service tax demand against the appellant, a mental healthcare professional, ruling that the Revenue failed to establish any positive act or malafide intent to evade tax.
Background of the Case
The appellant, Sarosh Homi Forbes, is a Psychoanalyst, Psychotherapist, and a Mental Healthcare professional, assisting doctors and psychiatrists in providing mental healthcare, including emergency and crisis situations. The Revenue’s case was solely based on the appellant’s income tax returns, which reflected earnings under direct tax. The department contended that the appellant’s services were not covered under the negative list of services as per Section 66D of the Finance Act, 1994, introduced via Notification No. 19/2012-ST, dated 5.6.2012, thereby making the services taxable.
The Revenue alleged that the appellant provided taxable services without obtaining service tax registration. Applying the best judgment assessment method, the department raised a demand for the period from October 2014 to June 2017, invoking the extended period of limitation. A show cause notice (SCN) was issued on 30.12.2020, demanding service tax of Rs. 16,59,494/- along with interest and penalties. The Adjudicating Authority, via Order-in-Original dated 23.1.2023, confirmed a demand of Rs. 10,47,270/- after scrutinizing documents submitted by the appellant. The first appellate authority upheld this order, leading to the present appeal before CESTAT.
Findings of the Tribunal
The Tribunal, presided over by Judicial Member Ajay Sharma, observed that the Revenue’s case was entirely based on third-party data obtained from the Income Tax Department for FY 2015-16. The Tribunal pointed out that the demand was calculated using the best judgment method and the SCN was issued just one day before the limitation period expired.
CESTAT found that there was no evidence on record to show that the department had conducted an independent inquiry before issuing the SCN to ascertain whether the appellant actually received the amounts in question for providing taxable services. The Tribunal stated: "From the records it is not coming out whether before issuing the show cause notice any independent enquiry had been conducted by the department to ascertain the receipt of amount in issue towards rendering any taxable service."
Further, CESTAT emphasized that the burden lies on the department to identify the nature of taxable service and the recipients of such service before imposing tax liability. It ruled that merely relying on income tax returns without such identification is unjustified: "In order to fasten any duty liability on the appellant the department, in the first place, has to identify the nature of taxable service and the recipient of such service as well. Section 72 ibid cannot be applied merely on the basis of income-tax return without identifying the specific taxable service and the service recipients."
Extended Period of Limitation Not Justified
The Tribunal also held that invoking the extended period of limitation was unjustified, as the department failed to prove any deliberate suppression of facts by the appellant. The judgment stated: "Mere failure to obtain the registration or non-filing of returns under the Finance Act, 1994 does not ipso facto amounts to suppression without establishing any positive act or mala fide with intention to evade service tax."
Referring to the principle established in Oudh Sugar Mills vs. UOI (1978 (2) ELT J172 SC) and Sharma Fabricators & Erectors Pvt. Ltd. vs. Commissioner (2017 (5) GSTL 96 Tri.-All.), later confirmed by the Allahabad High Court (2019 (22) G.S.T.L. J166 All.), the Tribunal reiterated that a demand based on presumption and third-party data without examining the assessee’s books of accounts is unsustainable.
No Evidence of Service Tax Collection from Customers
CESTAT also noted that the appellant had not collected service tax from clients, nor was there any such allegation by the department. It highlighted that the appellant had disclosed his entire income in his ITR and had duly discharged direct tax liability. The Tribunal held: "The appellant was under the bonafide belief that he is not liable for service tax and therefore neither he applied for service tax registration nor filed the service tax returns. The appellant had shown the entire amount received in his income-tax return and the tax liability under direct tax was duly discharged by the appellant. These facts establish that there was no malafide intention on the part of the appellant to evade payment of service tax."
In light of the above findings, the Tribunal concluded that the service tax demand against the appellant was not sustainable and allowed the appeal by setting aside the demand. The ruling stated: "Information derived from the income-tax returns solely cannot be made the basis to confirm the demand of service tax herein by invoking the extended period of limitation as the department has failed to bring on record any positive act or malafide intention on the part of the appellant to evade the service tax."
Before concluding, the Tribunal clarified that it had not examined whether the appellant’s services were classifiable as paramedical services liable for service tax, leaving the issue open for determination in appropriate proceedings. "Before parting with the order, I am making it clear I have not gone into the issue whether the service rendered by the appellant is classifiable as paramedic or not and liable for service tax? The same has been kept open to be decided in appropriate proceedings."
Appearance
Present for the Appellant: Shri Sushasnt Murthi, Advocate
Present for the Respondent: Shri A.P. Singh, AR
Cause Title: Sarosh Homi Forbes V. Commissioner Of Central Goods And Service Tax-Mumbai South
Case No: Service Tax Appeal No.85287 OF 2024
Coram: Hon'ble Mr. Ajay Sharma [Member (Judicial)]
[Read/Download order]
