2025 (10) TMI 10 - AT - Service Tax

Taxpayer victory: service-tax demand quashed where reliance on Form-26AS and P&L was improper; abatement under Rules upheld

M/s Santosh Pal Contractor Versus Commissioner of Central Excise & CGST, Varanasi

CESTAT All. allowed the taxpayer's appeal and set aside the Commissioner (Appeals) order, finding the service-tax demand (for construction services to a ... Levy of service tax - providing services to Nagar Panchayat, Hariharpur for construction of ATITHI BHAWAN in Indira Nagar for Public Welfare - whole case of demand has been built up merely on the basis of figures shown in the ITR and Form-26AS statement - entitlement to an abatement of 60% on the gross value in terms of Rule 2(i)(A) of the Service Tax (Determination of Value) Rules, 2006 - invocation of extended period of limitation - HELD THAT:- It is a known fact that Form-26AS statement is prepared by the Income Tax Department, not by the tax payers. There may be chances of error in such statement. It is further seen that the figures shown in Form-26AS statement differs with turnover declared in the Profit & Loss Account. The Department has not made any enquiry to ascertain the reason of difference between the figures shown in the Profit & Loss Account and Form-26AS statement. It is found that the demand raised by invoking the longer period of limitation is solely based upon the Profit & Loss Account and Form-26AS statement submitted with the Income Tax Authorities which has been consistently held to be as not proper by the Tribunal in various decisions. Reference stands made to the decision of Hon’ble Madras High Court in the case of M/s Firm Foundation and Housing Pvt. Ltd. vs. Principal Commissioner of Service Tax, Chennai (Mad) [2018 (4) TMI 613 - MADRAS HIGH COURT], as also to the Tribunal’s decision in the case of M/s Sigma Trade Wings vs. Commissioner of Central Excise, Lucknow [2019 (3) TMI 36 - CESTAT ALLAHABAD]. It stands held in both the above decisions that the revenue’s reliance upon Profit & Loss Account are irrelevant for the purpose of confirmation of tax. Inasmuch as, the revenue’s entire case is based upon the Profit & Loss Accounts read with the Form-26AS and the Service Tax stands confirmed by invoking the longer period of limitation. The impugned order of learned Commissioner (Appeals) is not sustainable on limitation itself - the impugned order is set aside - appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether a service tax demand and invocation of extended limitation can be sustained when the demand is founded primarily on figures extracted from Income Tax returns, Form-26AS and Profit & Loss accounts without any departmental inquiry to reconcile differences or establish that the amounts represent consideration for taxable services. 2. Whether services rendered for construction of a guest house for a local authority during the relevant period are exempt under the mega exemption (Entry 12 / Entry 12A) or Section 102 of the Finance Act, having regard to the date of contract/tender. 3. Whether works contract/original works classification and consequent abatement (60% under Rule 2A(i)(A) of the Service Tax (Determination of Value) Rules, 2006) is correctly available where construction involved supply of materials. 4. Whether penalties and fees imposed under Sections 78, 77(1)(a), 77(2) and Rule 7C/Section 70 are justified where registration was not obtained and returns not filed, and whether Rule 7C applies to non-filing as opposed to delayed filing. 5. Whether initiation of proceedings in 2021 under the repealed Finance Act (service tax regime) rendered the proceedings without jurisdiction. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Reliance on ITR/Form-26AS/P&L to sustain demand and invoke extended limitation Legal framework: Revenue may invoke extended limitation where suppression or wilful evasion is found; assessment/demand must be based on evidence establishing taxable receipt. Departmental fact-finding and enquiry are prerequisites when source documents (ITR/Form-26AS/P&L) generate discrepancies. Precedent treatment: The Tribunal relied on prior decisions (including a Madras High Court decision and a Tribunal decision cited by the Adjudicating Bench) which hold that mere reliance on Profit & Loss accounts and Form-26AS without independent enquiry is not a proper basis to confirm tax and to invoke extended limitation. Interpretation and reasoning: The Court found material discrepancies between Form-26AS figures and amounts declared in the Profit & Loss account. It observed Form-26AS is prepared by the Income Tax Department and may contain errors; Revenue failed to probe or reconcile differences or to establish that the amounts reflected actually constituted consideration for taxable services. Because the Department's case was built solely on these documents and no further enquiry was conducted to establish the taxability of amounts, the invocation of extended limitation was held not sustainable. Ratio vs. Obiter: Ratio - A demand based solely on ITR/Form-26AS and P&L, without departmental enquiry to establish receipt of consideration for taxable services, cannot sustain confirmation of tax nor the invocation of extended limitation. Obiter - Observations on potential for errors in Form-26AS supportive but ancillary. Conclusion: The impugned order confirming demand and invoking extended limitation is unsustainable; the appeal is allowed on limitation grounds and the order set aside. Issue 2 - Applicability of mega exemption (Entry 12/12A) / Section 102 given contract date Legal framework: Entry 12/12A of the mega exemption notification and Section 102 (as applicable) exempt certain construction services provided to Government/local authorities, subject to temporal and contractual prerequisites (notably, contract entered into prior to 1.3.2015 for Entry 12A as amended). Precedent treatment: The first appellate authority applied the textual requirement that the contract must have been entered into prior to 1.3.2015 (as per the amendment) and held that a contract executed on 24.03.2015 falls outside the exemption. Interpretation and reasoning: The Court noted that tender finalization and contract dates are material; since the contract was signed after 1.3.2015, Entry 12A exemption (which requires contract prior to that date) did not apply. The Tribunal did not disturb the Commissioner (Appeals) finding on this point; however, the primary disposition of the appeal was on limitation such that the substantive tax confirmation was set aside. Ratio vs. Obiter: Ratio (as applied by Commissioner (Appeals)) - Exemption under Entry 12A is not available where the contract is entered into after the specified cut-off date. Tribunal's decision to set aside on limitation does not endorse or reverse this substantive finding. Conclusion: On the facts, exemption under Entry 12A was not available because contract date post-dated the cutoff; but the Tribunal's ultimate relief was granted on procedural/limitation ground, leaving substantive exemption question academically decided by lower authority but not operative due to setting aside of the order. Issue 3 - Classification as works contract/original works and entitlement to 60% abatement Legal framework: Works contract services involving original work may attract abatement (60% under Rule 2A(i)(A) of Value Rules, 2006) where supply of materials is integral to original work. Precedent treatment: Commissioner (Appeals) examined bills and construction nature and treated the activity as works contract/original work, granting 60% abatement. Interpretation and reasoning: The appellate authority found construction included supply of materials and constituted original works, thereby qualifying for abatement; it recast taxable value accordingly and reduced confirmed tax. The Tribunal did not specifically overturn this classification but disposed of the appeal on limitation grounds. Ratio vs. Obiter: Ratio (as found by Commissioner (Appeals)) - Where construction of a guest house with materials constitutes original works/works contract, abatement of 60% is available. Tribunal's setting aside on limitation leaves the abatement finding intact at the appellate-authority level but not finally enforceable in consequence of the Tribunal's decision. Conclusion: Works contract/original works classification and 60% abatement was accepted by Commissioner (Appeals); Tribunal's allowance of appeal on limitation precludes confirmation of tax notwithstanding that acceptance. Issue 4 - Penalties under Sections 78, 77(1)(a), 77(2) and Rule 7C/Section 70 late fee Legal framework: Section 78 permits penalty equal to tax where suppression with intent is found; Section 77 imposes penalty for failure to register/other contraventions; Rule 7C prescribes late fee for delayed returns under Service Tax Rules; Section 70 deals with filing returns obligation. Precedent treatment: Commissioner (Appeals) applied Section 78 (reduced to match revised tax), maintained Section 77(1)(a) penalty for failure to register, imposed Section 77(2) penalty for non-filing, and set aside Rule 7C late fee relying on a Tribunal decision distinguishing non-filing from delayed filing. Interpretation and reasoning: The appellate authority concluded that failure to register and file returns constituted contraventions warranting penalties under Sections 77(1)(a) and 77(2). It held Rule 7C inapplicable to complete non-filing (applying precedent that Rule 7C applies to delay, not non-filing) and therefore set aside the Rs.40,000 late fee; penalty under Section 78 was reduced in amount to correspond to revised tax liability. Tribunal's decision to set aside the tax confirmation on limitation implies corresponding consequences for penalties predicated on that confirmation, but it expressly did not disturb the legal reasoning on applicability of Rule 7C and Section 77 penalties at the appellate stage. Ratio vs. Obiter: Ratio - Rule 7C penalty for late filing is inapplicable where there is complete non-filing; Section 77 penalties may be imposed for failure to register/file; Section 78 penalty requires finding of suppression/intent and is amenable to reduction where tax confirmed is reduced. Tribunal's setting aside of tax demand may have consequential impact on penalties but does not negate the legal propositions applied by Commissioner (Appeals). Conclusion: Commissioner (Appeals) correctly applied principles distinguishing delayed filing from non-filing (setting aside Rule 7C fee) and imposed/adjusted statutory penalties; however, since the Tribunal allowed the appeal on limitation and set aside the impugned order, practical enforcement of penalties requires consequential adjustments as per law. Issue 5 - Jurisdictional challenge based on repeal of Finance Act / validity of proceedings commenced in 2021 Legal framework: Proceedings must be initiated under a valid statutory regime and within prescribed limitation; repeal does not automatically render all earlier statutory responsibilities void if acts were committed in the operative period and proceedings are timely initiated per applicable law. Precedent treatment: The Tribunal did not base its decision on lack of jurisdiction due to repeal; instead it addressed procedural inadequacy (reliance on ITR/Form-26AS without enquiry) and limitation. Interpretation and reasoning: The appellant argued proceedings in 2021 under a repealed Act were without jurisdiction; the record shows the Tribunal did not accept this as the basis for decision and resolved the appeal on stronger procedural/limitation grounds. No express finding was made that proceedings were void for jurisdictional reasons. Ratio vs. Obiter: Obiter - Observations about repeal and jurisdiction were not central to the decision; the operative ratio rests on insufficiency of evidence and improper invocation of extended limitation. Conclusion: Jurisdictional objection was not upheld as the Tribunal disposed of the appeal on limitation and evidentiary grounds; no declaration of lack of jurisdiction was made.