Voluntary tax compliance scheme: interregnum service tax deposits could not be ignored, and recovery action was quashed.

Under the Service Tax Voluntary Compliance Encouragement Scheme, 2013, the relevant reference date for "tax dues" was 1 March 2013, and payments made after that date but before the Scheme's formal incorporation on 10 May 2013 could not be excluded absent an express bar. The Patna HC held that deposits made in that interregnum remained payments toward service tax arrears, so rejection of the declaration on that ground was unsustainable and was set aside. For the same reason, recovery under Section 87 of the Finance Act, 1994 could not proceed as if no payment had been made; the recovery notice was quashed and the recovered amount was directed to be refunded.

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Issues: (i) Whether deposits of service tax made after 1 March 2013 but before the scheme's incorporation on 10 May 2013 could be ignored for the purpose of the Service Tax Voluntary Compliance Encouragement Scheme, 2013; (ii) Whether recovery under Section 87 of the Finance Act, 1994 could be sustained despite such deposits.

Issue (i): Whether deposits of service tax made after 1 March 2013 but before the scheme's incorporation on 10 May 2013 could be ignored for the purpose of the Service Tax Voluntary Compliance Encouragement Scheme, 2013.

Analysis: The Scheme defined "tax dues" with reference to service tax due or payable for the specified period that remained unpaid as on 1 March 2013. Its procedure provision permitted declaration of such dues and payment in instalments. Reading these provisions together, the relevant date was 1 March 2013, and the Scheme contained no exclusion for payments made after that date but before 10 May 2013. A deposit made in that interregnum remained a payment toward declared tax arrears and could not be disregarded merely because the Scheme was formally incorporated later.

Conclusion: The rejection of the declaration on the ground that the deposits were made before 10 May 2013 was unsustainable and was set aside.

Issue (ii): Whether recovery under Section 87 of the Finance Act, 1994 could be sustained despite such deposits.

Analysis: The undisputed deposits were toward tax arrears. Even on the department's own view that two deposits did not qualify under the Scheme, they could not be treated as if no payment had been made for the purpose of treating the petitioner as a defaulter. Invocation of the recovery machinery under Section 87 on that basis amounted to a misapplication of the statutory scheme and an improper exercise of power.

Conclusion: The recovery notice could not be sustained and was quashed.

Final Conclusion: The impugned rejection of the VCES declaration and the consequential recovery action were invalid, and the petitioner was entitled to refund of the recovered amount.

Ratio Decidendi: Under a voluntary compliance scheme framed with reference to unpaid tax dues as on a specified date, payments made after that date but before formal incorporation of the scheme cannot be excluded in the absence of an express statutory bar, and consequential recovery action treating such payments as non-existent is unlawful.

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