CAG audit power and extended service tax limitation require express authority and concrete allegations of tax evasion.

Article 149 confines the CAG's powers to matters prescribed by law, and the CAG framework was treated as not conferring a general right to audit a non-government company not financed by Government. On that reading, Rule 5A of the Service Tax Rules, 1994 could not enlarge the CAG's audit powers beyond the parent statute. The text also states that the extended limitation under Section 73(1) of the Finance Act, 1994 requires concrete particulars of fraud, suppression, wilful misstatement or intent to evade tax; mere non-payment or vague allegations are insufficient. It further notes that a notice based mechanically on an audit report, without independent reasons, is jurisdictionally unsustainable.

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Issues: (i) whether the Comptroller and Auditor-General or its audit team could inspect and audit the accounts of a non-government company under Rule 5A of the Service Tax Rules, 1994 and the governing statutory scheme; (ii) whether the impugned show cause notice invoking the extended period under Section 73(1) of the Finance Act, 1994 was sustainable in the absence of properly disclosed facts showing fraud, suppression or intent to evade tax.

Issue (i): whether the Comptroller and Auditor-General or its audit team could inspect and audit the accounts of a non-government company under Rule 5A of the Service Tax Rules, 1994 and the governing statutory scheme.

Analysis: Article 149 of the Constitution of India confines the powers and duties of the Comptroller and Auditor-General to such matters as are prescribed by or under law made by Parliament. The Comptroller and Auditor-General's (Duties, Powers and Conditions of Service) Act, 1971, read with Articles 148, 149 and 151 of the Constitution of India, was held not to confer any general power to audit the accounts of a non-government company not financed by Government. The statutory audit provisions examined in the Companies Act, 1956, the Income-tax Act, 1961, the Central Excise Act, 1944 and the Finance Act, 1994 contemplate audits by the competent departmental authorities or by specially authorised auditors, and not by a CAG audit team in the absence of a specific enabling request or statutory mandate. On a harmonious reading, Rule 5A of the Service Tax Rules, 1994 could not be construed to enlarge the CAG's powers beyond the parent Act or authorise such an audit of the petitioner's accounts.

Conclusion: The audit by the CAG team was held to be without authority in the present context and could not sustain the notice.

Issue (ii): whether the impugned show cause notice invoking the extended period under Section 73(1) of the Finance Act, 1994 was sustainable in the absence of properly disclosed facts showing fraud, suppression or intent to evade tax.

Analysis: Section 73(1) of the Finance Act, 1994 permits the normal period of limitation to be extended only where non-payment or short-payment is by reason of fraud, collusion, wilful misstatement, suppression of facts or contravention with intent to evade service tax. The Court applied the settled principle that mere non-payment, mere contravention, or a mere failure to disclose does not by itself justify the extended period; there must be a positive and conscious act intended to evade tax. The notice did not disclose concrete particulars of the alleged suppression, and the reasons recorded were found to be vague. The assessee had already furnished information in response to an earlier departmental requisition, and the later invocation of the extended period was treated as mechanically based on the CERA audit report rather than on an independent formation of requisite belief. The Court also held that the demand was, in substance, pre-determined and that limitation being jurisdictional, a belated notice issued beyond the normal period could not stand.

Conclusion: The extended period was held inapplicable and the show cause notice was unsustainable.

Final Conclusion: The writ petition succeeded, the impugned show cause notice was quashed, and the petitioner obtained relief on both the audit-jurisdiction issue and the limitation issue.

Ratio Decidendi: A show cause notice for service tax cannot validly invoke the extended period of limitation unless the authority independently records a reason to believe, supported by concrete particulars, that non-payment was caused by fraud, suppression or similar deliberate evasion, and the CAG framework or delegated rules cannot be construed to confer a general audit power over a non-government company in the absence of express statutory authority.

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