Service Tax Demand Based Solely On ITR–ST-3 Mismatch Quashed: CESTAT
Pranav B Prem
The Mumbai Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has set aside a service tax demand of ₹1.39 lakh, holding that confirmation of tax liability merely on the basis of a mismatch between Income Tax Return (ITR) figures and ST-3 service tax returns, without proper verification of facts and without valid service of a show cause notice, is legally unsustainable and violative of the principles of natural justice.
The Bench of M.M. Parthiban (Technical Member) allowed the appeal filed by Varkha Deepak Melwani, observing that the department had mechanically confirmed the demand without examining whether the income reflected in the ITR actually represented taxable service value or included non-taxable components.
The dispute arose from a departmental scrutiny comparing the appellant’s ST-3 returns with ITR and Form 26AS data for the financial year 2015–16. While the appellant had declared a taxable value of ₹4.20 lakh under “renting of immovable property service” in the ST-3 returns, the ITR reflected gross receipts of ₹14.40 lakh. Treating the differential amount as suppressed turnover, the department issued a show cause notice dated 30 December 2020 demanding service tax at 14.5%, along with interest and penalties under Sections 77 and 78 of the Finance Act, 1994.
The adjudicating authority proceeded ex parte and confirmed the demand, interest and penalties, citing non-appearance of the assessee during personal hearings. Although the Commissioner (Appeals) condoned the delay in filing the appeal, the appeal was dismissed on merits on the ground that the demand had not been substantively contested.
At the outset, the Tribunal held that the statutory monetary limit of ₹2 lakh for maintainability of appeals would not apply, as the matter raised a pure question of law relating to denial of natural justice and legality of proceedings initiated without proper service of the show cause notice. It observed that issues of this nature require adjudication irrespective of the tax amount involved.
A crucial issue before the Tribunal was whether the show cause notice had been validly served in terms of Section 37C of the Central Excise Act, 1944, as made applicable to service tax matters. The Tribunal noted that there was no proof of delivery of the show cause notice on record. It further took serious note of the fact that two separate show cause notices had been issued on the same day for the same period, one of which was subsequently withdrawn by the department itself as a duplicate. The Tribunal held that valid service of a show cause notice is a sine qua non for adjudication and that any ex parte order passed without ensuring lawful service is a nullity in the eyes of law.
On merits as well, the Tribunal found that the demand was confirmed solely on the basis of numerical differences between ITR and ST-3 data, without any verification of facts. There was no examination of whether the ITR figures included non-taxable receipts, exempt income, or amounts already subjected to tax. No independent evidence was brought on record to establish actual provision of taxable services to the extent alleged.
The Tribunal placed reliance on CBIC instructions dated 26 October 2021, which caution field formations against issuing indiscriminate show cause notices merely on the basis of ITR–TDS data. These instructions mandate reconciliation, verification of exemptions and negative list services, and determination of actual taxability before raising any demand. The Tribunal observed that although the show cause notice in the present case was issued prior to the instructions, the adjudication and appellate proceedings took place thereafter, making the instructions fully applicable.
It was further held that penalties under Sections 77 and 78 were imposed mechanically, without establishing suppression, wilful misstatement, or intent to evade tax. Once the foundational demand itself was found to be unsustainable due to procedural lapses and lack of evidence, the consequential penalties could not survive.
Taking note of the fact that the assessee had voluntarily deposited the entire service tax amount during the pendency of proceedings, the Tribunal set aside the impugned order, allowed the appeal, and closed the matter without sustaining any further liability. The ruling reiterates that service tax demands cannot be confirmed merely on the basis of ITR–ST-3 mismatches and underscores the mandatory requirement of proper verification and lawful service of notices before initiating or sustaining tax proceedings.
Cause Title: Varkha Deepak Melwani Versus Commissioner of CGST & Central Excise Mumbai South Commissionerate
Case No: Service Tax Appeal No. 85984 Of 2024
Coram: M.M. Parthiban (Technical Member)
