Service tax demand based on balance-sheet comparison failed where accounting entries were not backed by rejected books or proper valuation basis.

A service tax demand based only on a comparison between balance-sheet receipts and ST-3 returns was found unsustainable where the alleged difference arose from accounting entries and the audited books of account were not rejected. The Tribunal noted that gross receipts and sundry debtors reflected in the financial statements were accounting figures, and the Revenue had not identified any defect in the books or a proper basis for treating the differential amount as taxable value. On that footing, the show cause notice was treated as misconceived, vague, and erroneous, and the demand and penalties were set aside.

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Issues: Whether a show cause notice demanding service tax on the basis of a comparison between balance-sheet receipts and ST-3 returns was maintainable when the alleged difference arose from accounting entries and the books of account were not rejected.

Analysis: The notice proceeded on a misreading of the financial statements by treating gross receipts shown in the balance sheet and sundry debtors as figures that could be clubbed for service tax computation. The Tribunal noted that the balance-sheet figures were accounting figures and that the Revenue had not pointed out any defect in the audited books of account. In the absence of rejection of the books and without a proper basis for treating the alleged differential amount as taxable value, the demand was found to be misconceived, vague, and erroneous.

Conclusion: The show cause notice was held to be unsustainable, and the demand and penalties were set aside in favour of the assessee.

Ratio Decidendi: A service tax demand cannot be sustained merely by juxtaposing balance-sheet receipts with ST-3 returns where the alleged difference stems from accounting treatment and the books of account have not been rejected.

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